Commercial Anarchism

Our forthcoming article, Deregulating Contracts (Notre Dame Law Review, 2025), advances a simple but radical claim: sophisticated parties should enjoy the same freedom over contract procedure—remedies, interpretation, and renegotiation—as they already enjoy over substance.  Contract law makes this ‘triad’ of procedural rules mandatory. The triad rules are meant to protect the parties’ bargain but, to the extent they bind, function as a morally unwarranted, economically inefficient, and deeply regressive tax on commerce. That extent is limited, however: large, well-lawyered firms can use costly contracting strategies to escape the triad’s constraints while smaller actors remain regulated. We show how the triad fails on both efficiency and justice grounds, and we sketch an alternative, decentralized order we call commercial anarchism—a legal archipelago of private associations empowered to craft and enforce their own contract law.

Why the Triad Misfires

Courts generally restrict damages to the promisee’s expected loss: contract terms that would award greater damages are unenforceable penalties. This restriction limits the parties’ ability to efficiently police performance or to create efficient incentives for parties to invest in their transaction. For example, two firms cannot agree to a high late-delivery charge, even if both view it as a cost-effective way to secure performance. A common substitute is to increase the price initially and provide a rebate if performance is timely, but implementing such structures requires legal expertise and adds contractual complexity.

Interpretation rules function similarly. Courts require detailed factual reconstruction of the parties’ intent, encouraging highly specific contracts that still may not eliminate uncertainty in interpretation. This increases transaction costs, slows negotiation, and reduces predictability. Parties who might prefer less detailed contracts to save time and expense risk courts not enforcing their agreements.

Renegotiation doctrine follows the same pattern. Courts often decline to enforce strict no-modification clauses and may view strong renegotiation penalties as inconsistent with good faith. Yet the possibility of enforcing such terms could reduce opportunistic behavior in long-term commercial relationships. By restricting them, the law limits credible commitment strategies, constrains contractual design, and encourages different but more costly organizational forms, like vertical integration, that avoid contract enforcement altogether.

Together, these procedural rules reduce the scope for efficient agreements. Though justified as safeguards for fairness, their practical effects fall disproportionately on certain parties.

A Regressive Tax on Contracting

Parties endowed with robust contracting capacity—legal departments, retained counsel, and experience negotiating bespoke instruments—respond by transforming forbidden procedural terms into elaborate substantive proxies. A penalty becomes a two-part price. A no-renegotiation covenant reappears as an asset-specific collateral requirement. Interpretive risk shrinks behind densely drafted annexes. Because the freedom-of-substance principle remains intact, courts must enforce those elaborate substitutes.

This strategy is costly. Only repeat players—particularly those with greater legal resources—can absorb the fixed costs of developing, testing, and implementing such contractual workarounds. Occasional or economically marginal contractors typically cannot. They must accept the public default, bear higher prices that reflect increased legal uncertainty, or exit the market altogether. The result is a structural inequality of opportunity: the regulatory framework imposes greater burdens on those least equipped to manage them. A regime that permits functionally equivalent substantive terms for the well-resourced, while restricting procedural freedom for others, lacks both coherence and fairness.

Efficiency Meets Autonomy

The economic indictment is straightforward. The triad hardens the participation constraint—ie, raises the expected return that would induce parties to contract—by increasing contracting costs. The triad rules also prohibit the high-powered incentives that sometimes are needed to induce parties to invest in their transactions: in economic terms, the triad rules soften the incentive-compatibility constraint. The result is that fewer trades occur, and those that survive do so at lower joint surplus. In welfare terms, the doctrinal status quo is a deadweight loss.

The moral case against the triad is also compelling. While liberal frameworks emphasize autonomy, mandatory procedural rules limit parties’ ability to structure their own cooperation, even in the absence of third-party effects. The common choice-theory reply—that offering a menu of forms is sufficient—overlooks that inflating the cost of procedural choices while leaving substantive ones unconstrained distorts rather than respects autonomy. Also, moral theory does not support rules that burden weaker parties while allowing stronger parties to escape.

Toward a Commercial Archipelago

If mandatory procedure is the disease, commercial anarchism sketches strong cure. Imagine a market in which businesses form private associations—industry networks, supply-chain consortia, or standard-form clubs—that promulgate their own contract codes. Courts supply coercive enforcement but defer to the association’s chosen law. Parties dissatisfied with one association can go elsewhere, creating competitive pressure among rule-makers. Nothing in our argument depends on a libertarian utopia. The state retains the monopoly of force, polices externalities, and ensures transparent disclosure of associational rules. What it relinquishes is the conceit that a single public template can effectively govern every commercial interaction.

Such pluralism promises order. Because association members share commercial context, they can tailor procedure with far finer granularity than any court or legislature. Because exit remains feasible, rules that entrench opportunism or inefficiency will hemorrhage adherents and wither. And because public courts still stand ready to enforce associational law, parties enjoy the security of state violence without the straitjacket of state drafting.

Implications for Courts and Legislatures

Courts need not await legislative overhaul. Nothing in existing doctrine forbids demoting the triad rules to defaults for contracts between sophisticated actors. Enforcing a well-negotiated penalty clause, or honoring a contractual instruction to limit interpretive evidence, is less a break with precedent than a restoration of the common-law commitment to private ordering. The judgment of the parties, not the paternalism of jurists, should determine how much protection they want.

Legislatures can go further. Uniform Commercial Code and Restatement drafters should convert the triad into opt-out standards, available for those who want them but never imposed on those who do not. That single move would reduce compliance costs, enlarge the feasible space of deals, and—most importantly—eliminate the regressive structural bias that now penalizes small enterprises.

Business actors need not wait for formal reform. Through trade associations and standard-form agreements, they can begin developing associational governance. International merchants already do so by selecting ICC Arbitration Rules or a designated law merchant. Domestic industries can adopt similar approaches to test procedural alternatives.

Takeaways

Contract law should support, rather than restrict, the cooperative arrangements of market participants. Mandatory procedural rules—on remedies, interpretation, and renegotiation—undermine this role by reducing efficiency and limiting party autonomy.  Deregulating Contracts proposes replacing uniform procedural constraints with a more flexible framework. If parties can freely set substantive terms, there is little justification for denying them similar control over procedure. Aligning freedom across both domains would improve contractual performance and reduce structural disparities.

Alan Schwartz, Sterling Professor Emeritus of Law and Professor of Management, Yale University. 

Simone M. Sepe, Professor of Law and Finance and Honorable Frank Iacobucci Chair in Capital Markets Regulation, University of Toronto Faculty of Law and Rotman School of Management; Center for the Philosophy of Freedom, University of Arizona; ECGI. 

The authors' forthcoming article, 'Deregulating Contracts' (Notre Dame Law Review, 2025), is available here.