Rethinking Contract Law and Contract Design

Rethinking Contract Law and Contract Design

Rethinking Law series

Victor P. Goldberg

Rethinking Contract Law and Contract Design presents a rich array of ideas that reassess the law and economics of contractual relations. Victor P. Goldberg uses a transactional framework to critically analyse and re-evaluate contract doctrine and specific legal cases. This important work examines particular contractual precepts whilst conducting a detailed exercise in legal archaeology, challenging readers to reconsider significant legal decisions by forensic exploration of records, briefs, and other materials, including the staple cases of textbooks and casebooks.

Chapter 2: The reliance-flexibility tradeoff and remedies for breach

Victor P. Goldberg

Subjects: economics and finance, law and economics, law - academic, commercial law, law and economics, law of obligations

Abstract

Contract performance takes place over time and the nature of the parties’ future obligations can be deferred to take account of changing circumstances. If one party has the discretion to terminate, the other party can confront the decision maker with a price reflecting its reliance. The decision to breach can be viewed as the exercise of an option to abandon with the remedy being the implicit price of that option. By looking at the pricing of explicit termination options, we can get some insight into how the implicit option could be priced. The evidence from the explicit pricing of the termination option indicates that the price need bear no relation to the amount of money that would fully compensate the counterparty if the option were exercised.

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