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