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 8: The “tacit assumption” and consequential damages

Victor P. Goldberg

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

Abstract

This chapter defends the “tacit assumption” test for recovery of consequential damages. Critics of the notion ask: “would reasonable people have contemplated the possibility?” The test asks, even if they would have contemplated the possibility, how would reasonable people allocate the risks? The risks are, to some degree, endogenous—both parties contribute to the harm. The relevant question should be to what extent can one party run its business in reliance on the successful performance of the counterparty’s obligation? The widespread use of disclaimers suggests that the risk of consequential damages should typically be assigned to the non-breaching party. The chapter also considers some significant exceptions to that rule.

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