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Governmental Liability for Breach of Contract

Daniel R. Fischel

University of Chicago Law School

Alan O. Sykes

Stanford University - Law School

March 1999

Government contracts are subject to a number of legal rules that have no private sector analogs, and that have received virtually no attention from law and economics scholars. This paper explores these rules from an economic perspective, with special attention to the leading modern case on the subject, United States v. Winstar.

The analysis emphasizes a number of differences between governmental and private actors that have important implications for the wisdom of applying conventional breach of contract remedies to the government. These differences afford plausible efficiency justifications, in our view, for many of the most important doctrines governing government contracts. Some of these doctrines help to impede the use of long term contracts to insulate inefficient rent seeking arrangements against subsequent attack, some seem to prevent the government from inefficiently contracting away its ability to respond to new information, and others seem to work a sensible allocation between the government and private contractors of the risk that government may change its policies. Not all doctrines and decisions can be justified in this fashion, however, and we do not mean to claim that the existing body of law is in any sense optimal. Indeed, the Winstar decision itself seems quite mistaken from an economic standpoint.

The considerations that we develop have implications for a number of related legal issues. Not all of these implications are developed here, but we do consider modern litigation under the Contract Clause of the United States Constitution, as well as the recent academic debate about the wisdom of retroactive taxation.

Number of Pages in PDF File: 68

JEL Classification: H57, K12

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Date posted: April 17, 1999  

Suggested Citation

Fischel, Daniel R. and Sykes, Alan O., Governmental Liability for Breach of Contract (March 1999). Available at SSRN: http://ssrn.com/abstract=157379 or http://dx.doi.org/10.2139/ssrn.157379

Contact Information

Daniel R. Fischel
University of Chicago Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
773-702-9610 (Phone)
773-702-0356 (Fax)
Alan O'Neil Sykes (Contact Author)
Stanford University - Law School ( email )
559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
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