Abstract

http://ssrn.com/abstract=2274708
 


 



Revisiting the Efficiency Theory of Non-Contemplated Contingencies in Contract Law


Yuval Procaccia


Interdisciplinary Center (IDC) Herzliyah - Radzyner School of Law

June 5, 2013

Canadian Journal of Law and Jurisprudence, Forthcoming

Abstract:     
In contract law, common mistake or frustration are grounds for relieving the promisor from the obligation to perform. Conventional economic theory justifies relief by appealing to its effect on the promisee’s incentives, namely, her incentives to act efficiently to prevent the unfavorable occurrence or its associated losses.

The Article challenges this justification. While relief may indeed generate efficient incentives under certain conditions, these are not the conditions in which it is in fact granted. Consequently, the cases in which the conventional theory recommends that relief be provided and those in which it is actually awarded, are incompatible.

Based upon this premise, the Article develops a new theory of the law of common mistake and frustration, bearing descriptive and prescriptive implications. Under the new theory, the purpose of relief is not to incentivize promisees, but rather to determine the legal consequences of non-contemplated events. Viewed in this light, the Article identifies a new set of efficiency rationales for the rule. Under specified conditions, relief allows contracting parties to (1) refrain from welfare-reducing trade in unquantifiable risk; (2) maintain control over the distribution of contractual gains; and (3) overcome disincentives to form efficient contracts. The Article analyzes the conditions under which these virtues are applicable, and finds that they generally correspond to those in which relief is actually awarded.

Number of Pages in PDF File: 36

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Date posted: June 15, 2013  

Suggested Citation

Procaccia, Yuval, Revisiting the Efficiency Theory of Non-Contemplated Contingencies in Contract Law (June 5, 2013). Canadian Journal of Law and Jurisprudence, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2274708

Contact Information

Yuval Procaccia (Contact Author)
Interdisciplinary Center (IDC) Herzliyah - Radzyner School of Law ( email )
P.O. Box 167
Herzliya, 46150
Israel
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