Determinants of the Optimal Degree of Pro-activeness in Contracting

Abstract:     
The paper explores the extent to which contracting parties should include future contingencies in their contract rather than leave them for future (re-)negotiation. It is argued that whether or not to include a contingency or specific clause in a contract depends on three factors:

- how important any deviation from the fully elaborate contract is in terms of the essential functions served by the contract, including securing efficient risk-allocation, incentives, and reliance investments;

- whether the contingency is sufficiently likely and important for it to be worthwhile to spend time on drafting a clause concerning it; and

- whether something approaching the clause may come about as the result of renegotiation of the contract under the shadow of default rules and contract interpretation by the court (including the possibility of invalidation of unfair contract terms) as well as under the shadow of the parties' concern for their reputation.

Number of Pages in PDF File: 9

Keywords: pro-active contracting, optimal level of detail, the role of contracting

JEL Classification: K12, D23

Accepted Paper Series