Pre-Contractual Reliance

John M. Olin Center for Law, Economics, and Business, Harvard Law School, Discussion Paper No. 192

Posted: 20 Jan 1997

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Omri Ben-Shahar

University of Chicago Law School

Multiple version iconThere are 3 versions of this paper

Date Written: August 1996

Abstract

During contractual negotiations, but before entering a contract, parties might make (reliance) expenditures that would increase the surplus should a contract be made but would be fully or partially wasted otherwise. This paper develops a model for analyzing parties' decisions to invest in pre-contractual reliance under alternative legal regimes. Whereas parties' investments in reliance will be socially suboptimal in the absence of any pre-contractual liability, they will be socially excessive under a regime of strict liability for all reliance expenditures. Given the results for the two polar cases, the analysis explores how "intermediate" liability rules could be designed to induce optimal reliance decisions, considers what information courts would need to implement such rules, and discusses implications for the doctrines governing pre-contractual liability. The case for liability is shown to be stronger when a party retracts from a preliminary understanding or from terms that it has proposed. Finally, the analysis shows that pre-contractual liability does not necessarily have an adverse overall effect on parties' decisions to enter into contractual negotiations.

Keywords: Contracts, Negotiations, Reliance

JEL Classification: K12

Suggested Citation

Bebchuk, Lucian A. and Ben-Shahar, Omri, Pre-Contractual Reliance (August 1996). John M. Olin Center for Law, Economics, and Business, Harvard Law School, Discussion Paper No. 192. Available at SSRN: https://ssrn.com/abstract=10283

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Omri Ben-Shahar

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

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