Efficient Material Breach of Contract

Journal of Law, Economics, and Organization 33(3), pp. 507-540, August 2017

56 Pages Posted: 29 May 2010 Last revised: 3 Sep 2018

See all articles by Bernhard Ganglmair

Bernhard Ganglmair

ZEW – Leibniz Centre for European Economic Research - Junior Research Group Competition and Innovation; University of Mannheim - Department of Economics; Mannheim Centre for Competition and Innovation (MaCCI)

Date Written: August 8, 2016

Abstract

In an environment in which sellers can reduce the probability of defective delivery through cooperative investment, and in which enforcement of default remedies for breach of contract is imperfect, an optimal performance standard grants buyers the option to reject goods for some but not all defects, in other words, when the delivery is sufficiently defective and the seller said to be in "material breach" of contract. This optimal performance standard implements efficient cooperative investment more often under a policy that, in addition, allows buyers to collect compensation for non-delivery of the good (upon rightful rejection) than a policy that limits buyers' compensation to the recovery of the price. While contracts with liquidated damages (i.e., a customized compensation function) can solve the investment problem as long as court enforcement is not too imperfect (in which case optimal liquidated damages are excessive and likely not enforced), the doctrine of material breach with an option to reject performs well as a default rule.

Keywords: breach remedies; cooperative investment; expectation damages; imperfect contract enforcement; material breach; perfect tender rule; rejection; under-compensatory damages

JEL Classification: D86, K12, K41

Suggested Citation

Ganglmair, Bernhard, Efficient Material Breach of Contract (August 8, 2016). Journal of Law, Economics, and Organization 33(3), pp. 507-540, August 2017, Available at SSRN: https://ssrn.com/abstract=1617154 or http://dx.doi.org/10.2139/ssrn.1617154

Bernhard Ganglmair (Contact Author)

ZEW – Leibniz Centre for European Economic Research - Junior Research Group Competition and Innovation ( email )

L7,1
Mannheim, 68161
Germany

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Mannheim Centre for Competition and Innovation (MaCCI) ( email )

L 7, 1
Mannheim, 68131
Germany

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