Pre-Contractual Reliance

55 Pages Posted: 11 Dec 2000 Last revised: 10 May 2009

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

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Abstract

During contractual negotiation, parties often make (reliance) expenditures that would increase the surplus should a contract be made. This paper analyzes decisions to invest in pre-contractual reliance under alternative legal regimes. Investments in reliance will be socially suboptimal in the absence of any pre-contractual liability - and will be socially excessive under strict liability for all reliance expenditures. Given the results for these polar cases, we focus on exploring how "intermediate" liability rules could be best designed to induce efficient reliance decisions. One of our results indicates that the case for liability is shown to be stronger when a party retracts from terms that it has proposed or from preliminary understandings reached by the parties. Our results have implications, which we discuss, for various contract doctrines and debates. Finally, we show that pre-contractual liability does not necessarily have an overall adverse effect on parties' decisions to enter into contractual negotiations.

Keywords: Contracts, bargaining, negotiations, reliance

JEL Classification: C78, D23, K12

Suggested Citation

Bebchuk, Lucian A. and Ben-Shahar, Omri, Pre-Contractual Reliance. Journal of Legal Studies, Vol. 30, pp. 423-457, 2001; Harvard Law and Economics Discussion Paper No. 319, 2001; U of Michigan Law & Economics, Olin Working Paper No. 00-009. Available at SSRN: https://ssrn.com/abstract=251730 or http://dx.doi.org/10.2139/ssrn.251730

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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