Substituting Invalid Contract Terms: Theory and Preliminary Empirical Findings

44 Pages Posted: 26 Sep 2019 Last revised: 7 Jan 2020

See all articles by Eyal Zamir

Eyal Zamir

Hebrew University of Jerusalem - Faculty of Law

Ori Katz

Hebrew University of Jerusalem, School of Law, Students

Date Written: September 21, 2019

Abstract

The law often lays down mandatory rules, from which the parties may deviate in favor of one party but not the other. Examples include the invalidation of high liquidated damages and the unenforceability of excessive non-compete clauses in employment contracts. In these cases, the law may substitute the invalid term with a moderate arrangement; with a punitive arrangement that strongly favors the protected party; or with a minimally tolerable arrangement (MTA), which preserves the original term as much as is tolerable.

The article revisits the choice between the various substitutes. Based on theoretical analysis and a series of new empirical studies, it argues that the incidence of MTAs should be rather limited. It demonstrates that people find moderate substitute arrangements more attractive than the alternatives. It also points to two overlooked incentive effects of the substitute arrangement (in addition to its impact on the drafting of contracts). First, the applicable substitute strongly influences customers’ inclination to challenge excessive contract terms once a dispute arises. Second, when the invalidation of an excessive term is discretionary, the applicable substitute can affect decision-makers’ inclination to invalidate excessive clauses in the first place.

Keywords: mandatory rules, contract law, substitute arrangement, minimally tolerable arrangement, judicial discretion, consumer contracts, exemption clauses

JEL Classification: K, K12, K41

Suggested Citation

Zamir, Eyal and Katz, Ori, Substituting Invalid Contract Terms: Theory and Preliminary Empirical Findings (September 21, 2019). Hebrew University of Jerusalem Legal Research Paper 19-22. Available at SSRN: https://ssrn.com/abstract=3457893 or http://dx.doi.org/10.2139/ssrn.3457893

Eyal Zamir (Contact Author)

Hebrew University of Jerusalem - Faculty of Law ( email )

Mount Scopus
Mount Scopus, IL 91905
Israel
+972 2 582 3845 (Phone)
+972 2 582 9002 (Fax)

Ori Katz

Hebrew University of Jerusalem, School of Law, Students ( email )

Jerusalem
Israel

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