Information and the Scope of Liability for Breach of Contract: The Rule of Hadley V. Baxendale

31 Pages Posted: 21 Nov 2003 Last revised: 5 May 2009

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: 1990

Abstract

According to the contract law principle established in the famous nineteenth century English case of Hadley v. Baxendale, and followed ever since in the common law world, liability for a breach of contract is limited to losses "arising...according to the usual course of things," or that may be reasonably supposed "to have been in the contemplation of both parties, at the time they made the contract...." Using a formal model, we attempt in this paper to analyze systematically the effects and the efficiency of this limitation on contract damages. We study two alternative rules: the limited liability rule of Hadley, and an unlimited liability rule. Our analysis focuses on the effects of the alternative rules on two types of decisions: buyers' decisions about communicating their valuations of performance to sellers; and sellers' decisions about their level of precautions to reduce the likelihood of nonperformance. We identify the efficient behavior of buyers and sellers. We then compare this efficient behavior with the decisions that buyers and sellers in fact make under the limited and unlimited liability rules. This analysis enables us to provide a full characterization of the conditions under which each of the rules induces, or fails to induce, efficient behavior, as well as the conditions under which each of the rules is superior to the other.

Keywords: contracts, breach, damages, precautions, information, communication

Suggested Citation

Bebchuk, Lucian A. and Shavell, Steven, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley V. Baxendale (1990). Journal of Law, Economics and Organization, Vol. 7, pp. 284-312, 1991; Harvard Law and Economics Discussion Paper No. 78. Available at SSRN: https://ssrn.com/abstract=471883 or http://dx.doi.org/10.2139/ssrn.471883

Lucian A. Bebchuk (Contact Author)

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Steven Shavell

Harvard Law School ( email )

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National Bureau of Economic Research (NBER)

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