INTRODUCTION
This essay aims to give law and economic analysis involved in a breach of contract. That is how to think like an economist within a law framework as a guidance in approaching legal issues such as a breach of contract might entail. It is important to note that this essay will present not only verbal explanations but also that of mathematical figures to address the legal and economic rules under discussion here.
In this essay, I will further endeavour to see whether the efficiency and equity principles are applied in a breach of contract or not, or whether they are use in the “best” way. The aim of this essay as mentioned above is to convey the spirit of law and economic approaches and the advantages or understandings gains without much technical approaches.
The analysis will focus on our class discussion with Prof.Guido Calabresi, Prof.Daniel Markovits, Prof. Ugo Mattei, and Margherita Baldarelli and countable citations to closely give a real but practical and not only theoretical and speculative economics breakdown to giving legal problems we continue to face today.
I will define certain terms my way to suit this essay and to carry out my arguments but of course not betraying the mainstream. I will also analyse using the Ronald H. Coase’s theory of 1960. That is to what extent is efficiency link to zero transaction cost or if in fact there exist a zero transaction cost. .
CONTRACT LAW AND ITS BREACH
One more area of law that can be debated within a Coasian framework of bargaining among individuals is contract law. Unlike in normal nuisance law, in a contract law, parties negotiate with each other ahead of any disagreement arise. Adopting a framework first suggested by Guido Calabresi and A. Douglas Melamed, the solution of a nuisance dispute may be viewed as involving two steps. First, an entitlement must be chosen, that is to say, a determination must be made regarding who is entitled to prevail. The injurer can be entitled to the rights to engage in an activity that causes harm, or the victim can be handed the right to be free from harm. Then a decision must be made on how to protect the entitlement. One such a decision could be to handle the owner of the entitlement an injunction. If the victim holds the entitlement, protecting it by injunction means that he can prohibits the injurer from causing harm. Thus, the injurer can cause damage(s) only when he “buys off” the victim. Similarly, when the injurer holds the entitlement, protecting it by injunction means that the victim must buy off the injurer if he wants damages reduced. An alternative method of protecting entitlements is to give the holder of the entitlement and amount of money for damages that some governmental authorities such as the court determines. If the victim has the entitlement, he owes the right to be compensated but he cannot stop the injurer from causing harm because the injurer could under injunction remedy. Correspondingly, if the injurer holds the guarantee or entitlement defending it by a damage remedy means that the injurer could only stop or reduce his harms when the victims compensate him. Whether this second entitlement is efficient or not or whether it is in the interest of the majority is something controversial and courts have being deciding in favour of such.
Another area of importance and that interests us more here is the breach in contract. Here again we can use the Coasian framework of bargaining among a small number of individuals. What one may ask is since parties here could discuss before-hand to resolve probable disputes, is it necessary to have general legal rules governing disputes? After all, contract rules are desirable because it will be unlawfully expensive where possible to decide and construct a contract that provides for every conceivable contingency. And because this is rarely done, it makes contract issues not only complicated but also inefficient and to the advantage of one party. According to Schwartz, Alan, and Markovits, “The Myth of Efficient Breach” (2010), Faculty Scholarship Series, there is no breach of contract that is efficient both to the breach decision and to the reliance decision. There is usually information asymmetry and thus efficiency and equity in doubt. Most of the times, contingencies that are thought to be unlikely or that do not affect the parties’ cost and benefits are very much, it is not worth going to the trouble to specify in advance what to do if the contingency should occur.
Contract law is viewed to be filling this space or gap in contract, attempting to produce what the parties would have agreed to should they decide to costly plan for the event before its occurrence. Moreover, since the parties will decide to include contract conditions that maximize their joint benefits off their joint costs, both parties can thereby be made better off. This approach according to scholars like Guido Calarbresi, Daniel Markovicts and Mattei, is equivalent to designing contract laws according to the efficiency principle.
In this perspective, there could be three forms of remedies in case a contract went breached. First, expectation damages, awards the breach-against party (the victim) an amount of money that would have put him in the same condition had the contract been complicated. Much of this statement still wait to be true however many laws regards it correct and apt. The second remedy in a breach of contract could be the reliance damages. Here an amount of money is awarded to the breach-against party in a position he would have been in had he never entered into a contract initially. This is not evidential at least for time would have been better utilized in another contract were such was avoidable. Were a contract failed, the first energy got unsatisfied on the side of the breach-against and more is gain on the contrary. Last but not least is restitution damages. This system awards the breach-against an amount of money corresponding to any benefits that he has conferred upon the breaching party.
The similar and sample analysis used by Alan Schwartz and Daniel Markovits in their “Myth of Efficient Breach” owes me a rooting here. Suppose a seller, A, can produce a good called widget for $150 and that this good called widget is usually unavailable, and for this reason a buyer, B1, who values the widget at $200, enters into a contract with A for a future delivery of the widget, and that the contract price is paid in advance in order to use the widget, B1 must take an expenditure of $10 prior to delivery (for example, where he might to modify his warehouse slightly to store the widget), this will be here referred to as reliance expenditure or reliance investment to borrow still the terms use by the above authors. They claimed that where this contracted is not completed, this expenditure is assumed to have no value.
Moreover, before this delivery occurs, there is still chance that some other buyer, B2, may also want the widget. Here the value B2 attaches to the widget is not known at the time A and B1 enter into their contract. For simplicity, let’s assume that B2’s will be either $0, $180 or $250, and that he will offer this amount for it. Thus, after A and B1 have entered into their contract, there is chance that B2 will offer more for the widget than B1 did, certainly if B2’s value is $250. Both A and B1 are aware of these possibilities.
In conclusion, I will assume that the parties here are risk natural that is they care only about value of a risky situation- that is the magnitude of a potential loss or gain multiplied by the probability of the loss or gain occurring. For example, the expected gain in a situation involving a 50 per cent gain chance of winning $10,000 is $5000. A risk-neutral person would, by definition be uninterested between this situation and any other one with the same expected gain such as a situation involving a 25 per cent chance of winning $20, 000, or one involving a certinity of winning $5000. It will be important here that before we conclude how breach of contract remedies fill the gaps in incompletely specified contracts, it is essential that we examine carefully the contract between A and B1 where everything is specified in advance.
Certainly, the explanations above transparently illustrated a simple but fundamental principle of/in economics analysis of contract law. Thus a fully specified contract is efficient.
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