Document Type

Article

Publication Date

2010

Center/Program

Center for Contract and Economic Organization

Center/Program

Center for Law and Economic Studies

Abstract

The world is in a bit of a mess. Oil prices soared to more than $140 per barrel and within months plummeted to below $40. The pound fell from $2 to less than $1.40. Housing and stock prices crashed. Foreclosures, bankruptcies, and bailouts became newspaper staples. When things go awry like this, inevitably many people and firms regret having entered into contracts under more favorable circumstances. Many of them will be looking for ways to limit, or better yet, avoid the consequences. A preeminent contracts scholar, Melvin Eisenberg (2009), has provided them with considerable ammunition in a recent paper, arguing for expanding the domain of the excuse doctrines. His arguments for giving the disappointed contracting party a "get out of jail (almost) free" card, however, are seriously flawed.

The core of his argument is the inability of private actors to anticipate remote risks. Contracting parties, he argues, have bounded rationality; they can't think of everything. If the parties shared an incorrect tacit assumption about some low-probability event, performance would be excused (the shared-assumption test). He breaks out a subcategory for special treatment: when a change in prices would be sufficiently large to leave the promisor with a loss significantly greater than would have reasonably been expected (the bounded-risk test). He argues that courts should have a broader set of responses than excuse or don't excuse. Rather than an on-off switch, he suggests that the more appropriate analogy is to a dimmer. Relief need not mean that the contract is terminated with no remedy for the promisee. He proposes remedies that fall short of full expectation damages.

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