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Decreasing-Liability Contracts

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  • Robert Cooter
  • Ariel Porat
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    Abstract

    Like constructing a building, performance on many contracts occurs in phases. As time passes, the promisor sinks more costs into performance and less expenditure remains. For phased performance, we show that optimal liability for the breaching party decreases as the remaining costs of completing performance decrease. In brief, efficiency requires a decreasing-liability contract. To implement such a contract, we recommend deducting past expenditures on incomplete performance from liability. We show that some types of progress-payment contracts are materially equivalent to decreasing-liability contracts. Our analysis should prove useful for elucidating progress-payment contracts and for drafting and litigating phased contracts.

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    File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?id=doi:10.1086/381289
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal The Journal of Legal Studies.

    Volume (Year): 33 (2004)
    Issue (Month): 1 (01)
    Pages: 157-197

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    Handle: RePEc:ucp:jlstud:v:33:y:2004:p:157-197

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    Web page: http://www.journals.uchicago.edu/JLS/

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    Cited by:
    1. Jacobi, Osnat & Weiss, Avi, 2013. "Allocation of fault in contract law," International Review of Law and Economics, Elsevier, vol. 36(C), pages 1-11.

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