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Efficient Material Breach of Contract

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  • Bernhard Ganglmair

Abstract

In an environment in which sellers can reduce the probability of defective delivery through cooperative investment, and in which enforcement of default remedies for breach of contract is imperfect, an optimal performance standard grants buyers the option to reject goods for some but not all defects, in other words, when the delivery is sufficiently defective and the seller is said to be in “material breach” of contract. This optimal performance standard implements efficient cooperative investment more often under a policy that, in addition, allows buyers to collect compensation for nondelivery of the good (upon rightful rejection) than a policy that limits buyers’ compensation to the recovery of the price. Although contracts with liquidated damages (i.e. a customized compensation function) can solve the investment problem as long as court enforcement is not too imperfect (in which case optimal liquidated damages are excessive and likely not enforced), the doctrine of material breach with an option to reject performs well as a default rule.

Suggested Citation

  • Bernhard Ganglmair, 2017. "Efficient Material Breach of Contract," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 33(3), pages 507-540.
    • Handle: RePEc:oup:jleorg:v:33:y:2017:i:3:p:507-540.
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    File URL: http://hdl.handle.net/10.1093/jleorg/eww020
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    Cited by:

    1. Alessandro De Chiara, 2018. "Courts' Decisions, Cooperative Investments, and Incomplete Contracts," CEU Working Papers 2018_5, Department of Economics, Central European University.

    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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