IDEAS home Printed from https://ideas.repec.org/a/oup/jleorg/v7y1991i2p284-312.html
   My bibliography  Save this article

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

Author

Listed:
  • Bebchuk, Lucian Ayre
  • Shavell, Steven

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Bebchuk, Lucian Ayre & Shavell, Steven, 1991. "Information and the Scope of Liability for Breach of Contract: The Rule of Hadley vs. Baxendale," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(2), pages 284-312, Fall.
  • Handle: RePEc:oup:jleorg:v:7:y:1991:i:2:p:284-312
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Surajeet Chakravarty & Bentley MacLeod, 2004. "On the Efficiency of Standard Contracts the Case of Construction," Working Papers 874, Princeton University, Department of Economics, Industrial Relations Section..
    2. Surajeet Chakravarty & W. Bentley MacLeod, 2006. "Construction Contracts (or “How to Get the Right Building at the Right Price?”)," CESifo Working Paper Series 1714, CESifo Group Munich.
    3. Yair Listokin, 2010. "Bayesian Contractual Interpretation," The Journal of Legal Studies, University of Chicago Press, vol. 39(2), pages 359-374.
    4. Liu, Zhiyong & Avraham, Ronen, 2012. "Ex ante versus ex post expectation damages," International Review of Law and Economics, Elsevier, vol. 32(4), pages 339-355.
    5. Anderlini Luca & Felli Leonardo & Postlewaite Andrew, 2011. "Should Courts Always Enforce What Contracting Parties Write?," Review of Law & Economics, De Gruyter, vol. 7(1), pages 14-28, February.
    6. Surajeet Chakravarty & Bentley MacLeod, 2004. "On the Efficiency of Standard Contracts the Case of Construction," Working Papers 874, Princeton University, Department of Economics, Industrial Relations Section..
    7. Thomas J. Miceli & C.F. Sirmans & Geoffrey K. Turnbull, 2009. "Lease Defaults And The Efficient Mitigation Of Damages," Journal of Regional Science, Wiley Blackwell, vol. 49(5), pages 915-930.
    8. De Geest, Gerrit, 2013. "N problems require N instruments," International Review of Law and Economics, Elsevier, vol. 35(C), pages 42-57.
    9. Zervogianni, Eleni, 2004. "Remedies for damage to property: money damages or restitution in natura?," International Review of Law and Economics, Elsevier, vol. 24(4), pages 525-541, December.
    10. Lewis A. Kornhauser & W. Bentley MacLeod, 2012. "Contracts between Legal Persons," Introductory Chapters,in: Robert Gibbons & John Roberts (ed.), The Handbook of Organizational Economics Princeton University Press.
    11. Richard Craswell, 2003. "Kaplow and Shavell on the Substance of Fairness," The Journal of Legal Studies, University of Chicago Press, vol. 32(1), pages 245-275, January.
    12. Hviid, Morten, 1996. "Default rules and equilibrium selection of contract terms," International Review of Law and Economics, Elsevier, vol. 16(2), pages 233-245, June.
    13. Giuseppe Dari-Mattiacci & Sander Onderstal & Francesco Parisi, 2011. "Inverse Adverse Selection: The Market for Gems," Tinbergen Institute Discussion Papers 11-017/1, Tinbergen Institute.
    14. Surajeet Chakravarty & W. Bentley MacLeod, 2009. "Contracting in the shadow of the law," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 533-557.
    15. Steven Shavell, 2003. "On the Writing and the Interpretation of Contracts," NBER Working Papers 10094, National Bureau of Economic Research, Inc.
    16. Isabel Marcin & Andreas Nicklisch, 2014. "Testing the Endowment Effect for Default Rules," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2014_01, Max Planck Institute for Research on Collective Goods.
    17. Amy Farmer & Paul Pecorino, 2005. "Civil Litigation with Mandatory Discovery and Voluntary Transmission of Private Information," The Journal of Legal Studies, University of Chicago Press, vol. 34(1), pages 137-159, January.
    18. Oren Bar-Gill & Omri Ben-Shahar, 2016. "Optimal Defaults in Consumer Markets," The Journal of Legal Studies, University of Chicago Press, vol. 45(S2), pages 137-161.
    19. Steven Shavell, 2003. "Economic Analysis of Contract Law," NBER Working Papers 9696, National Bureau of Economic Research, Inc.
    20. Anderlini, Luca & Postlewaite, Andrew & Felli, Leonardo, 2006. "Should courts always enforce what contracting parties write? this paper replaces TE/2003/464," LSE Research Online Documents on Economics 58189, London School of Economics and Political Science, LSE Library.
    21. Miceli, Thomas J. & Sirmans, C. F., 1995. "An economic theory of adverse possession," International Review of Law and Economics, Elsevier, vol. 15(2), pages 161-173, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:jleorg:v:7:y:1991:i:2:p:284-312. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum). General contact details of provider: https://academic.oup.com/jleo .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.