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The effect of time on default remedies for breach of contract

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  • Jacobi, Osnat
  • Weiss, Avi

Abstract

Among default remedies for breach of contract, expectation damages are believed superior to property rules such as specific performance since they allow the promisor to breach inefficient contracts when renegotiation is economically infeasible. We examine whether the promisor's ability to accurately determine when to breach is maintained when taking into account the value of time that distinguishes between immediate performance and paying damages in court. We show that if prejudgment interest does not equal the promisor's subjective value from time (e.g. if the court uses the promisee's interest rate to fully compensate him), the promisor's breach decision will be distorted. When renegotiation is feasible this problem of excessive breach is mitigated, however asymmetric information about discount factors can lead to a renegotiation process that is doomed to fail. Punitive damages behave similarly. Specific performance without ancillary monetary awards always creates a pie for division between the parties. Ancillary awards for delay are unlikely to change this, but ancillary awards for partial breach make specific performance behave more like expectation damages, although to a lesser degree.

Suggested Citation

  • Jacobi, Osnat & Weiss, Avi, 2013. "The effect of time on default remedies for breach of contract," International Review of Law and Economics, Elsevier, vol. 35(C), pages 13-25.
    • Handle: RePEc:eee:irlaec:v:35:y:2013:i:c:p:13-25
    DOI: 10.1016/j.irle.2012.11.004
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    References listed on IDEAS

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    Cited by:

    1. Jacobi Osnat & Sher Noam, 2015. "A Commitment Mechanism to Eliminate Willful Contract Litigation," Review of Law & Economics, De Gruyter, vol. 11(2), pages 231-266, July.

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    More about this item

    Keywords

    Contract law; Breach of contract; Default remedies; Expectation damages; Specific performance; Punitive damages; Renegotiation costs; Discount factor; Prejudgment interest;
    All these keywords.

    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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