week 4 - contract law Flashcards

Question

How does reputation increase trust? what is one limitation?

Answer 1

- when a certain deal between two parties is repeated multiple times, it increases trust bc it makes the seller + buyer reliable = better cooperation ex. - if an ebay seller is known to be good = they will get more customers limitation; - it doesnt work for one time interactions

Answer 2

- when you sign a contract (voluntarily), breaching it results in a penalty - therefore you end up losing money instead of making it - SO the contract makes it so you have **no** incentive to cheat, therefore builds trust between two parties - lets the cooperate and mutually benefit - SO contracts are voluntary limits that create incentives for cooperation - thus increasing trust ex. - u get 200 dollars, are supposed to keep only 50 acc to contract, u breach it, now u have to pay fine of 175 = only left with 25 instead of 50

Answer 3

- when you sign a contract, ur essentially agreeing that there are certain things ur not allowed to do - thus u 'limit' yourself and ur choiced - this might SOUND bad but its not! - in some situations, having fewer otpions is better bc it removes the otpion to break a contract which increases trust + inreases credibility - SO - contracts are **voluntary limits** that create incentives for cooperation USSUALLY; - ex ante - before a deal is made - the parties both want enforceability BUT - ex post - after the deal is made - suddenly one party switches up and doesnt want enforceability anymore - contracts ensure the switch up doesnt happen

Answer 4

1. to facilitate efficient trade where **trust + committment** are needed 2. incentivize **efficient level of performance and breach** 3. minimize transaction costs of negotiating contracts by supplying **efficient** **remedy** for a breach

Answer 5

Sometimes, a contract is breached BUT the outcome of the breach is more efficient than if the contract had been completed - aka it makes more economic sense / is financially beneficial SO its when breaching a contract is more efficient than performing it - even AFTER compensating the other party - THEREFORE the cost of performance MUST outweigh the value of perforformance - therefore it avoids wasting resources, esp when costs outweigh the benefits - as resources should be moved to where they have the highest value examples; - the cost of perfoming thes ervice becomes too high - i find someone who values the performance more (is willing to pay more)

Answer 6

NO - remedies are more then compensation, they serve as incentives that influence our decisions before and during a contract the type of remedy that is used my impact; - contract formation - investing in a performance - relying on promises - breaching performance

Answer 7

**1) court imposed remedies** - damages vs specific performance **2) party designed remedies** - liquidated damages

Answer 8

1) court imposed remedies; **a) damages** - damaged party entitled to compensation - expectation - reliance **b) specific performance** - court order forces breaching party to do what they promised 2) party designed remedies

Answer 9

1) expectation damages 2) Reliance damages 3) opportunity costs | we are focusing on 1 and 2

Answer 10

- a standard legal remedy for when a contract is breached - forward looking = places the injured party in the same position they would have been in had the contract never been breached = thus giving them the 'benefit of the bargain' - the breacher is not punished must pay enough (compensation) to make the other party whole - THEREFORE efficient behaviour is incentivized, a breach only occurs if the benefit of the breach outweighs its costs SO; - non-breaching party is compensated + placed in same posiition they wouldve been in if the contract was never breached, therefore, the benefit of the bargain is protecte4d economic aim; - make the victim indifferent between getting the performance, and having the contract breached but getting damages (aka theyll be happy with both) - this forces the breaching parties to internalize the costs of the breach

Answer 11

a court imposed remedy of damages, specifically = expectation damages

Answer 12

- expecation damages refers to compensations that places the injured party in the same position they would've been in had the contract been completed, therefore, it is forward looking -

Answer 13

1) substitution - awards damages based on the cost to replace or fix what was not delivered or performed 2) diminishing value - method awards damages based on the difference between the value of what was promised and what was actually delivered

Answer 14

expectation damages; - forward looking - compensation that places the injured party in the same position they would have been in had the contract been completed reliance damages; - backwards looking - compensation that places the injured party in the same position they were in BEFORE the contract was concluded - thus all costs the damaged party incurred due to relying on a agreed upon performance (fulfilment of a promise) would be covered

Answer 15

*if contract occured as intended;* - Father = expects 8k, recieves 10k = gains 2k - Phoebe = values at 15k, pays 10k = gains 5k Option 1: not breaching the contract - Father = recieves 10k, must pay 18k, looses 8k - Phoebe = pays 10k, values at 15k, gains 5k - total; 5k -8k = -3k = it is inefficient to perform the contract Option 2: breaching the contract, - father doesnt create the custom software but must compensate A for A's expectation loss - Phoebe = was supposed to gain 5k but didnt - father = pays phoebe 5k - total; 5k-5k = 0 - this is a better outcome than -3!!

Answer 16

- court enforced, reliance damages - the aim is to undo the harm and restore pre-contractual conditions, and compensate losses incurred because the victim relied on the promise, protects the injured party against wasted investemnts

Answer 17

- backwards looking - compensation that places the injured party in the same position they were in BEFORE the contract was concluded - thus all costs the damaged party incurred due to relying on an agreed upon performance (fulfilment of a promise) would be covered so - expenses that were made with the assumption that the promise will be fulfilled are relience cost aim; - make victim indifferent between no contract and a contract breach with damages compensated

Answer 18

- any expense that a party made with the assumption that a certain promise will be fulfilled is a relience cost example; - Joey has signed a contract to purchase a new car, assuming he will recieve the car, he also purches a new garage for 10k (which is a reliance cost)

Answer 19

Sofi; Ross; - 17k spent on items he bought as he assumed he'd get the van, thus they are reliance costs. SO Sofi must compensate 17k to him. Now Ross is in the same state he was in before the contracct was concluded.

Answer 20

Knowing one can be compensated for reliance damages may lead to **overreliance**, incentivizing a party to over-invest as they **dont personally bear the risk** if the investments go wrong, as the investments would be fully compensated as part of reliance damages - this creates a **moral hazard**, as the promissee makes too many investments as someone else pays if it fails HOWEVER this is not an automatic result of perfect relience damages, it is one limitation - and happens less frequently than in expectation damages

Answer 21

The problem of overreliance exists in both expectation and reliance damages, but it is more frequent and more severe in expectation damages. The foreseeability doctrine helps control this in both systems

Answer 22

=> By applying the doctrine of foreseeability, especially as established in Hadley v. Baxendale (1854). => established that the party breaching the contract is only responsible for losses that are **reasonably forseable** or **specifically communicated ** example; - Joey signed contract to purchase new car, assuming he will get it he orders red paint to pain his name on the car. if he did not communicate this specifically, the court may say the breaching party is not responsible for the cost of the red paint as it was not forseable

Answer 23

established the doctrine of foreseability, which is one way in which the issue of overreliance can be limited by establishing that the party breaching the contract is only responsible for losses that are **reasonably forseable** or ** specifically communicated **

Answer 24

1) this is a reliance cost 2) this cost will not be compensated as, he did not communicate this purchase and the purchase is not forseable

Answer 25

investment = how much time, effort, money is spent on the agreed upon performance, and costs incurred due to relying on the conclusion of the agreed upon performance

Answer 26

1. promisors (seller) invest in a performance - what the seller has to do to actually perform the conduct properly ex. buying material, maintenence - the higher the penalty imposed for breaching a contract, the stronger the promisors incentive to invest properly and ensure the performance 2. promissee (buyer) invests in reliance - what a buyer does because they expect the contract to be fulfilled ex. buying a new garage for new van - the greater the compensation for reliance costs in case of a contract breach, the more investments the buyer will make (leading to over investing) - if compensation is too small - can lead to under investing

Answer 27

high incentive

Answer 28

- LOTS of investments because if the contract is breached and performance doesnt occur, all the reliance damage will be compensated - This might lead to over investing

Answer 29

you cannot design a single remedy for both the promisor and promissee that creates the right investment incentive for both BECAUSE; if damages are high; - strong incentive for the promisor (seller) to perform (good), strong incentive for promissee to over-invest due to overreliance - which is a moral hazard (bad) if damages are low; - weak incentive for promisor (seller) to perform well (bad), this means the promissee bears the risk and invests carefully (good) = you can never win because the damages paid for by the promissor are the damages recieved by the promissee, thus incentivizing one party de-centivizes the other

Answer 30

the forseability legal doctrine established by Hadley v Baxendale, outlining that we should limit compensation only to forseable reliance, and exclude unforseabel relience, which would incentivize the promisee to disclose unforceable reliance to the promissor

Answer 31

- established by Hadley v Baxendale, outliend that one way in which the issue of overreliance can be limited by establishing that the party breaching the contract is only responsible for losses that are **reasonably forseable** or **specifically communicated **

Answer 32

=> rules that provide what would happen in some circumstances if the parties didnt specify the outcome of that particular circumstance => from an economic perspective, they reduce transaction costs (bc they reduce the time, effort, money it takes to create a contract) => the default rule is based on what works for majority of ppl, but what works for the majority may not work for everyone, thus this incentivizes the minority to contract around them (in this case, sign a prenup) => the econ goal of default rules is to enforce efficient rules that work for most ppl that the two parties would have agreed two had they included the scenario in their contract SO court imposed rules, such as damages (expectation and relience) and specific performance, are default rules. | SO they minimize the transaction costs of negotiating?

Answer 33

1) court imposed rules a) damages - expectation + relience b) specific performance

Answer 34

default rules minimize transaction costs

Answer 35

In Marriage, if there is no prenup outlining what occurs in case of default, the state resorts to default rules that outline that what was yours before marriage will be yours after marriage, and what was acquired during marriage will be evenly divided / shared

Answer 36

YES - they minimize the transaction costs of negotiating (reduce time, effort, money, etc.)

Answer 37

rules that override the terms of a contract, even if both parties agreed to those terms. - they correct market failures and protect third parties / public interests - THUS they encourage efficient info disclosure for example - rules that prevent; - ppl who lack rationality to make binding contracts and be taken advantage of

Answer 38

mandatory rules prevent; 1. people who lack rationality from making decisions, for example; incompetence - minors, mental incapacity, duress - threats, coercion, necessity - forced choice bc of desperate conditions 2. asymmetric information (when one party knows a lot and the other doesnt) for example; fraud -intentional deception, duty to disclose-witholding important info, mutual mistake-both parties misundersrtand important fact 3. monopoly power - when one party has so much power they can force unfair terms for example; unconscienbility - shockingly unfair terms, lesion-a gross imbalance between value given and value recieved 4. externalities - when a contract harms 3rd parties who are not involved (ex. public policy violations)

Answer 39

=not just written agreements, but long term business relationship - enforcement is informal (not always via courts) - cooperation os based on trust, reputation, shared expectation

Answer 40

The main issue is the end game problem. - informal enforcement is weakened, therefore if a company knows it will no longer going to be working with another company, they are more tempted to 'cheat' since their reputation no longer matters - thus trust decreases (but they dont care bc they wont work with them again)

Answer 41

end game problem = when trust decreases towards the end of cooperative relations between two companies, incentivizing the parties to 'cheat' and screw each other over sollution = - combine formal contracts with relational norms - at the start + end of the relationship = have it be ruled by formal contracts - middle of relationship = have it be ruled by informal cooperation

Answer 42

1. court imposed remedies a) damages - expectation vs reliance damages b) specific performance 2. party designed remedies a) liquidated damages

Answer 43

when you get compensated for the 'opporutnity' costs you lost because you chose this contract instead of the second best option - and this contract was breahced "if I haden't chosen this contract that was later breached, I would've chosen a different contract and wouldve been way better off" Thus, you get compensated for the foregone opporutnity

Answer 44

- The next best option costs 5k extra, therefore this is the opportunity cost that Ross would be compensated for. - without being compensated 5k, Ross would only 'gain' 10k instead of 15k

Answer 45

1) expectation damage 2) opportunity costs 3) reliance damage

Answer 46

1) highest compensation = expectation damages - u r well off as if the contract had been performed (same lvl of joy) 2) middle ocmpensation = opportunity costs - ur placed in the position of the next best alternative 3) lowest compensation = reliance damages - ur place din the position as if the contract was never made - it does not account for what you gained, only what u actually lost

Answer 47

reliance damages - since ur placed in the same position you wouldve been in had the contract never been made

Answer 48

- this means there is no objective market value for that good

Answer 49

- Hawkins had a scarred hand, Dr. McGee said he could fix it, but the outcome was even worse then before, and the hand grew hair - Hawkins wanted to be compensated bc he was promised a 'perfect hand' and instead got a 'harry hand'. - what is the market value of a 'perfect hand'? this can only be determined subjectively, meaning we must look beyond market value - SO the court looked at the difference between what was promised (perfect hand) and what was recieved (harry hand) - the damages compensated must relfect the difference in value between the two so; - if a contract is breached, you should be compensated based on your expected value - no just market prices, so long the subjective expected value is forseable and reasonable

Answer 50

specific performance

Answer 51

when the court orders the promised performance instead of damages (financial compensation)

Answer 52

- used when a good is unique ex. art, land, custom pieces - damages are hard to calculate (have subjective value) - there are no close substitutes to the performance

Answer 53

1. prevents having to place a value to a busjective good which is difficult 2. gives promissee some bargaining power 3. may lead to an inefficient performance if re-negotiation fails

Answer 54

Remedies agreed upon by parties in advance, and are written into the contract (instead of using default rules)

Answer 55

Liquidated Damages

Answer 56

When two contracting parties agree on a specific amount of money to be paid in case of a contract breach. This is written into the contract and followed above all other rules - except mandatory rules.

Answer 57

1. reduces litigation costs (cost for lawyer afterwards) 2. signals commitment - shows both parties take the contract seriously, increases trust, helps deter OTHER breaches 3. provides insurance for losses that are hard to measure

Answer 58

NO - liquidated damages are only enforceable if the cost outlined in the contract geniunely reflects the anticipated harm - IF the cost is excessive, or the clause is a penalty clearly meant to punish as opposed to compensate it is NOT legally enforceable

Answer 59

- civil law is more willing to enforce penalties than common law

Answer 60

- if there are no transaction costs, regardless of the remedy used the outcome will always be efficient due to bilateral negotiation. - if there ARE transaction costs, the remedy used WILL impact whether or not the final outcome will be efficient

Answer 61

- In an ideal world, when we bargain (aka negotiate) the outcome will always be efficient, assuming there are no transaction costs - therefore, the legal rules / remedies used only affect the distribution of rights - NOT efficiency

Answer 62

Yes - if transaction costs are high, the type of remedy used will impact efficiency

Answer 63

- under specific performance the court can order the party that wants to breach the contract to follow through, thus forcing them to perform. The con is that this might not be efficient, especially if the cost is greater than the value of the performance, and when renegotiation is expensive, and / or the victim refuses to renegotiate.

Answer 64

*note; timeline of a contract* *0. formation 1. investments 2. performance* An anticipatory breach is when a party informs the other it will breach the contract before performance occurs

Answer 65

1. when + how should damages be calculated - at the time of the breach or at the time when the performance is due? 2. should the injured be compensated for reliance costs, even if they are incured after they are notified that the other party is breaching the contract? => ex. B keeps investing even after A says they are breaching the contract 3. How does timing affect the breach?

Answer 66

the one who values a product the most, which is determined by the fact that they are willing to pay the most money for a product, thus maximizing the value of the product. In this way, the aggregate benefit is maximized, since the total payoff for everyone included is the greatest

Answer 67

- The most economically efficient owner is not always the best solution at who the owner should be - For example, the story about an expensive and scarce hormone therapy treatment that makes you grow taller. A poor family has a son with dwarfism who could greatly benefit from the treatment, and a rich family has a son who wants to be taller for aesthetic purposes. The rich family is willing to pay a lot more than the poor family, thus maximizing the economic value of the scarce product, and therefore being the most efficient owner. However, from a societal perspective, the poor family would value the product a lot more as their son has dwarfism.

Answer 68

The efficient owner of the scooter is the person who values the product the most, thus maximizing its value by paying the most for it. In this case, the most efficient owner is Maxine as she is willing to pay 6k for it, whilst Marcus only offers 3k. In this way, the aggregate (total) benefit is maximized since the total pay off (combined gain) of everyone included is the greatest

Answer 69

a) Relience damages are forward looking and are compensation for costs incurred by the injured party by relying on the completion of the promise. It is therefore forward looking and places the injured party in the same position they would have been had the contract never been made. Relience damage incentivizes people to invest before performance occurs. One potential limitation is overrelience, meaning the promissee overinvests as they dont bear the risk of damages (this CAN occur but does not always, perfect relience damages does NOT automatically lead to overinvestment. A sollution was proposed by Hadley v. Baxendale (1854) who outlined that the reliance cost must be reasonably forseable. - In this case, Marcus spends 150 euros on protective gear for the scooter which is a reasonably forseabele cost. Thus, the reliance damage is 150 euros. Expectation damages are backward looking. It is compensation for **expected profit from proper performance of the obligation** outlined in the contractand place the injured party in the same position they would have been in had the contract been concluded, thus making them indifferent to whether or not the contract should be breached whislt they are compensated, or followed through - as they would be in the same position either way. It is calculated by subtracting the value of the total benefit the product from the actual price. - In this case, Marcus's total benefit from purchasing the bike would have been 5k, and he paid 3k, meaning the expectation value is 2k, which is the 'real benefit' of what he would have recieved had the contract been performed. b) Ginny as he would only get the expectation damages if the contract is breached and Ginny does not perform the agreement, thus does not give Marcus the scooter.

Answer 70

value of the product - the reservation price (how much you actually pay)

Answer 71

in this case; - Expectation damages for marcus is 2k because its the value of the product minus how much you actually paid (5k-3k = 2k) - Therefore now Marcus is in the same position he would have been in had the contract actually been concluded. - so the one that would ed up owning the scooter is the one that gives Ginny the greatest benefit, which in this case is Maxine who is willing to spend 6k. so - Maxine = -6k + bike = happy - Ginny = +6k - 2k = 4k = happy - Marcus = +2k = happy so everyones interests are maximized, everyone is happy, this outcome is more efficient then if Marcus was the one to buy the bike = In this way, expectation damages provide incentive for an efficient breach, efficient performance, and it aligns with private incentives with social welfare - it allows for flexibility as it allows each individual to assess the cost and benefits of the breach for themselves, and choose the most efficient outcome for themselves - which also happens to be the most efficient outcome for society as a whole

Answer 72

false - expectation damages dont rely on ones kindness, instead they allow for flexibility which gives the parties involved a chance to assess the costs and benefits of a potential breach for themselves, and choose what is most efficient **for themselves**, which also happens to be most efficient for society as a whole

Answer 73

From an economic perspective, expectation damages are favored because they promote efficient performance, efficient breach, and maintain the value of the bargain — making them the remedy that most often maximizes overall economic welfare - one major limitation is overrelience !! (solution = forseability doctrine) - Overreliance means that the injured party (usually the promisee) overinvests beyond the efficient point in anticipation of the contract being performed.

Answer 74

specific performance = court ordered conclusion of the performance - since Maxine and Marcus cannot renegotiate a deal and dislike each other, transaction costs are extremely high. High transaction costs serve as barriers to efficient trade and prevent the efificent outcome Therefore; - Ginny has to sell the scooter to Marcus, therefore Marcus will get the scooter individual payoffs; - Ginny; +3k - Marcus: -3k, + scooter (indv gains 2k bc 5k-3k = 2k) - Maxine = 0 This outcome is not efficient, and if a different remedy was to be used the outcome would be efficient.

Answer 75

- it means the transaction costs serve as barriers to efficient trade which prevent the most efficient outcome

Answer 76

the remedies we can use; relience damages, expectation damages, specific performance **Relience damages and low TC:** - ginny breaches the contract with marcus and sells the bike to maxine, marcus gets compensated for relience costs of 150 so maxine; - -6k+bike ginny; - +6k total welfare = 6k **expectation damages and low TC** - ginny breaches contract with marcus and sells the bike to maxine, marcus gets compensated. so marcus; - +2k expectation damages (indv pay off) maxine; - -6k + bike ginny; - +6k total welfare = 6k welfare **Specific performance and low TC;** - Ginny sells the scooter to Marcus because it is court ordered, but Marcus can easily negotiate a deal with Maxine who values the scooter more, and thus sells it to Maxine who becomes the ultimate owner. so marcus; - -3k + scooter - +6k - = +3k total payoff ginny: - +3k total payoff maxine; - -6k + scooter total welfare; 6k SO under low transaction costs the remedy used does NOT MATTER because the outcome will ALWAYS be efficient

Answer 77

High transaction costs: - the remedy impacts the efficiency of the outcome Low transaction costs: - the remedy used does NOT impact the efficiency of the outcome, the outcome will ALWAYS be efficient

Answer 78

- the coase theorem - outlines that the legal rule used does not matter, efficiency will always be achieved vai bilateral negotiations - the legal rule simply impacts who gets what (the allocation of goods)

Answer 79

- the distribution of goods - aka who gets what (who the final owner of a certain good is)

Answer 80

the remedies we can use; relience damages, expectation damages, specific performance **Relience damages:** - ginny breaches the contract with marcus and sells the bike to maxine, marcus gets compensated for relience costs of 150 so maxine; - -6k+bike ginny; - +6k total welfare = 6k **expectation damages ** - ginny breaches contract with marcus and sells the bike to maxine, marcus gets compensated. marcus; - +2k expectation damages (indv pay off) maxine; - -6k + bike ginny; - +6k - = THIS IS EFFICIENT total welfare = 6k welfare **Specific performance;** - Ginny sells the scooter to Marcus because it is court ordered, Marcus cannot negotiate a deal with Maxine who values the scooter more, and thus keeps it. Maxine does not get anything. Marcus becomes the ultimate owner. so marcus; - -3k + scooter ginny: - +3k total payoff maxine; - 0 - total welfare = 3k = inefficient because the person who values the product the most, which is Maxine, does not get it.

Answer 81

**Rachel can cancel the purchase without penalty; = inefficient breach of contract** - if there is no penalty to breach a contract, Rachel will obviously breach it as she bears no costs and does not like the color of the new sofa. She has no incentive to take into account the costs of breaching the contract - So the outcome would be inefficient because Rachel would bear zero costs and be happy, but the store was expecting a large profit from this sale and thus lost lots of money **Rachel can cancel purchase but there is a penalty for their expected lost profits = efficient breach** - in this scenario, if Rachel breaches the contract she would have to pay expectation costs to the sofa suppliers. This incentivizes her to think about the cost and benefit of breaching the contract, meaning she will only breach it if the benefit outweighs the cost - This would be efficient because Rachel would have to bear the costs of expected damage the store would incur, so in this way the store would not lose any money

Answer 82

breach of contract = imposing an externality expectation damages = internalizing the externality damages - SO if you have to pay expectation damages you are incentivized to weigh the cost and benefit of breaching a contract, meaning you;ll only breach it if the benefits outweigh the costs.

Answer 83

A penalty clause is a contractual term that sets a predetermined sum to be paid in case of breach. Expectation damages is a court ordered default rule

Answer 84

party designed remedies = remedies agreed upon by parties in advance that are written into a contract a) lliquidated damages = a specific amount of money the parties agreed to in advance to be paid if one party breaches the contract, it is legally enforceable under common + civil law b) penalty clause = a clause aimed to punish the party that breaches the contract, not legally enforceable under common law, can be legally enforceable under civil law - but courts can reduce penalties that are manifestly excessive

Answer 85

a) lliquidated damages = a specific amount of money the parties agreed to in advance to be paid if one party breaches the contract, it is legally enforceable under common + civil law b) penalty clause = a clause aimed to punish the party that breaches the contract, not legally enforceable under common law, can be legally enforceable under civil law - but courts can reduce excessive penalties

Answer 86

- they sometimes cause a party to continue with the performance of an obligation outline in a contract, even if performance in this case is inefficient - only because the penalty clauses are higher than the damages. thus this leads to an inefficient outcome

Answer 87

because if the penalty would be higher then the expectation damage, you would perform the contract -even when it would be more efficient to breach it, simply because you dont want to pay the high penalty, as it would mean the compensation that you'd have to pay is greater than the expectation damage. The aim should be to achieve the optimal outcome, NOT to make the victim rich or to punish the breacher.

Answer 88

default rule = rules that provide what would happen in a circumstance that the parties didnt specificy the outcome of. They allocate the risk in the most efficient way, thus to the party who can avoid it at the lowest societal cost. They lower transaction costs for the majority, and although they may increase transaction costs for a minority who is incentivized to find a different sollution, it is efficient as the benefit outweights the cost. aka automatically used unless otherwise specified in the contract (ex. expectation, relience damages, specific performance) majoritarian default rules = the default rules used are based on what is most beneficial for majority of the parties that were in the same position. Just because something is beneficial for a majority does not mean it is most beneficial for all people, thus the minority of people are incentivized to draw up individual clauses that are more beneficial to them. to manage a risk means one can avoid it or proive an alternative sollution at a lower cost than the other party. In this case, the majoritarian default rule benefits 8-% of buyers, and outlines that the buyer is best fit to manage risks that Rachel is facing such as lack of financing ,unexpected expenses, etc. So she would bear the costs for damages. However, for 20% of buyers, the seller is better suited to handle them, meaning the seller would bear the costs of risks in case of a breach and be held liable. ii) IF Rachel would choose for the seller to bear the costs of damages in case of a contract breach, it is most probable that the price of the sofa will increase, as it would includue the cost of potential damages. Contrarily, if she chose to bear the risks the price of the sofa would decrease - as in case of a breach she would need to cover the costs herslef. So Rachel must balance the costs and benefits of each option in order to determine the most beneficial outcome for her situaiton. She will chose the situation where the benefits outweigh the costs.

Answer 89

default rule = rules that provide what would happen in a circumstance that the parties didnt specificy the outcome of. They allocate the risk in the most efficient way, thus to the party who can avoid it at the lowest societal cost. They lower transaction costs for the majority, and although they may increase transaction costs for a minority who is incentivized to find a different sollution, it is efficient as the benefit outweights the cost.

Answer 90

The most efficient owner is homeowner B because they are willing to pay the most amount of money for the same product, thus maximizing the products value, indicating the value it the most.

Answer 91

expectation damages = compensation for **expected profit from proper performance of the obligation** outlined in the contractand place the injured party in the same position they would have been in had the contract been concluded, thus making them indifferent to whether or not the contract should be breached whislt they are compensated, or followed through - as they would be in the same position either way. It is calculated by subtracting the value of the total benefit the product from the actual price Homeowner A; - values the deck at 8k - agreed price is 6k - individual benefit; 8-6 = 2k So the expectation damages is 2k Homeowner B; - willing to pay 9k contractor; - if they were to breach the contract, they would get 9k, pay 2k in damages and be left with 7k profit. If they were to not breach the contract, they would get 6k. Therefore, they are icnentivized to breach the contract as it is more efficient since they get 1k extra.

Answer 92

Since both homeowners can negotiate, the transaction costs are low. So; **specific performance** = court ordered performance of the contract. This means the contractor must sell the deck to homeowner A for 6k. However, through bilateral negotiation, Homeowner A can sell the deck to Homeowner B for 9k. Thus; Homeowner A; - -6k + 9k = 3k total Homeowner B; - -9k + deck = happy contractor; - +6k total welfare = 9k **under expectation damages;** - The contractor would breach the contract with homeowner A, pay expectaiton damages of 2k, and sell the Deck to homeowner B for 9k. Thus; Homeowner A; - +2k Homeowner B; - -9k + deck contractor; - +9k - 2k = 7k total welfare = 9k Therefore, in both scenarios Homeowner B would become the owner of the deck. Due to the low transaction costs, both outcomes would be efficient, however, the allocation of goods could differ, in this case the allocation of welfare differs as under specific performance the contracter gets 6k, and under expectation damages he would get 7k - but the total social welfare would be the same in both situations.

week 4 - contract law Flashcards

lecture 7 + 8 = contract law I and II (117 cards)