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

Author: Steven Shavell; Lucian Arye Bebchuk; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 1991.
Series: Working paper series (National Bureau of Economic Research), no. w3696.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
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  Read more...
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Additional Physical Format: Print version:
Bebchuk, Lucian A.
Information and the scope of liability for breach of contract.
Cambridge, MA : National Bureau of Economic Research, [1991]
(OCoLC)23928442
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Steven Shavell; Lucian Arye Bebchuk; National Bureau of Economic Research.
OCLC Number: 756570759
Description: 1 online resource.
Series Title: Working paper series (National Bureau of Economic Research), no. w3696.
Responsibility: Lucian Arye Bebchuk, Steven Shavell.

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.

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