Designing Default Rules of Contract Law from the Perspective of Incomplete Contract Theory- A Focus on the Rules regarding Damages for Breach of Contract
Date Issued
2012
Date
2012
Author(s)
Li, Cheng-Tao
Abstract
Given the fact that the default rules of contract law can be easily opted-out by the agreement of contracting parties, most of the domestic researches focus on the descriptive analysis of default rules in our civil law. But with regard to the role and the function default rules play in contract law, the majority of domestic scholars merely point out the rules are kind of contractual boilerplates provided by the legislator. As the emergence of interdisciplinary research, the advocates of economic analysis of law redefine the role of the default rules in contract law from the perspective of incomplete contract theory: since it is almost impossible for the parties to structure deals by complete contracts, the goal of default rules is to fill the gaps of the incomplete contract. The theory advocated by Aryes and Gertner introduced in Chapter 2 supports that when designing the default rules, the legislator should consider not only the market participants’ preferences among possible proposals, but various cost of each proposal the participants have to bear when they cannot opt-out the default rules. The legislator can further influence the behaviors of the participants by those various cost to maximize social welfare surplus.
This thesis in Chapter 3 takes the theory advocated by Aryes and Gertner as criterion to analyze the respective contractual equilibrium under Expectation Interest, Reliance Interest, Restitution Interest, Disgorgement Interest, Liquidated Damage and other possible proposals for the default damage for breach of contract. This thesis discovers that the default damage for breach of contract will affect the promisor’s cost of precaution against breach and the willingness to breach, the promisee’s willingness to make over-investment in reliance and take self-precaution against breach, the resulting damages from breach and the public cost of resolving disputes through judicial approach. This thesis, after considering all the above factors, claims that Expectation Interest can not only provides the promisee with more sufficient protection but enhance promisor’s willingness to take enough precaution against breach. In addition, given the difficulties in proving the damage and the limited scope of damage for breach of contract, Expectation Interest tends not to be too high to induce the over-investment for the promisee. Therefore, Expectation Interest should be the default rules of damage for breach of contract so as to maximize social welfare surplus.
In Chapter 4, this thesis further analyzes first, the calculating standard of Expectation Interest and second, whether the scope of damage for breach of contract should be limited by the promissor’s foreseeability with the theory introduced in In Chapter 2. For the first issue, courts frequently measure the damages of the injured party either by the cost for completing the performance or the diminution in market value at the time of breach from less than perfect performance. This thesis argues that the cost for completion should be the default rule to measure the damages of Expectation Interest. This is because it will reflect the parties’ assessment and allocation of risk at the time of contracting and will not cause over-compensation or economic waste, which will create more social welfare surplus. Current domestic judicial opinion is of similar view. As for the second issue, the thesis argues that it would be less attractive for the contracting parties to strategically withhold information and the cost of gathering information would be lower, if the scope of damage were limited to those foreseeable by the party in breach at the time of contracting. The domestic judicial opinion, conventionally dominated by Taiwanese Adequate Causation, should thus be revised.
Subjects
Default rules
damage for breach of contract
Expectation Interest
Cost of Completion
Diminution in Value
Foreseeability
Adequate Causation
Type
thesis
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