ABSTRACT
Should a party to a contract be excused from fulfilling the contract if doing so has become much more burdensome due to a radical change of circumstances? Legal doctrines of impracticability, force majeure, frustration or hardship ask if the change of circumstance negated the parties’ basic assumptions or was unforeseeable. What this means is however unclear as was recently evidenced during the Covid pandemic where contracting parties found little guidance from these doctrines when their contracts were frustrated. The law and economics approach may provide greater clarity by asking when it is optimal in terms of risk allocation to repair incomplete contracts. However, while it is commonly understood by contract managers and while economic discussions have often made reference to it, the fact that excuse doctrines will remain vague and that there will therefore be opportunistic claims for relief and disputes has not been part of formal analysis. This article trades off risk allocation and dispute costs. If courts interpret standards of excuse broadly, there will be two main consequences. On the one hand, incomplete contracts will be ‘repaired’ more often, which may be beneficial from the viewpoint of risk allocation. On the other hand, more disputes are likely to occur, when the parties disagree about how broadly the standard applies, and when the promisor may raise opportunistic claims for relief. How broadly courts should interpret, and contracting parties should write, the terms of excuse depends in this framework on the degree of vagueness of the standard, the parties’ risk preferences, the costs of disputes as affected by the conflict resolution mechanism, and on whether the parties govern their contract by relational norms.
Lando, Henrik, When Should Non-performance of Contracts Be Excused Under Changed Circumstances? (September 15, 2023).
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