Lecture 6 - strategic contracting Flashcards
What is strategic contracting?
Using law to gain/sustain competitive advantages. Either one party could pursue it at the expense of the other (opportunism), or both parties use the contract to promote collaboration by incorporating terms that prevent opportunism (incentives or penalties).
What does good faith in the negotiation phase imply?
There is a fair and open way of dealing with each other, to prevent pre-contractual opportunism. This is a duty in civil law, so you can’t walk away from the negotiation phase with the intention of hurting each other. Regulated in the UNIDROIT principles.
In common law, there is no such general duty. Thus we can use knowledge to question and put pressure on the other party, and then just leave the negotiation without any remedy.
What is a breach of contract?
Failure by one party to fulfil an obligation under the contract through non-performance or defective performance (late performance or quality issues).
Do you have the right to receive performance in case of a breach of the contract?
- Common law: No. The contract is made with freedom, meaning that the only binding promise is to pay damages if you want to walk away from the contract. Promise to pay if fail to do. Damages are thus the normal remedy for breaches.
- Civil law: Yes, specific performance is the norm in theory.
What is an efficient breach of contract?
Breaching a contract and paying the damages (common law) in favour for something more profitable
What is specific performance?
The obligor is required to personally perform the obligation. If land is involved, specific performance can often be granted since damages is an inadequate remedy for the buyer.
What is injunction?
Court prohibits an individual from doing something.
What is the purpose of damages?
Putting the claimant into the position he would have been in had the contract been properly performed (expectation measure). In common law, the party affected by the breach should be, so far as money can do it, put in the same position as if the contract had been performed.
Damages in tort (common) / dealings (civil) should give the same position as if the tort had not been committed.
What are contractual clauses and why can they be used?
Parties can stipulate which remedies are available in case of breach. In case of breach, they can then point to these clauses, otherwise they have to prove everything (amount etc) to a judge.
What is special about penalty clauses under common law?
They are unenforceable if it amounts to a penalty (not genuine pre-estimate of loss) since it takes away freedom. Can be enforceable if it is liquidated damages.
What is liquidated damages?
Damages specified ex ante that reasonably approximate actual harm caused by the breach. Makes it easier to get money in case of breach (does not need to prove) but is bad in cases where money is not sufficient remedy.
In common law, what should you do if you don’t want to fulfil an agreement?
Make sure penalty clauses are so extravagant in relation to legitimate interest that it cannot be enforceable.
Since penalty clauses are not allowed in common law, what can you do instead to make parties perform?
Use incentives such as rewards and performance bonuses. (also possible in civil law).
