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goods and for provision of services. Additionally, it may be observed that specific performance
might be peculiarly difficult to enforce in these contexts because of problems in monitoring and
controlling parties effort levels and the quality of production.
However, specific performance does have advantages for parties in certain contexts, such as
in contracts for the transfer of things that already exist, like land, and specific performance is the
usual legal remedy for sellers breaches of contracts for the sale of land. This point is discussed
briefly below, in section 4.3.1. On specific performance and its general comparison to damage
remedies, see Bishop (1985), Kronman (1978b), Schwartz (1979), Shavell (1984b), and Ulen
(1984). (Specific performance also is examined in some of the articles on production contracts
cited in section 4.2.2.)
4.1.8. Renegotiation of contracts. Parties often have the opportunity to renegotiate their
contracts when problems arise. Indeed, the assumption that they will do this has appeal because,
having made an initial contract, the parties know of each other s existence and of many particulars
of the contractual situation. For this reason, much of the economics literature on contracts
assumes that renegotiation always occurs when inefficiency would otherwise result; see, for
82
When parties do not so specify in advance, certain legal doctrines may serve this function. See Joskow (1977),
Posner and Rosenfield (1977), and Sykes (1990).
83
For example, if a party wants to breach because he has a superior opportunity, optimal damages might be higher,
although adjusting damages in the case of beneficial risks is not likely to matter as much on risk-bearing grounds.
84
For example, if the victim s loss is non-monetary, such as the loss due to failure of musicians to appear at a
wedding, financial compensation in the form of damages may not constitute an optimal form of insurance. See section 2.4.2.
85
Some economists have employed the term  specific performance in an unconventional sense, to refer to
enforcement of all provisions in a contract, including any damage measure named in it. Thus, they would say that a contract
is specifically performed when the parties name expectation damages in their contract and parties who breach are thus
required pay these damages.
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example, Hart (1987), Hart and Holmstrom (1987), and Rogerson (1984).
Nevertheless, in many circumstances contracts will not be renegotiated because parties are
not in contact with each other when difficulties are experienced and one party would benefit from
acting quickly. A problem may occur during the course of production and the producer may have
to decide on the spot whether to abort the process or proceed at greater cost. Or a new bid may
be heard and have to be immediately answered. Furthermore, even if the parties are in contact
with one another, asymmetric information may lead to breakdowns in renegotiation.
In any event, let us assume that successful renegotiation tends to occur and consider how it
affects the welfare of contracting parties. Plainly, renegotiation often allows parties to avert
Pareto inefficient breach decisions. For example, if damages exceeding the expectation measure
or specific performance were the remedy for breach, a seller might be led to perform when his
production cost exceeds the value of performance to the buyer. To avoid this inefficient outcome,
the seller might pay the buyer to release him from his obligation to perform. That renegotiation
may result in performance if and only if it is efficient means, as we noted, that damage measures
for breach are not necessary to accomplish this, and also helps to explain why contracts lack
detail.
But even if renegotiation tends to occur, it may represent only a partial substitute for explicit
contractual terms or for appropriate damage measures for breach. One reason (see section 4.2.3)
is that renegotiation cannot affect actions that are taken before the time of renegotiation, which
influence the likelihood of nonperformance; renegotiation can only affect future decisions about
breach. Another reason involves the allocation of risk-bearing. Consider, for instance, the
substantial risks borne by a producer who may have to purchase a release from an obligation to
perform when his production costs would be extremely high. Such risks could be mitigated by
use of a clause excusing him from performance or by a damage measure such as expectation.
Additionally, the prospect of renegotiation affects the incentives of parties to invest in the
contractual relationship. A party s level of reliance investment will be inefficient if renegotiation
results in the extraction of part of the surplus that the party s reliance investment creates. Yet
renegotiation is influenced by, among other elements, the damage measure that applies for breach;
and if the damage measure is appropriately chosen, the damage measure together with
renegotiation may, in principle, spur desirable reliance investment; see section 4.2.2.
One presumes that the ability to renegotiate is usually desirable for contracting parties,
because it allows them to improve their situation when difficulties arise and to write simpler
contracts than otherwise. Thus, we would expect that parties will want their renegotiated
contracts enforced, and the law generally does enforce renegotiated contracts. However, the
ability to renegotiate can also work to the detriment of parties because they might thereby be
prevented from committing themselves to particular outcomes in their initial contract. See Jolls
(1997) and the literature cited therein, especially Fudenberg and Tirole (1990). Nevertheless, the
law usually prevents parties from binding themselves not to renegotiate, even though that could in
theory be done.86
4.1.9. Legal overriding of contracts. A basic rationale for legislative or judicial overriding
86
It is true that parties will not usually be able to bind themselves against engaging in renegotiation, for they could
ordinarily renegotiate in secret. However, as Jolls (1997) observes, one of the parties will usually prefer that the original
contract be enforced, so that if the courts stand ready to enforce the original contract, renegotiation cannot result in a new [ Pobierz całość w formacie PDF ]