Contracts and Non-Simultaneous Exchange
Opportunism and Unforeseen Contingencies
Non-simultaneous exchange potentially subjects the parties to the problem of opportunistic behavior. Unforeseen contingencies can also lead to problems, further, it is often difficult to distinguish between opportunistic behavior and problems caused by unforeseen contingencies.
Contracting is costly and as a result, contracts will not be perfect.
Contracts allow for efficient exchange by facilitating the efficient timing of exchange.
As in the Coase Theorem it is usually assumed in contracts between two firms that the intent of the parties is to maximize the joint profit generated by the joint productive activity covered by the contract.
Is joint profit maximization consistent with Judge Benjamin Cardozo's decision, in an exclusive dealer case, that the exclusive dealership contains an implied condition that the dealer shall use his best efforts to sell the supplier's product? Why?
Risk--Suppose A agrees to sell B parts used in the manufacture of B's product, and further, suppose that before B can take delivery, A's warehouse burns down destroying the parts. Who should bear the risk in this situation? Why?
In light of the fact that contract law is the handmaiden of exchange, consider the following cases:
1) A wealthy man in an expansive moment promises to pay my way through college. I give up my part time job, but then he breaks is promise, and I am unable to get a new job.
2) A promises to deliver goods to B "on the twelfth." B thinks he means the twelfth of this month, but in fact A means the twelfth of next month--he could not possibly deliver as soon as B (unbeknownst to him) expects.
3) A steel company agrees to deliver steel to a bridge-building company within 60 days, but the steel company is shut down by a wildcat strike and cannot make delivery within that time.
What is the efficient solution in these three cases? Why?
Contract law has five distinct functions:
1) To prevent opportunism, 2) To interpolate efficient terms, 3) To prevent mistakes in the contracting process, 4) To allocate risk, 5) To reduce the cost of resolving disputes.