Allocation of fault in contract law

Osnat Jacobi and Avi Weiss

International Review of Law and Economics, 2013, vol. 36, issue C, 1-11

Abstract: In this paper we consider situations in which the parties are in disagreement about the allocation of a certain risk, and either party could have acted ex-ante to prevent breach, to lower its probability or to insure against it (“least-cost avoidance” in tort law), but neither did so. When the state-of-the-world is revealed there remain steps the parties can take to prevent breach or mitigate damages. We consider strict liability and other regimes such as negligence and comparative fault, and show that the first-best solution is not achieved in those regimes because they incentivize the parties to consult the court in order to determine the identity of the obligor, and this is done only after the contract has collapsed.

Keywords: Contract law; Breach of contract; Unallocated risk; Strict liability regime; Fault regime; Bilateral care; Unilateral care; Mechanism design; Revelation principle (search for similar items in EconPapers)
JEL-codes: K12 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:irlaec:v:36:y:2013:i:c:p:1-11

DOI: 10.1016/j.irle.2013.02.002

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