When should contract obligations be relieved under changed circumstances?

Abstract

Wars, pandemics, and many other kinds of events disrupt contracts. Sellers cannot perform, or can only perform at great cost, or buyers find that performance has become pointless or much less advantageous. Should the disadvantaged party still be liable for breach of obligations, or should there be relief either through discharge or amendment of obligations? This question is relevant to the parties when they write force majeure clauses and to judges when they interpret various doctrines such as impossibility, impracticability, force majeure, frustration of purpose, mistake, and good faith and fair dealing. It is a question that has been answered differently throughout legal history, to some extent divides common and civil law, and is far from settled in either legal or economic theory. This article analyses which standard of relief then maximizes the expected value of the contract ex-ante, in a trade-off between risk allocation and dispute costs that arise when the parties interpret one of the vague standards differently. The optimal standard is then shown to depend on the degree of vagueness of the standard, the parties’ risk preferences, the costs of disputes as affected by the conflict resolution mechanism, the density function of the inefficiencies that may arise due to changed circumstance, and on whether the parties govern their contract by relational norms.