The Enforcement of Contracts and Private Ordering

Abstract

Varying the time between contract formation and contract performance has two offsetting effects. On the one hand, the longer the period between contract formation and the date of execution, the greater the dispersion of price estimates. Hence, the reward to acquiring information should be higher; the earlier the contract date the greater the incentive to spend resources in pursuit of information. On the other hand, the earlier the contract date, the less likely an incremental investment in pursuit of information will be valuable. Expenditures on weather patterns two months from now might prove very useful in projecting future prices, but attempts to produce two-year projections would be fruitless. This factor would lead to a reduction of expenditures on information gathering as the length of time between the contract date and performance date increases. Thus, there are both benefits and costs from increasing the length of time between the performance date of the contract and the time at which the parties enter into the contract. The problem the parties face is determining the optimal lead time. Absent enforceable contracts they would be unable to attain that lead time since the party disadvantaged by a price change in the interval between contract execution and performance would have no reason to honor the original agreement. If the law does enforce these executory contracts, parties will be able to contract in a timely fashion, thereby enabling them to avoid the wastes inherent in the search for price information. I do not mean to imply that businessmen make calculations about the optimal time for entering into a contract or even that they pose the problem in this way. It is reasonable to presume, however, that market forces would sort this out, penalizing those who contract too early or too late and rewarding those who contract in a timely manner. Enforceable contracts enable the market to perform that function. In effect, enforcement allows the parties to assert a “property right” in the price just as a patent allows the patentee to assert a property right in an idea.1 The notion that enforcement of the executory contract enables people to economize on price search costs goes a long way towards illuminating some of the problems arising in the area of contract damages. In particular, the idea that the parties were attempting to establish a property right in the price suggests that damage measures should be designed to protect that interest. p. 497