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Article
Decreasing-Liability Contracts
Journal of Legal Studies (2004)
  • Robert D. Cooter
  • Ariel Porat, Tel Aviv University
Abstract

Like constructing a building, performance on many contracts occurs in phases. As time passes, the promisor sinks more costs into performance and less expenditure remains. For phased performance, we show that optimal liability for the breaching party decreases as the remaining costs of completing performance decrease. In brief, efficiency requires a decreasing-liability contract. To implement such a contract, we recommend deducting past expenditures on incomplete performance from liability. We show that some types of progress-payment contracts are materially equivalent to decreasing-liability contracts. Our analysis should prove useful for elucidating progress-payment contracts and for drafting and litigating phased contracts.

Publication Date
January, 2004
Citation Information
Robert D. Cooter and Ariel Porat. "Decreasing-Liability Contracts" Journal of Legal Studies (2004)
Available at: http://works.bepress.com/robert_cooter/108/