Document Type

Article

Disciplines

International Law

Abstract

The fundamental tenet of contract law is the aptitude for enabling cooperative solutions amongst economic operators. In fact, when an exchange takes place through a contract, a resource is transferred from one party to the other, and consent of both parties to such transfer generally guarantees that each participant gains from the exchange.

For instance, in a sales contract, the transferor receives a price, which exceeds the value she places on the transferred asset; meaning that the next best use she could make of it could not yield as high a payoff as that obtained by transferring the asset against the given price. In turn, the transferee obtains a positive net payoff by paying a certain price in exchange for the transferred resource, since the latter enables her to produce a greater amount of wealth than is given away to purchase said asset. In other words, contracts allow the moving of a resource from someone who values it less to someone who values it more, and "cooperative surplus is the name for the value created by moving the resource to a more valuable use."'

The paradigm for this economic understanding of contract consists of on-thespot transactions, in which the exchange is simultaneous. On the other hand, when the transfer of the relevant resource is delayed or protracted in time, the profitability of the transaction for either party may vary, depending on the possible alternative uses for the concerned asset (which may change over time). This problem is of paramount importance in the context of long-term supply contracts: when one party promises to provide the promisee with a given commodity over a specified period of time, the contract price may initially be deemed adequate by both parties. Subsequent changes in the economic context,2 however, may affect the profitability of the transaction. This entails the risk that one of the parties be left with a losing contract, meaning a contract in which she no longer benefits from the terms of the exchange, since a resource is to be transferred at a price that is lower-for the supplier or higher-for the transferee-than the value of the next best use she could make of it.

Accessibility Requirements

1

Download

Share

COinS