Economic Analysis of Negotiation as a Method of Dispute Resolution in Commercial Contracts, with Emphasis on Contractual Liability

Abstract

The breakdown of commercial negotiations in legal systems characterized by low predictability is a phenomenon whose less-explored dimensions can be revealed through the economic analysis of law. The principal question of this article is which economic model is optimal for determining damages arising from breach of an obligation to negotiate, and how the conventional distinction between negative and positive damages affects the economic incentives of the parties. Employing a comparative law-and-economics methodology and drawing on the Expected Value of Litigation (EVL) model, Bebchuk’s theory of information asymmetry, and Becker’s theory of optimal deterrence, this study examines the legal systems of France, England, and Iran. The findings indicate that the French model, which limits compensation to negative-interest damages, results in under-deterrence in cases of intentional bad faith, while the English model, which distinguishes liability according to the type of fault, loses much of its effectiveness because of evidentiary complexities. In the Iranian legal system, the complete legislative vacuum and inconsistency in judicial practice likewise increase information asymmetry and contribute to the systematic breakdown of negotiations. Through an economic analysis of the legislative provisions proposed in the author’s doctoral dissertation, the article develops an integrated, tiered model of damages in which negative-interest damages constitute the general rule (based on the Islamic jurisprudential rule of lā ḍarar [no harm]), positive-interest damages apply in cases of intentional bad faith (based on the rule of ghurūr [deception-induced liability]), and additional damages are available in exceptional cases of manifest bad faith. The article concludes that increasing the predictability of the legal system through the enactment of explicit statutory provisions is a necessary condition for the economic efficiency of commercial negotiations.