Stipulated damage clauses (Danish: »Konventionalbodsklausuler«)1 are enforceable in most civil law courts as long as they are not unjustified. In Denmark this is decided in accordance to the Danish Contract Law § 36. The case rulings in this paper demonstrates a clear tendency to favor the promisor as evidenced by damages paid averaging about a third of the contractual stipulated damage clause. In particular, five legal considerations impact the court rulings: 1. proportionality, 2. externalities inflicted on the promisee, 3. the promisor’s enrichment, 4. loyal/disloyal behavior by either party, and 5. the extent to which the specifics of the breach has been clearly specified in the contract (wording). The combination of contract price and the stipulated damage clause can be viewed as a determined an ex ante assessment of projected payoffs and risks between the contractual partners. Incorporating an incentive-based principal agent model to the domain of stipulated damage contracts, it becomes clear that a number of contractual concerns can effectively be remedied. The risk of paying punitive damages discourages opportunistic behavior (moral hazard and adverse selection) and increases the incentive that the contractual specifications are met. As such, stipulated damage clauses can be compared to an insurance as well as a financial option for the promisor with an upper limit (exercise price) for contract breach. However, to the extent that courts consistently favor the agent (promisor) by significantly lowering the damages paid, there is a real risk of market failure, if the principal is not be properly compensated in the event of contract breach. With lower expected compensation in case of contract breach, the principal can try to adjust his risk-premium, but without adjusting the contract price accordingly the agent (promisor) may be unwilling to sign the contract, thereby resulting in market failure.
|Educations||MSc in Auditing, (Graduate Programme) Final Thesis|
|Number of pages||86|