The purpose of this thesis is to examine the obstacles parties face when contracting. Transaction costs, asymmetric levels of information and the occurrence of moral hazard have an impact on how parties will choose to contract. In addition, events that alter the foundation of the contract, and how to deal with these events legally, are examined. Finally it is discussed how efficient allocation of risk complies with the theory on how to contract and how to unite the parties’ interests. Initially, basic elements of contracting such as risk aversion, transaction cost, asymmetric information and moral hazard are studied. Thereafter, these elements are used in determining what type of contract should ideally be used, when entering into an agency relation. Through agency theory and generally risk allocation theory, it is examined how to optimise risk allocation in accordance with risk profile and moral hazard. Legally speaking, parties in a business-to-business relationship have a multitude of options regarding the contract itself. English contracting tradition is typically a lot more explicit and specific, whereas Danish or Scandinavian contracting tradition is more simplistic, and relies on underlying law. However, the use of lex mercatoria as a means of governing the contract is also an option. UNIDROIT Principles, FIDIC and PECL are examples of means that the contracting parties have as alternatives when deciding on how to contract. The main legal problem arises when an event occurs that alters the contract equilibrium and makes the contract inefficient to uphold. The means available to the parties, to safeguard against such events, are then discussed. Having identified the obstacles parties face, and reviewed their options of mitigating incentives to defect from the contract, the positive influence of quasi-rents’ on parties’ behaviour in the contract will be discussed. Finally, the issues of how to align party interests and how to economically view proactive contract clauses are assessed. This will lead to a discussion on how to contract, whether to use a more simplistic approach or an explicit approach, and how it benefits according to the individual contract, but also how it can limit successful renegotiation of contract terms.
|Educations||MSc in Commercial Law, (Graduate Programme) Final Thesis|
|Number of pages||109|