Efficiency of Contract Modification

Abstract

The contract law is based on the premise of the bilateral voluntary exchange. In a market economicsystem, such exchanges involve a process in which the parties bargain voluntarily, each seeking tomaximize his own economic advantage on terms that are acceptable to the other party. The presumption isthat this process yields a "Pareto improvement" in which at least one party is better off and neither partyis worse off than the case without exchange. The same logic can be applied to the contract if the partiesto a contract want to modify it due to some changes in circumstances. Breach of contract is generally made when a change in the circumstance occurs after the contract issigned but not yet performed. In some cases, it may be possible that breach of the contract can be avoidedif the court enforces to renegotiate and modify the contract. Traditionally, however, courts have notenforced such contract modifications under the pre-existing duty rule. This paper shows that when theperformance of the original contract incurs too much cost due to the change in the circumstances, theenforcement of contract modification may be more efficient than the enforcement of the original contractor breach of it under some conditions.