A Law and Economics Analysis of Contract Law: Focus on Reliability and Foreseeability

Consequential damages from reliance can be recovered only if foreseeability is warranted. The doctrine of foreseeability has been built upon the British case of Hadley v. Baxendale, but has been subject to criticisms including the difficulty in applying it in practice. We first attempt to substantiate its efficiency-driven definition especially when there is no relevant contractual stipulation. Our simple theoretic inquiry leads to the proposition that a reliance investment is more (less) likely to be considered foreseeable as its generally-known rate of returns increases (decreases) ceteris paribus. Examining an intriguing case in California reveals that our proposal could provide a workable formula applicable in courts, as an alternative to other rules, for example, making parties to excessively focus on modes of notification. Given that many jurisdictions have increasingly used the foreseeability test, this paper is expected to make a contribution to the literature by helping preserve the optimality of damage measures concerning consequential damages.