THE ECONOMICS OF CONTRACT
The preceding chapter was primarily concerned with various remedies for breach of contract, taking as a given that the contracts in question were judged to be enforce+able. This chapter is largely concerned with the prior question of what contracts are enforceable. It therefore begins with a brief description of the elements that courts have traditionally required to be present in an enforceable promise, the most interesting of which is the doctrine of consideration. It then goes on to examine formation defenses, which argue that a contract is unenforceable because it was not legitimately formed, and performance excuses, which argue that a contract was legitimately formed but that the promisor's obligation to perform should nevertheless be discharged without damages.
It is important to point out that an economic analysis of the question of what contracts are enforceable is not independent of the question of what is the optimal remedy for breaching an enforceable contract. For example, if a court ruled that a given contract is unenforceable, and therefore that the promisor is not obliged to perform his promise, this would be essentially equivalent to ruling that the contract is enforceable, but that the appropriate remedy for the promisee is zero damages. The analysis of formation and performance defenses in this chapter adopts this unified view by examining them as alternative solutions to the general enomic problems discussed in the previous chapter -- namely, providing incentives for efficient breach, reliance, and risk sharing. I retain the basic model of contracting from the previous chapter as well.
In addition to formation defenses and performance excuses, this chapter examines the question of when contract modification should be enforced by the court. Contract modification represents an effort by the parties to adjust the terms of a contract after it has been signed but before it is performed, generally in response to changed circumstances. Thus, it represents an alternative to breach that will often involve lower transaction costs. However, it can also signify an attempt by one party to behave opportunistically as a result of a change in the relative bargaining powers of the parties. Thus, from an economic perspective, a key issue regarding enforcement is whether the proposed modifi-