party’s cost and recovers part of its own cost).23 In order to achieve efficiency, the sharing formula should be linked to the parties’ respective bargaining power. The rule, therefore, imposes a great informational burden on courts. While conceding that it is implausible to assume that courts will be able accurately to evaluate the parties’ bargaining power, the authors suggest that a cost-sharing formula that requires the parties to share reliance expenditures equally could nonetheless reduce distortions produced by polar regimes.

Rule 3: the third and final rule combines a strict liability standard with a ‘capped’ measure of damages.24 When negotiations break down, each party will be liable regardless of conduct. But a party’s recovery is limited to the optimal reliance investment. If courts can correctly determine the level of optimal reliance, this rule creates incentives for optimal reliance because each party must bear the cost of any reliance investment beyond that point.

Bebchuk and Ben-Shahar’s interesting insights highlight the potentialities of ‘intermediate’ liability regimes in solving relevant incentive problems in the analysis of precontractual reliance. However, none of the proposed intermediate rules resemble existing legal rules. The analysis is eminently ‘normative’, suggesting new legal solutions rather than analysing the efficiency of existing rules. For this reason, Bebchuk and Ben-Shahir’s model will not be much used in the analysis of the following hypothetical cases.

An economic perspective on eight hypothetical cases

The cases analysed in this section cover a variety of situations in which precontractual liability may arise. In some of the cases, most jurisdictions would probably reach similar solutions, though not necessarily on the same legal grounds. For other cases, the solutions will be less unanimous, showing the differences in the approaches to precontractual liability in various jurisdictions.25 Our purpose in this section is to analyse the hypothetical cases from an economic perspective and to determine the outcomes of the various cases if the economic models exposed above had been applied. Also, we will try to determine,

23 Ibid. pp. 438–9. 24 Ibid. pp. 439–41.

25The cases selected for discussion in this section are cases 1, 2, 3, 4, 5, 6, 8 and 9 above. The results for each of the jurisdictions covered within this study are summarised in the comparative conclusions on each case, and a more general comparative conclusion is drawn by the Editors of the study in the Conclusions, below.

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for each case, whether the application of the specific legal rules in the different European jurisdictions leads to solutions consistent with the results and suggestions of the economic models.

Case 1 Negotiations for premises for a bookshop26

In this case, A began negotiations with B without any serious intention actually to enter into a contract. A’s conduct was motivated exclusively by the desire to prevent B from selling his premises to C. It is therefore plausible that A would be held liable both under a general rule of precontractual liability imposing a duty to negotiate in good faith and in common law jurisdictions where, even in the absence of a general precontractual liability rule, liability may be imposed under tort law, for instance under the tort of fraudulent misrepresentation.

From a legal point of view, the solution seems rather clear: there is no doubt that A acted in bad faith and in fact, even in those jurisdictions where there is reluctance to recognise precontractual liability, A’s conduct will be sanctioned on different grounds.

From an economic perspective, the question is whether it is economically efficient to hold A liable for B’s reliance damages (the difference between the price he could have obtained from C and the final selling price of the premises). To put it in another way, we need to verify whether holding A liable will create optimal incentives for reliance.

We briefly discussed two economic approaches to this problem in B(1) and B(2) above. According to Craswell, liability should be imposed when doing so is necessary to stimulate an optimal level of reliance. Since Craswell assumes that reliance is beneficial for both parties, he concludes that in this situation even the withdrawing party (in this case A, the bookshop owner) would have wanted to be bound in order to induce efficient reliance and increase the value of the contract. Here, however, it is clear that A never wanted to be bound: he never intended to form a contract with B; his sole intent was to prevent a successful transaction between B and C. Nevertheless, the success of A’s (fraudulent) strategy depends upon B’s reliance on A’s intention to buy at the proposed price. Had A’s intentions been serious, both parties would have gained from the transaction (B would have obtained a greater price for his property and A would have had the opportunity

26For the full hypothetical, see case 1, above p. 21. In brief, A, a bookshop owner, entered into negotiations with B to buy property for the sole purpose of preventing B from selling the property to C, a large bookshop chain. A never intended to enter a binding contract with B.

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These solutions are consistent with the economic analysis in that they provide a remedy to B, and a disincentive for A to engage in fraudulent behaviour, even in the case in which B’s damage is not a direct consequence of B’s reliance on A’s representation.

Case 2 Negotiations for renewal of a lease28

This case is very similar in its essence to case 1. As in case 1, one of the parties has no serious intent to form a binding contract with the other (the renewal of the lease) but entered negotiations for the sole purpose of maximising his own profit (through obtaining a higher price from C). B relied on A’s representation that the lease would be renewed and as a consequence he suffers losses associated with the need to rent a temporary warehouse at short notice and with the disturbance to his distribution arrangements.

The fact that this case involves a contract for a lease may control the solution of this case in most jurisdictions. Indeed, many jurisdictions have a specific statutory protection for tenants against the wrongful termination of a lease. The need to apply a general rule of precontractual liability may then appear limited to a situation in which the statutory protection cannot be applied. Regardless, in light of the general perspectives adopted by Craswell and Katz, liability should be imposed on A. In this case, A is in fact the least-cost-avoider: the greater profit he received from C puts him in the position to repay B without disruptive consequences. In addition, A’s liability is necessary in order to create an efficient reliance incentive for B: if no liability is provided, B (or any tenant in a similar position) has the incentive to incur the cost of searching for a new location every time his lease is close to expiring, even if the landlord clearly indicates an intent to renew the contract.

In accordance with this conclusion, almost all jurisdictions provide B with a remedy.29 The only exception is Ireland, which does not recognise any ground for liability because the elements for an action in deceit or for fraudulent misrepresentation are not considered to be

28For the full hypothetical, see case 2, above p. 64. In brief, B, who leases a warehouse from A, enters into negotiations with A for an extension of the lease. In reliance on these negotiations, B declines to lease a warehouse from X. A, never intending to extend B’s lease, in fact uses the negotiations with B as evidence of the warehouse’s value in A’s negotiations to sell the warehouse to C. A sells the warehouse to C, forcing B to rent a temporary warehouse and incur other damages based on his reliance.

29See comparative conclusions on case 2, above pp. 90–2.