extant in this case. Ireland’s solution is not consistent with the analysed economic models in that it would create suboptimal incentives for B’s reliance.

Case 3 Mistake about ownership of land to be sold30

This case differs from the previous two cases because here there is no bad faith or knowing misconduct. A has been, at most, negligent in not having ensured that he has authority to sell the property before entering negotiations. The solutions to this problem may therefore be significantly different by jurisdiction, depending on whether A’s simple negligence would be sufficient to impose liability.

From an economic perspective, however, imposing liability on A is efficient. Allowing B to rely on the fact that A took the necessary steps to verify his own authority to sell avoids a wasteful duplication of information costs. In addition, A may be seen as the party with the greater bargaining power ex post, because the selling party is generally in the position to act opportunistically after the buying party has made significant investments in reliance on the possible contract. Hence, notwithstanding A’s good faith, he should compensate B for his reliance expenditures.

The solutions adopted in those jurisdictions which find A liable on the basis of his negligence (France, Greece, Italy, the Netherlands, Portugal and Switzerland) seem to be consistent with economic findings, while the solutions adopted by those jurisdictions which require an intent to inflict damage in order to find precontractual liability conflict with the economic goals of cost minimisation and efficient reliance.31

Case 4 An architect’s preparatory work for a contract which does not materialise; parallel negotiations32

Generally, precontractual expenditures by a professional do not give rise to liability. Nevertheless, B’s investment is wasted because the

30For the full hypothetical, see case 3, above p. 93. In brief, B negotiates with A about buying a piece of land. A thinks he is the sole owner of the land, but later in the negotiations discovers that he owns the land jointly with his two sisters who refuse to sell to B, and B and A do not enter into a contract. B incurs costs relying on A’s assertions that he is the sole owner of the land.

31See comparative conclusions on case 3, above pp. 113–16.

32For the full hypothetical, see case 4, above p. 117. In brief, A, a manufacturer, enters into negotiations with B, an architect, for a potential contract for B to design a new facility for A. At the same time, but unbeknownst to B, A enters into negotiations with

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contract did not materialise. Therefore, it may seem that, at least when A knew of B’s particular custom (and so knew that his silence concerning parallel negotiations could cause B to lose more than the average expected loss for a professional in the same position), B’s expenditures should be compensated.

A is probably the least-cost-avoider and B’s investment in reliance would have been beneficial for A had the contract be formed. However, a rule imposing liability on A has an obvious side-effect: it may have prevented A from entering negotiations with B in the first place. In fact, under such a rule, A, knowing the particular custom adopted by B, will be liable if he decides to form a contract with a third party even if the third party is able to offer better terms. In this situation, B will lose the possibility of even competing for the contract. Imposing liability on A in this case would go to the detriment of B, who probably himself prefers a rule of no liability, and to bear his own costs, in exchange for the opportunity to compete with other professionals.

Consistent with the economic analysis, most jurisdictions take the position that, unless there is some other basis of liability, B’s expenditure is at his own risk and therefore he is not entitled to a remedy, at least when A had no knowledge of B’s custom. By contrast, the majority of jurisdictions hold A liable when he has knowledge of B’s custom, although generally it seems that A’s liability does not arise from the parallel negotiations themselves but rather from the failure to inform B about such negotiations.33 This last solution may be economically efficient to the extent that the duty to inform could place B in a better position to decide how much to spend in reliance, thus avoiding waste when B thinks the contract is not likely to materialise. From an economic perspective, A should inform B of parallel negotiations even when A does not have knowledge of B’s policy because such a disclosure would serve to induce optimal reliance by B.

Case 5 A broken engagement34

This case involves many social policies and considerations of a nonlegal nature. It may therefore have a number of different solutions

a different architect as well. B begins work on designing the facility as is his custom, incurring significant expense. Though he knows of B’s investment, A eventually contracts with the other architect rather than with B.

33See comparative conclusions on case 4, above pp. 136–9.

34For the full hypothetical, see case 5, above p. 140. In brief, A and B got engaged.

B bought A a ring and made a number of other expenditures in consideration of the

based on different jurisdictions’ approaches to such a delicate matter. From an economic point of view, however, an engagement may well be seen as any other negotiation in view of the conclusion of a contract (the marriage). A should compensate B for his expenditures: the investments made by B in preparation for the wedding are in fact beneficial for both A and B because they increase the total benefit obtainable from the transaction. Adopting Craswell’s terminology, A’s liability is necessary to induce B to exercise optimal reliance. In addition, A is the party with the greater bargaining power ex post (she is in the position to change her mind about the marriage without losing anything). A rule which imposes liability on A for B’s reliance expenditures is consistent with both the examined economic models.

Many jurisdictions, however, tend to regard this case as substantially different from more traditional cases of precontractual liability. Social policy and ethics often play a lead role in deciding whether, and under what circumstances, to impose liability. Some jurisdictions have special rules about the return of gifts, many for engagement rings in particular. Regarding expenses, most jurisdictions that have a general principle of precontractual liability would apply this principle to give B a remedy but only when A’s breaking of the engagement was unjustified. This seems consistent with economic principles as discussed above. On the other hand, jurisdictions that have not accepted a general principle of precontractual liability (namely England, Scotland and Ireland) impose no liability, with the partial exception of Ireland, which has a statutory provision mandating a remedy in specific circumstances.35

Case 6 An express lock-out agreement36

The presence of an express agreement, whether it has the effect of precluding one of the parties from negotiating with third persons for a specific period of time or just imposing a duty to negotiate in good

upcoming wedding and marriage. Shortly before they were to marry, A broke off the engagement.

35See comparative conclusions on case 5, above pp. 160–1.

36For the full hypothetical, see case 6, above p. 162. In brief, A and B are negotiating for the sale of A’s business to B. A agrees that he will not enter into negotiations with third parties for the purchase of his business for three months. Before the threemonth period expires, A gets an attractive offer for the sale of his business from a third party and contracts with that party for the sale. B has incurred significant costs in the negotiations with A and investigations into A’s business. Also considered is the situation in which A and B had agreed to negotiate for three months in good faith.

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faith, may be interpreted as imposing contractual, rather than precontractual, liability or, in those jurisdictions which have a general rule of precontractual liability, as simply strengthening the already existing duty of good faith. Hence, although this situation is quite common in business acquisitions, legal solutions vary greatly within jurisdictions. The unpredictability of courts’ decisions in cases of breach of lock-out provisions has opened the debate about the enforceability of this kind of precontractual agreement and, more generally, of the letter of intent as an instrument to facilitate the negotiation of complex transactions. An analysis of the factual hypothetical from an economic perspective, however, demonstrates the grounds for a more straightforward solution.

Applying Craswell’s model, it is easy to conclude that A should be held liable to B. In evaluating the opportunity to purchase A’s business, B necessarily has to incur substantial expenses. Without the assurance that, at least for a while, he enjoys exclusive negotiations with A, B may not be willing to engage in expensive due diligence. Of course, the interest of the seller is exactly the opposite: he tries to maintain as much of his freedom to negotiate with others as possible. However, if the seller agrees to an express lock-out provision, he demonstrates the seriousness of his commitment to negotiate with the buyer and, implicitly, his positive valuation of the buyer’s offer. Indeed, a lock-out provision is often necessary to stimulate optimal reliance investment in the business acquisition context. In such situations, Craswell’s model would suggest the imposition of precontractual liability on the seller who violates the agreement by negotiating with a third party. The same solution applies when the parties have agreed, more generally, to a duty to negotiate in good faith. In that context, the agreement to negotiate in good faith has the same goal of an express lock-out agreement, which is to stimulate the buyer’s optimal reliance investment by spreading the risk of failed negotiations.

The application of Katz’s model suggests the same solution. Another purpose of a lock-out agreement is to prevent the seller’s opportunistic behaviour, specifically the seller’s opportunity to ‘shop’ the deal by using the existing negotiations as leverage to obtain better offers. From this perspective, A (the non-relying party) can be seen as the party with the greater bargaining power ex post. Thus, according to Katz, A should be held liable for the violation of the precontractual agreement.

Furthermore, since precontractual agreements (whether or not they are themselves contractual in nature) are intended to stimulate optimal