Material Breach of Contract and Rejection with Imperfect Expectation Damages

Abstract

In an environment in which sellers can reduce the probability of defective delivery through cooperative investment, and in which enforcement of default remedies for of contract is imperfect, an optimal performance standard grants buyers the option to reject goods for some but not all defects, in other words, when the delivery is sufficiently defective and the seller said to be in breach of contract. This optimal performance standard implements efficient cooperative investment more often under a policy that, in addition, allows buyers to collect compensation for non-delivery of the good (upon rightful rejection) than a policy that limits buyers' compensation to the recovery of the price. While contracts with liquidated damages (i.e., a customized compensation function) can solve the investment problem as long as court enforcement is not too imperfect (in which case optimal liquidated damages are excessive and likely not enforced), the doctrine of material with an option to reject performs well as a default rule.