Substituting Invalid Contract Terms: Theory and Preliminary Empirical Findings

Ori Katz, Eyal Zamir

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

The law often lays down mandatory rules, from which the parties may deviate in favor of one party but not the other. Examples include the invalidation of high-liquidated damages and the unenforceability of excessive noncompete clauses in employment contracts. In these cases, the law may substitute the invalid term with a moderate arrangement, with a punitive arrangement that strongly favors the protected party, or with a minimally tolerable arrangement (MTA), which preserves the original term as much as is tolerable. This article revisits the choice between the various substitutes. Based on theoretical analysis and five new empirical studies (N = 2,089), it argues that the incidence of MTAs should be rather limited. It demonstrates that people find moderate substitute arrangements more attractive than the alternatives. It also points to two overlooked incentive effects of the substitute arrangement (in addition to its impact on the drafting of contracts). First, the applicable substitute strongly influences customers' inclination to challenge excessive contract terms once a dispute arises. Second, when the invalidation of an excessive term is discretionary, the applicable substitute can affect decision makers' inclination to invalidate excessive clauses in the first place.

Original languageEnglish
Pages (from-to)780-818
Number of pages39
JournalLaw and Social Inquiry
Volume48
Issue number3
DOIs
StatePublished - 30 Aug 2023
Externally publishedYes

Bibliographical note

Publisher Copyright:
© The Author(s), 2022. Published by Cambridge University Press on behalf of the American Bar Foundation.

Funding

We thank Yonathan Arbel, Netta Barak-Corren, Samuel Becher, Omri Ben-Shahar, Uri Benoliel, Ryan Bubb, Paulo Furquim de Azevedo, Meirav Furth-Matzkin, David Hoffman, Tamar Kricheli-Katz, Daphna Lewinsohn-Zamir, Ofer Malcai, Sergio Mittlaender, Yuval Procaccia, Yaacov Schul, Doron Teichman, Roi Yair, three anonymous referees, and the participants of the meeting of the American Law and Economics Association (New York), the Conference of the Society of Empirical Legal Studies (Claremont), the Conference of the European Association of Law and Economics (Tel Aviv), and the workshops at the University of Pennsylvania Carey Law School, the Max Plank Institute for Research on Collective Goods in Bonn, the Hebrew University of Jerusalem, the Tel Aviv University, the Bar-Ilan University, and the FGV law school in São Paulo for valuable comments on previous drafts. This research was supported by the Israel Science Foundation (Grant no. 699/20), the Israel Academy of Sciences and Humanities Program for Israeli Post-Doctoral Fellows, and the Aharon Barak Center for Interdisciplinary Legal Research.

FundersFunder number
Aharon Barak Center for Interdisciplinary Legal Research
Israel Academy of Sciences and Humanities Program for Israeli Post-Doctoral Fellows
Israel Science Foundation699/20

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