Penalty Default Rules in French, German and Louisianan Contract Law

Abstract

Abstract Some American law and economics scholars have used the term “penalty default rules” to describe default rules that are undesirable to at least one party to a contract. Parties have incentives to depart from these default rules and to share information in doing so. In a recent article, I brought this concept outside of the United States, the common law tradition and the law and economics literature by using it to describe a selection of rules in Québec contract law. In this article, I build on that work by identifying a selection of penalty default rules in three other civilian jurisdictions – France, Germany and Louisiana – that apply to contract formation, contract interpretation, changed circumstances and remedies for breach. Then, I argue that the penalty default rules that I have identified serve two valuable functions. First, they enhance at least some parties’ freedom of contract by better equipping them to make informed decisions. Second, they complement the duty of good faith by incentivizing the sharing of information, including information that might not always need to be shared in order to comply with the duty of good faith. Although these functions are somewhat different than those that law and economics scholars have attributed to American penalty default rules, my analysis reveals that penalty default rules both exist and have value in the civilian world.