Contracts, Holdup, and Legal Intervention

This article develops the point that the incentive and risk-bearing problems associated with contractual holdup may justify legal intervention in theory, and the article relates this conclusion to legal intervention in practice. Contractual holdup is considered for fresh contracts and for modifications of contracts. One type of legal intervention is flat voiding of contracts. This policy tends to be advantageous when contracts are socially undesirable and thus should definitely be deterred, notably when events permitting holdup are engineered. Another type of intervention is price-conditioned voiding – voiding only if the price is excessive. This policy tends to be advantageous when contracts are socially desirable, especially when events that permit holdup are not engineered (bad weather puts a ship in jeopardy). Price-conditioned voiding prevents the use of holdup prices but still allows contracts (to a tow ships in distress) to be made Both types of legal intervention in contracts and their modifications are employed by courts to counter problems of pronounced holdup. Also, various price control regulations appear partly to serve the same objective