Contractual Holdup and Legal Intervention

Abstract

This article develops the point that incentive and risk‐bearing problems associated with contractual holdup may justify legal intervention. Contractual holdup is considered both for fresh contracts and for modifications of contracts. One type of legal intervention is flat voiding of contracts. Such intervention tends to be advantageous when holdup situations are engineered. Another type of intervention is price‐conditioned voiding of contracts—voiding only if the price is excessive. This policy tends to be advantageous when contracts are socially desirable (bad weather puts a ship in jeopardy and it needs rescue). Price‐conditioned voiding prevents the imposition of holdup prices but still allows contracts (to 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. In addition, various price control regulations appear partly to serve the same objective.