ABSTRACT
Law and economics has produced a vast literature on the efficient design of contract damages, but almost none on the defensive counterpart to damages: the contractual condition that lets a promisee withhold its own performance when the performance it was promised falls short. This article supplies that missing analysis. Contracts protect entitlements through a mixture of offensive protection – the right to sue for damages or specific performance – and defensive protection – the right to withhold. The observed variation in that mixture is neither random nor merely path dependent. Two variables dominantly explain this: the forfeiture that a defensive withholding can inflict on a relying counterparty, and the verifiability (or enforceability) of breach to a court. We catalog five recurring configurations, ranging from offensive-only to defensive-only protections, and use the forfeiture-verifiability framework to resolve a series of puzzles that resist explanation when damages are studied in isolation: why sellers enjoy a perfect-tender right while buyers of services receive only substantial-performance protection, why some restaurants are paid in advance and others after the meal, why insurers are protected by conditions alone, and why material-adverse-change clauses are drafted as standards rather than rules. A formal numerical model reproduces different offensive and defensive protection configurations as the optimal contract for a different region of the forfeiture-verifiability space. Finally, we explain – and at times criticize – the doctrines through which courts limit the enforcement of conditions, arguing that anti-forfeiture, good-faith, burden-allocation, and interpretive rules are best understood as responses to externality and parentalism concerns, and that courts go astray when they excuse a condition without first correctly identifying the purpose it was meant to serve.
Wickelgren, Abraham L and Ayres, Ian, An Economic Analysis of Contractual Conditions (August 17, 2026).
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