Taking Bubbles Seriously in Contract Law

71 Pages Posted: 4 May 2011 Last revised: 27 Jul 2012

See all articles by John P. Hunt

John P. Hunt

University of California, Davis - School of Law

Date Written: March 30, 2011

Abstract

If bubbles reflect social outbreaks of poor judgment, then even those who adhere to individualistic notions of contract should recognize that there is a basis for denying enforcement of bubble contracts.

This article outlines the argument that bubbles -- defined as outbreaks of poor judgment -- exist and can be recognized, at least after the fact. It then argues that declining to enforce bubble contracts is consistent with libertarian and utilitarian approaches to contract. Finally, it considers the merits of rescission versus equitable adjustment as a way of handling unenforceable bubble contracts.

The article argues that an approach to modifying or rescinding bubble contracts -- perhaps including mortgages entered into during the recent housing bubble -- that is grounded in contract theory may be preferable to approaches that are based on the state's power to react to emergencies.

Keywords: bubbles, contracts, mortgage modification

JEL Classification: K12, G14, G38

Suggested Citation

Hunt, John P., Taking Bubbles Seriously in Contract Law (March 30, 2011). 61 Case W. Res. L. Rev. 681, 2010, Available at SSRN: https://ssrn.com/abstract=1830356

John P. Hunt (Contact Author)

University of California, Davis - School of Law ( email )

Martin Luther King, Jr. Hall
Davis, CA CA 95616-5201
United States
(530) 752-5052 (Phone)

HOME PAGE: http://ratingagencylawblog.wordpress.com/

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