Incompleteness of Contracts and Harmonization of Contract Execution Allowing for Counterparty Risk

Abstract

When drafting a contract, it is often impossible for the parties to consider and specify in the contract all kinds of unforeseen circumstances. In particular, the parties may not be able to provide a detailed description of the global situation so that the outsiders (courts) could later verify the conditions at that time, and therefore contracts are naturally incomplete. The parties can fill this incompleteness to some extent by including in the contract a mechanism to review the terms after the information is received on the advantages and expenses upon its execution. In remarkable work (Hart O., Moore J. Incomplete contracts and renegotiation. Econometrica, 1988, vol. 56, no. 4), the logic of the counterparties behavior was built for a certain type of contracts, resulting in the equilibrium conditions for the contract execution, to which contract counterparties can lead due to their actions considering the possible counteraction of the opposite side. Using the ideas of work (Hart O., Moore J., 1988), the work analyzes an optimal variant of a contract with a possibility to review the terms of the initial contract in case of relations between two counterparties: the supplier of goods (equipment) purchased for foreign currency for the buyer who purchases the goods for Russian rubles, considering the currency risk for the supplier and the risk for the both counterparties.