Question

If two parties choose to litigate rather than settle, should the law presume that

the transaction costs between them are high and, therefore, award legal relief

(compensatory money damages)? If we assume transaction costs are low, give

examples why they may still litigate.

Answer 1

There can be disagreements happening between 2 parties. Not every transaction gets successfully finished. Now when 2 parties want to litigate each other rather than settling, there can be various reasons for that and not just the reason of transaction cost.

Thus, the court should not presume that the litigation is happening just because of the high transaction cost. Obviously, this can be a one possible reason but there can be others too. Now when the high transaction costs are present, the court can award legal relief. That would surely help the parties to settle down.

Talking about the other factors, when the transactions are even low and the parties are still going for litigation instead of settling. There can be false information that is being communicated between the 2 parties that could harm each other’s business in any way. Suppose first party is trading with second party and second party has a tie up with third party (friends or something). Also assume that first and third party sells perfect substitutes. When there’s a situation like this, second party might deal with first party in a wrong way as to harm the business of the first party in non monetary terms.

In a situation like this, two parties can litigate instead of getting settled without going to the court to demand justice.