The Price of Exit: Why Buyouts Fail in College Athletics

The usefulness of contract law derives from establishing sufficiently clear expectations that enable parties to order their affairs without judicial intervention. To that end, a contract that requires litigation to perform one of its most important functions has already failed. Well-constructed liquidated damages provisions are useful tools for promoting contractual clarity by assigning a predetermined consequence for breach. Thus, they allow parties to properly evaluate the costs of nonperformance before a dispute occurs. This principle is central to the law-and-economics theory of efficient breach. While contract remedies can discourage nonperformance and protect the parties’ expectations, they also permit parties to redeploy resources to higher-value uses while requiring them to internalize the costs imposed on others. For that system to function effectively, the consequences of breach must be sufficiently predictable to serve as credible price signals. If the price of exit becomes uncertain, parties lose the ability to make informed ex ante decisions and are rationally incentivized to negotiate under the shadow of the law.