their moral duty to compensate the investing party for relying on a representation from which they wish to retreat. A legal rule according to which O has to comply with her LPA, will help to foster an environment where efficient pre-contractual reliance thrives, and valuable transactions in property rights can prosper.40

3.2 Building up trust: the role of LPA

This leads us back to an important question which was left open: why can’t we expect of the parties to negotiate and agree on the question of reliance expenditure and thus save themselves (and us) the doubts, the arguments and the litigation that follows? As you surely have noticed by now, I believe that by making a representation that ‘I will do X’ or that ‘X will happen’ we do not necessarily come under the obligation to make this representation good; rather, depending on the circumstances, we may only have a duty to make sure that the representee is not harmed if he relied on our representation to his detriment. But even if you accept that parties who make informal representations at the pre-contractual stage may come under an LPA obligation to the other party, you can still argue that the law should only enforce explicit promises, or agreements. The law, so the arguments goes, should not intervene where people refuse to fulfil some vague casual assurances which they (allegedly) gave to others, as we want to encourage people to be clear and unequivocal about the obligations they assume. If we insist that only recipients of explicit promises can expect the assistance of the court in getting them fulfilled, we will save ourselves a lot of judicial headache as people will learn to ask for explicit guarantees before they rely to their detriment.

Accordingly, unless R was promised by O that his pre-contractual investment will be covered (in part at least) if she withdraws from the negotiations, he will have to bear their costs on his own. The way out of the ‘holdup’ trap is only by means of explicit agreement. This approach, however, while it would add clarity to the parties’ legal obligations at the pre-contractual stage, is likely to nip in the bud many efficient pre-contractual investments as such preliminary agreements can hardly be expected to be the norm. The reasons for that are many and varied. It has been argued that such agreements will many times be inefficient as they increase the transaction costs, are dependent on the costly-to-verify extent of R’s reliance, and may encourage overinvestment.41 But here I would like to focus on a different reason that militates against a rule according to which a party who wishes to guard himself against the perils of the holdup trap must insist on an agreement in which the responsibility for pre-contractual investments is expressly allocated between the parties.

reliance rational players will rely and this will become the convention (Katz 1996, 1253–6, 1264). For a more sceptical view in the context of PE see Mee 2011, 192.

40See Goetz and Scott on this point: ‘when the mutual interests of both parties are furthered by more assured promises, the promisor will voluntarily look for legal mechanisms for providing additional reassurance . . . especially when extra-legal sanctions are relatively ineffective’ (Goetz and Scott 1980, 1278).

41See more in Schwartz and Scott 2007; Katz 1996, 1306; and Ben-Shahar 2004, n. 37 and sources cited there. For criticism of these arguments (but not of this position) see McFarlane 2010, 100.