The Definition of Secured Debt-in-kind from Behavioral Economics
The criterion of"before/after the expiry of the period of performance of the obligation"adopted in Judicial Interpretation of the General Principles of the Contracts Part does not allow for a clear definition of the secured debt-in-kind.Defining secured debt-in-kind is vital for correctly applying the fluidity prohibition rule.The failure to define it clearly is rooted in a misunderstanding of the rule's legitimacy basis.In behavioral economics and psychology,the fluidity prohibition rule's legitimate basis is to prevent damage to the debtor caused by overconfidence and blind optimism.This can be achieved by re-categorizing the debt-in-kind.If the debtor's final payment isn't tied to its ability to perform or doesn't pose uncertainty leading to loss,the effectiveness of the debt-in-kind is unrestricted.In other cases,restricting the effectiveness of debt-in-kind is necessary.If parties intend to guarantee,the debt-in-kind's effectiveness is limited by the fluidity prohibition rule;otherwise,discretionary liquidated damages rule applies.
Judicial Interpretation of the General Principles of Contracts PartBehavioral EconomicsSecured Debt-in-kindFluidity Prohibition RuleDiscretionary Liquidated Damage Rule
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