Watson’s book gives two definitions of contract on p. 115. In his book on Canadian contract law G. H. L. Fridman states. “The essence of a valid, binding contract is the idea of a “bargain” between the parties. A contract consists of an exchange of promises, acts, or acts and promises, as a result of which each side receives something from the other.” The Law of Contract in Canada Carswell 1994.
In Chapter 13, Watson is looking at a simultaneous play one shot game which has an original structure represented in the underlying game. The underlying game has the attribute that the outcome from coordinated behaviour between the two players (when the players both “invest” in the relationship) exceeds the outcome when one or both players fails to “invest” in the relationship. Watson also uses the term “technology of the relationship” to refer to the underlying game. If the (I,I) outcome is a Nash equilibrium then the desirable outcome will occur and the contract, which need not be written or referred to a court, is self-enforced.
A complete contract involves specifying a set of side payments in each possible outcome of the game other than the one generated by the strategy set (I,I).
There are three side payment regimes that are explored for a contract where the third party enforcer, the courts, can distinguish what strategies each player has chosen to play (full verifiability). They are expectation damages, reliance damages, and restitution damages (see definitions in Ch. 13). The rest of the chapter is largely an exploration of whether these schemes would generate an efficient outcome or not and if not the circumstances in which they would fail. This discussion can be viewed as a guide to what the parties should include in a contract for the courts to enforce or as indicated on p. 123 as a guide to the courts on how to proceed when one party has not performed in the contract but there is no explicit specification in the contract as to damages, i.e. what default damage scheme the courts should impose when none is part of the contract itself.
Full verifiability by the court is one information situation investigated in Chapter 13. Another is when the court has limited verifiability (see p. 121). The side payment scheme can only specify a single transfer payment that will be made in any of the situations where one side has not invested in the contract or both sides have not invested. Since a single transfer rather than three conditional transfers can be specified, a contract under limited verifiability can achieve less. Watson identifies the conditions that would make it impossible to draft a contract with limited enforcement that would achieve induce both players to invest in the relationship. There are additional discussions of the importance of information in deciding among the schemes, such as in the second last paragraph on p. 126.
Most of the discussion assumes no court costs. Question 1 (p. 127) addresses this. Question 2 addresses the additional circumstances that warrant the court investing in being able to make finer distinctions as to what has transpired, i.e., in being able to achieve full verifiability as compared to limited verifiability.