ECON 1450 – Professor Berkowitz Lecture Notes -Chapter 5 Remedies for Breach of Contract Efficient Breach Model Previous lectures – what promises should.

Slides:



Advertisements
Similar presentations
SALIENT FEATURES OF ISLAMIC FINANCIAL LEASE
Advertisements

Recht und Ökonomie (Law and Economics) LVA-Nr.: WS 2011/12 (7) Contract Law (Vertragsrecht) 1 of 20 Prof. Dr. Friedrich Schneider Institut für.
Performance, Discharge, and, Remedies. If you cant give me your word of honor, will you give me your promise? Samuel Goldwyn, Hollywood producer Everyone.
Contractual Obligations
Discharge of Contract Lecture # 6 Discharge of Contract Lecture # 6.
Real and Personal Property Objective Compare the legal rights of acquisition, transferal and renting/leasing of real or personal property. RELATIONSHIP.
ECON 1450 – Professor Berkowitz Lectures on Chapter 2 Tort Law Area of Common Law concerned with accidental injuries Potential defendant engages in activity.
Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide.
1 Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide.
ECON 1450 – Professor Berkowitz Lecture Notes -Chapter 6 Property rights Use assets Exclusion Disposal Property Rights and Incentives.
Taking into Account Regulatory Risk Professor Joshua Gans University of Melbourne.
1 Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide.
Econ 522 Economics of Law Dan Quint Spring 2010 Lecture 10.
Mutual Consideration ● 9-1 What is Consideration? ● 9-2 Legal Value and Bargained-For Exchange ● 9-3 When is Consideration Not Required?
Contracts for the Sale of Goods & Warranties Law A.
Construction Engineering 380 Engineering Law Payment and Performance.
Hazards Liability and Tort Lecture 8. Outline Another economic role for the government is regulating hazards and risks Factory producing explosives (location.
Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide.
Performance & Termination of Contract (Discharge of Contract)
Chapter 8 Contract Performance: Conditions, Breach, and Remedies Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution.
Breach of Contract and Remedies
What is the difference between an assignment and a delegation?
© 2010 Pearson Education, Inc., publishing as Prentice-Hall 1 REMEDIES FOR BREACH OF TRADITIONAL AND E-CONTRACTS © 2010 Pearson Education, Inc., publishing.
Breach of Contract and Remedies
©2001 West Legal Studies in Business. All Rights Reserved. 1 Chapter 18: Contracts — Breach of Contract and Remedies.
CHAPTER PowerPoint ® Presentation Prepared By Susan McManus, Mount Royal College CHAPTER PowerPoint ® Presentation Prepared By Susan McManus, Mount Royal.
Law of Contracts - 2. Statute of Frauds Must all contracts be in writing?
BUSINESS Law Chapter 9 Mutual Consideration.
Prof. Dr. Friedrich Schneider Institut für Volkswirtschaftslehre Recht und Ökonomie (Law and Economics) LVA-Nr.:
Chapter 17.  From chapter 17, we know that once the 5 essential elements are in place and the parties have agreed, a binding contract exists.  But how.
Law and economics: game theory N.J. Philipsen Associate Professor of Law and Economics Faculty of Law, Research Institute METRO Shandong University, Jinan,
 A contract is an agreement between two or more persons to exchange something of value  What does it do?  It legally binds parties to do what they.
© 2007 by West Legal Studies in Business / A Division of Thomson Learning CHAPTER 9 Contract Performance, Breach, and Remedies.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.
Essentials Of Business Law Chapter 8 Consideration McGraw-Hill/Irwin Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 19 Discharge of Contracts
Chapter 9 Contracts for the Sale of Goods Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior.
Business Law Combined Chapters 9, Chapter 9 What is Bait and Switch?  Using understocked, low-prices “come- on” to lure prospective buyers out.
Econ 522 Economics of Law Dan Quint Spring 2012 Lecture 14.
Chapter 9 Mutual Consideration. Consideration Main purpose of consideration is to distinguish between social promises and more serious transactions where.
Essentials Of Business Law Chapter 15 Sales McGraw-Hill/Irwin Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
CHAPTERCHAPTER McGraw-Hill/Irwin©2008 The McGraw-Hill Companies, All Rights Reserved Compensatory and Related Damages THIRTEENTHIRTEEN.
Chapter 12 Contract Discharge and Remedies for Breach.
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.
Methods to Terminate a Contract
1. 2 BUT FIRST SOME ADDITIONAL BUT IMPORTANT DEFINITIONS AND LEGAL CONCEPTS.
Econ 522 Economics of Law Dan Quint Fall 2009 Lecture 14.
MT 311 Seminar 6. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 2 Contract Discharge Conditions.
1 How breach may occur 2 Express repudiation 3 One party renders performance impossible 4 Failure of performance 5 Types of remedies 6 Damages 7 Equitable.
Discharge A party is discharged when she has no more duties under a contract. Most contracts are discharged by full performance. Sometimes the parties.
Econ 522 Economics of Law Dan Quint Fall 2012 Lecture 11.
Econ 522 Economics of Law Dan Quint Fall 2015 Lecture 14.
Econ 522 Economics of Law Dan Quint Fall 2011 Lecture 11.
Consequential Damages – Buck v. Morrow
© 2004 West Legal Studies in Business A Division of Thomson Learning 1 Chapter 10 Contract Performance, Breach, and Remedies.
Contract Performance In Traditional and E-Contracts; Breach of Contract and Remedies Chapter 18 & 19.
Contract Pricing Principles. What is pricing? Pricing: The process of establishing a reasonable amount or amounts to be paid for supplies or services.
Contracts STREET LAW CHAPTERS definition  An agreement between two or more persons to exchange something of value.
COPYRIGHT © 2011 South-Western/Cengage Learning. 1 Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears,
Econ 522 Economics of Law Dan Quint Fall 2009 Lecture 13.
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 13 Discharge and Remedies.
 Valid ◦ Legally good  Void ◦ No legal force  Voidable ◦ Not void, but may be voided by one party  Unenforceable ◦ Some rule of law can not be enforced.
Modern Real Estate Practice in Illinois Eighth Edition Chapter 11: Real Estate Contracts ©2014 Kaplan, Inc.
LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 1 When Is Consideration Not Required? Identify when promissory estoppel applies.
Econ 522 Economics of Law Dan Quint Fall 2009 Lecture 10.
LAW FOR BUSINESS AND PERSONAL USE © SOUTH-WESTERN PUBLISHING Chapter 9Slide 1 Legal Value and Bargained-For Exchange Identify when there is legal value.
Ch. 7 Consumer Law and Contracts 7-1 Sales Contracts.
When is consideration “not” required
CHAPTER 9 Test review.
Presentation transcript:

ECON 1450 – Professor Berkowitz Lecture Notes -Chapter 5 Remedies for Breach of Contract Efficient Breach Model Previous lectures – what promises should be legally enforceable? Enforce contracts that are mutually beneficial Suppose conditions change and a contract that was mutually beneficial is no longer mutually beneficial

Efficient Breach Model Contract: buyer is a rock band Contract: seller is music store V = value of contract to buyer C = cost of contract to seller – where C includes variable costs Contract is socially efficient if V > C Contract is socially inefficient if V < C

Uncertainty and Social Efficiency Uncertainty over production costs Uncertainty over value of performance to buyer Uncertainty about offers from alternative buyers Efficient breach rule versus individual incentives to breach

Money damages and efficient breach Suppose there is uncertainty over production costs (C) Buyer is homeowner, seller is contractor who is fixing homeowners kitchen V = value of house is additional resale value after kitchen is fixed, P = price Expected that V > P and P > C => then both parties go ahead with contract and contract is efficient

Reliance investment R = reliance investment – example, homeowner hires moving company to deliver cabinets for kitchen on a particular day R – an upfront investment by owner that is not salvageable – enhances investment for homeowner, but is a pure loss if the investment (kitchen repair) does not go through

Breach of contract D = court imposed damage that contractor (seller) must pay buyer if there is a breach What D incentivizes the contractor to breach efficiently? Efficient contract: Joint return from contract is (V – P – R) + (P – C) = V – R – C, Joint return from breach is –R => efficient breach holds when – R > V – R – C or C > V!

Using D to get efficiency Sellers breach decision – sellers return w. breach = - D, sellers return w. contract is P – C Seller breaches when C > P + D (interpret) Efficient breach by seller occurs when C > V and C > P + D => D = V – P Interpretation – D = buyers surplus

Efficient breach and actual rules Expectation damages – money that leaves promissee (homeowner) just as well off as if contract had been performed: D = V – P Reliance damages – money that leaves promissee as well off as if the contract had never been made: D = R Under reliance damages sellers breach when C>P+D = P+R, where V > P+R, so seller breaches too much!

Actual rules – continued Breach when D=0 Seller breaches when C > P + D = P, and since V > P, the seller breaches too frequently! See figure 5.1 Check exercise 5.1

Incentives for Efficient Reliance Suppose the homeowner can choose R R is chosen to enhance resale value if contract goes through: V(R) > 0 and V(R) < 0 R* chosen to maximize V(R) – R Therefore, V(R*) – 1 = 0

Realism – seller is uncertain about costs C h > C L, and C h > V > C L Contract is only efficient when costs are low Probability that costs are low = q; probability costs are high = 1 – q Efficient R: maximizes expected joint return which is q(V – R - C L ) + (1-q)(-R) = q(V – R) - R

R^ - efficient reliance Max qV(R) – qC L – R Max qV(R) – R See Figure 5.2 – R^ buyer should invest less to account for losses when high costs are realized Show that dR^/d(1-q) 0)

Expect Damages and Uncertainty Expectation damages D = V(R) – P We want the buyer to invest efficiently in R and we want the buyer to efficiently honor or breach the contract Seller efficiently breaches (we have already shown this!) Buyer chooses R: max q(V(R)–R–P) + (1-q)(D-R)

Expectation damages continued Since D = V(R) – P, then Max q(V(R) – R – P) + (1-q)(V(R) – R – P) or Max V(R) – R – P, or you get R* > R~, so buyer over-invests! Expectation creates a moral hazard problem for the buyer! Similar to under-investment of victim in tort model with strict liability!

Solution to problem Efficient contract enforcement by seller and over-investment by buyer (moral hazard) Analogy to negligence in contract law – set a due standard for buyer (R-due standard)… if buyer meets this and does not exceed it, then the seller pays for full damages for breach There is no such remedy in contract law

Hadley v. Baxendale Rule Read case on pp Damages for breech of contract are limited to a reasonable level Interpretation – reasonable level = R^ (the efficient level under uncertainty) Thus, D = V(R^) – P and D = V(R^) – P < V(R) – P, R is unlimited expectation damages!

Hadley v. Baxendale, contd With unlimited damages, buyer get R and with expectation damages buyer gets R^ only Expectation damages and buyers behavior Choose R: Max qV(R) – R – P + (1-q)V(R^) or drop constants and max qV(R) – R Under this rule, seller breaches or honors contract efficiently and buyer invests efficiently!

Mitigation of Damages Example – owner of duplex agrees to rent an apt to a student for 12 months at $300 per month After 6 months the student abandons apt After 12 months, landlord files for $1,800 unpaid rent Student notes that friend offered landlord $200 per month for remaining 6 months

Mitigation – contd Landlord refuses to take on new lease holder Student admits to breaching contract Student also argues landlord should only get $600 Court sides with student – contractors have a duty to take on any reasonable (cost-effective) efforts to mitigate damages from breach!

Impossibility and related excuses Impossibility Frustration of purpose Commercial impracticability

Courts discharge contracts when performance is feasible but economically burdensome Conditional rule that discharges performance without penalty when costs are sufficiently high

Specific performance When is it efficient for the court to forego monetary damages (D) and, instead, order the promisor to perform the contract as written?