George Mason School of Law

George Mason School of Law
Contracts II Remedies F.H. Buckley

How Should Breach Be Punished?

And if we don’t punish? Hobbes, Leviathan 14.18 (1651)
If a covenant be made wherein neither of the parties perform presently, but trust one another, in the condition of mere nature (which is a condition of war of every man against every man) upon any reasonable suspicion, it is void… For he that performeth first hath no assurance the other will perform after, because the bonds of words are too weak to bridle men's ambition, avarice, anger, and other passions, without the fear of some coercive power; which in the condition of mere nature, where all men are equal, and judges of the justness of their own fears, cannot possibly be supposed. And therefore he which performeth first doth but betray himself to his enemy. Hobbes, Leviathan (1651)

What if the punishment is specified in the contract?

In what circumstances do we not enforce contracts?

Where do we not enforce contracts? Paternalism and Penalty Clauses

Where do we not enforce contracts? Paternalism and Penalty Clauses The third party judicial externalities of specific performance

Where do we not enforce contracts? Paternalism and Penalty Clauses The third party judicial externalities of specific performance But that apart, no reason not to enforce the contract

What happens when the contract is silent about the penalty?
Oliver Wendell Holmes

Give them what they “probably would have said if they had spoken about the matter.” Oliver Wendell Holmes

Which is to say, mimic the market Oliver Wendell Holmes

Contracts II Remedies F.H. Buckley

Give them what they “probably would have said if they had spoken about the matter.” Oliver Wendell Holmes

Globe Refining p. 93 What damages did the Π seek?

Globe Refining p. 93 What damages did the Π seek?
The difference between the contract price and the market price of oil at the time of breach, and… The cost of sending the tank cars to Louisville

Globe Refining p. 93 What did Holmes award?
The difference between the contract price and the market price at the time of breach? The cost of sending the tank cars to Louisville?

Globe Refining p. 93 What did Holmes award?
The difference between the contract price and the market price at the time of breach The cost of sending the tank cars to Louisville Only the former—and why was that?

What is the normal measure of damages at common law?

Damages are compensatory They are meant to put the innocent party in the position he would have been in had the wrong not been committed.

When the wrong is a tort, how does one compensate the Π?

When the wrong is a breach of contract, how does one compensate the Π?

When the wrong is a breach of contract, how does one compensate the Π? One makes him whole by putting in the position he would be in had the contract been performed

When the wrong is a breach of contract, how does one compensate the Π? In Globe Refining, the Π would have had the oil, but would have had to send the tank cars to Louisville in any event Giving him both is double counting

Why was the measure of damages the difference between the contract price and (1) the price of oil at breach, rather than (2) the prince of oil at the time stipulated for performance?

Why was the measure of damages the difference between the contract price and (1) the price of oil at breach, rather than (2) the prince of oil at the time stipulated for performance? What’s the innocent party supposed to do on breach?

Freund v. Washington Square
What are the three kinds of damages that are considered?

Freund What are the three kinds of damages that are considered?
The Expectation Interest: Put the Π in the same position he would have been in had the contract been performed

The Expectation Interest: Put the Π in the same position he would have been in had the contract been performed In this case, the royalties, which are too speculative to amount to anything

The Expectation Interest: Put the Π in the same position he would have been in had the contract been performed In this case, the royalties, which are too speculative to amount to anything Nominal Damages

Uncertainty Limits Damages
Dempsey p. 101 Does this undercompensate Π? And give Δ a temptation to breach?

Uncertainty Limits Damages
Dempsey p. 101 Let the parties cure with liquidated damages?

The Expectation Interest The Reliance Interest: Reimburse the Π for what he spent in reliance on the contract

The Expectation Interest The Reliance Interest: Reimburse the Π for what he spent in reliance on the contract A Tortious measure: Put the Π in his pre-contractual position

The Expectation Interest The Reliance Interest For costs actually incurred, not hypothetically incurred as here Semble not to exceed the expectation interest, or else a windfall

The Expectation Interest The Reliance Interest Semble not to exceed the expectation interest, or else a windfall But see the quantum meruit claim in Montgomery’s Estate at p. 100

The Expectation Interest The Reliance Interest Does the reliance interest approximate the expectation interest when account is taken of opportunity costs? P. 865

The Expectation Interest The Reliance Interest Does the reliance interest approximate the expectation interest when account is taken of opportunity costs? P. 865 If seller sells at $100 to buyer, does seller give up an alternative sale at $100 to another buyer?

The Expectation Interest The Reliance Interest The Restitution Interest Here the return of the MSS

The Expectation Interest The Reliance Interest The Restitution Interest Here the return of the MSS Restitution as unjust enrichment. See problem 7 at p. 101

The Expectation Interest The Reliance Interest The Restitution Interest Restatement §344

Remedies for a Nation of Shopkeepers
Napoleon at Boulogne

We presume that every loss is fungible with $$$ A presumption against specific performance

We presume that every loss is fungible with $$$ A presumption against specific performance Where it’s not, uncertainty limits recovery

We presume that every loss is fungible with $$$ A presumption against specific performance Were it’s not, uncertainty limits recovery No solatium doloris

We presume that every loss is fungible with $$$ A presumption against specific performance Were it’s not, uncertainty limits recovery No solatium doloris No punitive damages in contract

Why is the expectation interest the contractual measure of damages?
A contracts to build a custom made machine for B for $100,000

A contracts to build a custom made machine for B for $100,000 We are permitted to infer that, ex ante, the machine was worth at least $100K to B and would cost less than $100K for A to build

A contracts to build a custom made machine for B for $100,000 We are permitted to infer that, ex ante, the machine was worth at least $100K to B and would cost less than $100K for A to build If B breaches, A’s expectation interest is $100K less the cost of construction

A contracts to build a custom made machine for B for $100,000 We are permitted to infer that, ex ante, the machine was worth at least $100K to B and would cost less than $100K for A to build If B breaches, A’s expectation interest is $100K less the cost of construction Let’s assume that that is $50,000

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is $50,000

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is $50K Suppose that contract law awards A only $25K in damages

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is $50K Suppose that contract law awards A only $25K in damages This invites opportunistic renegotiation by B when the machine is half built

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is $50K Suppose that contract law awards A $75K in damages

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is $50K Suppose that contract law awards A $75K in damages Now A has an incentive to declare a breach

Efficient Breach A contracts to build a custom made machine for B for $100,000 Suppose that it now would cost A $120K to build it Performance gives him a net loss of $20K so he’ll want to breach

Efficient Breach A contracts to build a custom made machine for B for $100,000 Suppose that it now would cost A $120K to build it Performance gives him a net loss of $20K so he’ll want to breach But if damages are $150K he’ll want to build it—even if that is value-decreasing

Efficient Breach Holmes’ Path of the Law p. 102
The common law is indifferent between the promisor’s choice either to perform or breach and pay damages

Efficient Breach Richard Posner

Efficient Breach Richard Posner: The Second Life Avatar

Efficient Breach Posner’s hypothetical at p. 103
A agrees to sell widgets to B for $1,000 C subsequently asks A to sell widgets to him for $1500. A can’t do both

A agrees to sell widgets to B for $1,000 C subsequently asks A to sell widgets to him for $1500. A can’t do both Under expectation damages, A can pay damages of $1,000 to B and sell to C for $1500 and make $500

A agrees to sell widgets to B for $1,000 C subsequently asks A to sell widgets to him for $1500. A can’t do both This moves the goods to their most highly-valued user without renegotiation

A agrees to sell widgets to B for $1,000 C subsequently asks A to sell widgets to him for $1500. A can’t do both If damages were $1500, C could only get the goods by buying them from B

A agrees to sell widgets to B for $1,000 C subsequently asks A to sell widgets to him for $1500. A can’t do both If damages were $1500, C could only get the goods by buying them from B But does C know B?

A agrees to sell widgets to B for $1,000 C subsequently asks A to sell widgets to him for $1500. A can’t do both If damages were $500, C might acquire them for $800 even if C is the lowest-value user.

Efficient Breach: what we’re assuming
Impossibility of a complete contingent contract The parties can write the default remedy in their contract

Impossibility of a complete contingent contract Positive transaction costs on renegotiation

Impossibility of a complete contingent contract Positive transaction costs on renegotiation Transaction costs exceed litigation costs (maybe party in breach just pays up)

Impossibility of a complete contingent contract Positive transaction costs on renegotiation Transaction costs exceed litigation costs (maybe party in breach just pays up) Opportunism problems probably cut in favor of the expectation measure

Just what do the parties expect from performance?
The ambiguity in the expectation interest

Just what do the parties expect from performance
Where I bargain for pork belly futures, my claim is unquestionably fungible with $$$

Contracts II Remedies F.H. Buckley 72 72

Do we have a good faith problem here?
Holmes’ Path of the Law p. 102 The common law is indifferent between the promisor’s choice either to perform or breach and pay damages 73

You’re the buyer. You anticipate that on breach you’ll incur damages of $50,000. You specify that seller will pay this on breach. Any problems enforcing this (and not awarding buyer anything more than $50K?) 74

You’re the buyer. You anticipate that on breach you’ll incur lost profit damages. You don’t specify the amount but provide that “on breach seller will reimburse buyer for lost profits.” Any problems enforcing this (and not awarding buyer anything more than the lost profits?) 75

You’re the buyer. You anticipate that on breach you’ll incur lost profit damages. You don’t provide for an award on default. Should the court award lost profit damages (and nothing more?) 76

Would good faith norms require damages that exceed buyer’s lost profits? 77

Would good faith norms require damages that exceed buyer’s lost profits? How much higher (since there is always a theoretical incentive for seller to breach?) 78

Would good faith norms require damages that exceed buyer’s lost profits? How much higher (since there is always a theoretical incentive for seller to breach?) Might we have more bad faith with good faith? 79

Just what does it mean to provide compensatory damages in contract?

Just what does it mean to provide compensatory damages in contract?
How do we put the Π in the same position he would have been in had the contract been performed? Give the Π enough $$$ to permit him to make the repairs Give the Π the market value of the property had the contract been performed

Peevyhouse Lease of farm for five years for stripmining
Restorative work to be done at the end of the term at a cost of $29,000 Jury awarded $5,000, which was more than the market value of the land even if the repair work had been done

Peevyhouse And the winner is:
Give the Π the market value of the property had the contract been performed

Give the Π the market value of the property had the contract been performed Would it be economic waste to restore the land?

Give the Π the market value of the property had the contract been performed Would it be economic waste to restore the land? Suppose the facts of the case had been put to the Π at the time of contracting. What would he have bargained for?

Give the Π the market value of the property had the contract been performed Would it be economic waste to restore the land? Suppose the facts of the case had been put to the Π at the time of contracting. What would he have bargained for? Maute at p. 878

Give the Π the market value of the property had the contract been performed Would it be economic waste to restore the land? Suppose the Pevvyhouse’s got $29,000. What do you expect they would do with it? 87

Give the Π the market value of the property had the contract been performed Would it be economic waste to restore the land? Suppose the Pevvyhouse’s got $29,000. What do you expect they would do with it? What is the land worth? 88

Give the Π the market value of the property had the contract been performed Would it be economic waste to restore the land? Is it helpful to note that Δs breach was willful?

American Standard Niagara River, Tonawanda NY

American Standard What was the Δ to do? And why did it breach?

American Standard Cost of completion was $110.5K
Semble diminution of value was around $3K So what did the Π bargain for? Money’s worth or full performance

American Standard So what did the Π bargain for? Money’s worth or full performance Disparity in economic benefits is not the equivalent of economic waste in Jacob and Youngs v. Kent The breach was “incidental” to the main purpose in Peevyhouse.

American Standard Did the land have idiosyncratic or sentimental value in Peevyhouse? And here? Tonawanda!?!?!

Contracts II Specific Performance F.H. Buckley

George Mason School of Law

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