1. Econ 522 Economics of Law
Dan Quint
Spring 2017
Lecture 11

2. Reminders HW2 due tomorrow night First midterm in class next Wednesday
Covers through end of property law (middle of last lecture)

3. Last time, we started contract law
Legally binding promise
Allows for transactions that doesn’t occur “all at once”
Which promises should we enforce?
Bargain Theory: enforce promises made as part of a bargain
Requires three elements: offer, acceptance, consideration
Today:
For efficiency, which promises should we enforce?
Other ways contract law can be beneficial

4. For efficiency, what promises should be enforced?

5. For efficiency, what promises should be enforced?
We saw two examples of contracts which would not be enforced under bargain theory, but which both parties might have wanted to be enforceable
I’m shopping for a car, dealer promises to honor a particular price if I come back
Alum promises a large gift to his University, needs time to deliver the money
Suggests…
Both sides think enforceability of the contract makes them better off
If nobody else is effected  enforceability is a Pareto-improvement!
Brings us to a general principle:
In the two examples from last time – buying a used car, and the rich alumnus – both sides wanted the contract to be enforceable
This suggests that both sides think the contract being enforceable makes them better off
Neither of these contracts seem to impose any externalities on anyone else
So the enforceability of these contracts would appear to be a Pareto-improvement, that is, make the two sides better off without making anyone worse off
And therefore, efficiency suggests they should be enforceable.
And this illustrates a more general principle:
In general, economic efficiency requires enforcing a promise if the promisor and the promisee both wanted enforceability when it was made.

6. For efficiency, what promises should be enforced?
In general, efficiency requires enforcing a promise if both the promisor and the promisee wanted it to be enforceable when it was made
different from wanting it to actually be enforced
In general, efficiency requires enforcing a promise if the promisor and the promisee both wanted enforceability when it was made.
Go back to the example we did at the beginning, you trusting me to make an investment with your money
Suppose I promise to share the gains of the investment with you
You want the contract to be enforceable: it’s the only way you’ll get your money back
And I want the contract to be enforceable: it’s the only way I can get you to trust me with your money, which is good for both of us
So we both want my promise to be enforceable; efficiency then suggests that it should be
(Note the important distinction here between wanting the contract to be enforceable and wanting it to actually be enforced.
At the time I make the promise, I want it to be enforceable – I want us both to live in a place and time whose laws would hold me to my promise
Because if not, you won’t trust me, and won’t give me the money
Once you’ve given me the money, though, I’d rather the contract not actually be enforced – I’d still be better off if I could keep all the money
Hence, the wording of the principle above: efficiency requires enforcing a promise if both sides wanted it to be enforceable when it was made.)

7. For efficiency, what promises should be enforced?
In general, efficiency requires enforcing a promise if both the promisor and the promisee wanted it to be enforceable when it was made
different from wanting it to actually be enforced
The first purpose of contract law is to enable people to cooperate by converting games with noncooperative solutions into games with cooperative solutions
or, enable people to convert games with inefficient equilibria into games with efficient equilibria
There are lots of other situations that are variations on this agency game
I gave the example of an investment opportunity
It could have simply been a Pareto-improving trade: I have a good you want, but we’re far apart, and so you have to trust me with your money before I ship you the good
It could be an insurance policy: I choose to buy insurance, trusting that if my house burns down, the insurance company will pay for it
I could simply be putting my money in the bank, trusting I can get it out later
In all these cases, lack of enforceable contracts might lead us to miss out on a profitable exchange of some sort.
This brings us to Cooter and Ulen’s first (of many) proclamations about contract law:
The first purpose of contract law is to enable people to cooperate by converting games with noncooperative solutions into games with cooperative solutions.
Clearly, in the example we did, cooperation is more efficient than no cooperation, since the combined payoffs are higher
Thus, in this case, cooperation is efficient.
(If cooperation were not efficient, we would not have tried.)
Thus, we could rephrase this by saying that contract law enables people to convert games with inefficient solutions (equilibria) into games with efficient solutions

8. For efficiency, what promises should be enforced?
In general, efficiency requires enforcing a promise if both the promisor and the promisee wanted it to be enforceable when it was made
different from wanting it to actually be enforced
The first purpose of contract law is to enable people to cooperate by converting games with noncooperative solutions into games with cooperative solutions
or, enable people to convert games with inefficient equilibria into games with efficient equilibria
Also note that without enforceable contracts, it is my ability to run off with your money that causes cooperation to break down
In usual choice theory, more options always make you better off
When a restaurant adds items to its menu, you should be at least as well off – if you don’t like the new items, you don’t order them
But in a strategic setting, more options can make you worse off, since they change what other people expect you to do
Enforceable contracts give me a way to limit my own options – in this case, to take away my ability to run off with your money
In this case, limiting my options gives you a reason to trust me, and therefore makes me better off as well.
(Slightly off topic, but as an example of how “foreclosing (ruling out) an opportunity” can be beneficial, the book quotes Sun Tzu’s The Art of War:
“When your army has crossed the border [into hostile territory], you should burn your boats and bridges, in order to make it clear to everybody that you have no hankering after home.”
By taking away your option of retreating, you make it clear that you’re serious about fighting.)

9. So now we know… What promises should be enforceable?
For efficiency: enforce those which both promisor and promisee wanted to be enforceable when they were made
One purpose of contract law
Enable cooperation by changing a game to have a cooperative solution
Contract law can serve a number of other purposes as well
So now we have an initial idea of which promises should be enforceable
Those which both the promisor and the promisee want to be enforceable when the promise is made
And we know one purpose of contract law: to enable cooperation by changing a game to have a cooperative solution
However, there are a number of other purposes that contract law can serve.

10. Information

11. Information Private/asymmetric information can hinder trade
Car example (George Akerloff, “The Market for Lemons”)
One has to do with information
We did an example a couple weeks ago of asymmetric information, and how that can disrupt trade
We used the example of me wanting to buy your car, but you having more information than me about the condition of the car, and therefore how much it’s worth
And in the example we solved, we found we could only trade when the car was basically worthless – otherwise, I’m too afraid of you being opportunistic and only selling me the car if it’s in bad shape

12. Information Private/asymmetric information can hinder trade
Car example (George Akerloff, “The Market for Lemons”)
Contract law could help
You could offer me a legally binding warranty
Or, contract law could impose on you an obligation to tell me what you know about the condition of the car
Forcing you to share information is efficient, since it makes us more likely to trade
The second purpose of contract law is to encourage the efficient disclosure of information within the contractual relationship.
But this offers another way contract law can facilitate efficient trade – by helping us to overcome adverse selection problems
Contract law could give me a way to offer a legally binding warranty
Or contract law could impose on me a legal obligation to truthfully tell you anything I know about the condition of the car
That is, once we’ve signed a contract for you to buy my car, contract law could make me liable for any mechanical problems with the car that I didn’t warn you about
In this case, requiring me to share information is efficient, since it reduces your uncertainty about the value of the car, and therefore gives us a way to trade
Which brings us to…
The second purpose of contract law is to encourage the efficient disclosure of information within the contractual relationship.

13. Next question If a contract is a promise…
what should happen when that promise gets broken?
could be: I signed a contract with no intention of living up to it
but could be: I signed a contract in good faith, intending to keep it…
…but circumstances changed, making performance of the contract less desirable, maybe even inefficient!
so what should happen to me if I fail to perform?

14. Breach

15. Breach I’m an airplane builder You and I sign a contract
You agree to pay me $350,000
I agree to build you an airplane
You value the plane at $500,000; I expect building it to cost $250,000
Lots of things could happen…
Price of materials could go up, increasing my costs to $700,000…
…making it inefficient for me to build you a plane
Costs could increase to $400,000…
…so it’s still efficient for me to build you the plane, but I no longer want to
Another buyer could arrive and offer me $600,000 for the plane
I could break my arm, making it impossible for me to build the plane
These are all reasons why I might want, or need, to back out of my promise
There are also things that could happen that might make you want to back out
You might lose an eye and be unable to fly without depth perception
You might find another seller who can build a plane more cheaply, or a nicer plane
And so on

16. Breach A contract is a promise
Breach of contract is when promisor fails to keep promise
To make a promise legally binding, there has to be some consequence when it is broken
So, what should happen when a contract is breached?
If penalty is too small, contract law has no bite
If penalty is too large, promises might get kept even when that becomes inefficient
Can we design the law to get breach of contract only when it’s efficient to breach?
Suppose I’m an artist, and I’m working on a painting
It’s still a couple of weeks away from completion, but you’ve seen my work before, and you like my theme, and you know that when I’m done, you’ll value my painting at $1,000
There are other buyers out there who might value it similarly, so you don’t want to wait until it’s done to buy it
But I’m happy to sell it to you, and we agree on a price of $600
But now, as I’m finishing the painting, my crazy cousin comes to visit
He sees my painting, and loves it, and thinks the colors would go perfectly in his beach house, and offers me $5,000 for it
Clearly, he values the painting much more highly than you do
Efficiency would require that he get it
But I’ve already committed to sell the painting to you.
And if the penalty for breach is very severe, I’ll keep that promise, and my cousin won’t get the painting

17. When is breach of contract efficient?
Efficiency:
>
Social benefit of breach
Social cost of breach
Efficient to Breach 
<
Social benefit of breach
Social cost of breach
Efficient to Perform 
Social benefit of breach: promisor saves cost of performing
Social cost of breach: promisee loses benefit from promise
Like anything, breach is efficient when its social benefit is greater than its social cost

18. When is breach of contract efficient?
Efficiency:
>
Promisor’s cost to perform
Promisee’s benefit from performance
Efficient to Breach 
<
Promisor’s cost to perform
Promisee’s benefit from performance
Efficient to Perform 
Social benefit of breach: promisor saves cost of performing
Social cost of breach: promisee loses benefit from promise

19. How do we expect promisors to behave?
Efficiency:
>
Promisor’s cost to perform
Promisee’s benefit from performance
Efficient to Breach 
<
Promisor’s cost to perform
Promisee’s benefit from performance
Efficient to Perform 
What will actually happen (incentives of promisor):
Like any decisionmaker, we expect the promisor to consider his private cost and private benefit when deciding what to do
>
Promisor’s cost to perform
Promisor’s liability from breach
Promisor will Breach 
<
Promisor’s cost to perform
Promisor’s liability from breach
Promisor will Perform 

20. Can we design the law to get only efficient breach of contract?
Efficiency:
>
Promisor’s cost to perform
Promisee’s benefit from performance
Efficient to Breach 
<
Promisor’s cost to perform
Promisee’s benefit from performance
Efficient to Perform 
What will actually happen (incentives of promisor):
Promisor’s cost to perform
Promisor’s liability from breach 
Promisor will Breach
>
<
Promisor’s cost to perform
Promisor’s liability from breach
Promisor will Perform 

21. Can we design the law to get only efficient breach of contract?
>
Promisor’s cost to perform
Promisee’s benefit from performance
Efficient to Breach 
Promisor’s cost to perform
Promisor’s liability from breach 
Promisor will Breach
>
If we set liability from breach = promisee’s benefit from performance, promisor will breach exactly when it’s efficient
When a promisor breaches a contract, he should owe a penalty exactly equal to the benefit the promisee expected to receive
This is expectation damages
Expectation damages: if I promise you something that has value of $100 to you, and then I break my promise, I owe you $100
This way,
if it costs me more than $100 to keep my promise, I’ll break it, which is efficient
if it costs me less than $100 to keep my promise, I’ll keep it, which is efficient

22. Back to airplane example
Plane worth $500,000 to you, agree to price of $350,000, my cost of building the plane changes
Expectation damages: I owe you $150,000 if I fail to deliver the plane
Whenever cost is less than $500,000…
I’m better off keeping my promise
And it’s efficient for me to build you the plane
Whenever cost is above $500,000
I’m better off breaking my promise and paying damages
And it’s efficient for me to break my promise

23. Another way to think about expectation damages: eliminating an externality
If I breach contract, I impose externality on you
You expected payoff of $150,000 if I performed…
…so if I breach, you’re $150,000 worse off
If I have to pay you $150,000 if I breach, then I internalize the externality
Now my action no longer affects your payoff
(You get the same surplus of $150,000, whether or not I build the plane.)
No more externality  I choose efficiently when deciding whether to perform or breach

24. What would happen under other remedies?
Plane worth $500,000 to you, agree to price of $350,000, my cost of building the plane changes
No penalty
If costs rise to $400,000, I’ll choose to breach…
…but performance would be efficient
Penalty for breach is $1,000,000
If costs rise to $700,000, I’ll choose to perform…
…but breach would be efficient

25. Of course, with low TC, we could always negotiate around an inefficient rule (Coase)
Plane worth $500,000 to you, agree to price of $350,000, my cost of building the plane changes
No penalty
If costs rise to $400,000, I would want to breach…
…but we could renegotiate a different price
Penalty for breach is $1,000,000
If costs rise to $700,000, I would have to perform…
…but we could negotiate a “buy-out” price
Only expectation damages guarantee efficient breach/ performance even without renegotiation
But if we knew this was a possibility – that I could breach our contract without penalty, and get you to negotiate a new, higher price…
…then even if my costs didn’t really go up, I might be tempted to lie, and claim that they had, to force you to pay more
And on the other hand, if the penalty for breach is too severe…
…you might charge me a lot of money to get out of performing when my costs go up a lot…
…which means I might be more hesitant to agree to the initial contract

26. Another reason the remedy for breach matters: investment in performance
Many things promisors can do to reduce likelihood they will have to breach a contract
If promisor agreed to build a house, he can…
Buy materials ahead of time and store them in a warehouse
Spend more time lobbying (or bribing!) local government to ensure he can get required permits
Pay his assistant well, so he’s less likely to quit
Some of these things may be hard to observe/verify, so impossible to build them into the contract itself

27. Another reason the remedy for breach matters: investment in performance
Expectation damages (and only expectation damages) will lead to efficient level of these investments
If promisor internalizes the cost of breach…
…then he receives the full benefit of these investments,
along with paying their full cost,
so to minimize private cost, he chooses efficient level
If penalty for breach is less than expectation damages…
Breach still imposes negative externality, so investments in performance impose positive externality on promisee…
…so promisor will invest less than efficient amount
Similarly, if penalty for breach was more than expectation damages,
the promisor would choose more than the efficient level of investment

28. So now we’ve seen three things contract law can accomplish…
1. Facilitate non-simultaneous trade when trust is required
Turn games with inefficient equilibrium into games with efficient equilibrium
2. Encourage efficient disclosure of information
3. Secure efficient level of breach, and efficient level of investment in performance
Via expectation damages
Next a fourth…

29. Reliance

30. Reliance You expect an airplane to arrive in spring – you might…
Sign up for flying lessons
Build yourself a hangar
Buy a helmet and goggles
Reliance – investments which depend on performance
Reliance increases the value of performance to promisee
Reliance increases the social cost of breach
Another aim of contract law is to secure optimal level of reliance
I’m an airplane builder
You come to me in the fall and order an airplane, which I will build over the winter and deliver in the spring
Now that you’re expecting an airplane in the spring, there are a bunch of things you might do
You might sign up for flying lessons
You might build yourself a hangar – an airplane garage – so your plane doesn’t get rained on after I deliver it
You might buy an awesome leather helmet and aviator goggles, so you can look like this guy
Similarly, the farmer who has mailed in a check for $25 for a sure means to kill grasshoppers might plant more crops, since he’s no longer worried about the risk of grasshopper damage
Similarly, the nephew whose uncle promised him a trip around the world might go out and buy a backpack, or a linen suit to wear in the tropics
These are all examples of reliance – investments whose value depend on performance of the promise
(An airplane hangar is very valuable if you end up with an airplane, and worthless otherwise)
Or to put it another way, reliance is any investment which increases the value of performance to the promisee
(An airplane is more valuable if you already have a hangar)
Is reliance a good thing?
well, in some cases, it may be cheaper to make these investments ahead of time
if you wait to build a hangar until I deliver your airplane, the plane might get damaged in a hailstorm before the hangar is complete
if the nephew waits to buy a backpack until his uncle sends him plane tickets, he might miss a big sale
On the other hand, we know that the promisor may not always perform (and that this may be OK)
So reliance investments are not a sure thing – if I fail to keep my promise, your investment in reliance is lost
Or, since reliance increases the value of performance, it also increases the social cost of breach – you’ve built a hangar for nothing, or you resell the helmet and goggles at a loss
And this brings us to:
The fourth purpose of contract law is to secure optimal reliance.

31. When is reliance efficient?
When social benefit of reliance > social cost of reliance
Social benefit: increased benefit to promisee
(Value of airplane + hangar) – (Value of airplane without hangar)
Value is only realized if the promise is performed
Social cost: direct cost borne by promisee
Cost occurs whether or not promise is performed
Reliance is efficient whenever
(True of both discrete choices – whether or not to build a hangar – and also on the margin, for continuous choices)
Increase in value of performance
Probability of performance
Cost of investment X
>

32. How should reliance figure into damages?
Expectation damages = expected benefit from performance
If your reliance investment increases your anticipated benefit…
should it increase the damages I owe you if I breach?
Can we design damages to get efficient reliance, in addition to efficient breach?

33. Reliance and damages: example
Price of plane = $350,000 Value of plane = $500,000 Cost of hangar = $75,000 Value of plane + hangar = $600,000
Reliance and damages: example
You’re buying an airplane from me
Price is $350,000, to be paid on delivery
Airplane alone gives you benefit of $500,000
Building a hangar costs $75,000
Airplane with hangar gives you benefit of $600,000
Without hangar, expectation damages = $150,000
If you build a hangar and I fail to deliver plane, do I owe…
$150,000? (Value of original promise)
$250,000? (Value of performance after your investment)
$225,000? (Value of original promise, plus reimburse you for investment you made)
Some other amount?

34. To get efficient breach…
Price of plane = $350,000 Value of plane = $500,000 Cost of hangar = $75,000 Value of plane + hangar = $600,000
To get efficient breach…
The only way to guarantee efficient breach is if damages included the added benefit from reliance
Once you’ve made investment, you anticipate benefit of $250,000 from performance
If damages are anything less than that, I’ll breach too often
(If damages exclude the added benefit, then I’m back to imposing an externality when I choose to breach the contract)
So what happens to the incentive for reliance investments if damages will increase to include this added benefit?

35. If exp damages include benefit from reliance…
Price of plane = $350,000 Value of plane = $500,000 Cost of hangar = $75,000 Value of plane + hangar = $600,000
If exp damages include benefit from reliance…
If you don’t build hangar, your payoff will be…
$150,000 if I deliver the plane ($500,000 – $350,000)
$150,000 if I breach and pay expectation damages
If you build hangar, your payoff will be…
$175,000 if I deliver the plane ($600,000 – $350,000 – $75,000)
$175,000 if I breach and pay (higher) expectation damages
So if expectation damages include the increased value of performance due to reliance investments…
You’ll invest whenever (increase in benefit) > (cost)
In this case, you’ll invest (because $100,000 > $75,000)

36. If exp damages include benefit from reliance…
Price of plane = $350,000 Value of plane = $500,000 Cost of hangar = $75,000 Value of plane + hangar = $600,000
If exp damages include benefit from reliance…
If expectation damages include increased value of performance, you’ll invest for sure
Is this efficient?
Reliance is efficient if
(increase in benefit) X (probability of performance) > (cost)
$100,000 X (probability of performance) > $75,000
Only efficient if probability of performance > ¾
If probability of performance < ¾, reliance is inefficient, but happens anyway
Overreliance!

37. X + X > X > Overreliance
If reliance investments increase the damages you’ll receive in the event of breach, you’ll over-rely
You’ll rely if
Efficient to rely if
So if damages increase when you make reliance investments, we’re sure to get overreliance!
(Your investment imposes an externality on me)
Increase in benefit X
Prob. of perform. +
Increase in damages X
Prob. of breach
>
Cost of investment
Increase in benefit X
Prob. of perform.
>
Cost of investment

38. Better example: Continuous reliance
Price of plane = $350,000
Cost: either $250,000 or $1,000,000
Value of plane + $x hangar =
$500, Öx
Better example: Continuous reliance
Additional value of plane
Designer hangar with Starbucks - $480,000
Functional heating - $240,000
Metal poles, rigid roof - $120,000
Plywood frame, canvas roof - $60,000
Tarp and rope - $6,000 benefit
Investment in hangar
$100
$10,000
$40,000
$160,000
$640,000

39. Three questions Let p be probability of breach Three questions
Price of plane = $350,000
Cost: either $250,000 or $1,000,000
Value of plane + $x hangar =
$500, Öx
Three questions
Let p be probability of breach
Three questions
What is the efficient level of reliance?
What will promisee do if expectation damages include anticipated benefit from reliance?
What will promisee do if expectation damages exclude anticipated benefit from reliance?

40. Three questions Let p be probability of breach Three questions
Price of plane = $350,000
Cost: either $250,000 or $1,000,000
Value of plane + $x hangar =
$500, Öx
Three questions
Let p be probability of breach
Three questions
What is the efficient level of reliance?
x = $90,000 (1 – p)2
What will promisee do if expectation damages include anticipated benefit from reliance?
x = $90,000
What will promisee do if expectation damages exclude anticipated benefit from reliance?
Total social gain when costs stay low: 500, sqrt(x) – 250,000 – x
Total social gain when costs go up: – x
If probability costs rise is p, expected total social gain is
(1-p) (250, sqrt(x) – x) + p (-x)
250,000 (1-p) (1-p) sqrt(x) – x
Choose x to maximize this: derivative is
600 (1-p) /(2sqrt(x)) – 1 = 0
x = 90,000 (1 – p)2
x = 90,000 (1 – p)2 is the efficient level of reliance
When expectation damages include anticipated benefit,
private gain to promisee when costs stay low: 500, sqrt(x) – 350,000 – x = 150, sqrt(x) – x
Private gain to promisee when costs go up: 150, sqrt(x) – x
Expected private gain to promisee is 150, sqrt(x) – x
Choose x to maximize this: derivative is 600/(2 sqrt(x)) – 1 = 0 -> x = 90,000
So promisee would invest x = $90,000 in reliance
When expectation damages exclude anticipated benefit,
Private gain to promisee when costs stay low: 500, sqrt(x) – 350,000 – x = 150, sqrt(x) – x
Private gain to promisee when costs go up: 150,000 – x
Expected private gain to promisee is 150,000 + (1 – p) 600 sqrt(x) – x
Choose x to maximize this: derivative is 600 (1 – p)/(2sqrt(x)) – 1 = 0  x = 90,000 (1 – p)2
So promisee would invest x = $90,000 (1-p)2 in reliance

41. Reliance and breach
Just showed: if damages include added benefit from reliance, promisee will invest more than efficient amount
But if damages exclude added benefit…
Then promisor’s liability < promisee’s benefit from performance
Which means: promisor will breach more often than efficient
And promisor will underinvest in performance
“Paradox of compensation”
Single “price” (damages owed) sets multiple incentives…
…impossible to set them all efficiently!
(When we get to tort law – that is, rules covering liability for accidents – we’ll see this same problem
One price – how much I owe you if I hit you with my car – will create incentives for me (how fast to drive), and for you (how carefully to look when crossing the street)
And it’s hard to set both incentives efficiently
In tort law, we’ll see, there is a trick we can use)

42. So what do we do? Cooter and Ulen: include only efficient reliance
Perfect expectation damages: restore promisee to level of well-being he would have gotten from performance if he had relied the efficient amount
So promisee rewarded for efficient reliance, not for overreliance
So how do we fix this? Cooter and Ulen adjust their definition of expectation damages in the following way:
Perfect expectation damages restore the promisee to the level of well-being he would have had, had the promise been kept, and had he relied the optimal amount
(This is why they attach the word “perfect” to expectation damages)
Thus, the promisee is rewarded for efficient reliance
this increases his payoff from performance of the promise, and also increases his payoff from breach, since it increases the amount of damages he receives
But the promisee is not rewarded for excessive reliance – overreliance
damages are limited to the benefit he would have received given the optimal level of reliance.
It’s a nice idea, but it seems like it would be very hard in general for a court to determine after the fact what the optimal level of reliance was
(It might also be hard for the promisee to know this, since he may not know the probability of breach.)

43. So what do we do? Cooter and Ulen: include only efficient reliance
Perfect expectation damages: restore promisee to level of well-being he would have gotten from performance if he had relied the efficient amount
So promisee rewarded for efficient reliance, not for overreliance
Actual courts: include only foreseeable reliance
That is, if promisor could reasonably expect promisee to rely that much
What is actually done in practice?
The usual rule is that liability is limited to the level of reliance that is foreseeable.
Reliance is foreseeable if the promisor could reasonably expect the promisee to rely that much under the circumstances
Reliance is unforeseeable if it would not be reasonably expected
American and British law tend to define overreliance as unforeseeable, and therefore noncompensable.
An example of unforeseeable reliance
telegraph company fails to transmit a stockbroker’s message, resulting in millions of dollars in losses
the telegraph company could not reasonably expect the stockbroker to rely that heavily on one message
so the telegraph company would not be liable for the full extent of the losses
Another example: the rich uncle’s nephew, when he was promised a trip around the world, goes out and buys “a white silk suit for the tropics and matching diamond belt buckle”.
After the uncle refuses to pay for the trip, the nephew sells the suit and belt buckle at a loss, and sues his uncle for the difference
The court might find the silk suit foreseeable reliance, but the diamond belt buckle unforeseeable, and only award him the loss on the suit.
(The book points out that “in American law, gift promises are usually enforceable to the extent of reasonable reliance.”)