Damages Revisited Party-designed damages Specific performance Court-imposed damages

Expectations: promisee is indifferent between breach and performance

Reliance: promisee is indifferent between breach and no contract

Opportunity Costs: promisee is indifferent between breach and best alternative contract

Restitution: minimal remedy Disgorgement: promisor must give up any profits

earned from breach

Football Tickets You promise me your OSU ticket for $50

but then breach Expectations Damages

DE = Value - $50 = $150 - $50 = $100

Reliance Damages DR = purchase of scarlet & gray face paint

Opportunity Cost Damages DOC = Value - $80 = $150 - $80 = $70

What if there aren’t many good substitutes?

Ranking: DE > DOC > DR

Hawkins v McGee (1929) Hawkins scarred his hand in electrical

accident Dr. McGee promised to “make the hand

a hundred percent perfect hand” Skin from chest was grafted to hand,

but was disaster Hawkins successfully sued Dr. McGee,

issue on appeal was appropriate damages

Hairy Hand Case

Hairy hand

Scarred hand

Next-best-doctor hand

$

100% good

DE

DOC

DR

Hand’s Condition

Indifference Curve: combinations of $ and hand’s condition that give you constant utility

U1

U2

U3

Williams v ABC’s Extreme Makeover Deleese Williams was to get “makeover”

surgery: face lift, chin and breast implants, dental surgery

ABC backed out hours before first surgery because recovery time wouldn’t fit their show schedule

Williams sued for breach of contract claiming that ABC humiliated her and goaded her sister into insulting her

Sister committed suicide Petition (p22:64,66)

Settled out of court

Deleese Williams

Impact of Remedies on Efficiency Performance? Reliance?

Coase Theorem Revisited Efficient breach will occur regardless of the law

if TC are low

Airplane Sale You value my plane at $500,000 My expected costs are $250,000 (but there is a chance my

costs may rise to $1,000,000) We agree on a sale price of $350,000

What happens to performance under Expectations Damages Specific Performance Opportunity Cost Damages

“Unfortunate contingency”

Airplane Sale: DE

You value my plane at $500,000 My expected costs are $250,000 (but there is a

chance my costs may rise to $1,000,000) We agree on a sale price of $350,000

Costs Low (Perform)

Costs High (Perform)

Costs High (Breach/pay DE)

I get 100 - 650 -150

You get 150 150 150

Total 250 - 500 0

Breach is efficient

Airplane Sale: SP You value my plane at $500,000 My expected costs are $250,000 (but there is a

chance my costs may rise to $1,000,000) We agree on a sale price of $350,000

Costs Low (Perform)

Costs High (Perform)

Costs High (Renegotiate)

I get 100 - 650 - 650+250 = - 400

You get 150 150 150+250 = 400

Total 250 - 500 0

Buy out the contract

Note: If TC are low, either remedy will lead to efficient breach.

Surplus from cooperation

Reconsider the plane sale example with high production costs. If the transaction costs of renegotiating the contract are too high, then all of the following will occur:

1 2 3 4 5

0% 0% 0%0%0%0%

a) Specific performance would lead to inefficient performance

b) Specific performance would lead to efficient performance

c) Expectation damages would lead to efficient breach

d) Expectation damages would lead to inefficient breach

e) (a) and (c)f) (b) and (d)

a) Specific performance would lead to inefficient performance

b) Specific performance would lead to efficient performance

c) Expectation damages would lead to efficient breach

d) Expectation damages would lead to inefficient breach

e) (a) and (c)f) (b) and (d)

Airplane Sale: DOC

You value my plane at $500,000 My expected costs are $250,000 (but there is a

chance my costs may rise to $460,000) We agree on a sale price of $350,000 Next best contract price: $400,000

Perform Breach/pay DOC Renegotiate and Perform

I get - 110 - 100 P - 460

You get 150 100 500 - P

Total 40 0 40

Breach is inefficient

But, renegotiation can fix this

P = 380

Investments in Reliance an Performance Seller is liable for reliance

Seller will invest efficiently in performance Buyer will over-invest in reliance

Seller is not liable for reliance

Seller will under-invest in performance Buyer will invest efficiently in reliance

Expectation damages includes benefit due to reliance

Expectation damages do not include benefit due to reliance

Formation Defenses and Performance Excuses Incompetence

Minors Mentally handicapped Drunk?

Duress “give me $100 or I’ll shoot you” Promisee threatens to destroy value

Necessity Promisee threatens not to rescue

Fortuitous rescue Anticipated rescue Planned rescue

“intoxicated to the extent of being unable to comprehend the nature and consequences of the instrument he executed”

John Doe 1 and John Doe 2 v Borat

Deters threats

Reward rescue

Formation Defenses and Performance Excuses Mutual mistakes about facts

Timber and fire Mutual mistakes about identity

Rusty Chevy Unilateral mistake

Laidlaw v Organ (1815) Productive information Redistributive information

Duty to Disclose Promisee harms by withholding information

Fraud Promisee knowingly provides false information

Encourage precaution and risk-spreading

Prevent involuntary trades

Unite knowledge and control

Formation Defenses and Performance Excuses Unconscionability Impossibility Frustration of purpose Adhesion contracts