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
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Damages Revisited Party-designed damages Specific performance Court-imposed damages Expectations: promisee is indifferent between breach and performance.
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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
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