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Damages Revisited

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

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Damages Revisited

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  1. 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

  2. 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 Ranking: DE > DOC > DR What if there aren’t many good substitutes?

  3. 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

  4. Hairy Hand Case $ U1 U2 U3 DE DOC DR Hand’s Condition Hairy hand Next-best-doctor hand 100% good Scarred hand Indifference Curve: combinations of $ and hand’s condition that give you constant utility

  5. 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

  6. Impact of Remedies on Efficiency • Performance? • Reliance? • Coase Theorem Revisited • Efficient breach will occur regardless of the law if TC are low

  7. Airplane Sale “Unfortunate contingency” • 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

  8. 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 Breach is efficient

  9. 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 Buy out the contract Surplus from cooperation Note: If TC are low, either remedy will lead to efficient breach.

  10. 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: • Specific performance would lead to inefficient performance • Specific performance would lead to efficient performance • Expectation damages would lead to efficient breach • Expectation damages would lead to inefficient breach • (a) and (c) • (b) and (d)

  11. 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 Breach is inefficient But, renegotiation can fix this P = 380

  12. 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

  13. 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

  14. 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

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

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