Presentation on theme: "Damages Revisited Party-designed damages Specific performance"— Presentation transcript:
1 Damages Revisited Party-designed damages Specific performance Court-imposed damagesExpectations: promisee is indifferent between breach and performanceReliance: promisee is indifferent between breach and no contractOpportunity Costs: promisee is indifferent between breach and best alternative contractRestitution: minimal remedyDisgorgement: promisor must give up any profits earned from breach
2 Football TicketsYou promise me your OSU ticket for $50 but then breachExpectations DamagesDE = Value - $50 = $150 - $50 = $100Reliance DamagesDR = purchase of scarlet & gray face paintOpportunity Cost DamagesDOC = Value - $80 = $150 - $80 = $70Ranking: DE > DOC > DRWhat 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 disasterHawkins successfully sued Dr. McGee, issue on appeal was appropriate damages
4 Hairy Hand Case $ DE DOC DR U1U2U3DEDOCDRHand’s ConditionHairyhandScarredhandNext-best-doctor hand100%goodIndifference 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 surgeryABC backed out hours before first surgery because recovery time wouldn’t fit their show scheduleWilliams sued for breach of contract claiming that ABC humiliated her and goaded her sister into insulting herSister committed suicidePetition (p22:64,66)Settled out of courtDeleese Williams
6 Impact of Remedies on Efficiency Performance?Reliance?Coase Theorem RevisitedEfficient breach will occur regardless of the law if TC are low
7 Airplane Sale You value my plane at $500,000 “Unfortunate contingency”You value my plane at $500,000My 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 $350,000What happens to performance underExpectations DamagesSpecific PerformanceOpportunity Cost Damages
8 Costs High (Breach/pay DE) Airplane Sale: DEYou value my plane at $500,000My 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 $350,000Costs Low (Perform)Costs High (Perform)Costs High (Breach/pay DE)I get100- 650-150You get150Total250- 500Breach is efficient
9 Costs High (Renegotiate) Airplane Sale: SPYou value my plane at $500,000My 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 $350,000Costs Low (Perform)Costs High (Perform)Costs High (Renegotiate)I get100- 650= - 400You get150= 400Total250- 500Buy out the contractSurplus from cooperationNote: If TC are low, either remedy will lead to efficient breach.
10 Reconsider the plane sale example with high production costs 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 performanceSpecific performance would lead to efficient performanceExpectation damages would lead to efficient breachExpectation damages would lead to inefficient breach(a) and (c)(b) and (d)12345
11 Renegotiate and Perform Airplane Sale: DOCYou value my plane at $500,000My expected costs are $250,000 (but there is a chance my costs may rise to $460,000)We agree on a sale price of $350,000Next best contract price: $400,000PerformBreach/pay DOCRenegotiate and PerformI get- 110- 100P - 460You get150100500 - PTotal40Breach is inefficientBut, renegotiation can fix thisP = 380
12 Investments in Reliance an Performance Seller is liable for relianceSeller will invest efficiently in performanceBuyer will over-invest in relianceSeller is not liable for relianceSeller will under-invest in performanceBuyer will invest efficiently in relianceExpectation damages includes benefit due to relianceExpectation damages do not include benefit due to reliance
13 Formation Defenses and Performance Excuses IncompetenceMinorsMentally handicappedDrunk?Duress“give me $100 or I’ll shoot you”Promisee threatens to destroy valueNecessityPromisee threatens not to rescueFortuitous rescueAnticipated rescuePlanned 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 BoratDeters threatsReward rescue
14 Formation Defenses and Performance Excuses Mutual mistakes about factsTimber and fireMutual mistakes about identityRusty ChevyUnilateral mistakeLaidlaw v Organ (1815)Productive informationRedistributive informationDuty to DisclosePromisee harms by withholding informationFraudPromisee knowingly provides false informationEncourage precaution and risk-spreadingPrevent involuntary tradesUnite knowledge and control
15 Formation Defenses and Performance Excuses UnconscionabilityImpossibilityFrustration of purposeAdhesion contracts