Handout for Econ 522, Fall 2009, Disc #7, 10/23
0. Formation Defense:
Incompetence; Dire Constraints; Duress and Necessity; Derogation of public policy;
1. Performance Excuse (remote risks):
--fraud; failure to disclose
a. mutual mistake (sometimes is formation defense)
contingency materialize before signing contracts, involuntary exchange
b. frustration of perpose (e.g. ticket for sitting in the theatre)
something changed after signing, performance is meaningless, but could still be performed.
c. Impossibility
prevent one party from performing his duty, we ask if he is the efficient bearer of the risk.
2. Other concepts:
Uniting Knowledge and Control,
Productive Information and Distributive Information. see Question 3 below
Unilateral Mistakes ( generally not an excuse, doesn’t mean need to be enforced)
3. Efficient Investment in Performance
Sample Questions
Question 1 A manufactorer argue that she is excused from dilivering the promised goods because her factory
burned down. Should she? What does this depend on? What if it is done by the Joker?
Question 2 Chao sign a lease with his landlord for the coming year. Then World War III breaks out and Chao
needs to get back to China. What doctrine is applicable? What if the War actually breaks out before they sign the
contract?
Question 3 (page 255) Remedy for Breach of Contract
Buyer B pays $10,000 to New Orleans grain dealer D in exchange for D’s promise to deliver grain to buyer B’s
London office on October 1. As a result of signing this contract, B decides not to sign a similar contract with
another dealer for $10,500. D contracts with shipping company S to transport the grain. Buyer B agrees to resell
the grain on arrival in London for $11,000 to another party. B pays $100 in advance (nonrefundable) as docking
and unloading fees for the ship’s projected arrival in London.
The ship begins taking water serveral days out of New Orleans and returns to port. Inspection reveals that the
grain is badly damaged by salt water, and D sells it as cattle fodder for $500. D conveys the news to B in London,
who then purchases the same quantity of grain for delivery on October 1 at a price of $12,000.
Question: How would you measure expectation damages, reliance demages and opportunity-cost damages
for D’s breach of contract with B?
Question 3 (page 298)
Professor Schmidt, a geologist, has agreed to purchase McDonald’s farm for a price of $2000 per acre, which
corresponds to the price of good quality farmland in the vicinity. However, Schmidt, on the basis of his own
geological studies, is convinced that McDonalds’s farm contains valuable mineral deposits, which make the
property worth $25,000 per acre. Schmidt’s true motive is discovered by McDonald before Schmidt takes
possession, and McDonald refuses to hand over the property. Schmidt sues for breach of contract. McDonald
defends on the ground that Schmidt had a duty to disclose the results of his studies. According to our economic
principles, who should win? Is the information productive or redistributive or both?