LOGO
Contract Law
www.econ.sdu.edu.cn
www.econ.sdu.edu.cn
山东大学
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
www.econ.sdu.edu.cn
山东大学
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?
www.econ.sdu.edu.cn
山东大学
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
www.econ.sdu.edu.cn
山东大学
Hairy Hand Case
U1
$
U2
DE
U3
DOC
DR
Hand’s Condition
Hairy
hand
Scarred
hand
Next-bestdoctor hand
100%
good
Indifference Curve: combinations of $ and hand’s condition
that give you constant utility
www.econ.sdu.edu.cn
山东大学
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
www.econ.sdu.edu.cn
Deleese Williams
山东大学
Impact of Remedies on Efficiency
Performance?
Reliance?
Coase Theorem Revisited
 Efficient breach will occur regardless of the law
if TC are low
www.econ.sdu.edu.cn
山东大学
Investments in Reliance an Performance
 Seller is liable for reliance
Expectation damages includes benefit due to reliance
 Seller will invest efficiently in performance
 Buyer will over-invest in reliance
 Seller is not liable for reliance
Expectation damages do not include benefit due to reliance
 Seller will under-invest in performance
 Buyer will invest efficiently in reliance
www.econ.sdu.edu.cn
山东大学
Formation Defenses and
Performance Excuses
 Incompetence
 Minors
 Mentally handicapped
 Drunk?
“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
 Duress
 “give me $100 or I’ll shoot you”
 Promisee threatens to destroy value
Deters threats
 Necessity
 Promisee threatens not to rescue
• Fortuitous rescue
• Anticipated rescue
• Planned rescue
www.econ.sdu.edu.cn
Reward rescue
山东大学
Formation Defenses and
Performance Excuses
 Mutual mistakes about facts
 Timber and fire
 Mutual mistakes about identity
 Rusty Chevy
 Unilateral mistake
 Laidlaw v Organ (1815)
Encourage precaution
and risk-spreading
Prevent involuntary
trades
Unite knowledge and
control
• Productive information
• Redistributive information
 Duty to Disclose
 Promisee harms by withholding information
 Fraud
 Promisee knowingly provides false information
www.econ.sdu.edu.cn
山东大学