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
 Opportunity Cost Damages
 DOC = Value - $80 = $150 - $80 = $70
Ranking: DE > DOC > DR
What if there aren’t many good substitutes?
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
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
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
“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
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
Surplus from cooperation
Buy out the contract
Note: If TC are low, either remedy will lead to efficient breach.
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:
0%
a)
e)
f)
1
2
3
4
5
0%
0%
0%
0%
0%
f)
d)
e)
c)
d)
b)
c)
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)
b)
a)
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
I get
You get
Total
Perform
Breach/pay DOC
Renegotiate and
Perform
- 110
- 100
P - 460
150
100
500 - P
40
0
40
Breach is inefficient
But, renegotiation can fix this
P = 380
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
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
Reward rescue
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
Formation Defenses and
Performance Excuses
 Unconscionability
 Impossibility
 Frustration of purpose
 Adhesion contracts