Jeffrey Lynch Harrison has uploaded a piece titled A Nihilistic View of Efficient Breach (abstract here) in which he argues that the neo-classical law and economics folks have failed in their project to establish that the expectation measure of damages for breach of contract is the most "efficient" rule. Law and economics is an application of neo-classical economics to law, and neo-classical economics is simply a mathematically informed version of utilitarianism, one which describes the desiderata of the increase in a society's net utility in terms of wealth-maximization.
Courts and legal scholars hold out three measures of the legal remedy for breach of contract: restitution, reliance, and expectation. Expectation--the difference between the value of what you were promised and the value of what you got--has prevailed as the optimal measure for many years. The question that has troubled scholars (although not the courts) is how to justify this particular remedy. Different theories provide different accounts but none of them carry the day. If you want the detailed argument supporting this conclusion read my Principled Pluralism and Contract Remedies (abstract here). Notwithstanding my argument (and those of others), the law and economics account remains the standard one advanced by more legal scholars than any other.
Now Harrison takes aim at the law and economics account from an internal point of view. He rehearses the well-worn observation that there are at least three competing standards by which to measure efficiency: utilitarianism, Pareto efficiency, and Kaldor-Hicks efficiency. Kaldor-Hicks posits that sanctioning a contract breacher in an amount equal to an aggrieved promisee's loss will forces the breacher to internalize all costs and will therefore deter all breaches except those that produce a gain greater than the amount of the promisee's loss. Law and economics folks have settled on this approach because it's the only one that can possibly justify the expectation measure of damages. Nothing new here.
However, Harrison also draws on the insights of behavioral research to develop the "contract curve" and apply it to the one who does not received the contracted-for good, the aggrieved promisee. We can know with some certainty the pre-performance value that a promisee attaches to the good in question: the amount she agreed to pay for it. There is every reason to believe, however, that the post-contract value of the same good is a greater amount. Why? Because empirical research has revealed something called the endowment effect. People--real people, not the economist's deracinated "rational" wealth maximizer--"can attribute different values to the very same thing depending on whether they perceive it as belonging to them."
Thus, the contract price (from which the market value is subtracted to determine the expectation measure of damages) does not necessarily correspond to the efficient result. The cost that the breaching promisor should internalize is entirely unknowable. The expectation measure therefore cannot be justified on neo-classical economic theory.
This conclusion is not to say that the expectation measure of contract damages is wrong, or that it cannot be justified. It is only that neo-classical economics hasn't done it. You might want to check my Principled Pluralism and Contract Remedies linked above to see what I do about the problem.
Courts and legal scholars hold out three measures of the legal remedy for breach of contract: restitution, reliance, and expectation. Expectation--the difference between the value of what you were promised and the value of what you got--has prevailed as the optimal measure for many years. The question that has troubled scholars (although not the courts) is how to justify this particular remedy. Different theories provide different accounts but none of them carry the day. If you want the detailed argument supporting this conclusion read my Principled Pluralism and Contract Remedies (abstract here). Notwithstanding my argument (and those of others), the law and economics account remains the standard one advanced by more legal scholars than any other.
Now Harrison takes aim at the law and economics account from an internal point of view. He rehearses the well-worn observation that there are at least three competing standards by which to measure efficiency: utilitarianism, Pareto efficiency, and Kaldor-Hicks efficiency. Kaldor-Hicks posits that sanctioning a contract breacher in an amount equal to an aggrieved promisee's loss will forces the breacher to internalize all costs and will therefore deter all breaches except those that produce a gain greater than the amount of the promisee's loss. Law and economics folks have settled on this approach because it's the only one that can possibly justify the expectation measure of damages. Nothing new here.
However, Harrison also draws on the insights of behavioral research to develop the "contract curve" and apply it to the one who does not received the contracted-for good, the aggrieved promisee. We can know with some certainty the pre-performance value that a promisee attaches to the good in question: the amount she agreed to pay for it. There is every reason to believe, however, that the post-contract value of the same good is a greater amount. Why? Because empirical research has revealed something called the endowment effect. People--real people, not the economist's deracinated "rational" wealth maximizer--"can attribute different values to the very same thing depending on whether they perceive it as belonging to them."
Thus, the contract price (from which the market value is subtracted to determine the expectation measure of damages) does not necessarily correspond to the efficient result. The cost that the breaching promisor should internalize is entirely unknowable. The expectation measure therefore cannot be justified on neo-classical economic theory.
This conclusion is not to say that the expectation measure of contract damages is wrong, or that it cannot be justified. It is only that neo-classical economics hasn't done it. You might want to check my Principled Pluralism and Contract Remedies linked above to see what I do about the problem.
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