The myth of efficient breach: New defenses of the expectation interest

Virginia Law Review

Volumn 97, Issue 8, 2011, Pages 1939-2008

  Markovits, Daniel ^a   Schwartz, Alan ^a  

^a YALE UNIVERSITY   (United States)

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EID: 84855887848     PISSN: 00426601     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (66)

1. Among the more prominent critics, see, e.g., Melvin Eisenberg, The Disgorgement Interest in Contract Law, 105 Mich. L. Rev. 559, 562 (2006) [hereinafter Eisenberg, The Disgorgement Interest in Contract Law];
2. Melvin Eisenberg, Actual and Virtual Specific Performance, the Theory of Efficient Breach, and the Indifference Principle in Contract Law, 93 Calif. L. Rev. 975, 977-78 (2005) [hereinafter Eisenberg, Actual and Virtual Specific Performance];
3. Daniel Friedmann, The Efficient Breach Fallacy, 18 J. Legal Stud. 1-2 (1989);
4. Seana Shiffrin, Could Breach of Contract Be Immoral?, 107 Mich. L. Rev. 1551, 1565-66 (2009) [hereinafter Shiffrin, Could Breach of Contract Be Immoral];
5. Seana Shiffrin, The Divergence of Contract and Promise, 120 Harv. L. Rev. 708, 710 (2007) [hereinafter Shiffrin, The Divergence of Contract and Promise];
6. Richard R. W. Brooks, The Efficient Performance Hypothesis, 116 Yale L.J. 568, 572-73 (2006).
7. See Jeff Ferriell, Understanding Contracts 715-17 (2d ed. 2009);
8. Robert A. Hillman, Principles of Contract Law 140-41 (2d ed. 2009).
9. 79 Tex. L. Rev. 2021, 2028-29 (2001).
10. For England, see Ralph Cunnington, The Assessment of Gain-Based Damages for Breach of Contract, 71 Mod. L. Rev. 559-60 (2008).
11. For Israel, see Adras Building Material Ltd. v. Harlow & Jones Gmbh, 3 Restitution L. Rev. 235, 240, 242, 246, 249, 261, 268 (1995).
12. Adras is criticized in Andrew Botterell, Contractual Performance, Corrective Justice, and Disgorgement for Breach of Contract, 19 Legal Theory 135, 154-55 (2010).
13. See, e.g., Snepp v. United States, 444 U.S. 507, 515-16 (1980) (awarding the CIA disgorgement of profits earned by a former agent in connection with a tell-all book published without being vetted as required by his contract of employment with the CIA);
14. X-It Prods., L.L.C. v. Walter Kidde Portable Equip., Inc., 155 F. Supp. 2d 577, 658 (E.D. Va. 2001) (observing that "equitable remedies," including disgorgement, may be awarded in cases of "wrongfully obtained profits in a variety of contexts, including breach of fiduciary obligation or breach of contract" but suggesting that the proper award of these remedies depends on a factual finding of "unclean hands");
15. Ajaxo Inc. v. E*Trade Grp., Inc., 37 Cal. Rptr. 3d 221, 248 (Cal. Ct. App. 2005)
16. see also Univ. of Colo. Found., Inc. v. Am. Cyanamid Co., 342 F.3d 1298, 1311 (Fed. Cir. 2003) (recognizing EarthInfo as stating Colorado law);
17. Dastgheib v. Genentech, Inc., 438 F. Supp. 2d 546, 552 (E.D. Pa. 2006) (approving of disgorgement in EarthInfo-type situations);
18. Richard Craswell, Expectation Damages and Contract Theory Revisited 12
19. Richard Craswell, Contract Law, Default Rules, and the Philosophy of Promising, 88 Mich. L. Rev. 489, 513 (1989) [hereinafter Craswell, Philosophy of Promising].
20. MacLeod remarks: "Observe that, under a warranty contract, the production of a defective good does not result in a breach of contract. Only if the seller refuses to compensate the buyer is there a breach." W. Bentley MacLeod, Reputations, Relationships, and Contract Enforcement, 45 J. Econ. Literature 595, 602 (2007);
21. see also Philippe Aghion & Benjamin Hermalin, Legal Restrictions on Private Contracts Can Enhance Efficiency, 6 J.L. Econ. & Org. 381, 401 (1990).
22. Thomas Scanlon, Moral Dimensions: Permissibility, Meaning, Blame 23-24 (2008).
23. Stephen A. Smith, Contract Theory 402 (2004).
24. Stephen A. Smith, The Normativity of Private Law, 31 Oxford J. Legal Stud. 215, 238 (2011).
25. Andrew S. Gold, A Property Theory of Contract, 103 Nw. U. L. Rev. 1, 54 (2009).
26. Eyal Zamir and Barak Medina take the same view, claiming that "[t]he very use of the terms 'breach' and 'remedies' attests to the prevailing conception that a contract is not ordinarily an option to perform or pay damages, but rather carries a moral obligation to perform." Eyal Zamir & Barak Medina, Law, Economics, and Morality: A Response to Critics 31 (2011) (unpublished manuscript, on file with the Virginia Law Review Assocation), available at http://ssrn.com/abstract=1867186);
27. see also Eyal Zamir & Barak Medina, Law, Economics, and Morality (2010).
28. Jody S. Kraus, The Correspondence of Contract and Promise, 109 Colum. L. Rev. 1603, 1638 (2009)
29. Alan Schwartz & Robert E. Scott, Sales Law and the Contracting Process 389 (2d ed. 1991).
30. See Randy Barnett, Contract Remedies and Inalienable Rights, in Philosophy and Law 179, 198 (Jules Coleman & Ellen Frankel Paul eds., 1987). We attempt to advance the argument by showing that parties would write dual performance contracts in the conditions most analysts suppose.
31. See Robert E. Scott & George G. Triantis, Embedded Options and the Case Against Compensation in Contract Law, 104 Colum. L. Rev. 1428, 1429 (2004). We do not take a position here as to their general claim.
32. See Steve Thel & Peter Siegelman, You Do Have to Keep Your Promises: A Disgorgement Theory of Contract Remedies, 52 Wm. & Mary L. Rev. 1181 (2011).
33. See, e.g., Tess Wilkinson-Ryan, Do Liquidated Damages Encourage Breach? A Psychological Experiment, 108 Mich L. Rev. 633, 637 (2010);
34. Tess Wilkinson-Ryan & David A. Hoffman, Breach Is For Suckers, 63 Vand. L. Rev. 1003, 1004-05, 1013 (2010).
35. See David Baumer & Patricia Marschall, Willful Breach of Contract for the Sale of Goods: Can the Bane of Business Be an Economic Bonanza?, 65 Temp. L. Rev. 159, 164 (1992)
36. Tess Wilkinson-Ryan & Jonathan Baron, Moral Judgment and Moral Heuristics In Breach of Contract, 6 J. Empirical Legal Stud. 405, 405 (2009)
37. See Alan Schwartz, Comment on Zamir, J. Institutional and Theoretical Econ. (forthcoming 2012). A recent experimental study suggests that "people have a preference for keeping promises per se." Christoph Vanberg, Why Do People Keep Their Promises? An Experimental Test of Two Explanations, 76 Econometrica 1467, 1468 (2008).
38. See Alan Schwartz & Robert E. Scott, Market Damages, Efficient Contracting, and the Economic Waste Fallacy, 108 Colum. L. Rev. 1610, 1643-47 (2008).
39. Susanne Ohlendorf, Expectation Damages, Divisible Contracts, and Bilateral Investment, 99 Am. Econ. Rev. 1608, 1608 (2009);
40. Alexander Stremitzer, Standard Breach Remedies, Quality Thresholds, and Cooperative Investments, 28 J.L. Econ. & Org. (forthcoming 2012).
41. See Aaron S. Edlin & Alan Schwartz, Optimal Penalties in Contracts, 78 Chi.-Kent L. Rev. 33, 34-37 (2003).
42. See Alan Schwartz, Relational Contracts in the Courts: An Analysis of Incomplete Agreements and Judicial Strategies, 21 J. Legal Stud. 271, 310-11, 316 (1992).
43. See Alan Schwartz, How Much Irrationality Does the Market Permit?, 37 J. Legal Stud. 131, 131 (2008).
44. See John A. List & Daniel L. Millimet, The Market: Catalyst for Rationality and Filter of Irrationality, 8 B.E. J. Econ. Analysis & Pol'y, no. 1, 2008, at 3, available at http://www.bepress.com/bejeap/vol8/iss1/art47/ ("[W]e conclude that individual irrationality as measured in our experiment does not unduly influence aggregate efficiency in bilateral bargaining markets.").
45. For a deeper analysis, see Pierpaolo Battigalli & Giovanni Maggi, Rigidity, Discretion, and the Costs of Writing Contracts, 92 Am. Econ. Rev. 798, 798 (2002);
46. See also Ronald A. Dye, Costly Contract Contingencies, 26 Int'l Econ. Rev. 233, 233 (1985) (focusing on contract cost increasing in the number of contingencies the contract includes).
47. Alan Schwartz, The Case for Specific Performance, 89 Yale L.J. 271, 271, 275-77 (1979). In the modern lexicon, the latter claim held that specific performance should be the default.
48. Jody S. Kraus, A Critique of the Efficient Performance Hypothesis, 116 Yale L.J. Pocket Part 423, 423 (2007), http://www.yalelawjournal.org/the-yale- law-journal-pocket-part/scholarship/acritique-of-the-efficient-performance- hypothesis.
49. Here Eisenberg quotes Robert Birmingham, whose article introducing the idea of efficient breach observed that "[e]ncouragement of repudiation where profitable through elimination of moral content from the contract promise might also be socially desirable." Robert L. Birmingham, Breach of Contract, Damage Measures, and Economic Efficiency, 24 Rutgers L. Rev. 273, 292 (1970).
50. E. Allan Farnsworth, Your Loss or My Gain? The Dilemma of the Disgorgement Principle in Breach of Contract, 94 Yale L.J. 1339, 1341 (1985).
51. U.C.C. § 2-609 cmt. 1 (2003).
52. Oliver Wendell Holmes, The Path of the Law, 10 Harv. L. Rev. 457, 462 (1897) [hereinafter Holmes, The Path of the Law];
53. See also Oliver Wendell Holmes, The Common Law 301 (Boston, Little, Brown & Co. 1881).
54. Steven Shavell, Specific Performance Versus Damages for Breach of Contract: An Economic Analysis, 84 Tex. L. Rev. 831, 867 (2006). Shavell here distinguishes between a contract that is obligationally complete and a contract that actually is complete.
55. Steven Shavell, Is Breach of Contract Immoral?, 56 Emory L.J. 439, 441 (2006).
56. 107 Mich. L. Rev. 1569, 1570 (2009).
57. Ian Ayres & Gregory Klass, Promissory Fraud Without Breach, 2004 Wis. L. Rev. 507, 513.
58. See Jules L. Coleman, Some Reflections on Richard Brooks's "Efficient Performance Hypothesis," 116 Yale L.J. Pocket Part 416 (2007), http://yalelawjournal.org/the-yale-law-journal-pocket-part/scholarship/ somereflections-on-richard-brooks%E2%80%99s-%E2%80%9Cefficient- performancehypothesis%E2%80%9D/. In Coleman's view, the expectation remedy follows a breach (hence the term "efficient breach");
59. See, e.g., Douglas Laycock, The Death of the Irreparable Injury Rule 245-60 (1991);
60. Alan Schwartz, The Myth that Promisees Prefer Supracompensatory Remedies: An Analysis of Contracting for Damage Measures, 100 Yale L.J. 369, 372-73 (1990);
61. See William S. Dodge, The Case for Punitive Damages in Contracts, 48 Duke L.J. 629, 645-47 (1999).
62. See Ronald Coase, The Nature of the Firm, in The Firm, The Market, and the Law 33, 43-44 (1988).
63. See Joseph Raz, Promises and Obligations, in Law, Morality, and Society: Essays in Honour of H.L.A. Hart 210, 227-28 (Peter Michael Stephan Hacker & Joseph Raz eds., 1977).
64. See Alan Schwartz & Robert Scott, Precontractual Liability and Preliminary Agreements, 120 Harv. L. Rev. 661, 665-67 (2007).
65. 113 Yale L.J. 1417, 1456-58 (2004).
66. See Daniel Markovits, Promise as an Arm's Length Relation, in Promises and Agreements: Philosophical Essays 295, 309-13 (Hanoch Sheinman ed., 2011).