Damages Revisited p p p Party-designed damages Specific

Damages Revisited p p p Party-designed damages Specific performance Court-imposed damages n n n 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 p You promise me your OSU ticket for $50 but then breach n Expectations Damages p n Reliance Damages p n DE = Value - $50 = $150 - $50 = $100 DR = purchase of scarlet & gray face paint Opportunity Cost Damages p DOC = Value - $80 = $150 - $80 = $70 Ranking: DE > DOC > DR What if there aren’t many good substitutes?

Hawkins v Mc. Gee (1929) p p Hawkins scarred his hand in electrical accident Dr. Mc. Gee promised to “make the hand a hundred percent perfect hand” Skin from chest was grafted to hand, but was disaster Hawkins successfully sued Dr. Mc. Gee, issue on appeal was appropriate damages

Hairy Hand Case $ U 1 U 2 DE U 3 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 p p p 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 (p 22: 64, 66) Settled out of court Deleese Williams

Impact of Remedies on Efficiency Performance? p Reliance? p p Coase Theorem Revisited n Efficient breach will occur regardless of the law if TC are low

Airplane Sale “Unfortunate contingency” p 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) We agree on a sale price of $350, 000 p What happens to performance under p p n n n Expectations Damages Specific Performance Opportunity Cost Damages

Airplane Sale: DE p p p 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) We agree on a sale price of $350, 000 Costs Low (Perform) Costs High (Breach/pay DE) I get 100 - 650 -150 You get 150 150 Total 250 - 500 0 Breach is efficient

Airplane Sale: SP p p p 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) We agree on a sale price of $350, 000 Costs Low (Perform) Costs High (Renegotiate) I get 100 - 650+250 = - 400 You get 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: 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) a) b) c) d) e) f) 1 2 3 4 5

Airplane Sale: DOC p p 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 Perform I get You get Total 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 p Seller is liable for reliance Expectation damages includes benefit due to reliance n n p 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 n n Seller will under-invest in performance Buyer will invest efficiently in reliance

Formation Defenses and Performance Excuses p Incompetence n n n p John Doe 1 and John Doe 2 v Borat Duress n n p Minors Mentally handicapped Drunk? “intoxicated to the extent of being unable to comprehend the nature and consequences of the instrument he executed” “give me $100 or I’ll shoot you” Promisee threatens to destroy value Deters threats Necessity n Promisee threatens not to rescue p p p Fortuitous rescue Anticipated rescue Planned rescue Reward rescue

Formation Defenses and Performance Excuses p Mutual mistakes about facts n p Mutual mistakes about identity n p Timber and fire Rusty Chevy Unilateral mistake n Laidlaw v Organ (1815) p p p Prevent involuntary trades Unite knowledge and control Productive information Redistributive information Duty to Disclose n p Encourage precaution and risk-spreading Promisee harms by withholding information Fraud n Promisee knowingly provides false information

Formation Defenses and Performance Excuses p p Unconscionability Impossibility Frustration of purpose Adhesion contracts