Efficient Contract Remedies And the European Unification
This paper applies theoretical results that are derived from financial-economic principles to the issue of efficient contract remedies in view of the European Unification. Common Law favors the ‘expectation damages’ remedy, according to which a party who is aggrieved by a breach of contract expects an ex-post damages award, while this paper demonstrates that if the subject of the contract is traded continuously with observable values, an alternative remedy is equally efficient and just. The alternative remedy is rationalized on an ex-ante basis, and thus, courts intervention in the event of a breach of contract may not be essential. The EU aims to establish a “uniform commercial code superior to all national law.” This goal reflects current cultural differences and lacks of homogeneity, such as expectations and risk preferences across EU Member States. Lacks of homogeneity, can not, however, invalidate the above conclusion, as long as prices are continuously traded and a ‘single price’ regime prevails. Accordingly, this paper predicts that since price differentials across Member States are likely to disappear faster than other non-homogeneous factors, the Court of Justice will show a tendency to rule, utilizing the rationale underlying the ‘ex-ante regime,’ and perhaps, to overturn country-specific rulings by National Courts, which favor the ‘expectation damages regime.’
The Myth that Promisees Prefer Supracompensatory Remedies: An Analysis of Contracting for Damage Measures
Courts will not enforce liquidated damage clauses when a stipulated sum exceeds (i) the harm that the promisee could reasonably expect to suffer from breach or (ii) the actual harm that breach turned out to cause.' Courts traditionally have not awarded punitive damages "for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable."2 Courts also will not grant specific performance "if damages would be adequate to protect the expectation interest of the injured party," nor will courts enforce contracts that accord promisees a right to specific relief.3 These three rules share the goal of limiting a promisee's recovery to his lost expectation. The liquidated damage rule prevents the promisee from contracting for a supracompensatory remedy, and the punitive damage rule prevents courts from awarding such a remedy. The specific performance rule achieves the law's goal indirectly. A promisee who has a right to specific performance can compel the promisor to perform even when the promisor's loss from performance would exceed the promisee's gain. A promisor can purchase her freedom, but sophisticated promisees sometimes will demand more than their expectation as the price. Permitting specific performance only when damages could not protect the expectation interest limits the ability of promisees to obtain supracompensatory payments by threatening to seek specific relief. The ban on "specific performance clauses" prevents a promisee from obtaining by contract he power that the general specific performance rule aims to abolish.
On the Design of Contracts and Remedies for Breach
The implications of uncertainty for the design of contracts and of remedies for their breach are studied. After characterizing complete contingent contracts, incomplete contracts are examined. Specifically, in view of difficulties in making contingent provisions (costs of enumeration and of bargaining; verification of occurrence of events), it is shown for which contingencies provisions are made. Then, in the major part of the paper, two important implicit substitute for contingent terms are analyzed. The first is provided by remedies for breach of contract; for when a party must pay damages for breach, he will be induced to fulfill his obligations in approximately those contingencies which would have been agreed upon under the terms of a detailed contract. The second substitute for contingent terms lies in the opportunity for renegotiation in light of circumstances, since renegotiation will occur in more or less those contingencies where the contract terms would have differed under a more detailed agreement.