III. Contracts
    E. Breaking contracts

    Progress so far:
    --The parties have made a contract--offer, acceptance, consideration
    --The contract is valid and enforceable--acceptable parties, purpose, and conditions
    --The clauses are understood--gaps filled, language clear

    One final thing can go wrong: one party may want to break the contract = breach of contract

    The contract was presumably efficient when negotiated
    So what could prompt a contemplated break of contract?
    (1) less information was available or
    (2) circumstances were different
    when the contract was signed than when breach is contemplated

    goal: structure incentives to ensure only efficient breach of contract
    encourage efficient breach--a breach which makes the parties on net better off
    discourage inefficient breach--there was competition when the contract was signed but bilateral monopoly when breach is contemplated; avoid opportunistic breach

    Under the Coase theorem, efficient contracts are never breached even without enforcement.
    "As long as transaction costs are sufficiently low, contracts worth fulfilling will be fulfilled." (F163-4)
    Regardless of whether contracts are unenforceable or if specific performance is required. (F163)
    As usual, it is only because of transaction costs that breach of contract cases reach the courts

    2 issues to consider
    1. Economic analysis of breach of contract
    2. The law regarding breach of contract

    Contract damages can get pretty messy. As Posner notes, "There are a bewildering variety of possibilities" (P118)  -- we will focus on a few key ones

    1. Economic analysis of breach of contract

    Ex: Cruise contract following graduation
        Pay for your reservation / Buy a bunch of travel gear / make reservations at various locations

Before contract: a     Scenario 1: You have a great trip         Fulfill contract: f     Scenario 2: Right before departure, tour company cancels: you sue     reliance damages: costs incurred in reliance on performance of the contract     expectation damages: loss of the anticipated gain from the contract     specific performance: mandatory performance on penalty of being held in contempt of court

        Which of these ensure(s) breach only if it is efficient?

    2. The law regarding breach of contract
    a. Impossibility

    Goebel (d,app) v. Linn (p) 47 Mich 489 (1882)
    Goebel = brewer; Linn = holder of note of ice maker

1. What are the facts of the case?
2. Did the court side with the plaintiff or defendant? p
3. You are a judge in the following case:
   A contract calls for ice delivered to a brewery at $2 per ton if the ice crop was short. The ice provider suddenly demanded a new contract at $3.50 per ton for no apparent reason. The brewer signs but defaults on part of the payment. The ice provider sues for the rest of the payment.
   Would you enforce the $3.50 price given just these facts?
4. Suppose it is also the case that the brewer was in financial difficulties and the ice provider was aware of it.
   Would you enforce the $3.50 price then?
5. Suppose it is also the case that the brewer was in dire straits from having a large stock of beer on hand.
   Would you enforce the $3.50 price then?
6. Suppose it is also the case that there was an extreme shortage of ice at the time and the brewer couldn't find a cheaper source.
   Would you enforce the $3.50 price then?
7. Suppose that the brewer found a cheaper supplier after a few days and switched to the new supplier.
   Would you enforce the $3.50 price then?
8. Suppose instead that the brewer operated under the contract for the entire season.
   Would you enforce the $3.50 price then?
9. Suppose instead that the brewer refused to pay the higher price, the ice provider did not deliver any ice, and the beer spoiled as a result.
   You are the brewer's attorney. What's your advice?
10. You are the judge hearing the case.
    Would you award damages? How much?

    An involuntary breach: performance is impossible at a reasonable cost. (P119)

    A renegotiated contract is not a breach of the original contract in the absence of duress.
    This case illustrates necessity but not duress: dire straits of the defendant, but not due to the conduct of the plaintiff.
    Plaintiff retains the usual remedy of suing for damages instead of renegotiating.

    b. Specific performance

    Walgreen (p) v. Sara Creek (d,app), 966 F.2d 273 (1992) -- Posner opinion; approved an injunction vs. damages for breach of contract [essentially a specific performance requirement]

1. What are the facts of the case?
2. Which party did the court side with? p
3. Who was the judge?
4. You are a judge.
   RiteAid signs a 30-year lease with a mall landlord. The landlord promises not to lease space to any other pharmacy. 20 years later, the landlord subdivides the property and signs a rental agreement with Wal-Mart. RiteAid sues.
   Would you rule that the landlord has breached its contract with RiteAid?
   What would you ordinarily impose as a remedy?
5. You are an economic consultant hired to assess damages.
   What would you try to estimate as the relevant damages in a case like this?
6. What economic criticisms might be leveled against this remedy?
   (substitutes courts for markets; litigation errors)
7. Why is it so difficult to estimate damages in this case?
8. You are the judge.
   What remedy might you impose as an alternative to damages?
   Injunction = specific performance (stick to the terms of the contract)
9. What economic criticisms might be leveled against this remedy?
   (bilateral monopoly and costs of monitoring the injunction)

    specific performance is a property rule. (F164) --you need the other party's permission to breach the contract.

    Advantages: Market determines damages
        Avoids litigation costs and errors
    Disadvantages: Risk of inefficiency due to bilateral monopoly
        Requires court monitoring of performance

    "The results of decreeing specific performance are not catastrophic, since the seller can always pay the buyer to surrender the right of specific performance and presumably will do so if a substitute transfer would yield a higher price. But the additional negotiation will not be costless." (P131)
    "But specific performance, like other equitable remedies, requires the court to keep the case on its docket until performance is complete, so that if necessary it can respond to the plaintiff's argument that the defendant is failing to perform in good faith." (P132)

    "Specific performance is an uncommon rule except in contracts for the sale of real property." [An example of a case where specific performance was granted for a contract not involving real estate (involving, in fact, the supplying of tomatoes, which were in short supply) is Curtice Borthers Co. v. Catts, 72 N.J. Eq. 831, 66 A. 935 (1907).] (F164)
    "courts are reluctant to enforce specific performance of contracts, usually preferring to permit breach and award damages, calculated by the court or agreed on in advance by the parties." (ex: customized cams: MB=110K; MC=90K; MC after factory burns: $1M; contract price = 100K) (F93-4)

    c. Liability for damages

    Per Oliver Wendell Holmes: "The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it--and nothing else."
    Oliver Wendell Holmes, The Path of the Law, 10 Harv. L. Rev. 457, 462 (1897)(P119n)

    Groves (p-lessor,app) v John Wunder (d-lessee) 205 Minn. 163  (1939)
    Peevyhouse (p,app) v. Garland Coal (d). 382 P. 2d 109 (1963)

1. What do these two cases have in common? acknowledged breach in both cases
2. Complete the following table:
    

   		Case 1	Case 2
   		Groves v.  John Wunder	Peevyhouse v.  Garland Coal
   1	Type of property	Commercial	Farm
   2	Situation at time of breach:
   3	Specific performance	Grade land	Restore land
   4	Cost of performance	60K*	29K
   5	Market value of performance	12K	$300*
   * = Case outcome

3. Is it efficient to breach the contract in these cases?
4. VOTE: How much would you recommend for damages in each case?