E. Breach of contract
    2. The law regarding breach of contract
    c. Liability for damages (cont'd.)

    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)

    Liability for damages resulting from breach of contract handout

    Both cases illustrate an efficient breach of contract
    In both cases cost and market value of performance differed from each other substantially at the time of the breach
    The cases conflict with each other in other key respects

1. How does type of property differ, and why does that matter?
       subjective valuation more important in Peevyhouse => stronger case for cost of performance damages
2. How do the cases differ with respect to unforeseen events, and why does that matter?
       Great Depression in GvJW => stronger case for market value of performance damages

    Posner criticizes the size of the award in Groves
    The entire gain from the breach was awarded to Groves
    Makes the defendant (assuming he had anticipated the result) indifferent between breaching and (inefficiently) performing. (F162-3)

    My criticism is with the Peevyhouse award
    Compared to Groves, Peevyhouse presents a stronger case for cost of performance damages due to the greater role of subjective valuation and the smaller role of unforeseen events. (the dissent in Groves expressed support for cost of performance for "personal" use; court in Peevyhouse said it would also apply here if the contract had been specifically for improvements)
    The court decision opens a can of worms regarding efficiency, freedom of contract, and opportunism

    Damages set equal to the cost of performance puts both parties closest to where they expected to end up based on expectations at the time of the contract
    Avoids incentives for opportunistic behavior ex post.
    Smaller damages risk confounding and therefore discouraging contracts

    Per Posner, damages = cost of performance discourages efficient breach by making the promisor indifferent between performing and breaching even when a breach is efficient
    However, the promisee retains the option of renegotiating to let the promisor out of a contract, and can gain from bargaining when it is inefficient to complete a contract.

    specific performance might offer similar efficiency advantages

    Hadley v Baxendale, 9 Ex. 341 (1854) [case illustrates that liability is limited to what damages can in general be anticipated, not special damages such as lost profits, unless specifically warned of special circumstances]
    plaintiff = millers; defendant = carriers

    Court ordered a new trial with explicit instructions that damages not include the foregone profits, since it was not reasonable to expect the defendant to consider them unless they had been specifically mentioned by the plaintiff.

    The case is British but is universally accepted in Anglo-Saxon common law

    Illustrates consequential damages, which are not traditionally awarded under the common law
    "The general principle is that if a risk of loss is known to only one party to the contract, the other party is not liable for the loss if it occurs." (P127)

    What incentive does this create during the contracting process?

    Promotes disclosure of information

    Example: the film from a trip to the Himalayas
    Request special handling, but then expect to pay extra for the extra care

    But note that it does result in an asymmetry:
    Without specific disclosure, damages are capped by average circumstances, but there is no floor to damages, so contract damage payments have a downward bias.

    V. Torts

    What is a tort?
    Tort = a harm caused by someone else who can be held responsible for it

    Tort law blends elements of property, contract, and criminal law
    Like property law: your tort rights are good against the world rather than just a specified bargaining partner
    Like contract law: the usual remedy is damages (a liability right) instead of an injunction (a property right)
    Like criminal law:
        You have been "wronged" by someone else
        But: tort law is prosecuted privately rather than by the state

    As usual, we want both sides to behave efficiently in trying to avoid injury
    That's the primary economic goal of tort law

    Context for now: a situation in which the injurer does not actually devote resources to making the tort happen
    Just may not devote sufficient resources to prevent it from happening

    topic areas:
    the economics of tort liability

    then the various components that make up a tort:
    harm--is your injury of the type that someone else can be held responsible for?
    causation--can you trace your harm to an action by an injurer?
    liability--under what circumstances should the injurer be held responsible for your harm?
    damages--what should you receive for your harm?

    A. The economics of tort liability

    Our goal for now is to consider how to encourage efficient behavior by the parties who cause torts and know how much damage results
    So all of the relevant information about the tort is known and undisputed
    So the key focus at this stage is on the economics of liability

    Basic analysis

    Ex: deciding on how much to invest in safety features for big-rig trucks

    3 components:
    (1) potential loss (L)
    (2) probability of the loss (Pr)
    (3) precautions (s = safeguards)

    expected loss = Pr(s) x L
    cost of safeguards = C(s)

    Benefit of precautions?

    Cost of precautions?

efficient level of precaution:     MBs = MCs     |dPr/dS x L| = MCs     Absolute value since only size matters here.     Technically, both terms are negative      In words: Efficiency occurs where the     marginal reduction in expected loss     = marginal cost of precaution     How do we make the auto company choose the efficient level of precaution?     i.e., make them internalize the expected harm

    strict liability for damages provides incentives for the injurer to choose the efficient level of precaution

    Injurer is liable for any loss that the injurer is involved in
    Strict liability makes the tort system an insurance system
    Manufacturers build expected liability costs into the prices of their products
    Those costs include litigation costs, so a pretty expensive insurance system

    Complication 1: moral hazard

    With strict liability for damages, how does a potential victim feel about being injured compared to not being injured?

    So how careful will a potential victim be?

    strict liability for damages provides no incentive for potential victims to take precautions
    if victim precaution is not feasible, then strict precaution is efficient

    How do we make car owners choose the efficient level of victim precaution?
    i.e., make them internalize the expected harm to themselves

    no liability for damages provides incentives for the victim to choose the efficient level of precaution

    So how can people get compensated for their losses?
    Insurance contracts: we do that for many related purposes now: auto insurance, homeowners' insurance, life insurance, disability insurance
    If you suffer a loss, it doesn't matter whether someone wronged you or not--you are still worse off than before
    Insurance offsets at least part of the loss

    result is a contradiction: with no liability, the injurer will not take any precautions

    How do we get both sides to take precautions?

negligence = failure to take all cost-justified precautions     negligence rule: an injurer is liable only if negligent     result:     injurer chooses efficient precautions     victim chooses efficient precautions too since the victim will not be able to collect damages from a non-negligent injurer