IV. Contracts
    E. Breaking contracts
    1. Economic analysis of breach of contract (cont'd.)

    b. Efficient reliance

    Real-world complication: since breach is a possibility in contracts, contracting parties should anticipate that possibility.
    If you are guaranteed recovery for spending in reliance on a contract, then you are insured against any preparatory expenditures you make --> moral hazard
    "Both expectation damages and reliance damages result in an inefficiently high level of reliance. (F167)
    Contract damages should be structured to ensure efficient reliance.

MBf versus MBb     p = probability of breach     --> MBe (expected MB)     = p.MBb + (1-p).MBf     Result 1: efficient reliance: MBe = MC     Result 2: efficient damages:     perfect expectation damages: the anticipated gain from the contract of a promisee who pursues efficient reliance (CU197)

    As always, we face lots of uncertainty and complications in practice, but perfect expectation damages gives us our benchmark

    Example: under the doctrine of mitigation of damages, [the law] would not give a supplier damages for costs ... incurred in continuing production after notice of contract termination." (P119)

    2. The law regarding breach of contract

    a. Impossibility

    Goebel (d) v. Linn (p) 47 Mich 489 (1882)

1. P: What were the facts of the case?
2. D: Why do you dispute plaintiff's claim for payment?
3. P: Why did Belle Isle Ice fail to deliver the ice at the price you contracted for?
4. P: For how long did the defendant continue buying ice at the new price?
5. D: Did you have any other remedies available to you at the time you were in need of the ice?
6. D: So why did you not pursue one of these other remedies?
7. D: Was plaintiff responsible for the general weakness of your financial circumstances?
8. P: What did the court decide?

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

    A renegotiated contract is not a breach of the original contract without 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 v. Sara Creek, 966 F.2d 273 (1992) -- Posner opinion; approved an injunction vs. damages for breach of contract [essentially a specific performance requirement]

1. P: What were the facts of the case?
2. P: What remedy are you seeking?
3. D: Do you deny that you have breached your contract?
4. D: So what is your counterargument?
5. P: What are the efficiency advantages of an injunction for specific performance?
6. D: What are the efficiency disadvantages of Walgreen's proposal for specific performance?
7. P: Why is it so difficult to estimate damages in this case?
8. D: What did the court decide in this case? Who was the judge?

    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)

    Hawkins v. McGee 84 N.H. 114 (1929) (appellant not specified)

1. P: What were the facts of the case?
2. P: Why do you feel entitled to damages in this case?
3. D: How do you respond?
4. P: What makes you think the defendant did more than just express optimism?
5. D: How much experience did you have in skin grafting?
6. D: So why did you work so hard to convince plaintiff to undergo the operation?
7. P: How did the original trial court instruct the jury to measure the damages you suffered? How would we label those damages?
8. D: What measure of damages does the appeals court specify? How would we label those damages?
9. E: Based on the addendum: How large were the damages awarded at trial? On appeal?
10. P: What did the court decide?
11. P: Based on the addendum material, how well did the surgery work out in practice?
12. D: What was the ultimate outcome of this case after a new trial was ordered?

    Hawkins v. McGee explicitly illustrates that the law recognizes expectation damages not reliance damages as the appropriate measure--you must move the promisee to the indifference curve that would have resulted without breach of contract.

    Trial court: "the plaintiff ... is entitled to recover for ... what injury he has sustained over and above what injury he had before." 
    = reliance damages
    Appellate court: The purpose of the law is "to put the plaintiff in as good a position as he would have been in had the defendant kept his contract.". . . The measure of recovery "is based upon what the defendant should have given the plaintiff, not what the plaintiff has given the defendant or otherwise expended.". . . "The only losses that can be said fairly to come within the terms of a contract are such as the parties must have had in mind when the contract was made, or such as they either knew or ought to have known would probably result from a failure to comply with its terms.". . . We therefore conclude that the true measure of the plaintiff's damage in the present case is the difference between the value to him of a perfect hand or a good hand, such as the jury found the defendant promised him, and the value of his hand in its present condition, including any incidental consequences fairly within the contemplation of the parties when they made their contract . . . 
    = expectation damages

    The expectation measure of damages focuses on the gain that the victim of the breach anticipated from performance of the contract, the reliance measure on the victim's loss from the breach.
    If reliance costs were the exclusive measure of damages, it would follow that parties could walk away from their contracts whenever the contracts were still purely executory. (P122)

    Expectation damages = the efficient measure of damages
    For that: The court should have included pain and suffering beyond what is customary in such surgeries.

    The same in business cases as well:
    "Usually the objective of giving the promisor an incentive to fillfill his promise unless the result would be an inefficient use of resources ... can be achieved by givng the promisee his expected profit on the transaction. " (P120)

    Victims must mitigate damages.
    Example: If a tenant breaks a lease, the tenant is responsible only for the rent net of any rental income from a replacement tenant. (P123)
    But a defaulting purchaser is responsible for the entire loss of profit on the unpurchased units since firms typically have excess capacity to serve other customers (P123)

    Do any movie trivia buffs recognize this case?
        from "The Paper Chase" (1972)

    According to the Harvard Law School Record (1978): George Hawkins went on to lead a miserable reclusive life, and Dr. McGee went on to be elected mayor of Brattleboro, Vt. for several terms.