IV. Contracts
    E. Breaking contracts
    2. The law regarding breach of contract
    c. Liability for damages (cont'd.)

    Lake River v. Carborundum Co. 769 F.2d 1284 (1985) is a case where a contract provision was held unenforceable because the court viewed it as a penalty rather than reimbursement of actual damages. (F151) It's a Posner decision, well argued with some economic calculations.

1. What were the facts of the case?
2. What remedy is the plaintiff filing for?
3. Does the defendant deny breaching the contract?
4. So why is the plaintiff complaining?
5. What label does the plaintiff think best describes the key contract clause at issue here?
6. What label does the defendant think best describes it?
7. What's the potential economic problem with a penalty clause?
8. Why was it important to the plaintiff that defendant include such a clause in this case?
9. Did the court decide to enforce it or not? Why?
10. Who wrote the opinion?

    Illustrates liquidated damages--damages actually specified in the contract as the money remedy for a breach
    Right incentive to rely--because damages don't depend on reliance expenditures.
    Right incentive to breach if the amount agreed on is what expectation damages would be

    Penalty clause -- an agreement that the breaching party must pay a large penalty to the other party, representing more than the actual cost of the breach. (F)

    Disadvantage: deters efficient as well as inefficient breaches
    others: create bilateral-monopoly problems; ... might induce the prospective victim to provoke a breach.... and...discourage renegotiation. (P128-9)
    Advantage: signals reliability, compensates for high risk of default (P128)

    "A penalty clause is a private version of a property rule." It gives promisee a right that must be bought back. A property rule may be better than a liability rule--avoids courts, expresses confidence in renegotiation options. Yet the same legal system that routinely enforces property rules created by judges and legislatures refuses to enforce property rules privately created by the people they will bind."  (F151)

    If parties to contracts understand the terms that they negotiate, then the court is unlikely to raise welfare with rules that predispose against enforcing the terms.

    Overall, there seems to be room for improvement in the efficiency-enhancing impact of court decisions regarding contract damages.

    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?

    finally, we'll consider the special case of intentional torts

    none of these topic areas turn out to be as easy as they might seem

    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 (P)
    (3) precautions (s = safeguards)

    expected loss = P(s) x L
    cost of safegaurds = C(s)

    Benefit of precautions?

    Cost of precautions?

efficient level of precaution:     MBs = MCs     |DP/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
   [T]ort law is a poor way of providing insurance. It makes more sense to use insurance companies to provide insurance and tort law to deter actions that impose costs on others. (F193)