Why do we protect expectation interest in contracts?

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Sogui
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Why do we protect expectation interest in contracts?

Postby Sogui » Mon Dec 13, 2010 9:04 am

Just curious about this. My case book (Dawson) has several articles and my professor (who clerked for Posner) keep driving home the point that American law is somewhat unique in its "indifference" to breach of contract. We are fine with efficient breaches, we don't want to punish people for breaching, the law sees no morality in contracts. It's all just "perform or pay damages", we don't care which.

So why in the world, especially as society evolves, do we protect expectation interest? It seems to deal the harshest punishment for entities that try to offer the lowest prices or truly unique services. Furthermore it does seem like a form of punishment by allowing things like "lost profit" to get thrown into damages.

I mean if I promise to craft you an ornate rocking chair and you repudiate the contract when I'm 5% done, why don't we just measure damages in how much time and money I cost you? Why do I get to collect profit on a 2-month job for 3 days of work? It's a windfall that nobody ever seems to talk about, I (the craftsman) can start my next project 2 months earlier... or if I have no more projects than your breach doesn't leave me any better or worse off minus the materials and work you made me do.

Or say I was 90% done, you breach, I finish, sell it on the market, and sue you for the gap between your price and market price. Why should the craftsman be entitled to recover more than what the market values his work at? (Assuming efficient markets here) If the market values the work less than the costs I put into it (say it had your name carved into it or something), then I can get you for reliance damages instead.

So either I'm missing the point of contracts and we really are trying to attach "penalties" that encourage performance, or I'm misunderstanding how we apply expectation damages in a way that doesn't penalize you above and beyond the "actual costs" of the breach. We are smart enough to see profit isn't some mystical entity that everyone is entitled to on a breach, profit is used to pay for variable costs and fixed costs, the leftovers are reinvested in the company and to pay out bonuses and/or dividends. Why should I have to pay all the fixed costs and growth opportunities I cost you? We should simply include the "variable cost" portion of profitability that was harmed and let it be.

I mean, I found a more economical use for my money, and pressuring me to perform or risk having to shell out for your "expectation interest" can lead me to uneconomical business choices. We are sophisticated enough to have a very good idea of what you 'actually suffered' from my breach, why go further?

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Re: Why do we protect expectation interest in contracts?

Postby Renzo » Mon Dec 13, 2010 10:24 am

Expectation damages protect opportunity costs as well as financial damages, and this is what you're calling a "penalty."

To use your rocking chair example, I (the craftsman) only started building the damn thing because the price we agreed was enough to get me to do so. So, if you repudiate, not only have I lost the actual time/money spent, you tricked me into spending my time towards something that made me less money than I thought, and something I wouldn't have done if I had known how little I would make. If I had known I'd only get paid for the three hours I spent, I wouldn't have quit my other part time job. I also bought some tools that I can use again, but I wouldn't have bought if I'd have known I wasn't going to get paid for a whole chair.

Expectation damages says you don't have to pay the full price, but you do have put me in the position you lead me to believe I'd be in, since whatever you promised me tempted me away from another use of my time and got me to do something I wouldn't otherwise have done.

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Re: Why do we protect expectation interest in contracts?

Postby Chupavida » Mon Dec 13, 2010 12:09 pm

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Last edited by Chupavida on Tue Jul 19, 2011 10:38 pm, edited 1 time in total.

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Re: Why do we protect expectation interest in contracts?

Postby Sogui » Mon Dec 13, 2010 12:15 pm

Renzo wrote:Expectation damages protect opportunity costs as well as financial damages, and this is what you're calling a "penalty."

To use your rocking chair example, I (the craftsman) only started building the damn thing because the price we agreed was enough to get me to do so. So, if you repudiate, not only have I lost the actual time/money spent, you tricked me into spending my time towards something that made me less money than I thought, and something I wouldn't have done if I had known how little I would make. If I had known I'd only get paid for the three hours I spent, I wouldn't have quit my other part time job. I also bought some tools that I can use again, but I wouldn't have bought if I'd have known I wasn't going to get paid for a whole chair.

Expectation damages says you don't have to pay the full price, but you do have put me in the position you lead me to believe I'd be in, since whatever you promised me tempted me away from another use of my time and got me to do something I wouldn't otherwise have done.


Right but I'm basically arguing for "smarter" reliance damages. The kind of damages that would recognize "Hey evidence shows you were going to need 2 whole months to build this thing, you work 5 days a week for 8 weeks, that's 7.5% of the work you were going to need to finish this thing... so take .075 x contract price = what you deserve"

Basically the nice part of my craftsman example is we know that the contract price was what the craftsman wanted and all costs would be inclusive, including labor.... so you can't really go wrong with a pro-rata compensation that includes some a ratio of profits for the time you put in. For other situations we wouldn't use pro-rata, but a more detailed look at just how "profits" break down between "paying the workers who built the thing" and "gravy that would end up as an extra .01 boost to our dividends/share this year".

I see US contract damages like this: You have an island of "actual damages incurred both in economic damage and opportunity costs, etc...", it's going to have a crazy border with the ocean and instead of using all our modern sophistication to map the island with satellite photos and GPS, we just drew 3 big lines in a triangle around it and said "well that's about right". All the theories provide decent approximations but expectation damages go beyond what they claim to do.

It doesn't always overcompensate either, it's under-compensatory in many situations like Dempsey where certainty doctrine prevents us from giving profits for a boxing match that a breach had ruined. Yet it screamed out to me that "reliance" here was just more than paying a few promoters and secretaries to get publicity for the match, they had spent half the year getting it set up and the late breach meant they couldn't have spent that time finding another boxer for the match.

So why don't (if promoting efficiency is our true goal) we throw out expectation, at least as the default damages award (basically have it flip roles with reliance, expectation becomes the "special case" damages) and use a new and improved reliance damages to "feel out" what the parties really lost in the transaction, instead of throwing out small windfalls in a majority of cases that might add up to a sizable amount of deterrence against "economical breaching"

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Sogui
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Re: Why do we protect expectation interest in contracts?

Postby Sogui » Mon Dec 13, 2010 12:28 pm

Chupavida wrote:Expectation damages protect the trust and bargained-for profit margins that motivate people to enter into contracts in the first place, without preventing people from breaching when it is economically efficient to do so (better opportunity comes along).

If all anybody got was reliance damages, people would be less excited to bargain with strangers since they wouldn't be guaranteed the outcome they bargained for. Being compensated such that you're back where you started before the bargain isn't all that exciting. And if we preferred specific performance, then people would be stuck in inefficient contracts, robbing the market as a whole of delicious additional mutual benefits.

And think about the "market value" price. It's hard to separate the rules that underly contract law from the market they govern. It can be argued that a big reason that we even know what the chair is worth on the open market is that people are motivated to bargain for similar chairs by our system's profit-protecting preference for expectation damages.


The idea would be that you get everything you bargained for, nobody bargains for breaches and "true" reliance would always try to ensure you come out "even" and not "even with a little somethin-somethin for your troubles". I mean if we really want more deterrence against breaching that's fine. There's a million good argument for keeping the system in place, expectation gives more certainty which is valued in the law, and it leads to faster settlements with less litigation costs.

But you would always "get" what you had bargained for. I think a particularly innovative way of ensuring this would be financial theories on cost of capital. Companies require a certain "rate of return" for the business they do and the projects they invest in. This compensates them for the capital invested, for the time the capital stays tied up, etc... with enough sophistication it wouldn't be overly difficult to apply this to all cases where contracts are for objectively valued transactions.

This would only make sense to apply this more sophisticated actors at first, but it would basically ensure that companies completely "break even" on transactions. You breached? Ok the damages are all the variable costs that the other side committed, all the fixed assets that were "tied up" on this project that could have been used elsewhere, and (compensating for profit and opportunity cost) we use your financial records/history to figure out just how much 4 months of committed capital and time was worth to your corporation. If there was another project worth more... you would have been doing it!

In that sense it is a very pro rata approach, but using different tools for different levels of sophistication. The "craftsman" would always get "profit" for whatever time he put into the project and the multinational corporation will do no worse than the rate of return that it requires to keep shareholders happy.

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Re: Why do we protect expectation interest in contracts?

Postby Renzo » Mon Dec 13, 2010 12:34 pm

Sogui wrote:
Renzo wrote:Expectation damages protect opportunity costs as well as financial damages, and this is what you're calling a "penalty."

To use your rocking chair example, I (the craftsman) only started building the damn thing because the price we agreed was enough to get me to do so. So, if you repudiate, not only have I lost the actual time/money spent, you tricked me into spending my time towards something that made me less money than I thought, and something I wouldn't have done if I had known how little I would make. If I had known I'd only get paid for the three hours I spent, I wouldn't have quit my other part time job. I also bought some tools that I can use again, but I wouldn't have bought if I'd have known I wasn't going to get paid for a whole chair.

Expectation damages says you don't have to pay the full price, but you do have put me in the position you lead me to believe I'd be in, since whatever you promised me tempted me away from another use of my time and got me to do something I wouldn't otherwise have done.


Right but I'm basically arguing for "smarter" reliance damages. The kind of damages that would recognize "Hey evidence shows you were going to need 2 whole months to build this thing, you work 5 days a week for 8 weeks, that's 7.5% of the work you were going to need to finish this thing... so take .075 x contract price = what you deserve"

Basically the nice part of my craftsman example is we know that the contract price was what the craftsman wanted and all costs would be inclusive, including labor.... so you can't really go wrong with a pro-rata compensation that includes some a ratio of profits for the time you put in. For other situations we wouldn't use pro-rata, but a more detailed look at just how "profits" break down between "paying the workers who built the thing" and "gravy that would end up as an extra .01 boost to our dividends/share this year".

I see US contract damages like this: You have an island of "actual damages incurred both in economic damage and opportunity costs, etc...", it's going to have a crazy border with the ocean and instead of using all our modern sophistication to map the island with satellite photos and GPS, we just drew 3 big lines in a triangle around it and said "well that's about right". All the theories provide decent approximations but expectation damages go beyond what they claim to do.

It doesn't always overcompensate either, it's under-compensatory in many situations like Dempsey where certainty doctrine prevents us from giving profits for a boxing match that a breach had ruined. Yet it screamed out to me that "reliance" here was just more than paying a few promoters and secretaries to get publicity for the match, they had spent half the year getting it set up and the late breach meant they couldn't have spent that time finding another boxer for the match.

So why don't (if promoting efficiency is our true goal) we throw out expectation, at least as the default damages award (basically have it flip roles with reliance, expectation becomes the "special case" damages) and use a new and improved reliance damages to "feel out" what the parties really lost in the transaction, instead of throwing out small windfalls in a majority of cases that might add up to a sizable amount of deterrence against "economical breaching"



Your solution is not more efficient; you're still not accounting for opportunity costs.

It's entirely likely that someone would agree to build a fence for $100 but not agree to build half a fence for $50. So if you tell me you'll pay me $100 for a fence, then repudiate halfway through, you've tricked me into doing something I wouldn't have otherwise agreed to, and you should have to compensate me for that--not because it penalizes you, but because for any less I wouldn't have agreed to do it in the first place.

Another example: your boss offers you some overtime, but you have plans for the day. For 10 hours of overtime, it would be worth canceling your plans, but not for 2 hours. So, if your boss lies about you working for 10 and gets your there for 2, just paying your for the 2 hours doesn't make you whole--your time off was worth more than that.

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Re: Why do we protect expectation interest in contracts?

Postby Sogui » Mon Dec 13, 2010 1:23 pm

Renzo wrote:
Your solution is not more efficient; you're still not accounting for opportunity costs.

It's entirely likely that someone would agree to build a fence for $100 but not agree to build half a fence for $50. So if you tell me you'll pay me $100 for a fence, then repudiate halfway through, you've tricked me into doing something I wouldn't have otherwise agreed to, and you should have to compensate me for that--not because it penalizes you, but because for any less I wouldn't have agreed to do it in the first place.

Another example: your boss offers you some overtime, but you have plans for the day. For 10 hours of overtime, it would be worth canceling your plans, but not for 2 hours. So, if your boss lies about you working for 10 and gets your there for 2, just paying your for the 2 hours doesn't make you whole--your time off was worth more than that.


So then we're getting down into the gray areas. First off I can promise you for every shortcoming here, it will be less in number and magnitude than a set of examples that can happen under current law.

Still there's a reason you wouldn't build half a fence for $50 and you wouldn't cancel plans for 2 hours of overtime. If we used "actual" reliance you can offer verifiable evidence to the court as to why you relied more than a first-glance might indicate. Show the judge your canceled tickets to the Broadway show that night you were tricked into overtime, explain to the court that costs are front-loaded in the fence-making business so that 50% of the expenditures are just getting the equipment there. Show them your bills and receipts for other jobs, it wouldn't be hard. Opportunity cost would also be included, if you could prove that this repudiated fence job cost you another one across town to a competitor you could include lost profits on that work as well. Economically that amount would be capped at whatever lost profits for this job are, since you clearly thought this fence was the best way to spend your time.

So if this fence was the best value for your time, and the other fence was as valuable or less. Then you take the entire "cost" of 50% of the first fence, and if the "profits" gained for 50% of this fence (which under the above paragraph could be 90%+ of the contract profits) are still lower than the expected profit on the other fence, then we bump up the damages further so that you walk away from this contract with as much as you would have gotten on the other.

The whole point is that this type of reliance would always try to get at the "heart" of what you REALLY lost in a contract. Depending on the context it might "look" like restitution or reliance, and in cases with "lost opportunity" then it can look a lot more like expectation damages depending on how the math plays out.

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Re: Why do we protect expectation interest in contracts?

Postby Chupavida » Mon Dec 13, 2010 1:29 pm

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Last edited by Chupavida on Tue Jul 19, 2011 10:37 pm, edited 1 time in total.

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nealric
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Re: Why do we protect expectation interest in contracts?

Postby nealric » Mon Dec 13, 2010 1:41 pm

At this point in the semester, the correct answer is: "because the prof said so."

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Re: Why do we protect expectation interest in contracts?

Postby Renzo » Mon Dec 13, 2010 2:41 pm

Sogui wrote:
Still there's a reason you wouldn't build half a fence for $50 and you wouldn't cancel plans for 2 hours of overtime. If we used "actual" reliance you can offer verifiable evidence to the court as to why you relied more than a first-glance might indicate. Show the judge your canceled tickets to the Broadway show that night you were tricked into overtime, explain to the court that costs are front-loaded in the fence-making business so that 50% of the expenditures are just getting the equipment there. Show them your bills and receipts for other jobs, it wouldn't be hard. Opportunity cost would also be included, if you could prove that this repudiated fence job cost you another one across town to a competitor you could include lost profits on that work as well. Economically that amount would be capped at whatever lost profits for this job are, since you clearly thought this fence was the best way to spend your time.

So if this fence was the best value for your time, and the other fence was as valuable or less. Then you take the entire "cost" of 50% of the first fence, and if the "profits" gained for 50% of this fence (which under the above paragraph could be 90%+ of the contract profits) are still lower than the expected profit on the other fence, then we bump up the damages further so that you walk away from this contract with as much as you would have gotten on the other.

The whole point is that this type of reliance would always try to get at the "heart" of what you REALLY lost in a contract. Depending on the context it might "look" like restitution or reliance, and in cases with "lost opportunity" then it can look a lot more like expectation damages depending on how the math plays out.


You are making a fundamental error in your economic assessment: you're confusing value and price.

In my example, I value my free time even if I don't have Broadway tickets to show a judge. If my enjoyment in sitting home and watching a rerun marathon on TV exceeds the value of 2 hours of work to me, then it is by definition economically inefficient for me to work instead of watching TV.

So, if you trick me into working 2 hours instead of relaxing by offering me 10 hours and breaching, it would be economically inefficient not to compensate me for my lost enjoyment. And how do we price that enjoyment? We look at the price you had to agree to pay me to give it up--in other words my expectation interest.

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Re: Why do we protect expectation interest in contracts?

Postby savagecheater » Mon Dec 13, 2010 5:10 pm

nealric wrote:At this point in the semester, the correct answer is: "because the prof said so."


titOcr

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Re: Why do we protect expectation interest in contracts?

Postby downstream » Mon Dec 13, 2010 5:16 pm

BECAUSE JACK DEMPSEY TRIED TO RUIN IT FOR EVERYONE (even though expec damages were not granted in that case)

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Re: Why do we protect expectation interest in contracts?

Postby ntugwater » Tue Dec 14, 2010 5:50 am

Renzo wrote:
You are making a fundamental error in your economic assessment: you're confusing value and price.

In my example, I value my free time even if I don't have Broadway tickets to show a judge. If my enjoyment in sitting home and watching a rerun marathon on TV exceeds the value of 2 hours of work to me, then it is by definition economically inefficient for me to work instead of watching TV.

So, if you trick me into working 2 hours instead of relaxing by offering me 10 hours and breaching, it would be economically inefficient not to compensate me for my lost enjoyment. And how do we price that enjoyment? We look at the price you had to agree to pay me to give it up--in other words my expectation interest.

+1

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Re: Why do we protect expectation interest in contracts?

Postby savagedm » Tue Dec 14, 2010 6:06 am

Sogui wrote:Just curious about this. My case book (Dawson) has several articles and my professor (who clerked for Posner) keep driving home the point that American law is somewhat unique in its "indifference" to breach of contract. We are fine with efficient breaches, we don't want to punish people for breaching, the law sees no morality in contracts. It's all just "perform or pay damages", we don't care which.

So why in the world, especially as society evolves, do we protect expectation interest? It seems to deal the harshest punishment for entities that try to offer the lowest prices or truly unique services. Furthermore it does seem like a form of punishment by allowing things like "lost profit" to get thrown into damages.

I mean if I promise to craft you an ornate rocking chair and you repudiate the contract when I'm 5% done, why don't we just measure damages in how much time and money I cost you? Why do I get to collect profit on a 2-month job for 3 days of work? It's a windfall that nobody ever seems to talk about, I (the craftsman) can start my next project 2 months earlier... or if I have no more projects than your breach doesn't leave me any better or worse off minus the materials and work you made me do.

Or say I was 90% done, you breach, I finish, sell it on the market, and sue you for the gap between your price and market price. Why should the craftsman be entitled to recover more than what the market values his work at? (Assuming efficient markets here) If the market values the work less than the costs I put into it (say it had your name carved into it or something), then I can get you for reliance damages instead.

So either I'm missing the point of contracts and we really are trying to attach "penalties" that encourage performance, or I'm misunderstanding how we apply expectation damages in a way that doesn't penalize you above and beyond the "actual costs" of the breach. We are smart enough to see profit isn't some mystical entity that everyone is entitled to on a breach, profit is used to pay for variable costs and fixed costs, the leftovers are reinvested in the company and to pay out bonuses and/or dividends. Why should I have to pay all the fixed costs and growth opportunities I cost you? We should simply include the "variable cost" portion of profitability that was harmed and let it be.

I mean, I found a more economical use for my money, and pressuring me to perform or risk having to shell out for your "expectation interest" can lead me to uneconomical business choices. We are sophisticated enough to have a very good idea of what you 'actually suffered' from my breach, why go further?


One word: money.

Some doucher, at some point, said to the right person: you know what, we stand to gain big off of this and it would be unjust to not get a huge payout without this... lets make it law.

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Re: Why do we protect expectation interest in contracts?

Postby Sogui » Tue Dec 14, 2010 7:42 am

Renzo wrote:You are making a fundamental error in your economic assessment: you're confusing value and price.

In my example, I value my free time even if I don't have Broadway tickets to show a judge. If my enjoyment in sitting home and watching a rerun marathon on TV exceeds the value of 2 hours of work to me, then it is by definition economically inefficient for me to work instead of watching TV.

So, if you trick me into working 2 hours instead of relaxing by offering me 10 hours and breaching, it would be economically inefficient not to compensate me for my lost enjoyment. And how do we price that enjoyment? We look at the price you had to agree to pay me to give it up--in other words my expectation interest.


Yea but protecting the subjective interest of parties in such a strained scenario is always going to be a problem. I mean, we aren't deleting expectation from the books here, we just keep it as a "useful backup" like we use many other K doctrines. If it's introduce evidence that shows your boss was just jerking you around, and that this was a flagrant and willful breach, then the court should go Groves on your boss's ass and give the vastly overcompensating remedy.

Still the example just feels too strained, why is 2 hours of overtime not worthwhile but 10 is? I mean reasonably the rising marginal costs of each overtime hour would make it counter-intuitive when you're getting paid by the hour. Staying 2 hours for $50/hr isn't worthwhile but 10 hours at $50/hr suddenly makes it worthwhile? Are we talking about coming in on Saturday, because then you can raise argument about transportation costs, etc... but just staying at work longer? That just sounds like a case where you have subjective interests that defy market expectations and that's ALWAYS going to be a problem in courts, expectation damage doesn't really do any better of a job protecting that either.

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Re: Why do we protect expectation interest in contracts?

Postby Sogui » Tue Dec 14, 2010 9:26 am

betasteve wrote:Th' fuck is going on in here?

Expectation interest protects the promisee's right to what was bargained for. The promisee should not be in a worse off position having contracted with the promisor if the promisor breaches.


Replying to subject lines is fun

My proposition is that both statements you just made are completely correct, but that expectation does more than making sure they are not "worse off", it typically leaves them better off.

That wouldn't be a problem if everything I read on contracts says "we like punishing breaches, we think the injured party should get more than they've earned". But I keep hearing all talk about how our system is unique for allowing and tacitly encouraging efficient breaches. So why not just break out our reliance remedy, sharpen it up so that it does a better job of measuring real-world losses, and then using that as the primary remedy in breach of contract cases?

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Re: Why do we protect expectation interest in contracts?

Postby Renzo » Tue Dec 14, 2010 9:44 am

Sogui wrote:
Renzo wrote:You are making a fundamental error in your economic assessment: you're confusing value and price.

In my example, I value my free time even if I don't have Broadway tickets to show a judge. If my enjoyment in sitting home and watching a rerun marathon on TV exceeds the value of 2 hours of work to me, then it is by definition economically inefficient for me to work instead of watching TV.

So, if you trick me into working 2 hours instead of relaxing by offering me 10 hours and breaching, it would be economically inefficient not to compensate me for my lost enjoyment. And how do we price that enjoyment? We look at the price you had to agree to pay me to give it up--in other words my expectation interest.


Yea but protecting the subjective interest of parties in such a strained scenario is always going to be a problem. I mean, we aren't deleting expectation from the books here, we just keep it as a "useful backup" like we use many other K doctrines. If it's introduce evidence that shows your boss was just jerking you around, and that this was a flagrant and willful breach, then the court should go Groves on your boss's ass and give the vastly overcompensating remedy.

Still the example just feels too strained, why is 2 hours of overtime not worthwhile but 10 is? I mean reasonably the rising marginal costs of each overtime hour would make it counter-intuitive when you're getting paid by the hour. Staying 2 hours for $50/hr isn't worthwhile but 10 hours at $50/hr suddenly makes it worthwhile? Are we talking about coming in on Saturday, because then you can raise argument about transportation costs, etc... but just staying at work longer? That just sounds like a case where you have subjective interests that defy market expectations and that's ALWAYS going to be a problem in courts, expectation damage doesn't really do any better of a job protecting that either.


Again, you're making fundamental errors, and the example isn't strained at all. If you want to talk in terms of marginal utility, you have to remember that there is diminishing marginal utility for leisure, as well as for money. You could draw indifference curves for this tradeoff for an individual, so it's entirely possible that the only place on my preference map that I'm indifferent to work (and pay) v. leisure is at 10 hours.

And why on earth would we not protect the subjective interests of the parties? If all that matters is market price, you are assuming that when you walk into McDonalds and order french fries, you are no worse off if they hand you an equal price's worth of creamed spinach, even if you hate spinach.

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Re: Why do we protect expectation interest in contracts?

Postby savagedm » Tue Dec 14, 2010 3:15 pm

betasteve wrote:Th' fuck is going on in here?

Expectation interest protects the promisee's right to what was bargained for. The promisee should not be in a worse off position having contracted with the promisor if the promisor breaches.


I'm pretty sure my point above clearly explained this without the nerdiness.

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Re: Why do we protect expectation interest in contracts?

Postby Sogui » Tue Dec 14, 2010 4:53 pm

betasteve wrote:
Sogui wrote:
betasteve wrote:Th' fuck is going on in here?

Expectation interest protects the promisee's right to what was bargained for. The promisee should not be in a worse off position having contracted with the promisor if the promisor breaches.


Replying to subject lines is fun

My proposition is that both statements you just made are completely correct, but that expectation does more than making sure they are not "worse off", it typically leaves them better off.

That wouldn't be a problem if everything I read on contracts says "we like punishing breaches, we think the injured party should get more than they've earned". But I keep hearing all talk about how our system is unique for allowing and tacitly encouraging efficient breaches. So why not just break out our reliance remedy, sharpen it up so that it does a better job of measuring real-world losses, and then using that as the primary remedy in breach of contract cases?

In what way does it leave them better off? Example: I enter into K with you to paint my house for $450. If you breach, and the next comparable painter charges $700, then I should get the $250 more that it costs to procure had you not breached from you under expectation. How is there a reliance remedy here? You want to turn reasonable reliance to be a soft calculation of a reasonable opportunity cost of contracting at a specific point in time? I don't see how, under expectation, parties are left "better off."


Because if I breached on day 1, in good faith, etc... I still end up paying you out the nose because I'm providing a valuable service (Cheap painting). If I weren't around you would be paying $700 or letting your paint bubble and chip away. The more unique or cheap my services get, the more of a chance that I get the shit beat out of me with expectation damages.

Why do you deserve $250 because I'm the cheapest player in the market? You didn't do anything except call me up and sign some papers. You aren't out anything. It make no intuitive sense unless you see contracts as the very definition of expectation interest. As soon as I put pen to paper I better get that house painted or the cash equivalent for cover amiright?

Yet nowhere in contracts, books, restatement, etc... do we paint contracts as having that kind of entitlement. We try to make sure nobody is "worse off", we want "efficient breaches", we don't want to add "morality to contracts". So why don't we just limit it to what we lose when a breach occurs? You didn't lose $250 when I breached, so I shouldn't have to pay you that just because someone down the only other painter in town charges more. Why does the rip-off painter get to walk away from his breaches because I'm always a cost-effective cover?

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Re: Why do we protect expectation interest in contracts?

Postby Renzo » Tue Dec 14, 2010 7:17 pm

Sogui wrote:
Because if I breached on day 1, in good faith, etc... I still end up paying you out the nose because I'm providing a valuable service (Cheap painting). If I weren't around you would be paying $700 or letting your paint bubble and chip away. The more unique or cheap my services get, the more of a chance that I get the shit beat out of me with expectation damages.

Why do you deserve $250 because I'm the cheapest player in the market? You didn't do anything except call me up and sign some papers. You aren't out anything. It make no intuitive sense unless you see contracts as the very definition of expectation interest. As soon as I put pen to paper I better get that house painted or the cash equivalent for cover amiright?

Yet nowhere in contracts, books, restatement, etc... do we paint contracts as having that kind of entitlement. We try to make sure nobody is "worse off", we want "efficient breaches", we don't want to add "morality to contracts". So why don't we just limit it to what we lose when a breach occurs? You didn't lose $250 when I breached, so I shouldn't have to pay you that just because someone down the only other painter in town charges more. Why does the rip-off painter get to walk away from his breaches because I'm always a cost-effective cover?


I'm sorry boss, but the problem here isn't every other academic, lawyer, and economist in the world. The problem is your understanding of efficiency. It's only economically efficient if the breach creates so much more utility that the breacher can make the non-breaching party just as good as if they had performed, and still be better off themselves. That's not up for debate, that's the definition of efficiency.

In your painter example, we have to assume that both parties thought that $250 was a good deal--that's why they contracted. If the painter breaches, it's only economically efficient if the other party is still as good off as if the deal went through (again, this is just by the definition of economic efficiency). We don't care why he wants his fence painted, or how much more he might have potentially paid. We only care that both parties thought $250 was a good deal, and both parties should get what they bargained for, or the economic equivalent thereof.

What you are arguing for is strategic breach, not efficient breach. If the painter can perform or not, and is only liable to repay the other party for a signature and phone call, he will contract with many parties with no intention of performing all the contracts, and then only perform the contract that benefits him the most. He'll say "sorry" and repay the other parties for a phone call, but the whole system of contacting stops working because no one can actually believe that the other party will do what they say.

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ntugwater
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Re: Why do we protect expectation interest in contracts?

Postby ntugwater » Tue Dec 14, 2010 8:47 pm

Take econ 101

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Sogui
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Re: Why do we protect expectation interest in contracts?

Postby Sogui » Wed Dec 15, 2010 1:18 am

betasteve wrote:I contracted for a painting of my house for $450. If the enforceability of contracts are to mean anything, I at least get what I paid for. I paid for my house to be painted for $450. Why should your ability to breach - since I can't actually compel you to paint my house - cost me more than what I already bargained for?


Enforceability doesn't require expectations to be protected. I mean most people enter contracts because both sides stand to benefit, they don't breach for the hell of it. They breach because something has changed that makes their efforts more useful somewhere else (or they just fucked up lol). I mean the reason we allow "breach and pay" expectation instead of specific performance is because signing a contract never GUARANTEES a result. If we had kickass death panels replace our court system and death was the punishment for all contract breaches you could be VERY secure in the result. (No death panels but supposedly civil law countries "value" this security enough to make specific performance a common remedy)

Yet we tacitly encourage "breach and pay" because we don't value all the results so much that we want to protect arbitrary subjective interests either. At least when it's not made plain on the face of the contract. Even if you RREEEEEAAAALLLLY wanted Reading pipes in your house, the courts don't give 2-shits about your expectations then. It a push toward valuing economically efficient results.

Like everything else in law it works like a continuum:

"Actual" reliance interest- Only protect reliance interest, the law has been pushing closer and closer to this standard IMO through various doctrines. Many restatement provisions on "foreseeability" and other concerns encourage courts to sniff out "actual" damages
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* Expectation interest- Protects "where you expected to be", at cost of cover or diminished value - less concern for subjective value
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Lost Volume and Specific Damages Interest- God dammit YOU will give them whatever you promised

We can define contracts as "guarantees to an outcome" but clearly courts here have an eye for economic waste, so they won't take this doctrine literally. Our intuition tells us that we shouldn't allow economic damage just to fulfill someone's "hopes and dreams" of full performance. Our intuition isn't so hot when we get into complex agreements with countless economic undercurrents.

I don't have a problem with the theory at all, I can think of very few "unjust" scenarios that our courts could not remedy with this proposed system. The real argument I think is against application because it would allow almost arbitrary breaching and the system would have trouble calculating the cost of the "minimal reliance" for breaches early in the contract. You could argue back that people would only breach if they've found something more useful to do with their scarce resources, so you could take heart that while non-breaching Bob is back to square-one, at least breaching Ben is making the world a more efficient place.

Plus, I can't emphasize this enough, we would still use expectation when it's appropriate, that both parties wanted the results - not the efforts - to be protected. Like option contracts would make no sense without expectation protections. We just wouldn't make it the default like it is for 90% of the contracts cases.

It's interesting theory at least, because it bugs the hell out of me when I'm writing these practice exam answers and I have to put "Why yes, since Mary must breach due to the divorce and inability to make payments without a new home equity loan, the $200,000 AC system she had agreed to buy yesterday entitles the massive corporation to their expected profits despite the fact it cost them $2.00 for someone to take her order over the phone and upload the order into the system... and another $.50 of someone's time to delete that order and the business keeps going like nothing ever happened... they are entitled to full profits! Sure "profits" are actually about 30% overhead and 20% Christmas bonuses + dividend issues and about 50% lurking variable costs we swept into this category because it makes bookkeeping easy. The customer will never actually trigger those lurking varialbes, but the courts don't give a fuck, haha! Why the hell would we spend money on a more complex bookkeeping system that gives us less damages when our customers default?!"

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Sogui
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Re: Why do we protect expectation interest in contracts?

Postby Sogui » Wed Dec 15, 2010 1:21 am

@the econ haters

Like I said I'm not economically trained, but I know my intuition on this has hit something

You know it's wrong when you see a contract for something extremely valuable, and a week #1 good faith breach brings down the hammer of expectation damages onto one of the parties.

Telling me that the parties think something is "economically valuable" to them means nothing to me. Does a contract alone entitle you to the result? Our system says yes (most of the time). The intuitive problem to that is that scribbling your name on a $.10 boilerplate form somehow entitles both parties to a result. Sometimes, most times, the "hypo" leads to equitable results and our sense of justice is satisfied.

But sometimes it's not. Sometimes the contract is for something that requires difficult work by both parties, one party may have to do backbreaking work to meet a condition that will trigger the other party's performance. Yet if out of dire circumstances that party breaches, they may get nothing for their efforts while the many who signed his name on the $.10 sheet of paper who has spent the last year doing absolutely nothing except keeping the contract in his file cabinet... is completely and 100% entitled to the performance that was still a year away and would have required a tremendous amount of effort on his part. We don't care about that?

Why can't we have it the other way? Signing a paper should be signing a paper, we are going to make a good faith effort to work together in order to reach a goal. If we breach in good faith, then... oh well we gave it our best shot, let's square things away and go our separate ways. To the extent that we have ACTUALLY damaged the other party we should pay. A scrap of paper should not entitle them to something for nothing.

I know I'm bashing contracts here but back to the painter for Renzo:

"If the painter breaches, it's only economically efficient if the other party is still as good off as if the deal went through"

Like I said I haven't had economics since high school, but how is that anything but a conclusory definition of efficiency?

"If the painter breaches, it's only economically efficient if the other party is still as good off as if the deal never happened"

Why is one economically efficient and the other is "strategically" efficient. I breached because I found a more efficient way to spend my time and resources. If I leave you no better or no worse off, yet I'm better off. How is that not a more efficient situation when I can generate benefits for nothing. Outside of contracts that's always the efficient thing to do.

Yet throw a signature and some boilerplate form into the mix and suddenly efficient behavior becomes inefficient... why? Because we choose to make it inefficient. We are adding hurdles, walls, fences, barbed wire, whatever metaphor you need around the corners of the contract. Are they naturally there? Did the laws of economics put them there? No some old dead white nobility decided a long time ago that that's how we want things done.

The fact that we still treat "profits" like they are some kind of magical mystical entity that we cannot understand or decipher tells me that the economists, scientists, etc... of the world may have figured this stuff out, but that doesn't stop ancient legal doctrine and stale practices to continue through the ages. Maybe they just hide the good cases from 1L's but I've never seen a case try to actually distinguish overhead from profit. If the contract says "costs" and "profits" that's all the courts ever seem to see. What if 50% of the profits were actually just to cover the depreciation from wearing down a certain machine over the course of a contract? You didn't actually end up suffering that cost... but as long as we are "ball park" courts don't seem to care.

I mean Posner gets lavish praise spurring on the law and economics, but many of his greatest opinions are apply simple economic theories that had been resolved decades prior. He didn't need to be breaking ground in economics to be breaking ground in law and economics you know? There are so many areas of law that exist simply because tradition and consistency make it easier just to leave it alone. I have no doubt contracts is the same way. The only way to justify pure expectation interest is if society decides that the "true cost" of breaches isn't adequately compensated and expectation is the only way to prevent enough of those "hidden" costs to make the system more efficient overall.

Ok last example:

I'm a famous bioengineer, I will finish my current project in one year, so I offer myself up for an employment contract and get several offers, economics says all else equal I should take the highest offer. So I do. Also suppose this industry really isn't as volatile as we know it is.

X-Pharma Corp. the winning offer, forms a contract with me. I will develop X-drug with them for 4 years, starting 1 year from today and will be paid a total of $20 million at the end; in net present value terms. Frankly I'm old and rich... money doesn't mean much to me and I'd like to spend some time with my grandchildren and actually spend some of my wealth before I die. So I really only considered working the 4-year contracts that offered me at least $17m in NPV to compel me to continue working.

Inflation shoots up within the year, the $20m in NPV is now closer to $15m. Furthermore since the drug is supply constrained and demand is inelastic enough that we can raise the ultimate price of X-drug with inflation here and always match our required rate of return for the project.

Furthermore Y-Pharma has just made a breakthrough discovery in molecular science and discovered created a new machine that allows the manipulation of chemical compounds in a way never thought possible! The area of their breakthrough is my true specialty and I'm one of the only specialists who is qualified to work on this new medicine.

So we have this situation-

X-pharma is paying me $15m, $20m in fixed costs, and $20m in variable costs, net present value. Their required rate of return is 20%.
X-pharma knows it will make $75m in revenue on this new drug, and $20m in profits
My contract clearly makes it clear they have no substitutes, no cover, and my performance is a condition to them finishing their drug

Y-pharma wants their drug developed badly, the market is willing to pay a 25% premium on Y-drug over X-drug because their drug is 25% more effective than the X-drug that you just started working on today (X cures rare Z-disease 40% of the time, Y cures it 50% of the time...)
Y-pharma has similar conditions to develop their drug. 4 years of development starting today, $24m in fixed costs, $24m in variable costs and a 20% required rate of return.

Therefore Y-pharma knows it will make $93.75m in revenue on this drug, and they will pay me whatever is takes to join them, as long as it keeps the project as a whole worthwhile to Y-pharma. This is day 1 of your contract with X-pharma and they haven't even relied on the contract yet, your work only requires one of their spare labs and some basic equipment to test their proprietary formula with. The actual costs are for the specialized production facility that they will start building in another year.

X-pharma hears of Y's plan and has a simple strategy in U.S. contracts: "We will not release you from this contract, if you leave us now you will have to pay $20 million for the lost profits you will cost us."

Now frankly if expectation damages didn't exist, market conditions would compel me to retire since the rise in inflation has made the current contract worth less than I value my time. But in that world the company would have to renegotiate with me to keep me on board. They have plenty of wiggle room in their margins, so it's economically efficient when the renegotiation makes ME and THE STOCKHOLDERS better off than if I repudiated. But with expectation damages they know the cost for breaching will force me to stick around, the stockholders benefit from the market conditions but I don't. This is efficient too in a sense, the same amount of value is being preserved since I won't repudiate... it's just that the value is shifted from me to the shareholders. Is that an efficient world where changing conditions can lead to inefficient behavior for parties that is induced because the other party expects performance in return for the promise of a check that will take 30 seconds to fill out, in 4 years, that is worth 75% of what it used to be?

Anyway let's move on to what happens with Y-pharma, they need to pay at least $35m to give you any economic incentive to get you to leave X-pharma and breach the contract. Yet despite the fact that Y is producing a more useful services, and it is producing that service at a more efficient cost, it would bring their project total to $83m

Now you might think, 83m costs, 93.5m revenue... awesome it's profitable we can breach and give everyone what they want!

No, because no self-interested corporation in these facts would follow that transaction. Sure $10.5m in profits sounds nice, but the cost of capital is 20% for this company/market. That means Y-pharma only get's a 12.65% rate of return, a 11.22% profit margin.

For a corporation that exists to make money, earning less than your required rate of return means you simply are "losing money" on lesser profits. They may make money straight on this deal, but all corporations borrow their money from shareholders and lenders. If they have a 20% RRR for financing new projects, then any project earning under 20% is not worthwhile.

The result of this absurdly long example is that we are living in a world that by my reasoning, consistently blocks "efficient breaching" by adding extra costs to the cost of shifting resources that have to cross the edges of contracts to get to their most efficient destination.

Some of these "barriers" to efficiency are created by economics. At the beginning of this hypo the scientist will not be able to switch jobs because of expectation damages that artificially make the switch uneconomical. However near the end, the scientist will not switch based on reliance damages either because the first group has built a production facility that would be useless in a breach, these are real economic damages of having facilities built up and rendered obsolete.

So my "thesis" is that if the cost of inhibiting some (many?) economic breaches is worth the benefit received from increasing the "security" of contracts, then we should stick with the status quo but at least be honest that we find enough inherent value in promises that we will add legal "punishments" to discourage breaking punishments.

The easiest way to see it is this, if you see my ad for $200 paint-jobs and you get your hopes up and call me and I'm booked... we don't care. You have no right to my awesome cheap services, you have no right to get your house painted by me.

Yet if we exchange a few choice words over the phone, what have you become entitled to? A good faith effort for me to paint your house blue? NOPE Our law says you are now entitled to a blue goddamn house or the monetary equivalent of such a service.

Is one inherently better than the other? There former system has never been used because it is more sophisticated to administer, but in return you encourage more efficient behavior. The latter system is what we have and it uses cruder tools for easier results that can discourage efficient behavior. There are other problems with both that could lead to abuses, but that's why we have like a dozen doctrines in place to check the abuses of our current remedy regimen, who's to say we can't manage a different system of priorities?

Finally - you gave the example of the painter calling and breaching 100 times until he got the highest price.

1) That doesn't make sense. Why wouldn't he just use a bid-style system instead of offering-accepting-breaching over and over?
2) We have doctrines in place that prevent this kind of stuff, technically the "veteran" painter who charges more for his services than anyone in town could do this exact same thing and get away with it since "cover" would always be negative.
3) Flagrant, bad-faith, or abusive breaching could compel courts to apply expectation as the "back-up" remedy, we could also keep expectation as the default for subjective performance, contracts with unsophisticated parties, contracts with lost volume, etc... you can be flexible without having to keep expectation as the default damages rule.

(God I'm bored)

Renzo
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Re: Why do we protect expectation interest in contracts?

Postby Renzo » Wed Dec 15, 2010 1:30 am

Sogui wrote: it bugs the hell out of me when I'm writing these practice exam answers and I have to put "Why yes, since Mary must breach due to the divorce and inability to make payments without a new home equity loan, the $200,000 AC system she had agreed to buy yesterday entitles the massive corporation to their expected profits despite the fact it cost them $2.00 for someone to take her order over the phone and upload the order into the system... and another $.50 of someone's time to delete that order and the business keeps going like nothing ever happened... they are entitled to full profits! Sure "profits" are actually about 30% overhead and 20% Christmas bonuses + dividend issues and about 50% lurking variable costs we swept into this category because it makes bookkeeping easy. The customer will never actually trigger those lurking varialbes, but the courts don't give a fuck, haha! Why the hell would we spend money on a more complex bookkeeping system that gives us less damages when our customers default?!"



The law already answered this problem. The answer is: duty to minimize.

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Na_Swatch
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Re: Why do we protect expectation interest in contracts?

Postby Na_Swatch » Wed Dec 15, 2010 1:36 am

Duty to minimize? what do u mean? (or did u mean mitigate?)




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