Dawson, p. 32-34: Comment: The Economics of Contract Remedies

 

Johnny gets into Posnerish law & economics considerations.Economists talk about efficiency rather than fairness.The policy goal of contract enforcement should be the efficient distribution of resources.So there may well be a case when breach of contract plus enforcement of expectation damages may yield a better result overall than if the parties were forced to follow through with the contract.

 

Basically, if circumstances arise where the promisor would benefit a lot from not following through on the contract, in fact, so much so that theyíd be happier not doing the contract but paying the other person enough to make them as well-off as if the contract had been performed, then whaddya know! Itís Pareto optimal not to perform the contract!If this is true, we ought not keep it from happening.

 

Questions

 

1.     Johnson mustnít sell to Liberty Mills at $1.16 on July 29th, because he would be taking away the good deal that he promised to Acme.Itís a good deal in this case because Acme would be getting the wheat at 13 cents under that dayís market price.If Johnson sold to Liberty Mills, Johnson would be found liable for 13 cents times the number of bushels.If I make a contract that says Iím going to sell you, at todayís market price, my Barry Bonds rookie card one week after Barry Bonds is elected to the Hall of Fame (or, letís say, one week after his death), Iíd be hurting you by breaking that contract and selling the card to someone else, assuming that the card will be worth more at Bondsís death than right now.If I promise to sell you, at todayís market price, my Franklin Mint collectible Kelly Clarkson American Idol commemorative plate ten years from now, Iím not going to be liable for breach of contract assuming this artifact will be worthless in ten years.

2.     Letís consider each of the parties in turn.

a.      It appears the breach was good for Johnson because he got more money sooner than if he had sold the wheat to Acme later.However, itís an important fact of the case that Johnson didnít know that the price of wheat was going to drop, and in fact he thought it was going to rise.

b.     The breach was good for Acme because it would have been locked into a bad deal if the performance of the contract had taken place.

c.     The breach was neutral for Liberty, because presumably they could have purchased similar wheat at the market price of July 13th from someone else.

3.     The standard for determination of ďopportunismĒ is whether the promisor is attempting to get the ďbenefit of the bargainĒ without incurring the cost.Johnsonís sale to Liberty does not seem to be opportunistic because he gained the benefit of the bargain (the money) and more or less gave up the cost (the wheat).The only variables were the contract and market prices and his expectations of their rise and fall.

 

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