Engler and Heyman, ‘The Missing Elements of Contract Damages’

In this article, we juxtapose two classic contract doctrines to expose a subtle, but dramatic, anomaly of damage law. The Jack Dempsey case heads one leading line of contract law. After Dempsey breached a contract to pursue another championship boxing match, the spurned promoter sued for his costs. The court limited the promoter’s recovery to costs incurred after the contract signing, thereby wiping out his pre-contract expenses. Separately, a promissory estoppel line of cases, headed by Red Owl, would allow promoters who never finalize a contract to recover their costs if reasonably incurred in reliance on a pre-contractual promise. While Dempsey and Red Owl have been independently analyzed at length, our linkage of them uncovers the striking possibility that an aggrieved party on a finalized contract might receive less than if he had failed to successfully negotiate the deal!

Beyond this first anomaly, our critical analysis of a Judge Posner opinion reveals a second unrecognized inconsistency. We show how an aggrieved party recovers pre-contract and fixed overhead costs on final contracts that provide in advance a fixed return, but not on those with variable or less certain returns. In other words, the aggrieved party of a contract without a fixed return, like the spurned Dempsey promoter, is treated worse than an aggrieved party of a set-return contract. Yet Judge Posner curiously defends the current law as providing – symmetrical results.

In response to the undercompensation problem, some scholars have proposed that the breaching party should be required to give all his gains from the breach to the aggrieved party. We utilize the movie Rocky to demonstrate why this disgorgement remedy goes too far. Suppose Dempsey had to breach a small fight contract to accept Gene Tunney’s unique offer to fight for the heavyweight championship. Why deprive Dempsey of all his hard-fought revenue regardless of the promoter’s harm?

Finally, we propose an innovative solution in lieu of disgorgement for contracts without a set return: a presumptive recovery of all costs plus a reasonable risky rate of return for the investment period. Our proposal essentially extends the well-established presumption that the aggrieved party can recover his post-contract costs when he does not seek recovery of his lost revenue. Our default presumption could be rebutted in litigation upon a proper showing of additional (or lesser) value by the aggrieved party (or the breaching party).

Engler, Mitchell L. and Heyman, Susan Schwab, The Missing Elements of Contract Damages (September 21, 2011). Temple Law Review, Forthcoming; Roger Williams Univ. Legal Studies Paper No. 113.

First posted 2011-09-23 06:40:34

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