Michael Knobler, ‘A Dual Approach to Contract Remedies’

Are contracts options to perform or pay damages, or are they obligations to perform? This paper adopts a “both-and” answer to what commentators have spent decades debating as an “either-or” question. The correct theory of contract depends on the parties; applying the wrong theory harms the parties’ autonomy and economic interests. Recent empirical evidence shows that most people see contracts as obligations to perform. If the law applies the option theory to those parties’ contracts, it does not enforce the agreement to which they consented. The gap between the contract as understood at formation and the contract as enforced after breach not only limits the parties’ autonomy but also leads the parties to enter contracts that are not Pareto optimal. Adjusting the remedies can solve these deficiencies. Damages can be raised so as to be fully compensatory, covering not just the value of the unprovided contracted-for good or service but also the non-economic harm caused by the failure to perform. Forcing the breaching party to internalize the full costs of breach, as experienced by the non-breaching party, creates the correct incentives before and after formation. The computation of the remedy, and the theory underlying it, differ for contracts among merchants. Merchants typically contract for value, not performance, so the option theory better serves their autonomy and economic interests. Contracts among merchants already fall under different rules of formation and interpretation than other contracts; a dual approach to contract remedies provides a logical next step.

Knobler, Michael D., A Dual Approach to Contract Remedies (November 16, 2011). Yale Law & Policy Review, Forthcoming.

First posted 2011-12-10 08:52:03

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