Remedies OutlineFall 2011

Big Questions1. How do contracts and torts differ with respect to the different doctrines?2. How parties interact with the law (default rules, liquidated damages, etc.)?3. The extent to which parties avoid uncertainty (liquidated damages, opt for

different damages? 4. How do the different theories work? What are the different arguments and

responses (anti-insurance, offsetting risk, benefit restitution…)?

Class List1. Restoring Plaintiff to his rightful Position2. Value as the Measure of Rightful Position3. Reliance and Expectancy as Measures of Rightful Position4. Victim’s Incentives5. Consequential Damages6. Liquidated Damages7. Partial Compensation8. Avoidable Consequences, Offsetting Benefits and Collateral Sources9. Scope of Liability10. Specific Performance11. Restitution

Introduction - Rightful Position1. Remedies tell us about the substantive right of the parties Vincent - an exception b/c there is no way to know if it is a property or liability rule just by the remedy

a. Property Rule : i. The owner has the entitlement and is the only one who must agree to

waive the right. b. Liability Rule :

i. The owner has the entitlement but anyone has the right to take the property. However, they must pay. TAKE AND PAY.

Class Notes: Hatahley

US v. Hatahley10th Circuit 1958 (UTAH)pp.11

Facts: Livestock owned by eight families of Native Americans were grazing on government land without a permit. The government gathered the livestock and sold them at a nominal price, without notice to the Native American families.

Three items of damages:1) Market Value/Replacement Costs

Ritter says $395 - The trade price for sheep or goats Appeals says market value or replacement at the time of the

taking + the loss of use between time of taking and reasonable recovery

o What if during the reasonable time to mitigate the price of the horses increased?

You should get the higher price The market value should not be just the Native

American market, but the market outside as well + the amount that it costs to train the horse

o In the end, it really makes little difference. If they have to train a horse it will cost about the same. That is why the market set the price at $395.

If they buy a trained horse outside the NA market it could cost less, but the NA don’t get exactly what they want.

o What if the market for horses has gone up from the time of the taking to the time when reasonable mitigation takes place?

2) Diminution of the herds Ritter looked at the diminution of the herd from the roundup

to the first hearing, and then halved it.

The appeals wanted him to look at the each case specifically. 3) Mental Pain and Suffering

Ritter gave a lump sum to the entire tribe to be distributed equally (assumed that everyone suffered equally

Appeals said this was arbitraryTort Law

Corrective Justiceo The rest of the world is irrelevant. The only factor that matters is the

relation between the two parties, not the future actions of others Efficiency

o There should be incentives not to commit torts. Holding - The court looked at how much the NA could have gotten in a trade within themselves and not how much they could have replaced the animals. Also, the damages do not last forever. It is only until the NA’s could have replaced the livestock.

It is not so much about idiosyncratic preferences. It is more about getting exactly what they want.

Also the court generalized too much. They gave the same amount for each head in the livestock, regardless of size, gender or health. The court also gave the same amount for pain and suffering despite the fact that each suffered differently.

It could be that the P are more willing to pay more in the local market because they know exactly what they will get. It is not so much about idiosyncratic preferences. It is more about making sure you get exactly what you want.

Goal of Remedies1. The goal of contracts and torts remedies is to restore the P to his Rightful

Positiona. Torts and Contracts often reach different remedies.

Example - D sells book to P for $10 but you describe it as if it were worth $15. Torts - Put you in the position you were in had you not been wronged; He would have had a $10 book for $10. The remedy is $0. Contracts - Put you in the position had the contract been performed; He would have to pay $5 for the difference between the recommended book and the actual book.

i. Torts : Restore the plaintiff to the position that he would have been in had he never been wronged

1. Two theories:Hatahley - Government killed horses of Native Americans. Court attempts to restore the plaintiff as best as possible to his rightful position; No more no less. This is consistent with both theories.

a. Corrective Justicei. The rest of the world is irrelevant. The only factor

that matters is the relation between the two parties, not the future actions of others. Hatahley - The court looks into the damages that the government officials caused to the NA and awards no more, no less.

b. Efficiencyi. Provide incentives for the parties to avoid social

costsHatahley - The court looks into the damages that the government officials caused to the NA and awards no more, no less. There is no over or under deterrence.

ii. Contracts: 1. Restore the plaintiff to the position that he would have been in

had the defendant not breachediii. Restitution/Unjust Enrichment (focus on the defendant)

1. Bring the D to his rightful position; take away D’s benefitEdwards v. Lee - D finds cave under his land. The cave also went under P’s land. D took people down for a profit. Tort he would get nothing. There was also no contract. Court gave restitution, taking away the benefit D got from the cave

Rightful Position - Torts and Contracts1.Diminution in Market Value v. Cost of Repair Peevyhouse

a) Two questionsi. Is there idiosyncratic value?

Sept 11 - Towers fell and P wants cost to rebuild. Court finds not specialty property. No idiosyncratic value. Therefore, only market value.Trinity Church - Construction damages church. Damage doesn’t affect use of the church. Court finds specialty property; idiosyncratic value and awards cost of repair. R2K § 348 - award cost of completion if not disproportional to the value to him

ii. Was that value foreseeable to the other party? b) Five Considerations

i. Will the victim use the money to rebuild? a) If so, it is evidence that there is idiosyncratic value.

ii. Was the difference between the market value and cost of repair anticipated by the parties or caused by subsequent circumstances?

a) If they knew and still entered into the contract then it seems that there was idiosyncratic value and they took it into account.

b) If the value was due to subsequent events then it is probably not idiosyncratic value.

iii. Was the idiosyncratic value negotiated into the contract?a) If it was taken into account then it was likely foreseen

iv. Is the victim a individual or a corporation?a) If individual more likely to have IV then a corporation

Sept 11 - Towers fell and P wants cost to rebuild. The owner was a wealth-maximizing corporation. No idiosyncratic value. Therefore, only market value.

v. Is the term essential or incidental?a) The more important of a term the more likely it has idiosyncratic

value 2.Contract with 3rd Party

a) The court should not take it into account because it would create bad incentives to up damages due to contracts.Sept 11 - Towers fell and P wants cost to rebuild. P claims they have a contract to rebuild. The court finds this is not applicable too remote and not applicable to the damages at handExample - If there is a car dealer and the car costs 100 but the dealer is selling it for 120. The car can be replaced easily for the same price and there is no idiosyncratic value. If the court allows the tortfesor to be bound by the a contract between the victim and the 3rd party then the P and the 3rd party could place the price at $200 knowing that if it is damaged they can get a windfall.

Class Notes: Sept 11, Peevyhouse, Trinity Church

In Re September 11th LitigationSDNY 2008pp.18

Facts: The owner of the towers sued the several people for the planes hitting the towers. There damages are discussed below.

Holding: The “lesser of the two” rule applies. Also, the obligation to rebuild is not a consequence of the tort committed. The owner has an obligation to rebuild. The court finds that this is too remote. They rule that the duty of the tortfesor to compensate should not depend on contracts between the P and a 3rd party.

If there is a car dealer and the car costs 100 but the dealer is selling it for 120. The car can be replaced easily for the same price and there is no idiosyncratic value.

o If the court allows the tortfesor to be bound by the a contract between the victim and the 3rd party then the P and the 3rd party could place the price at $200 knowing that if it is damaged they can get a windfall.

Also, anticipated rental is part of the price that was paid for the towers and is not included either. The assumption is that the profit will be zero; the towers will not make a profit.

This also assumes that they could just go and buy a new building and start making a profit again.

Lesser of the Two - P may recover the lesser of diminution in value or it’s replacement cost

In this case it is either the cost of the market rate for the towers or the cost to rebuild them.

Specialty Property - Ones that are not usually on the market. The WTT were on the market recently and therefore do not apply.

Overcompensation/Under-compensation Under-compensation - Under efficiency theory there would be under-

deterrence, therefore there would still be an incentive for the wrongdoers to perform the action. There is also not the incentive to take proper precautions.

o Good example Harm = 100 Damages = 90 Precaution = 95

Not worth the precaution and incentivizes the harm.o Example of when under-compensation is efficient?

It is sometimes needed. Less then full compensation will increase the incentives of the victim to take precaution

Harm = 100 Damages = 50 Precaution = 5

This would further incentivize the precuation Overcompensation - There is over-deterrence.

o When there is under-enforcement, we need overcompensation

This evens out the under-enforcement

We generally want to compensate proportaionally

Peevyhouse v. Garland CoalSupreme Court of Oklahoma 1962PDF

Facts: The plaintiff leased their land to a coal mining company. They performed every part of the contract except for the repair work on the land. It would cost $29,000 to repair the land, but it would only add $300 in value. The value of the farm as a whole was $3000.

Is this really economic waste?o No, because the person the V doesn’t have to spend the money to

repair the land. They could do something else with it. Why is there such a gap?

o A shortage in manpower and building materials. Also, the demand for property is very low.

Dissent - The buyer took the price into account. It was priced into the contract and it effected the consideration. It does not make sense now to not hold the buyer to the contract.

It is a windfall for the mining company, instead of the land owner. Why is that better then the

Holding: The court finds that normally the coal mining company should pay for the restoration work. On this occasion, however, the cost of repair is so significant and the improvement so insignificant that there is no reason to force it.

Hypo - The owner of some property wants an ugly statute on his land, even though it would diminish the value of the land. The sculptor stops midway through and argues that he avoided a harm, which upped the market price. Should he have to pay?

The idiosyncratic preference is clear. They want the diminution for their own reason.

Should the court treat contract cases and torts cases the same?

The default rule essentially is $300, not $29000. Now in future cases they will have a liquidated damages clause. This may succeed or it may not, because the court could say that it is more of a penalty, not damages.

Given this, the more effective default rule would be $29,000 because there is no way that a court would strike down a $300 liquidated damages.

Restatement §348.2 - if the breach results in the ineffective or unfinished construction and the loss in value is not proven with sufficient certainty, he may recover the damages based on:

The diminution in the market price caused by the breach The reasonable cost of completing performance or remedying the offense if it

is not clearly disproportionate to the probable loss in value to him (seems to take into account idiosyncratic value).

If the court faces replacement or cost of repairs there are two questions:1. Is there idiosyncratic value there?

a. If there is none then it is clearly the diminution in value. 2. Is that value foreseeable by the other party?

Five Considerations to answer the two questions above:1. Will the victim use the money to rebuild?

a. If so, it is evidence that there is idiosyncratic value.2. Was the difference between the two parties anticipated by the parties or

caused by subsequent circumstances?a. If they knew and still entered into the contract then it seems that

there was idiosyncratic value and they took it into account.b. If the value was due to subsequent events then it is probably not IV.

3. Was the idiosyncratic value negotiated into the contract?a. If it was taken into account then it was likely foreseen

4. Is the victim a individual or a corporation a. If individual then more likely to have IV then a corporation; and vice

versa.5. Is the term essential or incidental?

a. The more important of a term the more likely it has IV

There are some instances when contracts with third parties are taken into account. Why sometimes and not others?

Replacement or the market value??

Trinity Church v. John Hancock Mutual Life InsuranceMass 1987 pp.28

Facts: During the construction of the John Hancock tower the foundation of the Trinity Church shifted, which caused the stone to crack and the church to face irreparable harm.

Before it was 26% but after it was 65%, a difference of 39%, which should be multiplied by the cost of reconstruction. Therefore, they awarded 39% of the reconstruction.

Something happened but the church can be used to the same extent as before.

o If the harm were zero, then econ would say that they should invest zero in precaution. There was a harm.

Holding: The church counts as a specialty property because it is not something that is usually auctioned off, therefore diminution in property is not the appropriate measure.

Cost of restoration to where the building was before the accident They don’t need to calculate the present value because they don’t necessarily

need to repair the damage. They can just pocket the cash.1. There is harm. It may not be able to be detected for a long time but when it

happens someone has to pay. They may have to reconstruct. The wrongdoer should pay their portion of the harm. IF they didn’t pay it would move into unrecoverable depreciation.

a. Dissent argues that if someone injures the church in the future they will be responsible for the full cost of the harm (egg shell plaintiff). They must take the plaintiff as they find him.

i. It could be that there is not a wrongdoer (natural causes). ii. Also, if someone does knock down the church, they surely not

have to pay for a new church. He didn’t knock down a full church but rather a half-steady one.

Dissent: There has been no loss. The church is cracked but it has not altered how the church is used or how it will be used. If it is not repaired it will last just as long. Therefore, there is no loss. Practically, nothing happened. There is not a risk of under-compensation because if someone else causes the falling of the church they will be responsible for the full price.

2. Egg Shell Skull - The future tortfesor deals with the church as they find it. If it is 39% wronged, the future tortfesor has to take that into consideration.

a. Should the last wrongdoer have to pay everything? Even if it’s 99% and 1%?

i. NO. If the house is 99% unsteady then the house is not worth as much as it is when it is 100%. Therefore, the fault should be portioned off. This is not an egg shell because “the plaintiff as it is found” is not worth the cost of reconstruction.

ii. The Egg shell does not apply to property, generally. 1. It causes over deterence if the minority view is taken.

3. The minority assumes that there will be a future wrongdoer. What if there is a hurricane or an earthquake? It could just deteriorate.

b. If the building is 39% less table then the insurance on the building would be larger. Who pays for that?

4. Justice among wrongdoers -

a. There are three wrongdoers and each is the but-for cause of the collapse. They are each equally responsible.

i. The P can sue any one of them for the full amount. 1. If one of them gets picked then he can enjoin the others

and sue them for contribution. ii. We don’t want the victim to have the power to determine who

shoulders all the blame. If so, he would negotiate with the others so that he would not sue them. Also, this would force the payment on the one who can pay.

b. According to the minority, there should not be any justice among the wrongdoers. Why give any preference to the last wrongdoers?

i. This applies the most to property. The Egg Shell applies, not to property, but to personal injury.

Difference Contracts/Remedies

“There is not complete uniformity in tort and contract remedies, but the differences work towards a very similar goal—ensuring efficient incentives for both parties. A basic point of difference is that transaction costs are often prohibitively high in the tort context to allow for private bargaining ex ante. Standard examples are auto drivers, because it is very hard to identify the victims ex ante, or a polluting factory, because collective action problems (holdouts, for example) might prevent bargaining with the numerous affected landowners. Because of these high transaction costs, tort law focuses on liability rules that compensate for harms ex post rather than encouraging market solutions that bypass the courts.

As an example of this difference, consider the foreseeability doctrine noted in the question. In contracts, the Hadley rule is designed to encourage ex ante revelation of information. This limits expectancy and consequential damages in order to avoid problems of over-deterrence, uncertainty, and adverse selection. The promisee in a case like Meinrath cannot shift all of his risk to the promisor without paying for it ex ante. In addition, in contracts, transaction costs are presumed to be low (at least between the parties, so ignoring any third party externalities), so the law encourages ex ante bargaining by refusing to open the litigation to evidence about Meinrath’s far-flung business empire. Courts want simple, easy to apply damages in contract, even at risk of under-compensation, in order to encourage specificity ex ante. Also, courts look to foreseeability at the time of the contract, not at the time of the harm (breach). This is to avoid having parties locked into inefficient contracts. There is no analogous timing in torts since there is no ex ante bargain before the actual harm occurs.

In tort, the foreseeability rule works much differently. The eggshell plaintiff rule means that even unusually high harm must be compensated. This is not over-deterrence, however, since unusually low harm is reduced accordingly, and in the aggregate the expected harms will still lead to efficient levels of precaution. Foreseeability enters tort through nebulous doctrines like proximate cause, in which courts will limit the scope of liability to avoid speculative or uncertain harms (see Pruitt).

The physical impact requirement of tort is obviously a drastic departure from contract law, in which the harms generally are economic. This difference makes sense though, taking into account that it might be more efficient for the various potential victims of an economic tort (like the restauranteurs in Pruitt) to insure against risks like disruption of business themselves rather than forcing the oil company to insure against all of this risk. This might be seen as a way of minimizing information costs, since it would be hard for the oil company to assess all of the social costs of its actions.

Although these examples show that the doctrines of tort and contract remedies are not uniform, they do have a very similar goal, which is to ensure efficient incentives by both parties at the lowest costs. In torts, this goal is addressed fairly straightforwardly through negligence rules (or strict liability plus contributory negligence). The tortfeasor will take efficient precautions to insulate himself from liability, while the potential victim will also

take efficient precautions, because he bears the costs of the residual harms—the harms caused by the non-negligent behavior of the tortfeasor. Of course, the tort rules may not always be applied efficiently by courts (consider the self-risk and offsetting risk principles), but the goal is still fairly clear. Limitations on liability through tort rules like proximate cause, negligence, and the physical impact requirement all aim at efficient incentives under the assumption that private bargaining ex ante is too costly.

In contracts, it seems more difficult to have a legal rule that leads to efficient incentives for both parties. This initially seems mysterious, given the low transaction costs involved, but ex post damages rules are crude in the abstract. At the extreme, a no damage rule leads to inefficiently high levels of breach (though efficient reliance by the promisee). Both from the corrective justice and efficiency point of view, this is problematic though, since the rule will discourage socially beneficial contracts. A reliance damage only rule also leads to inefficient levels of breach but also overreliance by the promisee. The usual damage rule of expectation leads to efficient levels of breach but over-reliance by the promisee. Full compensation for the promisee allows him to ignore the positive probability of breach, and therefore take inefficiently low levels of precaution. Liquidated damages provisions, if priced correctly at the amount of harm given efficient behavior on the part of the promisor also have the effect, as described in the Epstein article.

Therefore, limits on consequential damages, the foreseeability doctrine, and liquidated damages provisions all aim to ensure efficient incentives for the promisee by limiting compensation. These also have an information-forcing component for ex ante bargaining between the parties. More interesting mechanisms like the proposed anti insurance contracts also have this effect by magnifying the risk to both parties and therefore creating double responsibility. But the various problems of enforcement/monitoring and potential collusion between the parties are perhaps why we do not currently have an anti-insurance market.

Theories

Expectancy1. Put the D in the position that he would have been in had the contract been

performed2. Plaintiff’s loss (Below) + Other losses - Losses avoided = ED

a. Plaintiff’s Loss = (What was Promised) - (What was delivered) Chatlos1. Diminution in Market Value v. Cost of Repair (see Rightful Position)

Peevyhouse - Big Discrepancy b. Other Considerations

i. Lost Volume Seller Considerations1. Supply v. Demand

a. If the supply does not exceed demand then 2. Fungible v. Unique Good

a. If the good is unique enough then the 3rd party may have just wanted that good. Neri - The 3rd party may not have wanted the boat if he had to wait two weeks. The boat was available b/c D reneged.

3. Trickle down… someone might not have boughta. Maybe 3rd party would have bought, but what about

buyers 4, 5 or 6. Would they also have bought?4. Small Market

a. The buyers know about the other buyers’ needs, so they could have just sold their item to another buyer. This ultimately would not have affected the seller.Example - Supplier has100 planes. Delta reneges on one plane and supplier only sells 99. If Delta would not have reneged then they could have just sold to United, who bought the other 99, which would mean they would only need 98. Therefore, there is no overall loss.

ii. Extra Amenities with Price 1. In Chatlos, the 207K computer probably also contained lots of

software that they didn’t expect. This should be subtracted. Chatlos - P bought a computer from D for 46K that, if it worked as it was supposed to, was worth 207K. The computer they received was worth 6K. The court awarded the difference between what was deliver and what was promised: 201K

3. Arguments for Protecting Expectations:a. Substitute for Reliance

Fuller and Purdue - Claim that expectation is just protecting negative reliance (see reliance)b. Moral Implications

i. A culture should respect promises and expectation damages does thatii. Counter: A legal system that enforces reliance still respects promises.

The respect of promises does not necessarily necessitate expectancy damages

c. Predictability

i. It is important to people to rely in the present on future events. If he knew that he wasn’t protected in the future he wouldn’t take the most efficient actions.

d. Efficient Breach i. We want to encourage people to make the most efficient decisions. If

the breachers don’t pay expectation damages they will not internalize the costs of their breach. They will not be incentivized to make efficient decisions.

1. If the promisor can breach then the contract it would benefit both parties. It would benefit the promisor and he would factor that into the price of the other contracts; it would be lower.Example #1 - Seller makes machine for buyer 1 for $80. Expectation of buyer 1 is $100. Buyer 2 arrives and wants the machine. His expectation is $110. It is efficient for seller to breach the contract and sell to buyer 2. This is the efficient decision. Seller gains $10. Example #2 - Same as before but buyer 2’s expectation is $90. We don’t want the seller to breach the contract. Under reliance, the seller would breach the contract and sell the machine to the buyer who least values it. Under expectation damages, he would make the more efficient decision and not breach the contract.

Class Notes: Neri & ChatlosNeri v. Retail MarineNY 1972pp.35

Facts: The defendant was going to purchase a boat for $12,578 from the plaintiff. D paid $4290 as a deposit. The defendant reneged after the plaintiff order the boat from the supplier. The plaintiff then sold the boat for the same price. The plaintiff sued for the list profit plus the incidental damages of storing the boat before it could be resold.

Holding: The court found that the plaintiff was entiteld to the lost profits from the deal because they had an unlimited supply. Had the sale gone through they would have had two sales instead of just one. The incidental damages should also be included. The attorney’s fees are not included. Lost volume seller - It assumes that there is either an unlimited supply or that supply exceeds demand. “I could have sold two cars but now I only sold one.”

If there is a limited supply (car dealer who gets 10 cars a month) and the dealers sells them all regardless, then there would be no damages.

Chink in the Armor of Lost Volume Seller

What if the boat buyer who facilitated mitigation would not have bought the boat had there been a wait. Because of the lost sale a boat was ready on the spot. This could have helped in the sale…

The same could be said for a rental. Maybe the renter to who facilitates mitigation wanted that exact type of room. If that is the case, then it is not so much a lost volume seller.

With unique goods, the new buyer probably wanted that specific good. Therefore, there is mitigation. LOST SELLER DOES NOT APPLY!!

o You could argue, “this is a unique good but it is not so unique that the buyer would not have bought something else.”

What if B2 says “I would have bought Car 2” Even so, it trickles down so that if B2 would have

bought Car2, it is still unclear whether B3 would have bought Car 3. It goes on and on and on. It still is complicated.

What is considered a unique good then? It seems like most things are unique…o Argument on the recording… We bought a plane and we could have

sold it to United, who bought the other 99. If we didn’t repudiate you would United would have only bought 98 and us 1.

Three considerations for Lost Volume Seller1. Fungible v. unique good2. Demand v. supply3. Small market (airplanes)

a. The buyers know about the other buyers’ needs, so they could have just sold their plane to another buyer. This ultimately would not have affected the seller.

Amount of the supply??? Uniqueness of product??? Small Market???

o When there is a smaller market, such as that for a plane, the two buyers could interact and destroy the volume seller contract.

The seller does not have the contract resale damages or contract market damages because they sold the boat for the same price.

Because the supply is unlimited, the resale is not important. They could have just sold two instead of one.

2-718.3 – if there are damages, then they can take it from the deposit. If the

Damages

Expectancy Interest - The value of the P’s entitlement under the contract. Put the P in the same place as he would have been in had the contract been

performed.Reliance Interest - Everything P gave up in reliance of the contract.

You only get what you put in…o There are times when the P would want reliance instead of

expectation When it is too speculative to prove expectation damages

Restitution - Taking the benefit that the D received. Focus is on the breaching party

Example - P and D contract; $100 for a product that P intend to turn around and sell for a $20 profit. If D breaches:

Expectancy - $120 if already paid and $20 if not paid. Reliance - $100 Restitution - $100

Example - P and D contract for a wall; $100 but it really costs $250 for the wall. P spends 200 making the wall and D repudiates. P sues.

Expectation - $50 - you would have lost $150 so $50 would put you in the same position

Reliance - $50 - Cannot exceed expectation Restitution -

Expectation Damages Put the P in the same place as they would have been in had the contract been

performed.Reliance

Essential Reliance o Everything you do to perform your part of the contact

Incidental Reliance o Things other then the essential reliance (plane tickets, etc)

P entered into a contract with 3rd party and that is now breached because of the initial breach.

Negative Reliance (Lost Opportunity)o By entering into a contract with D he gave up other opportunities to

contract with someone else. Lost opportunity and expectation is the same. In a perfect

market you would have contracted with someone else and you would have received exactly what you contracted for.

In some cases it is easier to prove lost opportunity then expectation. Why has there not been any cases??? (Paper) (William and Purdue)

Restitution The focus is not on what the plaintiff lost but rather what the D gained.

o The new restatement of restitution says that it cannot exceed expectations

o Courts, however, are divided about it. Some allow restitution to exceed expectations and others don’t

Why does the law protect Expectation Damages?1. It is just a substitute for Reliance damages2. Moral implications

Arguments for and Against Protecting Expectation Damages A legal system that enforces reliance still respects promises. The respect of

promises does not necessarily necessitate expectancy damages. They need predictability. It is important to people to rely in the present on

future events. If he knew that he wasn’t protected in the future he wouldn’t take the most efficient actions.

The Efficient Brach Theory - We want to encourage people to make the most efficient decisions. If the breachers don’t pay expectation damages they will not internalize the costs of their breach. They will not be incentivized to make efficient decisions.

o If the promisor can breach then the contract it would benefit both parties. It would benefit the promisor and he would factor that into the price of the other contracts; it would be lower (listen to recording).

o Example #1 (Min. 54)- Seller makes machine for buyer 1 for $80. Expectation of buyer 1 is $100. Buyer 2 arrives and wants the machine. His expectation is $110.

It is efficient for seller to breach the contract and sell to buyer 2. This is the efficient decision. Seller gains $10.

o Example #2 - Same as before but buyer 2’s expectation is $90. We don’t want the seller to breach the contract. Under reliacne,

the seller would breach the contract and well the machine to the buyer who least values it. Under expectation damages, he would make the more efficient decision and not breach the contract.

Both parties want, from an efficiency point of view, want an efficient breach rule. It lowers the price of the product…

The promisor would obviously want to be able to breach efficiently. The promisee also wants efficient breach because it will be priced into the

contract and the promisee will get a lower price.

o The party is assumed to be a self-interested wealth maximizer.

Chatlos v. National Cash Register3rd Cir. 1982pp.45

Facts: The P ordered a computer with certain specifications for $46,000. They had a warranty on the product but the product did not perform. They then sued. The product that they received was worth $6,000. Should they get the difference between $6K and $46K or between $6K and $207K?

Contract Reliance - $40K Contract Expectation - $201K Tort Damages - $40K (THE SAME AS RELIANCE.)

o The same place they would have been in had the tort never taken place.

Holding: The court found that the cost a system that could do the same thing would be over $200,000. The court awards the difference between the product as delivered and the product if it were as warranted.

Dissent: The dissent argues that the court should award how much they would have paid for the product.

The buyer is sophisticated. It could be that he knew that he could not get that computer at that price and took advantage of the seller.

o The seller is also sophisticated. He sells the machine.

The find some figure in between $40K and $200K the judge could: Give reliance plus consequential damages For a $207K you probably are getting a lot of additional functions that are

not in the contract. You could subtract the value of the additional functions that are not included in the contract.

o The buyer could argue that the additional functions mean nothing to him and that they don’t have value. Therefore, you don’t need to take any money off the top.

Smith v. BollesUS Supreme Court 1889pp.50

Facts: The P bought stock at $1.50 on the assurance that it was good stock. The assurance came from possibly fraudulent information given by D. The lower court awarded P the value of the stock had the fraudulent information been true.

Holding: The lower court erred. The suit was not for breach of contract but rather for fraud. The D need only compensate the D for the price that he paid for the stock in the first place; to place him in the position had none of this happened.

Anti-Insurance1. Problem : Dilemma of Compensation

a. Compensate the promisee and he does not have incentives to avoid the harm. b. Don’t compensate & promisor does not have the incentives to not breach.c. If you split the price each will not have the sufficient incentives

2. Results : Victim does not have the incentives to: a. Help avoid breach

Example - There is a contract and the damages are 100. The promisee has information or can help the promisor complete the contract by contributing 5. The help would decrease the chance of breach by 20%, worth $20. There is no incentive for him to help, even though there will be a net gain.

b. Over-reliance on the promise i. Not matter if the D will breach, the P has an incentive to rack up and be

ready in case there is no breach.Example - You want to rent the apartment as soon as the house is done. You get a renter for the day the contract is to be performed. If there is a breach you get the price that you would have received had the rent been coming in. If you wait and don’t get a renter then if there is a breach you lose money. Therefore, there is an incentive to rack-up costs

3. Flawed Solutions a. Incorporate explicit terms in the contract that limit victim’s behaviors

i. Could be non-verifiable (to a 3rd party) or non-observable (other party)b. Put caps on damages

i. This could not place the proper damages on the promisor.c. Foreseeability

i. Only applied in extreme cases - not much of an effectd. Mitigation of Damages

i. This does not apply because mitigation is only after the breach. Over-reliance and lack of cooperation is before the breach.

e. Comparative Fault i. This only exists in tort law. In other countries this also exists.

ii. If you cannot verify the behavior of the victim then this would not work either…

4. Solution : Anti-Insurancea. The promisee and promisor agree to sell the right to the breach money to a

third party. The third party agrees to pay for that right up front.

i. The victim then has an incentive to help the promisor not breach and to avoid over-reliance because he will not get compensation

ii. The promisor still has the incentives not breach because he will have to pay the full damages to the 3rd party.

b. Potential Problemsi. Pricing Costs: The anti-insurer has to figure out how much to pay for

liability rights. Difficult institutional and actuarial problem. Costs typically fall with volume, so viable anti-insurance may require a large scale

ii. Adverse Selection: Adverse selection is a problem among insurance markets. The insurer must predict the probability of a claim to set the premium. When insureds know more about the probability of a claim than the insurers, many people with a high probability of a claim will seek insurance, which causes premiums to rise. Some people with a low probability will drop insurance, causing prices to rise further.

1. This is the same in anti-insurance. The value of the promisee’s liability right will vary from one another. One party often knows less than the other about the value. Owner will low value will sell, whereas above average will withhold.

iii. Victim’s Reporting Problems: There is no incentive from disclosing failure to Anti-insurer. To solve this, however, the anti-insurer may pay the promisee a fixed fee or a percentage of damages for making a report. Correspond to reverse deductibles.

iv. Collusion and fraud: Three scenarios1. Between Promisor and Promisee: The promisor has an

incentive to breach the K and to pay promisee not to report the harm

2. Between Promisee and Anti-Insurer: may pay the promisee to reduce precautions, thus increasing the value of the liability right.

3. Between the Promisor and Anti-Insurer: might secretly pay the anti-insurer for a promise not to collect damages

a. Buyer can reduce collusion between seller and anti-insurer by requesting that the anti-insurer be a consumer org., certified by a consumer org., or large corporation with a valuable reputation

Class Notes:

Reliance1. Place Plaintiff in the same position as he would have been in had the contract

never taken place.2. Sunk cost - Any Loss Avoided (losing contracts)

a. Different Forms (Fuller and Purdue)i. Essential Reliance

1. Everything you do to perform your part of the contactExample - D contracts with P to build a fence. D starts building but then P reneges. D recovers the expenses that he used to build the fence

ii. Incidental Reliance 1. Things other then the essential reliance (plane tickets, etc)

Example - P entered into a contract with 3rd party and that is now breached because of the initial breach.Example - P bought plane tickets to get to the event

iii. Negative Reliance (Lost Opportunity)1. By entering into a contract with D he gave up other

opportunities to contract with someone else.a. Lost opportunity and expectation is the same. In a perfect

market you would have contracted with someone else and you would have received exactly what you contracted

i. In some cases it is easier to prove lost opportunity then expectation.

3. Why chose Reliancea. If the Expectation Damages are hard to prove

Class Notes:

Specific Performance1. Why does a court opt for specific performance?

a. When a another remedy is inadequateCampbell Soup - They contracted for a special type of carrot. The grower breached and sold the good to someone else. The court held that the carrot was unique enough that it warranted specific performance.

i. When the good is economically unique, not necessarily physically uniqueVan Wagner - P leased a sign over the interstate. D aquired the building and breached the contract. P wanted specific performance. The court found that, although the sign location was “unique,” there were economic equivalents.Campbell Soup - They contracted for a special type of carrot. The grower breached and sold the good to someone else. The court held that the carrot was unique enough that it warranted specific performance.

b. Kornman’s Explanation i. It is not about inadequacy. Everything is compensatable. It is about a

lack of information about how to compensate correctly. 1. There is not enough information and there is a large risk of over

or under compensation a. The information may also be unreliableb. There will be additional costs searching for a

replacement. Those costs are not compensated. c. Property v. Liability Rule

i. When transaction costs are low, property rule is better because the parties can bargain. If the transaction costs are high then a liability rule is needed.

1. Specific Performance = Property Ruleii. Bargaining

1. One could argue that if you gave specific performance the parties could just bargain around the rule. That would essentially price the value of the billboard.

a. This could create an inefficient bi-lateral monopoly. b. There are high transaction costs so a liability rule is

needed.2. Why would some want specific performance and not just damages?

a. Some of the losses would not be compensated because a lot of the damages would be hard to prove.

i. There would be reputational losses, which are difficult to prove and calculate

b. Circumvent liquidated damages clausesi. Liquidated damages usually serve as floor and ceiling.

ii. Campbell didn’t want the liquidated damages ($50) because they could get more ($60) from getting the carrots.

c. Supply chain - Campbell wants to disincentivize breaches in their supply chain. This would scare the other suppliers.

d. Prevent Competition - Make sure that those carrots would not go to a competitor.

e. Avoid Mitigation - They would not have to seek out someone else to provide them with the carrots.

i. This distracts the court from the mitigation of the party.

Class Notes: Campbell Soup, Van WagnerCampbell Soup v. Wentz3rd Cir. 1948pp.391

Facts: Campbell bought carrots from D at $30 a ton. D sold all the carrots harvested from a 15 acre plot. The price of carrots rose and D started selling the carrots to others for $90 per ton. Campbell sued for specific performance because the carrots were nearly impossible to find.

Holding: The court finds that there can be specific performance is the remedy is inadequate. The court finds that the carrots are a unique good and that, because of the need to stay consistent with their brand and the scarecity of the carrots that specific performance is appropriate.

When a product is fungible there will not be specific performance. It is usually used for unique goods. The judge made the case for why the carrots are unique.

Why would someone want specific performance and not just damages?1. Some of the losses would not be compensated because a lot of the damages

would be hard to prove.a. There would be reputational losses, which are difficult to prove and

calculate2. Circumvent liquidated damages clauses

a. Liquidated damages usually serve as floor and ceiling.b. Campbell didn’t want the liquidated damages ($50) because they

could get more ($60) from getting the carrots. 3. Supply chain - Campbell wants to disincentivize breaches in their supply

chain. This would scare the other suppliers. 4. Prevent Competition - Make sure that those carrots would not go to a

competitor. 5. Avoid Mitigation - They would not have to seek out someone else to provide

them with the carrots.

a. This distracts the court from the mitigation of the party.

Liquidated Damages serves the floor and ceiling. 1. Campbell didn’t want the liquidated damages ($50) because they could get

more ($60) from getting the carrots.

Why would is uniqueness so important? When it is a unique good damages are inadequate.

o It could be something that is difficult to translate into money Someone’s life, etc…

Kornman’s Explanation - There is not enough information and there is a large risk of over or under compensation

o The information may also be unreliable There will be additional costs searching for a replacement.

Those costs are not compensated. o Everything is compensable. It is not about inadequacy.

Why does the court opt for Specific Performance The court does not have all the information about replacement

o The information may also be unreliable (people will over-exaggerate)

Notes Why couldn’t the breacher buy the right to the carrots from Campbell instead

of the farmer? Posner thinks that allowing specific performance creates a bilateral

monopoly. This creates higher transaction costso He then awards a specific performance, basically, to Walgreens in the

renter case (studied last year). Opportunistic breach is really just efficient breach in another form (despite

what Posner says)

Van Wagner Advertizing v. S&M Enterprises NY 1986pp. 402

Facts: P leased a sign off the freeway into New York from a building owner. The building then changed hands and the D took over. The D then terminated the lease for the sign. The P wants specific performance.

Holding: The court states that specific performance does not depend on physical uniqueness, but rather economic uniqueness. Also, renting has never been subject to specific performance. The most important factor is whether there is sufficient information about the product to determine whether there is a substitute or not. There is enough information in this case so the court ruled correctly. Also there would be a big economic hardship if the owner of the building could not redevelop due to a sign (undue hardship - when it would be very very costly for the D to perform). The court decided not to award specific performance.

Van Wagner wanted the profits that they would have made for the remaining 7 years on the lease.

They had a sub-lease with someone and they set that price and extended it for the remainder of the seven years.

o The D argued that it was too speculative. o The court rules that the D cannot argue that the damages are too

speculative b/c that would support specific performance.

Physically Unique v. Economically Unique Under traditional notions of uniqueness this is unique. Property does not

have an exact replica. However, the court rules that, although there is physical uniqueness, there is an economic equivalent.

o In Campbell Soup there is no economic equivalent. With Billboards there are.

Burden on Defendant One could argue that if you gave specific performance the parties could just

bargain around the rule. That would essentially price the value of the billboard.

o This could create an inefficient bi-lateral monopoly. o There are high transaction costs so a liability rule is needed

Type of Entitlements There is an entitlement for P to have clean air

o Liability Rule - The industry can pollute but they have to payo Property Rule - The industry cannot pollute without P’s permission

When the transaction costs are low, property rule is better because the parties can bargain. If the transaction costs are high then a liability rule is needed.

Notes The traditional rule is that damages are not adequate remedy for loss of real

estate. Specific performance is never ordered for an employee’s promise to work.

Restitution/Unjust Enrichment1. Consideration in awarding Restitution

a. Fairness i. Fault of the parties (Sommerville/other case mentioned)

1. Are the party’s actions deliberateii. Windfall

1. Someone can get a windfall by doing something wrong, even when they are caught doing it

b. Efficiency i. Are transaction costs high or low?

1. If transaction costs are low (easy to negotiate) then property rule of restitutionOwell - P had ownership of egg washer machine and kept it in storage. D took out of storage and used it for 3 years before P noticed. Court awarded $10 per week (how much the court estimated they saved), which was far more than the price of the machine. Because the transaction costs are so low to negotiate a deal, the court

enforces a property rule, even though it was more socially useful to have the machine working than sitting around.

2. If transaction costs are high then liability rule.ii. Level of enforcement

1. Might need higher damages (like punitive) c. What as provided

i. Money v. Productii. Example - What is the difference between a restitution claim for pizza

and for money? 1. Measure of benefit

a. There is a problem of measurement with Pizza. It is unclear what your benefit form the pizza is. It might not be the market price.

i. With money there is no problem of measurement2. Incentives

a. With items like pizza, allowing them to recover would incentivize them to send items to everyone.

i. They would force transactions on everyoneb. The law wants to give incentives for the pizza company to

be more carefuld. Affirmative Defense - Change of Position

i. The D spent the money or used the benefit in a way that he would not have had he not had the moneyBlue Cross - P accidently paid benefits to D. D claims that changed his position but the court does not buy it because he spent it on things he would have needed to buy anyway, like rent, etc.

1. When the money is spent on things that D would buy anyway, such as food and rent, the court is less likely to find change in position. When something like pizza the court is more likely to find change in position

2. Ways to compute restitution:a. Harm

i. In this case nothing was damaged because the machine would have been in storage. Maybe machine wear and tear…

b. Savings Owell - P had ownership of egg washer machine and kept it in storage. D took out of storage and used it for 3 years before P noticed. Court awarded $10 per week (how much the court estimated they saved), which was far more than the price of the machine.

Because the transaction costs are so low to negotiate a deal, the court enforces a property rule, even though it was more socially useful to have the machine working than sitting around.

i. Example - D was supposed to post three guards. Instead he only posts two, saves money and nothing happens. Should there be liability?

1. Could argue that nothing happened so there are no damages2. Since they saved money, you get less value. You should get the

savings and not the firm for skirting their duty.c. Rental Value

i. The rental value of the machine for three years. Instead of having someone wash the eggs by hand they could have rented.

d. Hypothetical Contract i. Wrothman - British case where there was a covenant on the land saying

that the owner could not build anything higher than four stories. He breached the covenant and built a 14-story building.

1. The P sued for harm, which didn’t work. He then sued for restitution and the court awarded 5% of the profits.

a. The court asked what would the contract have been had they bargained??

e. Sharing Rule i. The entire benefit cannot be attributed to the wrong. They also added

their own initiative. It was a combination of wrongfully using someone’s property and their own genius.

3. Why have liability under restitution? Different Theories:a. Measuring Harms

i. In a way it is a part of tort law and contract law, not an independent field, used to measure harms

1. It is hard to measure harms. This is an easy way to measure damages.

b. Prevent Harms

i. Restitution is about preventing harms. Sometimes, torts and contracts cannot prevent some harms

1. When the P is not harmed or very little, but the P has infringed on an entitlement. Restitution covers those areas between torts and contracts.

c. Anti-Exploitation/Fairness i. This is an independent idea, apart from torts and contracts. We don’t

want people to exploit others, despite the harms or lack of harms. 1. In situations like trademark and such, there will be less incentive

to make something new. They could be weighed down by the free-riders.

Private Actors/Public BenefitPrivate Actors Providing Public Benefits/RestitutionWhat if you build something on your property that costs $15 but the benefit of the building is only $10. The neighbors, however, will increase their value by $10. (Could be the neighbor has an interference and can take it down…)

There is a risk of high transaction costs; free riding. As a result the park will not be built, even though everyone wants it.

o Should the builder be able to sue for the benefit after he builds it? Porat argues that they should pay

Either their share of the cost or the indisputable benefit; whichever is lower.

What if people have idiosyncratic value or what if they don’t have the money to pay for the benefit.

Create a lien on the propertyo This could then be sold to firms, if the lien takes

too long to mature. What about opportunistic creators?

He can recover no more than costs, because it is the lower of the two figures

The enforcement costs could gobble up the benefits of the project.

When the enforcement costs are too high then it would not apply??? (recording).

Class Notes: Blue Cross, Summerville, Olwell, Maier Brewing

Enrichment not due to Wrongdoing

Blue Cross Health Services Inc. v. SauerMissouri Court of Appeals 1990pp. 619

Facts: BC accidentally made payments to D. The P wants the money to be placed in a constructive trust. Trust is a situation when someone has an ownership but doesn’t run its management. The benefits from the trust go to the owner.

Constructive Trust - a trust that is implied by law All of the proceeds out of the trust belong to the owner. Therefore the P

wants all of the money that D made out of the mistaken payments.

If there is a constructive trust then it goes to an equity court (jury) while this case took place in a legal court

Holding: The court finds that even though both made a mistake and that the D didn’t intend to take the benefit purposefully. The D claims that they used the money. They changed their position and so they shouldn’t have to pay back the debt.

Change of position: The person gets the money and changes is position, thinking that he is rich,

by buying a new big house and traveling all aroundo Spent the money on things that he would not have spent it on.o When the money is spent on food or rent, something that would need

to be done anyway, that is not change of position.

With money it is very difficult to convince the court that there is a change of position.

Comparative Fault The fault is on a third party, not the payer. Had there been a change of position and it was the payers fault then the court

may not award restitution.

Example - A pizza is misdelivered to your house and you eat it. There is no restitution.

Why is the law more suspicious with money? There is a problem of measurement with Pizza. It is unclear what your

benefit form the pizza is. It might not be the market price.o With money there is no problem of measurement at all

With items like pizza, allowing them to recover would incentivize them to send items to everyone.

o They would force transactions on everyone The law wants to give incentives for the pizza company to be more careful

Sommerville v. JacobsWest Virginia 1969pp.627

Facts: P built a warehouse on D’s land on accident. P argues that D should either sell him the land or pay for the benefit.After the building was constructed the majority of the value of the property was in the building.

Holding: The court doesn’t think P is to blame. Says that P had no way of knowing of his error. Therefore, it agrees with P and make s the D either sell him the land or pay for the benefit.

Differences between taking money and taking non-monetary benefit1. It is difficult to quantify the value of a non-monetary benefit

a. There is no way of knowing if the P values the warehouse $17,5002. With money there is no risk of abuse. With non-monetary benefit there is.

a. People might make a mistake intentionally and force the D to sell the land. The pizza could be delivered intentionally and then make the other party pay.

The court gives the P two options:1. Give the P the value of the building ($17,500)

a. Why would the D value a warehouse $17,5002. Sell the land to the P

Dissent: The P has the burden of finding out where to build the structure. More careful analysis would have rendered the true boundry.

Dissent adds a third option: Have P remove the building.

Solutions:1. Beneficiary has to pay for the benefit that he got (market value)2. The D could opt for the P to remove it. If not then pay3. Middle of the Road - Don’t confer the market price but rather to be

reimbursed for the cost of the benefit (how much it costs to make)a. This reduces the risk for abuse because it takes away the incentives of

the P to abuse the system. They will not make any money.

Private Actors Providing Public Benefits/RestitutionWhat if you build something on your property that costs $15 but the benefit of the building is only $10. The neighbors, however, will increase their value by $10. (Could be the neighbor has an interference and can take it down…)

There is a risk of high transaction costs; free riding. As a result the park will not be built, even though everyone wants it.

o Should the builder be able to sue for the benefit after he builds it? Porat argues that they should pay

Either their share of the cost or the indisputable benefit; whichever is lower.

What if people have idiosyncratic value or what if they don’t have the money to pay for the benefit.

Create a lien on the propertyo This could then be sold to firms, if the lien takes

too long to mature. What about opportunistic creators?

He can recover no more than costs, because it is the lower of the two figures

The enforcement costs could gobble up the benefits of the project.

When the enforcement costs are too high then it would not apply??? (recording).

Enrichment due to wrongdoing

Olwell v. NYE & NissenWash. 1946pp. 649

[[[ Facts: P sold the corporation to D. D agreed to store the egg cleaning machine for P. The war happened and P found out that D was using the machine for three years. They tried to negotiate a price for the machine but those failed.

Holding: The court holds that they should pay $10 a week for the machine. This is the cost that D would have incurred had he hired someone to wash the eggs by hand. The cost of the machine was $600 but the court awards $1560. ]]]

Once there is Restitution, what should the damages be?1. Harm

a. In this case nothing was damaged because the machine would have been in storage. Maybe machine wear and tear…

2. Savings (Olwell)a. Example - D supposed to post three guards. Instead he only posts two,

saves money and nothing happens. Should there be liability?i. Could argue that nothing happened so there are no damages

ii. Since they saved money, you get less value. You should get the savings and not the firm for skirting their duty.

3. Rental Value a. The rental value of the machine for three years. Instead of having

someone wash the eggs by hand they could have rented. 4. Hypothetical Contract (

a. Wrothman - British case where there was a covenant on the land saying that the owner could not build anything higher than four stories. He breached the covenant and built a 14-story building.

i. The P sued for harm, which didn’t work. He then sued for restitution and the court awarded 5% of the profits.

1. The court asked what would the contract have been had they bargained??

5. Sharing Rule a. The entire benefit cannot be attributed to the wrong. They also added

their own initiative. It was a combination of wrongfully using someone’s property and their own genius.

Restitution is effected by the interest protected by the law: Property right - Olwell Intellectual Property - Maier Trust Contract

o D breached a contract and sold house to someone else. Could the first buyer recover for restitution?

There are some courts that would allow it, especially if there is a unique good and the courts could apply a constructive trust.

This would be hostile to the efficiency theory, unless specific performance is necessary. (Specific Performance means that it is not a case for efficient breach).

There is a connection between the cases that qualify for restitution and specific performance.

Considerations on whether to award restitution1. Fairness

a. Fault of the parties (Sommerville/other case mentioned)i. Are the party’s actions deliberate

b. Windfall i. Someone can get a windfall by doing something wrong.

2. Efficiency a. Are transaction costs high or low?b. Level of enforcement

i. Might need higher damages (like punitive)

Why did the court opt for savings instead of rental value?

It could be that they opted for the larger sum because there is a low level of enforcement. In order to deter, there needs to be more liability.

o The Supreme Court states that efficiency and deterrence is not a good justification for higher damages. It must be for despicable behavior.

Courts want to encourage people to go to the market and not to act unilaterally. They want you to buy and not steal.

o Property Rule - The transaction costs are so low for the D that it makes sense to make it a property rule.

This is a case that needs the restitution because there is no harm. P was simply storing the machine.

Rescue - a situation where, even though restitution claim, the recovery

Maier Brewing Co. v. Fleischmann Distilling9th Cir. 1968pp. 658

Facts: [[The D sold cheap beer under the label of the P. The P was not harmed but the D made a large amount of money.]]

A big consideration is whether the parties were in competition. In this case they were not. The P sold whiskey.

Even though they are not in competition there could be harm to reputation.

Holding: The D should pay damages equal to their profits. Is there any evidence that the profits made are equal to the harm to the P.

o In this case there is no reason to assume that the harm and the gains were equal (most likely the benefits were far greater).

o The court wants to prevent harms to the owners of trademarks This takes away any possible incentive to steal the trademark

o Why not just injunction? If they get to keep the profits up until the time of the injunction

and make money. This would not totally take away the incentives

Is restitution more consistent with property or liability rule?o Property -

SummaryRestitution in other countries is more developed in other countries.Why do we have liability under restitution?

1. Measuring Harms - In a way it is a part of tort law and contract law, not an independent field, used to measure harms

a. It is hard to measure harms. This is an easy way to measure damages.

2. Prevent Harms - Restitution is about preventing harms. Sometimes, torts and contracts cannot prevent some harms

a. When the P is not harmed or very little, but the P has infringed on an entitlement. Restitution covers those areas between torts and contracts.

3. Anti-Exploitation/Fairness - This is an independent idea, apart from torts and contracts. We don’t want people to exploit others, despite the harms or lack of harms.

a. In situations like trademark and such, there will be less incentive to make something new. They could be weighed down by the free-riders.

Misalignments (Read paper on chalk) Exceptions to the Hand Formula when the incentives don’t match up.

Example - One day hits someone in a poor neighborhood. The next day hits someone in a rich neighborhood.

The lost income of the rich person will be much higher.o By the law, because of that difference, there could be situations where

you could liable for hitting a rich person then hitting a poor person. Therefore, people should be more cautious with rich people

than poor people How could the standard of care be the same but the

damages be different?? Hospital - If a poor person and a rich person enter a hospital. The doctor has

a larger incentive to give better care to a rich patient then a poor patient.

Limits on LiabilityIf the court finds that the wrongdoer is liable the wrongdoer should pay all the damages paid to the wrongdoer with the following exceptions:

Mitigation Unforeseeability Comparative negligence Uncertainty of damages (Speculative damages) Offsetting benefits (Porat also wants offsetting risk) Policy considerations

o Pure economic losso Emotional distress/non-pecuniary losses/deterence

Consequential Damages4. Definition

a. Everything that is not general damages; specific to the plaintiffBuck - D breaches contract and P has to find a new place to graze his cattle. General damages are the difference between the rents of the old lot v. the new lot. Consequential damages are everything else: the interim pasture, loss in cattle, etc.

i. The law is more generous with torts because people can protect themselves through the contracting Wagon Mound

5. Why have foreeability limit consequential damages?Example - Someone has to bear the burden of the losses. Why the victim and not the breacher

a. Cheapest Cost Avoider i. Because the victim has the power to avoid the loss they should bear the

burden. If he did not have the burden he would run up costs without any consequence.

b. Information Forcing i. The victim has the information about what the damages would be. IF

the victim is compensated for consequential losses he has no incentive to notify the seller of the possible consequential damages.

1. Both parties must have the proper information to be able to assess when it is efficient to breach.

ii. If there were no forseeability it would still be information forcing. The victims with the least amount of damages would step forward to get a lower price.

1. If the information is not available the promisee will assume the worst and charge more damages

c. Incentives i. This gives the buyer the incentives to avoid losses because he will not

get compensated for it. ii. Like cheapest cost avoider but more focused on incentives.

d. Over-deterrence i. It could over-burden one of the parties to a point where they would not

enter into contracts.e. Fairness

i. Liability needs to be cut off somewhere or else it would be unfair. Therefore, forseeability serves that purpose.

6. When does it need to be disclosed?a. At the time of contract formation so the parties can price it into the contract.

7. Money Damagesa. When the damages are purely monetary, courts are reluctant to award

consequential damages.Meinrath - The D failed to pay a bonus to P. The lack of a bonus caused disastrous consequences on his businesses. P sued for those consequential damages. The court ruled that, since the general damages were monetary, consequential damages will not be awarded

b. Least Cost Avoider i. P could easily have taken out a loan to cover the expenses.

1. What if the bank could not have provided a loan?ii. He could have added a liquidated damages clause into the contract

1. That could have signaled something that could have killed the contract.

8. UCC Demands Minimum Amount of Remediesa. This is stupid because sometimes consumer would want to buy something

with no warranties and a cheap price. This rule is inefficient but UCC probably did not want sellers to take advantage of unintelligent buyers

Epstein Article1. Orthodox view of consequential damages:

a. Law provides D full consequential damagesb. P can raise affirmative offense - D in violation

i. Failed to mitigate1. Mitigation is an imprecise tool. Mitigation is often unverifiable.

2. Problemsa. Litigation

i. Parties want to avoid litigation costs. The uncertainty with what damages will be awarded are essentially a sunk cost.

b. Bad Incentives

i. If full damages are awarded the victim does not have the incentives to avoid costs (anti-insurance)

ii. Even low damages awards incentivize the D to perform. As long as the damages are greater then the cost saved.

c. Reputation only for institutions, not individualsd. Adverse selection (See Below)

3. Solution: Capped Damagesa. Incentives

i. Both parties then have the incentive to limit damagesb. Adverse Selection

Example: Suppose sending packages by FedEx with half poor and half rich customers. 1000 dollar packages for rich and 200 for the poor. 1 percent of packages are lost. If no cap, then fully compensate each customer. Thus, the price each would pay would be x(cost of service) + 6 dollars (average loss between 200 and 1000). Rich people should pay (x+10) whereas poor should pay (x+2). Thus many poor people will subsidize rich people. Many poor people will give up the service.If benefit of the service is (x+4) because charged (x+6) the service is inefficient because charge outweighs benefit. Probably would have over-consumption by rich people because the benefit is higher than the cost. This over, under consumption is ADVERSE SELECTION. Price should be x+2 so all would enjoy. Cap on damages because buyer is cheapest cost avoider of adverse selection. You could also affect incentives of the other party with a cap

Liquidated Damages1. When are Liquidated Damages disallowed?

a. Four Considerations: Restatement §356/UCC 2-718i. Ex-Anti - A reasonable relationship between the clause and the

anticipated harmii. Ex-Post -Actual Loss

1. Damages that shock the conscious are invalidatediii. Difficulty is assessing damagesiv. Inconvenience of other remedies (UCC only)

b. Courts also invalidate if: (Penalty)i. The clause does not distinguish between a large or minor breach.

1. All breaches are under the same umbrella (small delay v. large delay)

c. With regard to warrantiesi. Against the reasonable expectations of the party

Kearney - D sold an engraving machine to P with a clause in the warranty that offered repairs and refunds but no consequential damages. The court validated the warranty and did not award consequential losses.

1. If the warranty fails its essential purpose then it is invalidated, which then resorts back to the default. This then allows consequential losses. UCC §2-719.2

a. There must be some remedy. If the limitation on damages goes too far then it will be invalidated.

i. This does not hold a lot of water because people pay a lower price for no remedy. i.e. - no-return stores you pay a lower price.

ii. The lack of a remedy is priced into the contract.b. The Supreme Court interprets the clause as invalidating

the warranty when it would be against the reasonable expectations of the party. (See Below).

2. Why Liquidated Damages?a. Creates certainty b. Reduces litigation c. Difficulties in Proving Damages/Non-feasibility

i. Consequential damages are difficult to prove. ii. Emotional damages and others cannot be recovered. Liquidated

Damages protect these interestsd. Incentives to avoid over-reliance. If set amount of damages, then receive same

amount of damages if it succeeds or fails

i. Internalize both costs and benefits of reliance on the K because get that set amount regardless. No one would overrely and pay more costs than the benefits they will receive

e. Signal of reliability. Clause shows that the party is reliable because guaranteed damages if failure to perform

f. Priced into the K 3. Problem w/ Liquidated Damages

a. Punishment - If it is too high the court will invalidate it. The parties are not allowed to punish each other.

b. Inefficient - If the liquidated damages are too high or too low the parties will choose to breach or not breach inefficiently

c. Cognitive - There is a bias against liquidated damages by lay people and the courts, so it may not be upheld

d. Externalizing costs to outside parties i. Example - The Liquidated Damages Clause bankrupts a party and then

the other creditors bear the burden of not getting their money.4. Summary

a. There are good reasons why parties want to have liquidated damages clauses. It sometimes leads to bad results but it is still a mystery why courts intervene in liquidated damages clause and not others.

i. There is no reason to think that courts will be able better to quantify damages better then the parties. Actually, courts are probably less accurate.

Notes: Kearney, Farmers Export, Northern Illinois GasThe default rule that is if something goes wrong you will be fully compensated. The parties, theoretically, can opt out of the contract.

Kearney v. Master EngravingsNJ 1987pp.75

Facts: D contracted with P to build a computer-operated machine that would cost$167K. The contract for the machine contained a provision stating that the damages could only be for the repair of the devise and or replacement. It would not include any consequential damages. The machine didn’t work 25-50% of the time. The lower court judge instructed the jury that it could award consequential damages. The jury awarded $57,000.

The default under the UCC is that the buyer could get consequential losses. The parties, however, opted out of that provision in the contract.

The lower courts allowed the jury to find consequential damages.

UCC §2-719.2 - If the warranty fails its essential purpose then it is invalidated, which then resorts back to the default. This then allows consequential losses.

There must be some remedy. If the limitation on damages goes too far then it will be invalidated.

o This does not hold a lot of water because people pay a lower price for no remedy. i.e. - no-return stores you pay a lower price.

The Supreme Court interprets the clause as invalidating the warranty when it would be against the reasonable expectations of the party. (See Below).

Holding: Some view clauses as an essential element of cost allocation performed by the parties. On the other hand, the code states that the provisions limiting damages cannot be unconscionable.

Many firms depend on limited damages clauses for their pricing and uprooting that would be costly and disruptive. In this instance, the circumstances do not warrant the invalidation of the clause. When could a party still recover consequential losses even though there is a clause?

When it would be against the reasonable expectations of the party.

What are the policy consideratons? It could be the case that the buyer didn’t handle the machine properly. They

didn’t program it right.o It could be that the buyer was the cheapest cost avoider. o Even if they can do nothing to avoid the problems in the machine, they

may have more incentives to cooperate with the seller to replace the parts and report the problems.

Why liquidated Damages?1. Certainty of damages2. It could reduce litigation costs

a. Less trials or shorter trials.3. Difficulties in proof/non-feasibility in damages4. Avoiding over-reliance

a. Since the damages are fixed (floor and ceiling), people won’t get more compensation if they over-rely on the contract.

5. Signal of reliabilitya. If the other party does not think they you are reliable then you could

propose a high liquidated damages

Problems with Liquidated Damages1. If it is too high then the court will strike it down. The parties are not allowed

to punish each other. 2. Could lead to inefficient behavior from the promissor? If the price is too high

he would have the incentive to perform even in times when it would be inefficient to do so.

3. Cognitive Problem - Why allow some clauses and not others? 4. Possibility of externalizing costs to outside parties

a. Example - It bankrupts a party and then the other creditors bear the burden of not getting their money.

Summary - There are good reasons why parties want to have liquidated damages clauses. It sometimes leads to bad results but it is still a mystery why courts intervene in liquidated damages clause and not others.

There is no reason to think that courts will be able better to quantify damages better then the parties. Actually, courts are probably less accurate.

Key Concepts (Not in the lecture)6. Cheapest Cost Avoider7. Incentives8. Information forcing

Farmers Export v. Georgis Prios5th Cir 1986pp. 83

Facts: The D held a boat at a port for longer then was allowed. The fixed damages for that offense, as stipulated by contract, was $5000/hr.

Holding: The P tries to prove the reasonableness of the damages and SUCCEEDS. P argues that b/c D was aware of the damages that it should be upheld. The court finds that is not valid. P also argues that the purpose of the provision was to incentivize the ships to leave on time. That is not the point of damages. It is to restore the P to the proper position. The P then argues that it was a reasonable approximation of the damages. This is accepted by the court.

Why do courts intervene with liquidated damages clauses and not other biases? Cognitive

Interface v. TWA

Termination Value - Rental value/resale

They claim that they should share the risk. However, the risk sharing only occurs if there is a breach. If TWA complied the only risk of the declining market value would have been bared by interface.

The liquidated damages clause is the same even if there is significant depreciation.

There is a deposit. This often times acts in the same way as a liquidated damages clause.

Restatement §356/UCC 2-718 (check section in recording) - Four considerations to take into account of whether to strike down a liquidated damages clause:

A reasonable relationship between the clause and anticipated harm Actual loss Difficulty in assessing damages (UCC only) inconvenience of other remedies.

An indication to courts that the parties intended to have a penalty: The clause does not distinguish between a large or minor breach. All breaches are under the same umbrella (small delay v. large delay)

Northern Illinois Gas v. Energy CooperativeIll. App. 1984pp. 88

Facts: The D bought naphtha from P. D then converted it into natural gas. After the price of natural gas plummeted, they stopped ordering the product. The D claims that there is a liquidated damage clause that sets the price at $13M, whereas P claims the price of actual damages to be around $305M.

Holding: The P argues that the liquidation clause is a limit on damages. The court does not think that this is the case. They argue that it is not a limit on damages but rather an agreed upon damages. The UCC states that provisions that limit damages are not valid but this does not do that.

Probabilistic Compensation1. Recurring Miss

a. Solutions:i. Regulatory or administrative sanctions

1. When there is no sign there is a fine.a. If the enforcement is 100%, what should the fine be?

i. The level of the expected harmEx: $1000 harm and 1/100 chance of harm = $10The incentives are the same as tort law.

b. We don’t replace the tort system with sanctions because of the difficulty of enforcement.

i. Every time you speed you would need to be fined. This would be very expensive.

2. Tort Law just says when the harm occurs you pay the full price. The recurring miss is a gap in the tort system so regulation may be needed.

ii. A probabilistic or expected value test - If 39% causation then 39% payment

1. The recovery would be the percentage of the causation times the harms.

a. It is kind of unfair that the difference between 49% and 51% is the difference between nothing and everything.

2. Assume that for every patient with 20% there is an 80%, 30% and 70%, etc.

a. Under Preponderance of the evidence on half he would pay full and in half he would pay nothing. Basically H/2

b. If he pays 70% one time and 30% another time. It equals the same as POE.

i. This makes it seem convincing that the cost of determining the % is very costly.

3. If in a department (AIDS) where all the patients had 30% chance of recovery, the doctor has no incentive to take precautions. (This is a typical recurring miss. Why treat it any different?)

a. Lost-Chance Rule (medicine) b. Market-Share Liability

i. Not just proportionate liability, each pays the harm done by their product.

1. This allows the proper incentives

ii. Because there are so many cases and the drug is identical, at the end of the day, all victims would get full compensation and all the wrongdoers would pay exactly what they caused.

4. When information is easy to come by (medical stats and market share) the court looks to probabilistic or proportional compensation.

a. Because information is not easy to come by the tort system opts for the POE rule.

5. Probabilistic recoveries are justified in recurring miss situations. iii. Proximate Cause - Split the baby - if the sign had been there the Dad

probably still would have died but he would have kept the son out of the water. Therefore, pay for the son and not the father.

1. They exploit the doctrine of proximate cause to mitigate the recurring miss.

iv. Switch the burden of proof Lone Palm Hotel1. This can be played with by courts which, although not

completely accurate, can mitigate the harms of recurring miss.v. Restitutionary Damages

1. The defendant was unjustly enriched by not posting the sign or the lifeguard.

a. Manufacturers - By not warning of the dangers, the company saved a lot of money and was able to sell much more products. They should not be able to gain the benefits.

2. Aggregate Probabilities: Negligence and Causation a. Tort

i. There is a 2/3 chance of negligenceii. There is a 2/3 chance of causation

1. When viewed separately then there is liability.2. When viewed together there should not be liability because the

overall probability is less then 50% -- 2/3 * 2/3 is 4/9.a. Should we aggregate the probabilities??

b. Criminal Lawi. D maybe committed two crimes - 90% Crime A/90% Crime B and

Beyond Reasonable Doubt is 95%.1. Though he could not be convicted for either separately, the

probability that he did one of them is 99% (10% * 10%)2. It could cut the other way - A = 95% / B = 95%

a. The chance that he committed both would be less then 95%

3. When do we need Probabilistic Recoveries?a. Recurring Miss

i. Indeterminate Defendant 1. Alternative liability - (Summers v. Tice)2. Market Share Liability

ii. Indeterminate Plaintiff1. A group of people are exposed to a chemical. The chemical only

increases your risk by 1/5. The chemical company pays 1/5 of the harm to everyone.

b. Recurring Hitc. Lost chance of recovery

i. Had 75% chance of recovery but doctor lowered it to 25%a. According to probabilistic recovery, the liability should

not be 1/2 but rather 2/3, because the victim lost 2/3 of his chance at survival.

b. This falls under POE4. Offsetting Risk

a. Basicsi. Under Tort law if one chooses a 500 risk (.1 chance of 5000) instead of a

400 risk (.1 chance of 4000) he is liable for the full amount; 5000. The paper argues that he should only be liable for the difference between the two; 1000 (100 risk with .1 chance).

1. The choice increases risk by 500 but also decreases risk by 400. a. Therefore it should be the difference between the two.

Paying the full amount exceeds the fault of his negligence and of his choice.

b. Causal Linkage - (Calabresi Argument)i. Driving fast and a tree falls on you. You driving fast didn’t increase the

likelihood that the tree falls on them. It must increase risk ex-ante. ii. Likewise, the four fingers are not at an increased risk of being lost. Only

the fifth finger has an increased risk. c. Poor incentives

i. B = 499 (1/10 risk) A = 500 (1/10 risk)1. The P wants the doctor to be negligent ex-ante because there is

the same risk that something goes wrong. If he chose the 499 he will not get compensated. If he chooses the 500 he will get fully compensated, with only a slightly different harm.

Class Notes: Levmore, Off-Setting RiskProbabilistic Recoveries - Recurring Miss

In situations like Lone Palm Hotel the hotel cannot be held liable because there is only a ten percent chance that a sign would have made a difference. This does not provide the hotel with any incentive to obey the law (beside a fine).

It is when there is always less 50% causation but more then 0%. This happens in failure to warn and informed consent cases.

Ways to deter such behavior:

1. Regulatory or administrative sanctions a. When there is no sign there is a fine.

i. If the enforcement is 100%, what should the fine be?1. The level of the expected harm

Ex: $1000 harm and 1/100 chance of harm = $10The incentives are the same as tort law.

ii. We don’t replace the tort system with sanctions because of the difficulty of enforcement.

1. Every time you speed you would need to be fined. This would be very expensive.

b. Tort Law just says when the harm occurs you pay the full price. The recurring miss is a gap in the tort system so regulation may be needed.

2. A probabilistic or expected value test - If 39% causation then 39% payment

a. Wouldn’t this under-deter?b. The recovery would be the percentage of the causation times

the harms. i. It is kind of unfair that the difference between 49% and

51% is the difference between nothing and everything.c. Assume that for every patient with 20% there is an 80%, 30%

and 70%, etc. i. Under Preponderance of the evidence on half he would

pay full and in half he would pay nothing. Basically H/2ii. If he pays 70% one time and 30% another time. It

equals the same as POE.1. This makes it seem convincing that the cost of

determining the % is very costly. d. If in a department (AIDS) where all the patients had 30%

chance of recovery, the doctor has no incentive to take precautions. (This is a typical recurring miss. Why treat it any different?)

i. Lost-Chance Rule (medicine) ii. Market-Share Liability

1. Not just proportionate liability, each pays the harm done by their product.

a. This allows the proper incentives 2. Because there are so many cases and the drug is

identical, at the end of the day, all victims would get full compensation and all the wrongdoers would pay exactly what they caused.

e. When information is easy to come by (medical stats and market share) the court looks to probabilistic or proportional compensation. (only in recurring miss or also in other things).

i. Because information is not easy to come by the tort system opts for the POE rule.

f. Probabilistic recoveries are justified in recurring miss situations.

3. Proximate Cause - Split the baby - if the sign had been there the Dad probably still would have died but he would have kept the son out of the water. Therefore, pay for the son and not the father.

a. They exploit the doctrine of proximate cause to mitigate the recurring miss.

4. Switch the burden of proof (Lone Palm Hotel)a. This can be played with by courts which, although not

completely accurate, can mitigate the harms of recurring miss.5. Restitutionary Damages

a. The defendant was unjustly enriched by not posting the sign or the lifeguard.

i. Manufacturers - By not warning of the dangers, the company saved a lot of money and was able to sell much more products. They should not be able to gain the benefits.

(Listen to Recording)EfficiencyCorrective JusticeRetributive Justice

Tort law mirrors the risk that the tortfesor causes to the victim. If the risk is 1/100 that a harm will take place given the behavior, then he has a 1/100 risk of doing it.

Multiple Factor Hypothetical There is a 2/3 chance of negligence There is a 2/3 chance of causation

o When viewed separately then there is liability.o When viewed together there should not be liability because the

overall probability is less then 50% -- 2/3 * 2/3 is 4/9. Should we aggregate the probabilities??

Criminal Lawo D maybe committed two crimes - 90% Crime A/90% Crime B and

Beyond Reasonable Doubt is 95%. Though he could not be convicted for either separately, the

probability that he did one of them is 99% (10% * 10%) It could cut the other way - A = 95% / B = 95%

The chance that he committed both would be less then 95%

We need probabilistic recoveries when there is a systematic bias where the POE cannot be achieved.

Indeterminate Defendant o Alternative liability - (Summers v. Tice)o Market Share Liability

Indeterminate Plaintiffo A group of people are exposed to a chemical. The chemical only

increases your risk by 1/5. The chemical company pays 1/5 of the harm to everyone.

Lost chance of recoveryo Had 75% chance of recovery but doctor lowered it to 25%

According to probabilistic recovery, the liability should not be 1/2 but rather 2/3, because the victim lost 2/3 of his chance at survival.

This falls under POE

Off-Setting Risk Under Tort law if one chooses a 500 risk (.1 chance of 5000) instead of a 400

risk (.1 chance of 4000) he is liable for the full amount; 5000. The paper argues that he should only be liable for the difference between the two; 1000 (100 risk with .1 chance).

o The choice increases risk by 500 but also decreases risk by 400. Therefore it should be the difference between the two. Paying

the full amount exceeds the fault of his negligence and of his choice.

Causal Linkage - (Calabresi Argument)o Driving fast and a tree falls on you. You driving fast didn’t increase the

likelihood that the tree falls on them. It must increase risk ex-ante. o Likewise, the four fingers are not at an increased risk of being lost.

Only the fifth finger has an increased risk. Poor incentives B = 499 (1/10 risk) A = 500 (1/10 risk)

o The P wants the doctor to be negligent ex-ante because there is the same risk that something goes wrong. If he chose the 499 he will not get compensated. If he chooses the 500 he will get fully compensated, with only a slightly different harm.

Causal Linkage- Driving fast and a tree falls on you. You driving fast didn’t increase the

likelihood that the tree falls on them. It must increase risk ex-ante.

L = Liability H = Harm R = Risk

The different cases where this occurs are:1. Different interests of the victim2. Victim’s interest v. 3rd party

Ex: Ambulance rushing someone to the hospital hits someone.3. Victim interest v. Society

Ex: Tour guide takes the hikers on a dangerous trail instead of hurting the environment off-trail

The problems of non-risk offsetting are:1. Defensive Medicine 2. Overinvestment in Precautions3. Overburdening the Negligence-Producing Activity and the Relevance of a

Contractual Relationship

Criticisms:1. Undercompensation of Victims2. Curing Underenforcement3. Information and Application4. Other Alternatives

Discounting Recovery1. Mitigation

a. P has duty to mitigate when it is reasonable.i. If there is more then one option in the range or reasonableness, the

benefit of the doubt is given to the P. Even if there is one that is slightly more reasonable, the court only cares that they did something within reasonS.J. Groves - D contracts with P to supply cement for a bridge. D is inconsistent and breaches repeatedly. P sues but D claims that P should have mitigated by using another cement company. The court finds their actions were reasonable

ii. Defendant Mitigation 1. When the action that D claims P should have done to mitigate are

things that the D could also have done.S.J. Groves - D claims P should have used another cement maker. Court decides that D could also have used the other cement maker to supplement their supply.

iii. Mitigation/Comparative Negligence1. Mitigation is inconsistent with comparative negligence. When it

is shown that the P didn’t mitigate he cannot recover anything. Why? Both are at fault. D forced the choice upon the P and P chose poorly.

a. Comparative fault is a new doctrine. Mitigation has been around for a while. Therefore, it is hanging on.

2. Offsetting Benefits/Collateral Sourcea. The benefits that a P receives that mitigate the harm should be counted against

the recovery.

i. Subrogation 1. The states that don’t follow the collateral source rule have

subrogation (insurance can sue for their share) so P’s don’t receive double recovery.

a. If insurers can’t get compensation they will just raise rates so ex-ante people will want insurance to get compensated

b. Double recovery will create a moral hazardii. Casual Linkage

1. There must be a casual linkage between the harm and the benefit that mitigates the harm.Example - The D hitting P didn’t increase the likelihood that the plane would crash. (like speeding doesn’t increase the likelihood that a tree will fall on you). Results that are not caused by an increased risk from the action should not be taken in to account. It could be that he misses his flight and the next flight crashes. Getting hit by the car didn’t increase the likelihood that the plane would crash.

Class Notes: SJ Grove, Oden

S.J. Groves & Sons v. Warner3rd Cir. 1978pp.85

Facts: There was a contract to build a bridge and P was the sub-contractor for some parts involving cement. The D was to supply the P with the mixing cement but they were terrible with deliveries. The P didn’t have another alternative that would work until Tap Rock said that it could deliver the goods at the same price. P stuck with the D and then sued at the end. D breached by not bringing the goods on time. The P had some options:

1. Make their own cement2. To stop the work3. Use Trap Rock (an alternative) (The lower court finds that the P should have

used this option)4. To use Tap Rock to supplement5. Keep getting assurances from Warner6. Just proceed with the work and do nothing (the option taken by the P and

what was deemed reasonable by the court)

Holding: The district court found that the P should have mitigated by using Tap Rock. The higher court thinks that this was a complicated choice and that the P took into account the benefits and costs of using Tap Rock.

The standards is not that a mitigation should be hyper-analyzed as a way to avoid liability. The P definitely took reasonable steps to mitigate.

Also, D could have used Tap Rock to fulfill it’s order. If there is more then one option in the range or reasonableness, the benefit of the doubt is given to the P. Even if there is one that is slightly more reasonable but both are reasonable, the court only cares that they did the reasonable thing.

Mitigation by the defendant - Even if it were more reasonable to move to Trap, D could just as easily have used Trap.

Until Trap was accredited, both courts agree that P should have kept with D, even though they were in breach.

When Trap becomes accredited both parties could have used them.

Mitigation is inconsistent with comparative negligence. When it is shown that the P didn’t mitigate he cannot recover anything. Why? Both are at fault. D forced the choice upon the P and P chose poorly.

Comparative fault is a new doctrine. Mitigation has been around for a while. Therefore, it is hanging on.

Efficient Breach - Taking a deal that pays D more then the expectation of P

Notes - How much should the P do?1. Finding a new job - Nothing below the level, out of state or in a new line of

work (Ford Motor v. Equal Employment Opportunity Commission). 2. Medical Treatment - As much as could be done to mitigate3. Financial Inability - Cannot mitigate because don’t have the money. Doesn’t

have the money to fix the car so it gets worse.4. Mitigation on the D’s Terms - The P is not required to take the D’s deal.5. Investment Strategies - They should take the next best strategy

Mitigation by the defendant: The Groves rule is frequently stated and sparsely applied.

Failed Efforts to Mitigate - expenses incurred in reasonable but unsuccessful effots to mitigate are recoverable as damages.

Offsetting BenefitsIt is like the avoidable consequences but from the other side of the coin; the benefits from mitigation should be counted against the recovery.

It only includes benefit to the interest of the plaintiff. Ex - P alleges pain and suffering. D cannot allege that harm provided lecture opportunities. Not the same interest.

Is remarriage an offsetting benefit? o Create incentive not to get married.

Casual Linkage!!!!!D harms P and breaks his leg. As a result he misses his flight. The flight then crashes. Should there be liability?

D hitting P didn’t increase the likelihood that the plane would crash. Just like speeding doesn’t increase the likelihood that a tree will fall on you. Results that are not caused by an increased risk from the action should not be taken in to account.

o It could be that he misses his flight and the next flight crashes. Getting hit by the car didn’t increase the likelihood that the plane would crash.

Applies to both benefits and harms!!In a wrongful death suit, should it be taken into account the likelihood that the spouse could remarry?

The court would have to look too far into the spouse’s personal life. The attorney’s would argue about looks, personality traits, etc, which would get too personal.

o The solution is to take it into account but on a scaled, set reduction. Everyone gets the same reduction (or people of the same age get the same reduction).

Oden v. Chemung County Industrial DevelopmentNY 1995pp. 95

Facts: The P was injured when steel column fell on him. The lower court reduced his damages because he was receiving disability benefits from the government.

Holding: Before, the rule was that collateral sources of income should not be taken into account in damages (collateral source rule). This has been eroded gradually as exceptions have been made in the medical and dental fields. This then expanded even further. This rule eliminates duplicate payments.

In this case the annuity for the accident has not replaced the medical expenses but rather part of his earnings (The annuity is a pension.)

Therefore the reduction is upheld. There must be correspondence between the damages and the collateral source. The P is paying for expenses to help with D’s disability. If D receives disability expenses to help with the disability then ca neb offset

This could skew the incentives. The D then doesn’t have the proper incentives to avoid the harm.

o The collateral source often times sue the tortfeasor.

Once the insurance has a subrogation claim then they will lower the premiums. If the insurance company cannot get compensation then the premiums will rise.

Therefore, the victim ex-ante wants the insurance company to be able to subrogate.

It could be argued that it is not really over-compensation because he has been paying for the insurance.

The juries might award less if the money is going to the insurance company then to an individual.

Notes What is a collateral source ? Third parties that pay money to the P -- money

that, but for the wrong, plaintiff would never had received.

Scope of Liability1. Economic Loss v. Pure Economic Loss

a. Economic Loss = Lots of things are economic. This includes things that are recoverable.

b. Pure Economic Loss = There are no injuries to person or property; but an injury to profit.

2. Why no pure economic lossa. Infinite Liability -

i. If there is no stop for economic loss there would be liability forever.ii. There could be a lot of frivolous claims.

b. Causation - i. The economic losses could be caused by something else. Difficult to fix

for sure what the cause is.c. Who is the cheapest cost avoider?

i. Employee misses work, but employees miss work for all sorts of reasons. This is background risk. The employer knows how to deal with those cases.

ii. Pure economic loss usually has a delayed impact.1. Once the harm is done, the economic loss victim needs the

incentives not to rack up costs.iii. This argument misses the possibility that the victim will take

precautions b/c there is essentially no liability for those losses1. This is costly and a social loss.

d. Offsetting losses and benefits a. If, due to a tort to a third party, a restaurant loses business, the

customers will just go to another restaurant.

i. By making the P pay it would be economic waste3. Injurers Self Risk

a. Learned Hand i. In order to be Learned Hand justified an action must create a benefit

greater than the harmb. Self Risk

i. The risk created to the injuring party should also be taken into accountii. Example: Driver drives 40 instead of 50 mph and hits someone. The

driver didn’t have an airbag. Burden (cost of precaution) Harm that could have been avoided100 (for going 10mph slower) 75 (risk to others) (with just this taken

into account there should not be liability)75 (self risk) (courts usually ignore self risk)

The driver knows that he will not be liable for the person he hits then he is looking at cost of his harms versus his benefits, which does not motivate him to take the precaution. Only when all risks are taken into account will the tortfeasor take the precaution

Really, his net precaution (burden to tortfeasor to make the precaution) should only be 25, because 75 of his 100 his taken away for his own risk. Therefore, the benefit to the D is 25 from speeding. With the 75 harm, he is negligent. From that point of view it is Hand Formula justified to take the precaution.

Notes: Pruitt, Self-Risk

If the court finds that the wrongdoer is liable the wrongdoer should pay all the damages paid to the wrongdoer with the following exceptions:

Mitigation Unforeseeability Comparative negligence Uncertainty of damages (Speculative damages) Offsetting benefits (Porat also wants offsetting risk) Policy considerations

o Pure economic losso Emotional distress/non-pecuniary losses

Economic Loss v. Pure Economic Loss

Economic Loss = Lots of things are economic. This includes things that are recoverable.

Pure Economic Loss = There are no injuries to person or property; but an injury to profit.

Pruitt v. Allied ChemicalVirginia 1981pp.102

Facts: The D polluted in a river and that pollution flowed into the bay. The D moved to dismiss a majority of the claims because a portion of the P’s didn’t have standing. D argues that only the fishermen are those that were directly harm. The others fall under the economic loss rule.

Holding: The court wrestles with the question of who should be compensated. The court makes the argument that the fishermen have a quasi-property right in the fish. This would entitle them to relief. It also finds that a bunch of other parties also need relief. It states that it has no articulatable reason to cut off damages but it just knows that it should. Not sure what the overall conclusion is.They stopped liability at the water’s edge.

In this case there is a physical harm but it didn’t not occur to someone that could have brought suit.

Why are courts reluctant to award Economic Loss2. Infinite Liability -

a. If there is no stop for economic loss there would be liability forever. b. There could be a lot of frivolous claims.

3. Causation - a. The economic losses could be caused by something else. Difficult to

fix for sure what the cause is.4. Who is the cheapest cost avoider?

1. Employee misses work, but employees miss work for all sorts of reasons. This is background risk. The employer knows how to deal with those cases.

2. Pure economic loss usually has a delayed impact.i. Once the harm is done, the economic loss victim needs the

incentives not to rack up costs.b. This argument misses the possibility that the victim will take

precautions b/c there is essentially no liability for those lossesi. This is costly and a social loss.

5. Offsetting losses and benefits a. If, due to a tort to a third party, a restaurant loses business, the

customers will just go to another restaurant. i. By making the P pay it would be economic waste

Notes Economic Loss Rule - If you or your property don’t suffer any damage you do

not have a claim.o Darnell-Taenzer - (Justice Holmes) “The general tendency… is not to

go past the first step.” (Should A for actions that harmed those who deal with B?)

Causation - The new restatement has two rules for causationo The harms must result from the risk of the tortious act. o Not liable if the act generally does not increase risk

Injurer’s Self-Risk Negligence is creating unreasonable risk for other people

Ex: Driver drives 40 instead of 50 mph and hits someone. The driver didn’t have an airbag.

Burden (cost of precaution) Harm that could have been avoided100 (for going 10mph slower) 75 (risk to others) (with just this taken

into account there should not be liability)75 (self risk) (courts usually ignore self risk)

The driver knows that he will not be liable for the person he hits then he is looking at cost of his harms versus his benefits, which does not motivate him to take the precuation. Only when all risks are taken into account will the tortfeasor take the precaution

Really, his net precaution (burden to tortfeasor to make the precaution) should only be 25, because 75 of his 100 his taken away for his own risk. Therefore, the benefit to the D is 25 from speeding. With the 75 harm then he is negligent.

From that point of view it is Hand Formula justified to take the precaution.

Self Risk29 J.L.S. (2000) pp.19

Non Pecuniary Losses3. When will courts compensate non-pecuniary losses?

a. The interest protected by the contract is a personal interest rather than an economic loss. House Seller v. Travel Agent - The principle gain from selling a house is monetary. By not selling the house the P is out money. The principle interest in traveling Europe is the personal experience, not money.

4. Do people want recovery for non-pecuniary losses? The answer points to the most efficient default. (see below)

a. Two considerations: (a “tradeoff”)i. Insurance

If it is about insurance then there should not be compensation for non-pecuniary losses

1. People generally don’t take into account pecuniary losses. It does not affect the marginal utility of money.

a. Marginal Utility of Moneyi. People value their first dollar more then their last

dollar. 1. People buy food (most valuable) and move

outward (least valuable)2. They pay the insurance with the later

dollars to protect the earlier dollars.ii. People do not buy insurance for non-pecuniary

losses1. Emotional losses do not affect the marginal

utility of money. He does not need more money for the harm (as opposed to a physical injury).

iii. People could buy insurance for non-pecuniary losses if it would provide the proper incentivesExample - Buy it from the travel agent

ii. Incentives If it is just about incentives then there should be compensation.”

1. When the losses are majority emotional (non-pecuniary) then the majority of the damages will not be recovered. Therefore the court will

“The solution to the tradeoff depends on how much compensation for non-pecuniary losses is essential for the incentives of the breaching parties. When the losses are mostly non-pecuniary it is more essential to give compensation for the losses to create the proper incentives.”

What is the default rule that both parties would like to have? What should be the default? The most efficient default rule is that which most parties would choose so that it eliminates transaction costs. When the majority of the losses are non-pecuniary then the parties want compensation to create efficient incentives. If the losses are mainly economical then they don’t want compensation because of they will pay a higher fee, which dives into the marginal utility of money.

Notes: Non-Pecuniary Loss

Why is it rare to award emotional losses in contracts? When it is appropriate?

Hypo - A is selling B a house. Right before the contract is to be performed, A reneges and B doesn’t get the house and suffers emotional distress.

B would not like the court to award pain and suffering ex-ante because it would raise the contract price.

It would essentially be an emotional insurance.o This could result in adverse selection, where the non-sensitive ones

subsidize for the really sensitive ones.o The honest ones subsidize those who bring frivolous claims.

Suppose the buyer has an option to pay more to get compensation for emotional harm in case of breach.

Why do people buy insurance in the first place, if they pay more then the risk is worth? Because people are risk averse…

Marginal utility of moneyo People value their first dollar more then their last dollar.

People buy food (most valuable) and move outward (least valuable)

They pay the insurance with the later dollars to protect the earlier dollars.

o People do not buy insurance for non-pecuniary losses

Emotional losses do not affect the marginal utility of money. He does not need more money for the harm (as opposed to a physical injury).

The Counterargument: Why would she sometimes buy insurance emotional harm? Hypo - A plans a trip to Europe through a travel agent. Would it make sense

to insure against the emotional harm in case the trip doesn’t work out? o If you insure yourself with the travel agent then you will know that he

will have stronger incentives for the trip to work out.

Courts allow damages for non-pecuniary loss when the interest protected by the contract is a personal loss and not an economic loss!!!!!!

With the travel agent the loss suffered by the P will not be compensated with economic losses because he majority of losses will be emotional.

With a contractor, even though there might be emotional distress, the majority of the harm will be recovered by the contract for economic loss.

Two considerations:1. Insurance

a. People generally don’t take into account pecuniary losses. It does not effect the marginal utility of money

2. Incentives a. When the losses are majority emotional (non-pecuniary) then the

majority of the damages will not be recovered.

What is the default rule that most parties would like to have? What would most parties like to have? If parties have to continually opt of

the default it increases transaction costs. o It depends in this case. If most of the damages will be mostly non-

pecuniary then they will most likely want to recover.