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Contracts

Contracts. Class 1 – Introduction to “Enforcement”. Enforcement = relief of promisees to redress breach, not punishment to compel performance. Contract law is commercial law Mostly about facilitating commercial exchange Expectations of promisee

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Contracts

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  1. Contracts Class 1 – Introduction to “Enforcement”

  2. Enforcement = relief of promisees to redress breach, not punishment to compel performance • Contract law is commercial law • Mostly about facilitating commercial exchange • Expectations of promisee • Contract remedy is to put promisee in position it would have been in had the promise been performed

  3. U.S. Naval Institute v. Charter Comm. Inc. (2d Cir. 1991)

  4. Facts • Licence agreement • Berkley could sell paperback starting in 10/84 • But they breached agreement, shipped and started selling a month early • Damages = • How much money Berkley made during the month they were in violation of agreement? OR • How much money Naval Press lost during that month, because some people who would have bought hardcover bought paperback instead?

  5. Damages = expectations (usually) • Naval Press put in position it would have been in had Berkley not shipped early • This is NOT the $724,300 Berkley made that month (Red October a HUGE bestseller) selling paperbacks in breach of agreement • It is the $35,380 lower court estimates Naval Press would have made in additional September hardcover sales, if no breach • Estimate based on August sales – close enough

  6. When is disgorgements of profits an appropriate rememdy? • The interesting case of spy memoirs . . .

  7. Frank Snepp, former CIA agent, and George Blake, Soviet Mole inside of British MI-5, each published books in violation of their employment contracts. Should they be able to keep the profits?

  8. Not if their breach of contract was also a breach of fiduciary duty • But this disgorgement remedy is really not a contract remedy. • It’s a equitable remedy to prevent a wrongdoer from profiting from their wrong • Based on concept of unjust enrichment and restitution

  9. Efficient Breach • Influential but controversial theory • Note that even after Berkley pays Naval Press the (apx.) $35K it lost, Berkley still has a net profit of roughly $690,000 • It is efficient for Berkley to breach • Naval Press as well off as if contract performed • Berkley better off • Damage rules should encourage “Pareto-superior” outcomes

  10. Sullivan v. O’Connor (Mass. 1973)(above, before and after rhinoplasty pictures of Ashley Tisdale, star of High School Musical)

  11. Facts –Sullivan v. O’Connor • Plaintiff professional entertainer • Before rhinoplasty, her nose was “straight, but long and prominent” • After 3 surgeries, “concave . . . Bulbous; flattened, broadened” and asymmetrical, and not improvable by further surgery • What should her damages be?

  12. Some subtleties . . . • Courts reluctant to treat contracts for medical procedures as normal commercial contracts • Afraid strict enforcement of expectations will lead to underpromising by medical doctors • OTOH too weak enforcement will lead to overpromising by doctors • Ex post enforcement affects ex ante incentives!

  13. Three contractual “interests” -- Introduction • Expectation interest – (amount of money damages necessary to put) promisee is as good a position as it would have been in, had promise been performed • Reliance interest – (amount of money damages necessary to put) promisee is as good a position as it would have been in, had promisor never made promise • Restitution interest – returning to promisee the benefit it conferred upon the promisor

  14. Plaintiff’s expectations in Sullivan • = money damages such that plaintiff in as good a position as she would have been in had she got the nose she was promised • Strictly: indifferent between the money and the nose, ex ante

  15. Problems . . . • Hard to measure that in money • Therefore, expectations work best in commercial settings, fungible goods, liquid markets • Policy concerns – too hard on doctors, might get defensive

  16. Reliance interest in Sullivan • Put plaintiff back in position (so far as money can) she was in before she relied on the promise • Money back – that’s easy • Difference in money (if measurable) between nose she got, and nose she had before • Pain and suffering? • possibly

  17. Problem, p. 16 Farnsworth • Assume: • Doctor’s fee $300 • Hospital fee $100/operation • P&S $3000/operation • Value promised nose $20,000 • Loss from disfigurment $10,000 • Plaintiff got 3 operations, and suffered disfigurement instead of getting promised nose • What is expectations interest? • Reliance interest? • Restitution interest?

  18. Plaintiff’s expectation interest

  19. Plaintiff’s Reliance Interest

  20. Plaintiff’s Restitution Interest

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