You Do Have to Keep Your Promises: A Disgorgement Theory of Contract Remedies

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ABSTRACT

Contract law is generally understood to require no more of a person who breaches a contract than to give the injured promisee the "benefit of the bargain." The law is thus assumed to permit a promise-breaker to keep any profit remaining from breach, after putting the victim in the position he would have been in had the promise been performed. This conventional description is radically wrong: across a wide range of circumstances, standard contract doctrines actually do require people to keep their promises, or to disgorge their entire profit from breach if they do not. Rather than protecting the expectation interest of injured promisees, therefore, the law of contract remedies is better characterized as enforcing "promisor expectation" or disgorgement, a regime that puts breaching promisors in the position they would have been in had they performed, even when that means overcompensating injured victims.

We offer two explanations for why we so often see "promisor expectation" remedies, even though contracting parties would prefer the remedy of perfect promisee expectation damages. First, promisor expectation is often much easier for courts to compute or implement than promisee-based remedies. Second, promisors themselves prefer to be subject to the promisor expectation regime because it allows them to commit credibly to perform their promises. Such commitments are valuable but cannot be sustained if the law awards damages that fall short of perfect promisee expectation, as it invariably does. By agreeing to a remedial scheme that makes it unprofitable or impossible for them to profit from breach, promisors can credibly commit to perform and thus realize a higher contract price ex ante. An "overcompensatory" remedy thus paradoxically serves the interests of promisors by providing them a valuable bonding mechanism.

TABLE OF CONTENTS

INTRODUCTION

I. THE ARGUMENT
   A. The Conventional Wisdom
   B. Prior Scholarship on Disgorgement .
II. THE AVAILABILITY OF PROMISOR EXPECTATION REMEDIES IN CONTRACT LAW
   A. What's a Widget?--The Continuity of Promisor Expectation Remedies
      1. Hypothetical Cover--Promisor Expectation
         When the Price of Performance Is Clear
      2. Specific Performance--Promisor Expectation
         When the Price of Performance Is Not Clear
         a. The Ordinary Remedy
         b. Ancillary Equitable Remedies
         c. Negative Injunctions
         d. Efficient Breach
      3. The Inadequacy Test Promisor Expectation in Between
   B. Promisor Expectation Elsewhere in Contract Law
      1. The Exclusive Benefit Rule
      2. Promisor Expectation by Characterization
      3. Promisor Expectation Through Rescission
   C. Innocent Breach--When Promisors Can Keep the
      Expenses They Avoid by Breach
III. EXPLAINING PROMISOR EXPECTATION
   A. Promisor Expectation as a Simple Remedy
   B. Promisor Expectation as a Promisor
      Bonding Mechanism
      1. The Example of Fiduciary Duties
      2. Bonding in Ordinary Contractual Settings
CONCLUSION
APPENDIX: A COMPARISON OF UNDERCOMPENSATORY- EXPECTATION
          AND DISGORGEMENT RULES

INTRODUCTION

"The only universal consequence of a legally binding promise is, that the law makes the promisor pay damages if the promised event does not come to pass. In every case it leaves him free from interference until the time for fulfillment has gone by, and therefore free to break his contract if he chooses."

--O.W. Holmes, Jr., The Common Law, 301 (1881)

"It is no reason for not enforcing a contract that the defendant can make ... more money by avoiding his agreement than by carrying it out."

--Roberts v. City of Cambridge, 49 N.E. 84, 84 (Mass. 1898)

Suppose that Jack promises Jill to deliver a pail of water in one week for a price of $10, payable on delivery. Jill values the pail of water at $12. Before the time for delivery arrives, though, Mr. …