Remedies on and off Contract

By Brooks, Richard R. W.; Stremitzer, Alexander | The Yale Law Journal, January 2011 | Go to article overview

Remedies on and off Contract


Brooks, Richard R. W., Stremitzer, Alexander, The Yale Law Journal


ARTICLE CONTENTS

INTRODUCTION

I.   BACKGROUND AND SKETCH OF ARGUMENT

II.  QUALITY AND CONTRACT REMEDIES
     A. Origins
     B. Quality as a Baseline of Expectation
     C. Quality as a Trigger of Rescission
        1. Ex Ante Investment Efficiency
        2. Redistribution
        3. Ex Post Trade and Expenditure Decisions

III. RESCISSION FOLLOWED BY ON-CONTRACT REMEDIES
     A. Traditional View (Rescission and Restitution)
     B. Rescission and Expectation Damages
     C. Rescission and Reliance Damages

CONCLUSION

INTRODUCTION

Not every wrong has a remedy, and some wrongs--like ordinary breach of contract, the subject of this Article--would appear to have very many remedies. Expectation damages, the common law default, are nowhere near an exclusive remedy for breach. Reliance, restoration, disgorgement, and specific performance are just some of the more familiar forms of relief available to disappointed promisees. Yet whether, and to what extent, promisees (or even courts) may choose among these conventional alternatives, as opposed to having the legally apposite remedy dictated to them by extant circumstances, are contested and unsettled questions. One remedial election, however, is unquestioned by observers. Aggrieved parties in appropriate circumstances may (1) "affirm" their contracts and seek money damages or specific performance on the contract or (2) "disaffirm" their contracts with the off-contract remedy of rescission followed by restitution. This fundamental choice, long part of the common law tradition, is doctrinal orthodoxy.

In the prototypical case, a buyer pays up-front for goods that are never delivered. Near-universal consensus holds that the buyer may elect to affirm the contract and receive an on-contract remedy or disaffirm the contract, which rescinds or, more sensationally, "annihilates the contract," after which the court "puts the parties in the same position as if [the contract] had never existed." (1) To put the parties in the same position as if the contract had never existed, the so-called status quo ante, it is necessary to restore the payment to the buyer; this restoration is achieved through an action in restitution. (2) Had the seller delivered goods that did not conform to the contract, so delivery was nonetheless a breach, then restitution to the seller in specie or in an amount equivalent to the reasonable value of the seller's nonconforming performance would apply as well. (3) As this last example reveals, the right to elect rescission and restitution is not limited to the prototypical case in which the breaching party wholly fails to perform.

Any breach of a sufficient degree by one party is enough to trigger the other's right to disaffirm the contract. No one disputes this basic proposition, but controversy has always surrounded the matter of what exactly counts as sufficient. For centuries, too low a threshold, which would allow easy availability of rescission followed by restitution, has been a source of great anxiety among legal authorities, who see it as a threat to commercial order and other normative values. Responding to these fears, authorities have limited the ease with which rescission may be elected. Their approach is often excessive and based on misunderstandings of the remedy's effects. Taking the economic effects of the remedy as a basis for its argument, this Article makes a case for a more liberal right of rescission followed by restitution.

The argument is relatively straightforward. First, foreseeing the possibility of rescission by counterparties, promisors will invest to enhance the quality of performance, thereby reducing the likelihood that the rescission right is triggered. Second, promisors can also make rescission less desirable for counterparties by reducing the price that they charge, implying a lower, less attractive remedy in restitution. Through its effect on quality and price, the option to rescind followed by restitution may be enlisted by parties to promote efficient contracting. …

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