Specific Performance versus Damages for Breach of Contract: An Economic Analysis
Shavell, Steven, Texas Law Review
When would parties entering into a contract want performance to be specifically required, and when would they prefer payment of money damages to be the remedy for breach? This fundamental question is studied here and a novel answer is provided, based on a simple distinction between contracts to produce goods and contracts to convey property. Setting aside qualifications, the conclusion for breach of contracts to produce goods is that parties would tend to prefer the remedy of damages, essentially because of the problems that would be created under specific performance if production costs were high. In contrast, parties would often favor the remedy of specific performance for breach of contracts to convey property, in part because there can be no problems with production cost when property already exists. The conclusions reached shed light on the choices made between damages and specific performance under Anglo-American and civil law systems, and they also suggest the desirability of certain changes in our legal doctrine.
When would parties entering into a contract want performance to be specifically required, and when would they prefer payment of money damages to be the remedy for breach? I study this fundamental question here and come to a conclusion based on a simple distinction between two types of contracts: contracts to produce new goods or to provide services;1 and contracts to convey existing goods or other property.2 Setting aside qualifications, the conclusion that I reach is that parties would tend to prefer the remedy of damages for breach of contracts to produce things, whereas they would often favor the remedy of specific performance for breach of contracts to convey property.3
This conclusion will help us to understand the choices made between damages and specific performance under Anglo-American4 and civil law systems5 and suggests the desirability of certain changes in our legal doctrine. The conclusion and the analysis underlying it differ significantly from those in previous writing, as I will indicate after describing the organization and content of the Article.
I begin in Part II with a theoretical, economically oriented examination of damages and specific performance.6 The question that I address there is what the parties to a contract would want the remedy for breach to be. The point of departure for the analysis of this question is that contracting parties should in principle agree ex ante to choose the remedy that would maximize the joint value of the contract to them-where the joint value is the value gained by the parties less any expenses, costs of bargaining, and risk-associated disutility. The parties should want to maximize joint value essentially because if a proposed remedy does not lead to the highest joint value, both parties can be made better off by agreeing to another remedy, generally after making a suitable price adjustment. If, for instance, they were contemplating specific performance but that remedy would lead to lower joint value than a damage measure, both the seller and the buyer can be made better off by changing from specific performance to the damage measure, after lowering the price to compensate the buyer if the buyer is made worse off because the seller no longer guarantees performance.
I initially consider the choice of remedy in the context of contracts to produce (say, a contract to excavate a construction site). Here I explain that specific performance involves four disadvantages that would often lower joint contractual value.7 First, sellers might have to perform even though performance is very expensive (suppose that an excavator unexpectedly encounters hard rock) and outweighs its value to the buyer. Of course, in such circumstances, sellers might also negotiate for their release, but that would involve bargaining costs and might not result in an agreement. Second, the prospect of these problems associated with high production expense might lead sellers to take wasteful avoidance steps (such as purchasing rock-crushing machines even though the expenditure is intrinsically uneconomic). …