Remedies Outline Fall 2011 Big Questions 1.

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 List 1. Restoring Plaintiff to his rightful Position 2. Value as the Measure of Rightful Position 3. Reliance and Expectancy as Measures of Rightful Position 4. Victim’s Incentives 5. Consequential Damages 6. Liquidated Damages 7. Partial Compensation 8. Avoidable Consequences, Offsetting Benefits and Collateral Sources 9. Scope of Liability 10. Specific Performance 11. Restitution

Introduction - Rightful Position
1. 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. Hatahley 10th 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 arbitrary Tort Law • Corrective Justice o 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.

The goal of contracts and torts remedies is to restore the P to his Rightful Position a. Efficiency i. There is no over or under deterrence.Put you in the position you were in had you not been wronged.The court looks into the damages that the government officials caused to the NA and awards no more. Two theories: Hatahley . Contracts: 1. Court attempts to restore the plaintiff as best as possible to his rightful position. Torts: Restore the plaintiff to the position that he would have been in had he never been wronged 1. The rest of the world is irrelevant. Torts and Contracts often reach different remedies. Example . ii. not the future actions of others. The remedy is $0.Put you in the position had the contract been performed.Government killed horses of Native Americans.D sells book to P for $10 but you describe it as if it were worth $15. Hatahley . He would have had a $10 book for $10. Restore the plaintiff to the position that he would have been in had the defendant not breached . He would have to pay $5 for the difference between the recommended book and the actual book.Goal of Remedies 1. Provide incentives for the parties to avoid social costs Hatahley . No more no less. The only factor that matters is the relation between the two parties. Corrective Justice i. b. no less. Torts .The court looks into the damages that the government officials caused to the NA and awards no more. Contracts . a. no less. i. This is consistent with both theories.

Tort he would get nothing. idiosyncratic value and awards cost of repair.D finds cave under his land. Was the idiosyncratic value negotiated into the contract? a) If it was taken into account then it was likely foreseen iv. Damage doesn’t affect use of the church. Lee . D took people down for a profit. it is evidence that there is idiosyncratic value. Will the victim use the money to rebuild? a) If so. Therefore. Bring the D to his rightful position. Is the victim a individual or a corporation? a) If individual more likely to have IV then a corporation Sept 11 . 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. taking away the benefit D got from the cave Rightful Position .Towers fell and P wants cost to rebuild. Cost of Repair Peevyhouse a) Two questions i. ii. Was that value foreseeable to the other party? b) Five Considerations i. There was also no contract. Court finds specialty property. take away D’s benefit Edwards v. b) If the value was due to subsequent events then it is probably not idiosyncratic value. Trinity Church .Construction damages church.Towers fell and P wants cost to rebuild. Diminution in Market Value v. Restitution/Unjust Enrichment (focus on the defendant) 1. only market value.iii. No idiosyncratic value. R2K § 348 . The owner was .Torts and Contracts 1. The cave also went under P’s land. iii. Is there idiosyncratic value? Sept 11 .award cost of completion if not disproportional to the value to him ii. Court gave restitution. Court finds not specialty property.

• If there is a car dealer and the car costs 100 but the dealer is selling it for 120.If there is a car dealer and the car costs 100 but the dealer is selling it for 120. The owner has an obligation to rebuild. P claims they have a contract to rebuild. Peevyhouse. Trinity Church In Re September 11th Litigation SDNY 2008 pp. The car can be replaced easily for the same price and there is no idiosyncratic value. Class Notes: Sept 11. Holding: The “lesser of the two” rule applies.Towers fell and P wants cost to rebuild. only market value. They rule that the duty of the tortfesor to compensate should not depend on contracts between the P and a 3rd party. 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. 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. the obligation to rebuild is not a consequence of the tort committed. The assumption is that the profit will be zero. Also. There damages are discussed below.18 Facts: The owner of the towers sued the several people for the planes hitting the towers. Sept 11 . anticipated rental is part of the price that was paid for the towers and is not included either. Is the term essential or incidental? a) The more important of a term the more likely it has idiosyncratic value 2. Therefore. the towers will not make a profit.P may recover the lesser of diminution in value or . 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. v. The court finds this is not applicable too remote and not applicable to the damages at hand Example . • This also assumes that they could just go and buy a new building and start making a profit again. Lesser of the Two . Also. The court finds that this is too remote.a wealth-maximizing corporation.

They performed every part of the contract except for the repair work on the land. we need overcompensation  This evens out the under-enforcement We generally want to compensate proportaionally Peevyhouse v. therefore there would still be an incentive for the wrongdoers to perform the action.There is over-deterrence. Garland Coal Supreme Court of Oklahoma 1962 PDF Facts: The plaintiff leased their land to a coal mining company. o When there is under-enforcement.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 .Under efficiency theory there would be under-deterrence. There is also not the incentive to take proper precautions. Overcompensation/Under-compensation • Under-compensation . The value of the farm as a whole was $3000.000 to repair the land. They could do something else . because the person the V doesn’t have to spend the money to repair the land. 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 . o Good example  Harm = 100  Damages = 90  Precaution = 95 • Not worth the precaution and incentivizes the harm. • Is this really economic waste? o No. It would cost $29. but it would only add $300 in value.Ones that are not usually on the market. o Example of when under-compensation is efficient? • It is sometimes needed. The WTT were on the market recently and therefore do not apply.

2 .with it. Also. the more effective default rule would be $29.if the breach results in the ineffective or unfinished construction and the loss in value is not proven with sufficient certainty. Restatement §348. Now in future cases they will have a liquidated damages clause.The owner of some property wants an ugly statute on his land. This may succeed or it may not. Should the court treat contract cases and torts cases the same? • The default rule essentially is $300.000 because there is no way that a court would strike down a $300 liquidated damages. Should he have to pay? • The idiosyncratic preference is clear. because the court could say that it is more of a penalty. Hypo . On this occasion. not damages. which upped the market price. the cost of repair is so significant and the improvement so insignificant that there is no reason to force it. If the court faces replacement or cost of repairs there are two questions: .The buyer took the price into account. Dissent . however. They want the diminution for their own reason. • Why is there such a gap? o A shortage in manpower and building materials. The sculptor stops midway through and argues that he avoided a harm. 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). instead of the land owner. the demand for property is very low. even though it would diminish the value of the land. 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. not $29000. • Given this. Why is that better then the Holding: The court finds that normally the coal mining company should pay for the restoration work. • It is a windfall for the mining company.

Is there idiosyncratic value there? a. 5. a difference of 39%. If individual then more likely to have IV then a corporation. Will the victim use the money to rebuild? a.1. therefore diminution in . Was the idiosyncratic value negotiated into the contract? a. 2. 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. 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. 3. which should be multiplied by the cost of reconstruction. If the value was due to subsequent events then it is probably not IV. If there is none then it is clearly the diminution in value. b. which caused the stone to crack and the church to face irreparable harm. then econ would say that they should invest zero in precaution. If so. Holding: The church counts as a specialty property because it is not something that is usually auctioned off. Is the victim a individual or a corporation a. they awarded 39% of the reconstruction. and vice versa. There was a harm. John Hancock Mutual Life Insurance Mass 1987 pp. Why sometimes and not others? Replacement or the market value?? Trinity Church v. If they knew and still entered into the contract then it seems that there was idiosyncratic value and they took it into account. Is the term essential or incidental? a. If it was taken into account then it was likely foreseen 4. • Something happened but the church can be used to the same extent as before.28 Facts: During the construction of the John Hancock tower the foundation of the Trinity Church shifted. Before it was 26% but after it was 65%. o If the harm were zero. Is that value foreseeable by the other party? Five Considerations to answer the two questions above: 1. Therefore.

ii. there is no loss. What if there is a hurricane or an earthquake? It could just deteriorate.property is not the appropriate measure. They must take the plaintiff as they find him. the fault should be portioned off. nothing happened. ii. He didn’t knock down a full church but rather a half-steady one. If the house is 99% unsteady then the house is not worth as much as it is when it is 100%. Therefore. 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). a. They can just pocket the cash. The church is cracked but it has not altered how the church is used or how it will be used. i. It may not be able to be detected for a long time but when it happens someone has to pay. 1. Justice among wrongdoers a. Should the last wrongdoer have to pay everything? Even if it’s 99% and 1%? i. Also. NO. generally. Therefore. If the building is 39% less table then the insurance on the building would be larger. Who pays for that? 4. It causes over deterence if the minority view is taken. There is harm. 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. The Egg shell does not apply to property. Practically. b. if someone does knock down the church. they surely not have to pay for a new church. Dissent: There has been no loss. • 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.The future tortfesor deals with the church as they find it. If it is not repaired it will last just as long. the future tortfesor has to take that into consideration. This is not an egg shell because “the plaintiff as it is found” is not worth the cost of reconstruction. 3. If it is 39% wronged. a. 1. IF they didn’t pay it would move into unrecoverable depreciation. There are three wrongdoers and each is the but-for cause . The wrongdoer should pay their portion of the harm. They may have to reconstruct. Egg Shell Skull . The minority assumes that there will be a future wrongdoer. It could be that there is not a wrongdoer (natural causes). 2.

The Egg Shell applies. We don’t want the victim to have the power to determine who shoulders all the blame. The P can sue any one of them for the full amount. If so. b. Why give any preference to the last wrongdoers? i. this would force the payment on the one who can pay. there should not be any justice among the wrongdoers. . ii. he would negotiate with the others so that he would not sue them. According to the minority. 1. They are each equally responsible.of the collapse. This applies the most to property. i. but to personal injury. Also. If one of them gets picked then he can enjoin the others and sue them for contribution. not to property.

easy to apply damages in contract. in order to encourage specificity ex ante. The tortfeasor will take efficient precautions to insulate himself from liability. A basic point of difference is that transaction costs are often prohibitively high in the tort context to allow for private bargaining ex ante. tort law focuses on liability rules that compensate for harms ex post rather than encouraging market solutions that bypass the courts. This is not over-deterrence. and in the aggregate the expected harms will still lead to efficient levels of precaution. This difference makes sense though. while the potential victim will also . which is to ensure efficient incentives by both parties at the lowest costs. Also. because it is very hard to identify the victims ex ante. In torts. so ignoring any third party externalities).Difference Contracts/Remedies “There is not complete uniformity in tort and contract remedies. Foreseeability enters tort through nebulous doctrines like proximate cause. for example) might prevent bargaining with the numerous affected landowners. This is to avoid having parties locked into inefficient contracts. 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. or a polluting factory. transaction costs are presumed to be low (at least between the parties. In contracts. The eggshell plaintiff rule means that even unusually high harm must be compensated. uncertainty. so the law encourages ex ante bargaining by refusing to open the litigation to evidence about Meinrath’s far-flung business empire. consider the foreseeability doctrine noted in the question. Because of these high transaction costs. the Hadley rule is designed to encourage ex ante revelation of information. even at risk of under-compensation. because collective action problems (holdouts. This limits expectancy and consequential damages in order to avoid problems of over-deterrence. courts look to foreseeability at the time of the contract. in contracts. this goal is addressed fairly straightforwardly through negligence rules (or strict liability plus contributory negligence). but the differences work towards a very similar goal—ensuring efficient incentives for both parties. in which the harms generally are economic. 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. Although these examples show that the doctrines of tort and contract remedies are not uniform. the foreseeability rule works much differently. however. Standard examples are auto drivers. Courts want simple. There is no analogous timing in torts since there is no ex ante bargain before the actual harm occurs. since it would be hard for the oil company to assess all of the social costs of its actions. in which courts will limit the scope of liability to avoid speculative or uncertain harms (see Pruitt). they do have a very similar goal. In addition. As an example of this difference. The physical impact requirement of tort is obviously a drastic departure from contract law. In tort. since unusually low harm is reduced accordingly. not at the time of the harm (breach). This might be seen as a way of minimizing information costs.

This initially seems mysterious. it seems more difficult to have a legal rule that leads to efficient incentives for both parties.take efficient precautions. and the physical impact requirement all aim at efficient incentives under the assumption that private bargaining ex ante is too costly. 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. limits on consequential damages. a no damage rule leads to inefficiently high levels of breach (though efficient reliance by the promisee). the tort rules may not always be applied efficiently by courts (consider the self-risk and offsetting risk principles). given the low transaction costs involved. The usual damage rule of expectation leads to efficient levels of breach but over-reliance by the promisee. In contracts. Therefore. These also have an information-forcing component for ex ante bargaining between the parties. negligence. since the rule will discourage socially beneficial contracts. but ex post damages rules are crude in the abstract. Of course. 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. Both from the corrective justice and efficiency point of view. because he bears the costs of the residual harms—the harms caused by the non-negligent behavior of the tortfeasor. Full compensation for the promisee allows him to ignore the positive probability of breach. if priced correctly at the amount of harm given efficient behavior on the part of the promisor also have the effect. this is problematic though. and liquidated damages provisions all aim to ensure efficient incentives for the promisee by limiting compensation. At the extreme. Liquidated damages provisions. Limitations on liability through tort rules like proximate cause. A reliance damage only rule also leads to inefficient levels of breach but also overreliance by the promisee. . the foreseeability doctrine. but the goal is still fairly clear. as described in the Epstein article. and therefore take inefficiently low levels of precaution.

If the supply does not exceed demand then 2.Big Discrepancy b. If Delta would not have reneged then they could have just sold to United. Other Considerations i. In Chatlos. Substitute for Reliance Fuller and Purdue . The court awarded the difference between what was deliver and what was promised: 201K 3. Maybe 3rd party would have bought. Delta reneges on one plane and supplier only sells 99. The computer they received was worth 6K.Claim that expectation is just protecting negative reliance (see reliance) . Example . This should be subtracted. Unique Good a. If the good is unique enough then the 3rd party may have just wanted that good. Demand a. The boat was available b/c D reneged. ii. Supply v. Small Market a. Arguments for Protecting Expectations: a. Plaintiff’s loss (Below) + Other losses .The 3rd party may not have wanted the boat if he had to wait two weeks. Plaintiff’s Loss = (What was Promised) .P bought a computer from D for 46K that. Lost Volume Seller Considerations 1. Neri .Theories Expectancy 1. Therefore. 5 or 6.Losses avoided = ED a. Diminution in Market Value v. Put the D in the position that he would have been in had the contract been performed 2. which would mean they would only need 98. the 207K computer probably also contained lots of software that they didn’t expect. Fungible v. This ultimately would not have affected the seller. The buyers know about the other buyers’ needs. 3.(What was delivered) Chatlos 1. if it worked as it was supposed to. Extra Amenities with Price 1. there is no overall loss. Cost of Repair (see Rightful Position) Peevyhouse . Chatlos . was worth 207K. but what about buyers 4. so they could have just sold their item to another buyer. who bought the other 99. Trickle down… someone might not have bought a.Supplier has100 planes. Would they also have bought? 4.

They will not be incentivized to make efficient decisions. Retail Marine NY 1972 pp. The respect of promises does not necessarily necessitate expectancy damages c. Under reliance. it would be lower.Seller makes machine for buyer 1 for $80. His expectation is $110. The defendant reneged after the plaintiff order the boat from the supplier. We don’t want the seller to breach the contract. If the breachers don’t pay expectation damages they will not internalize the costs of their breach.35 Facts: The defendant was going to purchase a boat for $12. Seller gains $10. Under expectation damages. Example #1 .b. Example #2 . 1. Class Notes: Neri & Chatlos Neri v. Expectation of buyer 1 is $100. It is important to people to rely in the present on future events. The plaintiff sued for the list profit plus the incidental damages of storing the boat before it could be resold. If the promisor can breach then the contract it would benefit both parties. The plaintiff then sold the boat for the same price. Moral Implications i. We want to encourage people to make the most efficient decisions. It would benefit the promisor and he would factor that into the price of the other contracts. d.578 from the plaintiff. If he knew that he wasn’t protected in the future he wouldn’t take the most efficient actions. A culture should respect promises and expectation damages does that ii. Buyer 2 arrives and wants the machine.Same as before but buyer 2’s expectation is $90. the seller would breach the contract and sell the machine to the buyer who least values it. Efficient Breach i. D paid $4290 as a deposit. This is the efficient decision. Predictability i. Counter: A legal system that enforces reliance still respects promises. Holding: The court found that the plaintiff was entiteld to the lost profits from the deal because they had an unlimited supply. It is efficient for seller to breach the contract and sell to buyer 2. Had the . he would make the more efficient decision and not breach the contract.

there is mitigation. Demand v.sale gone through they would have had two sales instead of just one. Three considerations for Lost Volume Seller 1. Lost volume seller . It still is complicated. If that is the case. “I could have sold two cars but now I only sold one. The buyers know about the other buyers’ needs.” • If there is a limited supply (car dealer who gets 10 cars a month) and the dealers sells them all regardless. Maybe the renter to who facilitates mitigation wanted that exact type of room. . supply 3. 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. LOST SELLER DOES NOT APPLY!! o You could argue. It goes on and on and on. then there would be no damages. “this is a unique good but it is not so unique that the buyer would not have bought something else. If we didn’t repudiate you would United would have only bought 98 and us 1.It assumes that there is either an unlimited supply or that supply exceeds demand. • With unique goods. The incidental damages should also be included. Therefore. the new buyer probably wanted that specific good. who bought the other 99. Fungible v. Small market (airplanes) a. Because of the lost sale a boat was ready on the spot. 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. unique good 2. then it is not so much a lost volume seller. it trickles down so that if B2 would have bought Car2. This could have helped in the sale… • The same could be said for a rental. it is still unclear whether B3 would have bought Car 3. The attorney’s fees are not included.”  What if B2 says “I would have bought Car 2” • Even so. so they could have just sold their plane to another buyer. This ultimately would not have affected the seller.

P and D contract for a wall. the two buyers could interact and destroy the volume seller contract.$100 Example .3 – if there are damages.$50 .Taking the benefit that the D received. • Reliance .P and D contract.you would have lost $150 so $50 would put you in the same position • Reliance . $100 for a product that P intend to turn around and sell for a $20 profit.$100 • Restitution .• • • Amount of the supply??? Uniqueness of product??? Small Market??? o When there is a smaller market. P spends 200 making the wall and D repudiates. • 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 . If the Damages Expectancy Interest . then they can take it from the deposit. If D breaches: • Expectancy . the resale is not important. P sues. • Expectation . • Put the P in the same place as he would have been in had the contract been performed. • Focus is on the breaching party Example . $100 but it really costs $250 for the wall. They could have just sold two instead of one. such as that for a plane.$120 if already paid and $20 if not paid.$50 .Cannot exceed expectation • Restitution - . Reliance Interest . 2-718. Because the supply is unlimited. The seller does not have the contract resale damages or contract market damages because they sold the boat for the same price.Everything P gave up in reliance of the contract.The value of the P’s entitlement under the contract.

 Lost opportunity and expectation is the same. • 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. 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. o The new restatement of restitution says that it cannot exceed expectations o Courts. • The Efficient Brach Theory .Expectation Damages • Put the P in the same place as they would have been in had the contract been performed.  Some allow restitution to exceed expectations and others don’t Why does the law protect Expectation Damages? 1. • They need predictability. It is just a substitute for Reliance damages 2. etc)  P entered into a contract with 3rd party and that is now breached because of the initial breach. If the breachers don’t pay . In a perfect market you would have contracted with someone else and you would have received exactly what you contracted for. • Negative Reliance (Lost Opportunity) o By entering into a contract with D he gave up other opportunities to contract with someone else. Moral implications Arguments for and Against Protecting Expectation Damages • A legal system that enforces reliance still respects promises. It is important to people to rely in the present on future events. The respect of promises does not necessarily necessitate expectancy damages. however. If he knew that he wasn’t protected in the future he wouldn’t take the most efficient actions.We want to encourage people to make the most efficient decisions. are divided about it.

It would benefit the promisor and he would factor that into the price of the other contracts. National Cash Register 3rd Cir.Same as before but buyer 2’s expectation is $90. Under expectation damages. Buyer 2 arrives and wants the machine. His expectation is $110.expectation damages they will not internalize the costs of their breach. It lowers the price of the product… • The promisor would obviously want to be able to breach efficiently.$40K (THE SAME AS RELIANCE.45 Facts: The P ordered a computer with certain specifications for $46. o If the promisor can breach then the contract it would benefit both parties.  It is efficient for seller to breach the contract and sell to buyer 2.) o The same place they would have been in had the tort never taken place. Seller gains $10.  We don’t want the seller to breach the contract. the seller would breach the contract and well the machine to the buyer who least values it. They had a warranty on the product but the product did not perform.$201K • Tort Damages . from an efficiency point of view. They will not be incentivized to make efficient decisions. Chatlos v. Should they get the difference between $6K and $46K or between $6K and $207K? • Contract Reliance . want an efficient breach rule. o Example #1 (Min. Both parties want. This is the efficient decision. Expectation of buyer 1 is $100. he would make the more efficient decision and not breach the contract. Holding: The court found that the cost a system that could do the same .$40K • Contract Expectation . 1982 pp. • The promisee also wants efficient breach because it will be priced into the contract and the promisee will get a lower price. They then sued. o Example #2 .Seller makes machine for buyer 1 for $80. it would be lower (listen to recording). The product that they received was worth $6. 54). o The party is assumed to be a self-interested wealth maximizer.000.000. Under reliacne.

Anti-Insurance 1.thing would be over $200. Compensate the promisee and he does not have incentives to avoid the harm. Don’t compensate & promisor does not have the incentives to not . o The seller is also sophisticated. The D need only compensate the D for the price that he paid for the stock in the first place. The suit was not for breach of contract but rather for fraud. Smith v. • The buyer is sophisticated. The court awards the difference between the product as delivered and the product if it were as warranted. The assurance came from possibly fraudulent information given by D. Dissent: The dissent argues that the court should award how much they would have paid for the product. you don’t need to take any money off the top. Bolles US Supreme Court 1889 pp. The lower court awarded P the value of the stock had the fraudulent information been true. Holding: The lower court erred. 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.000. You could subtract the value of the additional functions that are not included in the contract. to place him in the position had none of this happened.50 on the assurance that it was good stock. He sells the machine.50 Facts: The P bought stock at $1. b. Problem: Dilemma of Compensation a. It could be that he knew that he could not get that computer at that price and took advantage of the seller. o The buyer could argue that the additional functions mean nothing to him and that they don’t have value. Therefore.

e. ii. Comparative Fault i. Therefore. This does not apply because mitigation is only after the breach. Help avoid breach Example . You get a renter for the day the contract is to be performed. The help would decrease the chance of breach by 20%. Put caps on damages i. c. Flawed Solutions a. b. there is an incentive to rack-up costs 3. Example . the P has an incentive to rack up and be ready in case there is no breach. Could be non-verifiable (to a 3rd party) or non-observable (other party) b. This could not place the proper damages on the promisor. The promisee has information or can help the promisor complete the contract by contributing 5. The victim then has an incentive to help the promisor not breach and to avoid over-reliance because he will not get compensation ii. worth $20. The third party agrees to pay for that right up front. Solution: Anti-Insurance a. so viable anti- . The promisee and promisor agree to sell the right to the breach money to a third party. This only exists in tort law. Potential Problems i. If you wait and don’t get a renter then if there is a breach you lose money.not much of an effect d. Costs typically fall with volume. Results: Victim does not have the incentives to: a. Mitigation of Damages i. c. Over-reliance on the promise i.You want to rent the apartment as soon as the house is done. b. In other countries this also exists. Difficult institutional and actuarial problem. There is no incentive for him to help. If there is a breach you get the price that you would have received had the rent been coming in. Over-reliance and lack of cooperation is before the breach.There is a contract and the damages are 100. i. even though there will be a net gain. Only applied in extreme cases . Incorporate explicit terms in the contract that limit victim’s behaviors i. If you cannot verify the behavior of the victim then this would not work either… 4. If you split the price each will not have the sufficient incentives 2.breach. Pricing Costs: The anti-insurer has to figure out how much to pay for liability rights. The promisor still has the incentives not breach because he will have to pay the full damages to the 3rd party. Not matter if the D will breach. Foreseeability i.

1.insurance may require a large scale ii.. Correspond to reverse deductibles. thus increasing the value of the liability right. The value of the promisee’s liability right will vary from one another. Between Promisee and Anti-Insurer: may pay the promisee to reduce precautions. or large corporation with a valuable reputation Class Notes: . however. causing prices to rise further. whereas above average will withhold. The insurer must predict the probability of a claim to set the premium. One party often knows less than the other about the value. Adverse Selection: Adverse selection is a problem among insurance markets. Between the Promisor and Anti-Insurer: might secretly pay the anti-insurer for a promise not to collect damages a. 3. the anti-insurer may pay the promisee a fixed fee or a percentage of damages for making a report. Owner will low value will sell. When insureds know more about the probability of a claim than the insurers. which causes premiums to rise.. Buyer can reduce collusion between seller and anti-insurer by requesting that the anti-insurer be a consumer org. This is the same in anti-insurance. iii. Some people with a low probability will drop insurance. certified by a consumer org. Collusion and fraud: Three scenarios 1. many people with a high probability of a claim will seek insurance. To solve this. Victim’s Reporting Problems: There is no incentive from disclosing failure to Anti-insurer. iv. Between Promisor and Promisee: The promisor has an incentive to breach the K and to pay promisee not to report the harm 2.

2. a. Different Forms (Fuller and Purdue) i. D recovers the expenses that he used to build the fence ii. Things other then the essential reliance (plane tickets. 3. Sunk cost .Any Loss Avoided (losing contracts) a. Everything you do to perform your part of the contact Example . etc) Example . By entering into a contract with D he gave up other opportunities to contract with someone else.P entered into a contract with 3rd party and that is now breached because of the initial breach. Why chose Reliance a. Place Plaintiff in the same position as he would have been in had the contract never taken place. Lost opportunity and expectation is the same. Incidental Reliance 1. Essential Reliance 1.P bought plane tickets to get to the event iii. In a perfect market you would have contracted with someone else and you would have received exactly what you contracted i.D contracts with P to build a fence. D starts building but then P reneges. If the Expectation Damages are hard to prove Class Notes: . Example .Reliance 1. In some cases it is easier to prove lost opportunity then expectation. Negative Reliance (Lost Opportunity) 1.

Specific Performance
1. Why does a court opt for specific performance? a. When a another remedy is inadequate
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.

i. When the good is economically unique, not necessarily physically unique
Van 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 unreliable b. 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 Rule ii. 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 clauses i. 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 Wagner
Campbell Soup v. Wentz 3rd Cir. 1948 pp.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 calculate 2. 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 overexaggerate) 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 costs o 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)

Also. S&M Enterprises NY 1986 pp. The building then changed hands and the D took over. Property does not have an exact replica. • They had a sub-lease with someone and they set that price and extended it for the remainder of the seven years. o This could create an inefficient bi-lateral monopoly. Physically Unique v. Burden on Defendant • One could argue that if you gave specific performance the parties could just bargain around the rule. With Billboards there are. That would essentially price the value of the billboard. The P wants specific performance. Also there would be a big economic hardship if the owner of the building could not redevelop due to a sign (undue hardship . there is an economic equivalent. There is enough information in this case so the court ruled correctly. The D then terminated the lease for the sign. Van Wagner wanted the profits that they would have made for the remaining 7 years on the lease. The court decided not to award specific performance. but rather economic uniqueness. although there is physical uniqueness. Economically Unique • Under traditional notions of uniqueness this is unique. o The D argued that it was too speculative. o There are high transaction costs so a liability rule is needed Type of Entitlements . o In Campbell Soup there is no economic equivalent. 402 Facts: P leased a sign off the freeway into New York from a building owner. The most important factor is whether there is sufficient information about the product to determine whether there is a substitute or not. o The court rules that the D cannot argue that the damages are too speculative b/c that would support specific performance. renting has never been subject to specific performance.when it would be very very costly for the D to perform). the court rules that. However.Van Wagner Advertizing v. Holding: The court states that specific performance does not depend on physical uniqueness.

even when they are caught doing it b. even though it was more socially useful to have the machine working than sitting around.P had ownership of egg washer machine and kept it in storage. ii. Are transaction costs high or low? 1. 2. Fault of the parties (Sommerville/other case mentioned) 1. If transaction costs are high then liability rule. Level of enforcement 1. Consideration in awarding Restitution a. If the transaction costs are high then a liability rule is needed. property rule is better because the parties can bargain.The industry can pollute but they have to pay o Property Rule .• • There is an entitlement for P to have clean air o Liability Rule . • Specific performance is never ordered for an employee’s promise to work. Might need higher damages (like punitive) . • Because the transaction costs are so low to negotiate a deal. Efficiency i. Restitution/Unjust Enrichment 1. which was far more than the price of the machine. Are the party’s actions deliberate ii. Fairness i. Court awarded $10 per week (how much the court estimated they saved).The industry cannot pollute without P’s permission When the transaction costs are low. If transaction costs are low (easy to negotiate) then property rule of restitution Owell . Windfall 1. the court enforces a property rule. D took out of storage and used it for 3 years before P noticed. Notes • The traditional rule is that damages are not adequate remedy for loss of real estate. Someone can get a windfall by doing something wrong.

Instead he only posts two. In this case nothing was damaged because the machine would have been in storage. the court is less likely to find change in position. like rent. Harm i. It is unclear what your benefit form the pizza is. With money there is no problem of measurement 2. It might not be the market price. Affirmative Defense . D took out of storage and used it for 3 years before P noticed.Change of Position i. i. They would force transactions on everyone b. There is a problem of measurement with Pizza. Product ii. 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.What is the difference between a restitution claim for pizza and for money? 1. When something like pizza the court is more likely to find change in position 2. The D spent the money or used the benefit in a way that he would not have had he not had the money Blue Cross . which was far more than the price of the machine. • Because the transaction costs are so low to negotiate a deal. The law wants to give incentives for the pizza company to be more careful d. Savings Owell . Money v. you get less value.c. Could argue that nothing happened so there are no damages 2. saves money and nothing happens. You should get the savings and not the firm for skirting . Ways to compute restitution: a. 1. Maybe machine wear and tear… b. Incentives a. Since they saved money. i. Court awarded $10 per week (how much the court estimated they saved). Should there be liability? 1. even though it was more socially useful to have the machine working than sitting around.P accidently paid benefits to D. Example . etc.D was supposed to post three guards. Example . Measure of benefit a. What as provided i. With items like pizza. such as food and rent. i.P had ownership of egg washer machine and kept it in storage. When the money is spent on things that D would buy anyway. allowing them to recover would incentivize them to send items to everyone. the court enforces a property rule.

but the P has infringed on an entitlement. . The entire benefit cannot be attributed to the wrong. 1. Sharing Rule i. In situations like trademark and such. d. a. Instead of having someone wash the eggs by hand they could have rented.their duty. When the P is not harmed or very little. The rental value of the machine for three years. c. b. The court asked what would the contract have been had they bargained?? e. c. As a result the park will not be built. 1. free riding. torts and contracts cannot prevent some harms 1. We don’t want people to exploit others. despite the harms or lack of harms. This is an independent idea. Hypothetical Contract i. (Could be the neighbor has an interference and can take it down…) • There is a risk of high transaction costs. He breached the covenant and built a 14story building. The P sued for harm. They also added their own initiative. not an independent field. Anti-Exploitation/Fairness i. Sometimes. Restitution is about preventing harms. He then sued for restitution and the court awarded 5% of the profits. In a way it is a part of tort law and contract law. will increase their value by $10.British case where there was a covenant on the land saying that the owner could not build anything higher than four stories. It was a combination of wrongfully using someone’s property and their own genius. which didn’t work. 3. It is hard to measure harms. apart from torts and contracts. Rental Value i. This is an easy way to measure damages. even though everyone wants it. Prevent Harms i. Measuring Harms i. Private Actors/Public Benefit Private Actors Providing Public Benefits/Restitution What if you build something on your property that costs $15 but the benefit of the building is only $10. Restitution covers those areas between torts and contracts. Why have liability under restitution? Different Theories: a. however. Wrothman . used to measure harms 1. there will be less incentive to make something new. The neighbors. They could be weighed down by the free-riders.

• When the enforcement costs are too high then it would not apply??? (recording). Sauer Missouri Court of Appeals 1990 pp.  What if people have idiosyncratic value or what if they don’t have the money to pay for the benefit. 619 Facts: BC accidentally made payments to D. if the lien takes too long to mature. The P wants the money to be placed in a constructive trust.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. because it is the lower of the two figures  The enforcement costs could gobble up the benefits of the project. • Create a lien on the property o This could then be sold to firms.  What about opportunistic creators? • He can recover no more than costs. Olwell. They changed their position . whichever is lower. Maier Brewing Enrichment not due to Wrongdoing Blue Cross Health Services Inc.a trust that is implied by law • All of the proceeds out of the trust belong to the owner. v. 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. Class Notes: Blue Cross. The benefits from the trust go to the owner. The D claims that they used the money. Summerville. Constructive Trust . Therefore the P wants all of the money that D made out of the mistaken payments. Trust is a situation when someone has an ownership but doesn’t run its management.

Says that P had no way of knowing of his error. it agrees with P and make s the D either sell him the land or pay for the benefit. thinking that he is rich. Jacobs West Virginia 1969 pp. It might not be the market price. After the building was constructed the majority of the value of the property was in the building. . something that would need to be done anyway. Comparative Fault • The fault is on a third party. not the payer. Example . o They would force transactions on everyone • The law wants to give incentives for the pizza company to be more careful Sommerville v. There is no restitution. It is unclear what your benefit form the pizza is. With money it is very difficult to convince the court that there is a change of position. Change of position: • The person gets the money and changes is position. Holding: The court doesn’t think P is to blame. P argues that D should either sell him the land or pay for the benefit.627 Facts: P built a warehouse on D’s land on accident. o With money there is no problem of measurement at all • With items like pizza.A pizza is misdelivered to your house and you eat it. allowing them to recover would incentivize them to send items to everyone. by buying a new big house and traveling all around o Spent the money on things that he would not have spent it on. o When the money is spent on food or rent. • Had there been a change of position and it was the payers fault then the court may not award restitution. that is not change of position.and so they shouldn’t have to pay back the debt. Why is the law more suspicious with money? • There is a problem of measurement with Pizza. Therefore.

Sell the land to the P Dissent: The P has the burden of finding out where to build the structure. a.500 2. There is no way of knowing if the P values the warehouse $17. With money there is no risk of abuse. however. whichever is lower.500 2. More careful analysis would have rendered the true boundry. Beneficiary has to pay for the benefit that he got (market value) 2. The court gives the P two options: 1. Middle of the Road . Solutions: 1. With non-monetary benefit there is. Private Actors Providing Public Benefits/Restitution What if you build something on your property that costs $15 but the benefit of the building is only $10.500) a. The neighbors. It is difficult to quantify the value of a non-monetary benefit a. If not then pay 3. Dissent adds a third option: Have P remove the building. Why would the D value a warehouse $17. (Could be the neighbor has an interference and can take it down…) • There is a risk of high transaction costs. The pizza could be delivered intentionally and then make the other party pay. This reduces the risk for abuse because it takes away the incentives of the P to abuse the system. As a result the park will not be built. will increase their value by $10. free riding. .Don’t confer the market price but rather to be reimbursed for the cost of the benefit (how much it costs to make) a. 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. People might make a mistake intentionally and force the D to sell the land. The D could opt for the P to remove it. even though everyone wants it.Differences between taking money and taking non-monetary benefit 1. Give the P the value of the building ($17. They will not make any money.

Maybe machine wear and tear… 2. D agreed to store the egg cleaning machine for P. if the lien takes too long to mature. Example . 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. What about opportunistic creators? • He can recover no more than costs. Instead he only posts two. Could argue that nothing happened so there are no . • When the enforcement costs are too high then it would not apply??? (recording). saves money and nothing happens. • Create a lien on the property o This could then be sold to firms.   What if people have idiosyncratic value or what if they don’t have the money to pay for the benefit. Savings (Olwell) a. Harm a. 1946 pp. 649 [[[Facts: P sold the corporation to D. ]]] Once there is Restitution.D supposed to post three guards. NYE & Nissen Wash. because it is the lower of the two figures The enforcement costs could gobble up the benefits of the project. Enrichment due to wrongdoing Olwell v. They tried to negotiate a price for the machine but those failed. In this case nothing was damaged because the machine would have been in storage. Should there be liability? i. The cost of the machine was $600 but the court awards $1560. The war happened and P found out that D was using the machine for three years. what should the damages be? 1.

Are the party’s actions deliberate . The court asked what would the contract have been had they bargained?? 5. He then sued for restitution and the court awarded 5% of the profits. The P sued for harm. Fault of the parties (Sommerville/other case mentioned) i. It was a combination of wrongfully using someone’s property and their own genius.British case where there was a covenant on the land saying that the owner could not build anything higher than four stories. Rental Value a. Could the first buyer recover for restitution?  There are some courts that would allow it. Instead of having someone wash the eggs by hand they could have rented. He breached the covenant and built a 14-story building. you get less value. They also added their own initiative. You should get the savings and not the firm for skirting their duty.Olwell • Intellectual Property . 3.  This would be hostile to the efficiency theory. (Specific Performance means that it is not a case for efficient breach). Fairness a. The rental value of the machine for three years.Maier • Trust • Contract o D breached a contract and sold house to someone else. Sharing Rule a. especially if there is a unique good and the courts could apply a constructive trust. Considerations on whether to award restitution 1. 4. 1. i. which didn’t work. Since they saved money. • There is a connection between the cases that qualify for restitution and specific performance. The entire benefit cannot be attributed to the wrong.damages ii. Restitution is effected by the interest protected by the law: • Property right . unless specific performance is necessary. Hypothetical Contract ( a. Wrothman .

the recovery Maier Brewing Co. even though restitution claim.The transaction costs are so low for the D that it makes sense to make it a property rule. Windfall i. The P sold whiskey. v. . • Courts want to encourage people to go to the market and not to act unilaterally. Fleischmann Distilling 9th Cir. 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).a situation where. • Is there any evidence that the profits made are equal to the harm to the P. 1968 pp. o The Supreme Court states that efficiency and deterrence is not a good justification for higher damages. The P was not harmed but the D made a large amount of money. P was simply storing the machine. Someone can get a windfall by doing something wrong. • Even though they are not in competition there could be harm to reputation. there needs to be more liability. Holding: The D should pay damages equal to their profits.]] A big consideration is whether the parties were in competition. Rescue . 2. Efficiency a. o Property Rule . Are transaction costs high or low? b. This is a case that needs the restitution because there is no harm. 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 this case they were not. They want you to buy and not steal. It must be for despicable behavior. In order to deter.b. 658 Facts: [[The D sold cheap beer under the label of the P. Level of enforcement i.

If a poor person and a rich person enter a hospital. Anti-Exploitation/Fairness . Measuring Harms . They could be weighed down by the free-riders. When the P is not harmed or very little. Why do we have liability under restitution? 1. not an independent field. Restitution covers those areas between torts and contracts.One day hits someone in a poor neighborhood.This is an independent idea.In a way it is a part of tort law and contract law. despite the harms or lack of harms. apart from torts and contracts. o By the law. there could be situations where you could liable for hitting a rich person then hitting a poor person. The . In situations like trademark and such. torts and contracts cannot prevent some harms a. because of that difference. This would not totally take away the incentives • Is restitution more consistent with property or liability rule? o Property Summary Restitution in other countries is more developed in other countries. Example .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.  Therefore. This is an easy way to measure damages. 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 . The next day hits someone in a rich neighborhood.Restitution is about preventing harms. 3. 2. We don’t want people to exploit others. but the P has infringed on an entitlement. there will be less incentive to make something new. used to measure harms a. Prevent Harms . a. It is hard to measure harms. Sometimes. Misalignments (Read paper on chalk) • Exceptions to the Hand Formula when the incentives don’t match up. • The lost income of the rich person will be much higher.

Limits on Liability 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 loss o Emotional distress/non-pecuniary losses/deterence .doctor has a larger incentive to give better care to a rich patient then a poor patient.

General damages are the difference between the rents of the old lot v. Like cheapest cost avoider but more focused on incentives. 7. Liability needs to be cut off somewhere or else it would be unfair. courts are reluctant to award consequential damages. forseeability serves that purpose. Therefore. Meinrath . 1. If there were no forseeability it would still be information forcing. Both parties must have the proper information to be able to assess when it is efficient to breach. If he did not have the burden he would run up costs without any consequence. When does it need to be disclosed? a. The victims with the least amount of damages would step forward to get a lower price. Cheapest Cost Avoider i. It could over-burden one of the parties to a point where they would not enter into contracts. IF the victim is compensated for consequential losses he has no incentive to notify the seller of the possible consequential damages. Why the victim and not the breacher a. When the damages are purely monetary. Definition a.Someone has to bear the burden of the losses. Money Damages a. etc. the new lot. The law is more generous with torts because people can protect themselves through the contracting Wagon Mound 5. Because the victim has the power to avoid the loss they should bear the burden. Incentives i. If the information is not available the promisee will assume the worst and charge more damages c. b. Everything that is not general damages.The D failed to pay a bonus to P. e. Information Forcing i. Why have foreeability limit consequential damages? Example . This gives the buyer the incentives to avoid losses because he will not get compensated for it. . At the time of contract formation so the parties can price it into the contract. ii.D breaches contract and P has to find a new place to graze his cattle. since the general damages were monetary. 1. The victim has the information about what the damages would be. loss in cattle. Consequential damages are everything else: the interim pasture. Fairness i. i. The court ruled that. ii.Consequential Damages 4. Over-deterrence i. specific to the plaintiff Buck . P sued for those consequential damages. 6. d. The lack of a bonus caused disastrous consequences on his businesses.

If benefit of the service is (x+4) because charged (x+6) the service is inefficient because charge outweighs benefit. b. Thus. The uncertainty with what damages will be awarded are essentially a sunk cost. He could have added a liquidated damages clause into the contract 1.D in violation i. This is stupid because sometimes consumer would want to buy something with no warranties and a cheap price. Parties want to avoid litigation costs. If full damages are awarded the victim does not have the incentives to avoid costs (anti-insurance) ii. 1. Mitigation is an imprecise tool. This rule is inefficient but UCC probably did not want sellers to take advantage of unintelligent buyers Epstein Article 1. UCC Demands Minimum Amount of Remedies a. not individuals d. 8. Probably . Failed to mitigate 1. 2. What if the bank could not have provided a loan? ii. Mitigation is often unverifiable. 1 percent of packages are lost. Thus many poor people will subsidize rich people. Rich people should pay (x+10) whereas poor should pay (x+2). Adverse Selection Example: Suppose sending packages by FedEx with half poor and half rich customers. Even low damages awards incentivize the D to perform.consequential damages will not be awarded b. Problems a. As long as the damages are greater then the cost saved. That could have signaled something that could have killed the contract. Litigation i. Solution: Capped Damages a. 1000 dollar packages for rich and 200 for the poor. Bad Incentives i. Reputation only for institutions. P could easily have taken out a loan to cover the expenses. If no cap. Orthodox view of consequential damages: a. c. P can raise affirmative offense . Incentives i. Adverse selection (See Below) 3. the price each would pay would be x(cost of service) + 6 dollars (average loss between 200 and 1000). Both parties then have the incentive to limit damages b. then fully compensate each customer. Least Cost Avoider i. Law provides D full consequential damages b. Many poor people will give up the service.

Ex-Anti . Four Considerations: Restatement §356/UCC 2-718 i. You could also affect incentives of the other party with a cap Liquidated Damages 1. This over.A reasonable relationship between the clause and the anticipated harm ii. Price should be x+2 so all would enjoy.would have over-consumption by rich people because the benefit is higher than the cost. under consumption is ADVERSE SELECTION. When are Liquidated Damages disallowed? a. Damages that shock the conscious are invalidated . Cap on damages because buyer is cheapest cost avoider of adverse selection. Ex-Post -Actual Loss 1.

Incentives to avoid over-reliance. Emotional damages and others cannot be recovered. i. 1. ii. All breaches are under the same umbrella (small delay v. Problem w/ Liquidated Damages a. If the limitation on damages goes too far then it will be invalidated. Creates certainty b. The Supreme Court interprets the clause as invalidating the warranty when it would be against the reasonable expectations of the party. then receive same amount of damages if it succeeds or fails i. This does not hold a lot of water because people pay a lower price for no remedy.D sold an engraving machine to P with a clause in the warranty that offered repairs and refunds but no consequential damages. No one would overrely and pay more costs than the benefits they will receive e. Signal of reliability. The court validated the warranty and did not award consequential losses.iii. If set amount of damages. Punishment . which then resorts back to the default. Against the reasonable expectations of the party Kearney . Internalize both costs and benefits of reliance on the K because get that set amount regardless. If the warranty fails its essential purpose then it is invalidated. 1. b. (See Below). Inconvenience of other remedies (UCC only) b. Liquidated Damages protect these interests d. With regard to warranties i.e. This then allows consequential losses. Difficulties in Proving Damages/Non-feasibility i. There must be some remedy. Clause shows that the party is reliable because guaranteed damages if failure to perform f. 2. UCC §2-719. Courts also invalidate if: (Penalty) i. i. Reduces litigation c. Consequential damages are difficult to prove. Why Liquidated Damages? a. large delay) c. The parties . Difficulty is assessing damages iv.If it is too high the court will invalidate it. ii. Priced into the K 3. The lack of a remedy is priced into the contract. The clause does not distinguish between a large or minor breach.no-return stores you pay a lower price.2 a. .

can opt out of the contract. Northern Illinois Gas The default rule that is if something goes wrong you will be fully compensated.000.If the liquidated damages are too high or too low the parties will choose to breach or not breach inefficiently c. It sometimes leads to bad results but it is still a mystery why courts intervene in liquidated damages clause and not others. Farmers Export.The Liquidated Damages Clause bankrupts a party and then the other creditors bear the burden of not getting their money. Cognitive . . Example . Actually.There is a bias against liquidated damages by lay people and the courts. There are good reasons why parties want to have liquidated damages clauses. The parties. If the limitation on damages goes too far then it will be invalidated.75 Facts: D contracted with P to build a computer-operated machine that would cost$167K. There is no reason to think that courts will be able better to quantify damages better then the parties. • The default under the UCC is that the buyer could get consequential losses. which then resorts back to the default.If the warranty fails its essential purpose then it is invalidated.are not allowed to punish each other. Inefficient . UCC §2-719. Externalizing costs to outside parties i. Notes: Kearney. The jury awarded $57. Master Engravings NJ 1987 pp. The parties. • The lower courts allowed the jury to find consequential damages. however. theoretically. courts are probably less accurate. i. The lower court judge instructed the jury that it could award consequential damages. • There must be some remedy. Kearney v. opted out of that provision in the contract. It would not include any consequential damages. The machine didn’t work 25-50% of the time.2 . Summary a. b. 4. This then allows consequential losses. The contract for the machine contained a provision stating that the damages could only be for the repair of the devise and or replacement. so it may not be upheld d.

They didn’t program it right. . 2. If the other party does not think they you are reliable then you could propose a high liquidated damages Problems with Liquidated Damages 1. Signal of reliability a. Certainty of damages 2. 3. It could reduce litigation costs a. o Even if they can do nothing to avoid the problems in the machine. i. o It could be that the buyer was the cheapest cost avoider. Could lead to inefficient behavior from the promissor? If the price . The Supreme Court interprets the clause as invalidating the warranty when it would be against the reasonable expectations of the party. (See Below). In this instance. Holding: Some view clauses as an essential element of cost allocation performed by the parties. 5. If it is too high then the court will strike it down. the circumstances do not warrant the invalidation of the clause. people won’t get more compensation if they over-rely on the contract. What are the policy consideratons? • It could be the case that the buyer didn’t handle the machine properly. the code states that the provisions limiting damages cannot be unconscionable. Avoiding over-reliance a.• o This does not hold a lot of water because people pay a lower price for no remedy. On the other hand.e. Many firms depend on limited damages clauses for their pricing and uprooting that would be costly and disruptive. 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. they may have more incentives to cooperate with the seller to replace the parts and report the problems. Less trials or shorter trials.no-return stores you pay a lower price. Difficulties in proof/non-feasibility in damages 4. Why liquidated Damages? 1. The parties are not allowed to punish each other. Since the damages are fixed (floor and ceiling).

This is accepted by the court. P also argues that the purpose of the provision was to incentivize the ships to leave on time. Cheapest Cost Avoider 7. Georgis Prios 5th Cir 1986 pp. P argues that b/c D was aware of the damages that it should be upheld. 83 Facts: The D held a boat at a port for longer then was allowed.Why allow some clauses and not others? 4. • There is no reason to think that courts will be able better to quantify damages better then the parties. TWA Termination Value . Example . Cognitive Problem . That is not the point of damages. It is to restore the P to the proper position. was $5000/hr. Incentives 8. Key Concepts (Not in the lecture) 6. It sometimes leads to bad results but it is still a mystery why courts intervene in liquidated damages clause and not others.Rental value/resale .It bankrupts a party and then the other creditors bear the burden of not getting their money. Why do courts intervene with liquidated damages clauses and not other biases? • Cognitive Interface v. The court finds that is not valid. Holding: The P tries to prove the reasonableness of the damages and SUCCEEDS. as stipulated by contract. courts are probably less accurate. Summary . Actually. The fixed damages for that offense. The P then argues that it was a reasonable approximation of the damages.There are good reasons why parties want to have liquidated damages clauses. Possibility of externalizing costs to outside parties a. 3. Information forcing Farmers Export v.is too high he would have the incentive to perform even in times when it would be inefficient to do so.

If TWA complied the only risk of the declining market value would have been bared by interface. Holding: The P argues that the liquidation clause is a limit on damages. There is a deposit. 88 Facts: The D bought naphtha from P.They claim that they should share the risk. Restatement §356/UCC 2-718 (check section in recording) . The D claims that there is a liquidated damage clause that sets the price at $13M. they stopped ordering the product.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. After the price of natural gas plummeted. • All breaches are under the same umbrella (small delay v. 1984 pp. An indication to courts that the parties intended to have a penalty: • The clause does not distinguish between a large or minor breach. the risk sharing only occurs if there is a breach. Energy Cooperative Ill. This often times acts in the same way as a liquidated damages clause. large delay) Northern Illinois Gas v. However. D then converted it into natural gas. The UCC states that provisions that limit damages are not valid but this does not do that. The liquidated damages clause is the same even if there is significant depreciation. whereas P claims the price of actual damages to be around $305M. The court does not think that this is the case. . App. They argue that it is not a limit on damages but rather an agreed upon damages.

i.If 39% causation then 39% payment 1. The level of the expected harm Ex: $1000 harm and 1/100 chance of harm = $10 The incentives are the same as tort law. A probabilistic or expected value test . b. 2. Tort Law just says when the harm occurs you pay the full price. When there is no sign there is a fine. 2. what should the fine be? i. a. The recovery would be the percentage of the causation times the harms. Every time you speed you would need to be fined. Solutions: i. ii. We don’t replace the tort system with sanctions because of the difficulty of enforcement. Assume that for every patient with 20% there is an . Recurring Miss a. a. This would be very expensive. The recurring miss is a gap in the tort system so regulation may be needed.Probabilistic Compensation 1. Regulatory or administrative sanctions 1. It is kind of unfair that the difference between 49% and 51% is the difference between nothing and everything. If the enforcement is 100%.

By not warning of the dangers. v. Market-Share Liability i. a. Switch the burden of proof Lone Palm Hotel 1. Manufacturers . They exploit the doctrine of proximate cause to mitigate the recurring miss. Restitutionary Damages 1. (This is a typical recurring miss. Lost-Chance Rule (medicine) b. It equals the same as POE. the company saved a lot of money and was able to sell much more products. 4. Because information is not easy to come by the tort system opts for the POE rule. Basically H/2 b. each pays the harm done by their product. Proximate Cause .if the sign had been there the Dad probably still would have died but he would have kept the son out of the water. can mitigate the harms of recurring miss.80%. Not just proportionate liability. at the end of the day. pay for the son and not the father. all victims would get full compensation and all the wrongdoers would pay exactly what they caused. 5. a. 3. This allows the proper incentives ii.Split the baby . If in a department (AIDS) where all the patients had 30% chance of recovery. 30% and 70%. Therefore. When information is easy to come by (medical stats and market share) the court looks to probabilistic or proportional compensation. the doctor has no incentive to take precautions. 1. Probabilistic recoveries are justified in recurring miss situations. This makes it seem convincing that the cost of determining the % is very costly. iii. Under Preponderance of the evidence on half he would pay full and in half he would pay nothing. Because there are so many cases and the drug is identical. The defendant was unjustly enriched by not posting the sign or the lifeguard. i. although not completely accurate. . a. Why treat it any different?) a. If he pays 70% one time and 30% another time. They should not be able to gain the benefits. iv. etc. This can be played with by courts which. 1.

. The chemical only increases your risk by 1/5.1 chance of 5000) instead of a 400 risk (. Had 75% chance of recovery but doctor lowered it to 25% a. a. When viewed separately then there is liability. a. When do we need Probabilistic Recoveries? a. A group of people are exposed to a chemical. the probability that he did one of them is 99% (10% * 10%) 2. Offsetting Risk a. 1000 (100 risk with . Basics i. Indeterminate Plaintiff 1. D maybe committed two crimes . Recurring Miss i. the liability should not be 1/2 but rather 2/3. Indeterminate Defendant 1. Alternative liability . The paper argues that he should only be liable for the difference between the two. Aggregate Probabilities: Negligence and Causation a.2. According to probabilistic recovery. The choice increases risk by 500 but also decreases risk by 400.2/3 * 2/3 is 4/9. because the victim lost 2/3 of his chance at survival. When viewed together there should not be liability because the overall probability is less then 50% -. Though he could not be convicted for either separately.A = 95% / B = 95% a. 1.90% Crime A/90% Crime B and Beyond Reasonable Doubt is 95%.1 chance of 4000) he is liable for the full amount. The chance that he committed both would be less then 95% 3. Therefore it should be the difference between the two. 2. There is a 2/3 chance of causation 1. Under Tort law if one chooses a 500 risk (. The chemical company pays 1/5 of the harm to everyone. Tice) 2.1 chance). Tort i. 5000. Paying the full amount exceeds the fault of his negligence and of his choice. Lost chance of recovery i. This falls under POE 4. Recurring Hit c. b. There is a 2/3 chance of negligence ii.(Summers v. 1. It could cut the other way . Should we aggregate the probabilities?? b. Market Share Liability ii. b. Criminal Law i.

We don’t replace the tort system with sanctions because of the difficulty of enforcement.(Calabresi Argument) i. 2. Causal Linkage . If the enforcement is 100%. i. Class Notes: Levmore. If he chose the 499 he will not get compensated. If he chooses the 500 he will get fully compensated.b. The P wants the doctor to be negligent ex-ante because there is the same risk that something goes wrong. • Ways to deter such behavior: 1.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. with only a slightly different harm. ii. what should the fine be? 1. Likewise. ii. Only the fifth finger has an increased risk.If 39% causation then 39% payment a. You driving fast didn’t increase the likelihood that the tree falls on them. This would be very expensive. c. Wouldn’t this under-deter? . 1. This happens in failure to warn and informed consent cases. B = 499 (1/10 risk) A = 500 (1/10 risk) 1. Regulatory or administrative sanctions a. • It is when there is always less 50% causation but more then 0%. b. Poor incentives i. A probabilistic or expected value test . the four fingers are not at an increased risk of being lost. Off-Setting Risk Probabilistic Recoveries . The level of the expected harm Ex: $1000 harm and 1/100 chance of harm = $10 The incentives are the same as tort law. This does not provide the hotel with any incentive to obey the law (beside a fine). Tort Law just says when the harm occurs you pay the full price. It must increase risk ex-ante. Driving fast and a tree falls on you. Every time you speed you would need to be fined. When there is no sign there is a fine. The recurring miss is a gap in the tort system so regulation may be needed.

This allows the proper incentives 2. 1. Switch the burden of proof (Lone Palm Hotel) a. each pays the harm done by their product. 30% and 70%. i. Why treat it any different?) i. They exploit the doctrine of proximate cause to mitigate the recurring miss.if the sign had been there the Dad probably still would have died but he would have kept the son out of the water.Split the baby . Therefore. i. The recovery would be the percentage of the causation times the harms. Because information is not easy to come by the tort system opts for the POE rule. Not just proportionate liability. pay for the son and not the father. 4. d. If he pays 70% one time and 30% another time. 3. etc.b. a. When information is easy to come by (medical stats and market share) the court looks to probabilistic or proportional compensation. although not completely accurate. This makes it seem convincing that the cost of determining the % is very costly. (This is a typical recurring miss. (only in recurring miss or also in other things). Under Preponderance of the evidence on half he would pay full and in half he would pay nothing. Probabilistic recoveries are justified in recurring miss situations. c. Lost-Chance Rule (medicine) ii. the doctor has no incentive to take precautions. Because there are so many cases and the drug is identical. Market-Share Liability 1. It is kind of unfair that the difference between 49% and 51% is the difference between nothing and everything. e. Proximate Cause . can mitigate the harms of recurring miss. all victims would get full compensation and all the wrongdoers would pay exactly what they caused. It equals the same as POE. at the end of the day. This can be played with by courts which. Assume that for every patient with 20% there is an 80%. a. f. Basically H/2 ii. i. If in a department (AIDS) where all the patients had 30% chance of recovery. .

• Indeterminate Defendant o Alternative liability . The chemical only increases your risk by 1/5. o When viewed together there should not be liability because the overall probability is less then 50% -2/3 * 2/3 is 4/9.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. Restitutionary Damages a. They should not be able to gain the benefits.90% Crime A/90% Crime B and Beyond Reasonable Doubt is 95%.(Summers v. If the risk is 1/100 that a harm will take place given the behavior.  Should we aggregate the probabilities?? • Criminal Law o D maybe committed two crimes . Tice) o Market Share Liability • Indeterminate Plaintiff o A group of people are exposed to a chemical. i. • Lost chance of recovery .By not warning of the dangers. The defendant was unjustly enriched by not posting the sign or the lifeguard. (Listen to Recording) Efficiency Corrective Justice Retributive Justice Tort law mirrors the risk that the tortfesor causes to the victim. the probability that he did one of them is 99% (10% * 10%)  It could cut the other way . then he has a 1/100 risk of doing it. Manufacturers . the company saved a lot of money and was able to sell much more products. The chemical company pays 1/5 of the harm to everyone.  Though he could not be convicted for either separately.5. 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.

The paper argues that he should only be liable for the difference between the two. If he chose the 499 he will not get compensated. Paying the full amount exceeds the fault of his negligence and of his choice. • 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. Causal Linkage• Driving fast and a tree falls on you. L = Liability H = Harm R = Risk The different cases where this occurs are: 1. o Likewise. 1000 (100 risk with . the four fingers are not at an increased risk of being lost.1 chance of 4000) he is liable for the full amount. 5000.  Therefore it should be the difference between the two.1 chance of 5000) instead of a 400 risk (.o Had 75% chance of recovery but doctor lowered it to 25%  According to probabilistic recovery. with only a slightly different harm. the liability should not be 1/2 but rather 2/3.1 chance). Different interests of the victim 2. It must increase risk ex-ante. You driving fast didn’t increase the likelihood that the tree falls on them. You driving fast didn’t increase the likelihood that the tree falls on them. 3rd party Ex: Ambulance rushing someone to the hospital hits . • Causal Linkage . Only the fifth finger has an increased risk. Victim’s interest v.(Calabresi Argument) o Driving fast and a tree falls on you. 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 (. It must increase risk ex-ante. If he chooses the 500 he will get fully compensated. o The choice increases risk by 500 but also decreases risk by 400.

Victim interest v. Curing Underenforcement 3. Overinvestment in Precautions 3. Defensive Medicine 2. Information and Application 4. 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. 3.someone. Other Alternatives . Overburdening the Negligence-Producing Activity and the Relevance of a Contractual Relationship Criticisms: 1. Undercompensation of Victims 2.

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. When the action that D claims P should have done to mitigate are things that the D could also have done.Discounting Recovery 1.D claims P should have used another cement maker. P sues but D claims that P should have mitigated by using another cement company.D contracts with P to supply cement for a bridge. The benefits that a P receives that mitigate the harm should be counted against the recovery. Court decides that D could also have used the other cement maker to supplement their supply. iii. the benefit of the doubt is given to the P. a. 2. Mitigation/Comparative Negligence 1.J. When it is shown that the P didn’t mitigate he cannot recover anything. Defendant Mitigation 1. Double recovery will create a moral hazard ii. the court only cares that they did something within reason S. S. Mitigation has been around for a while. Subrogation 1. Groves . a. i. Offsetting Benefits/Collateral Source a. There must be a casual linkage between the harm and the benefit that mitigates the harm. D forced the choice upon the P and P chose poorly. P has duty to mitigate when it is reasonable. D is inconsistent and breaches repeatedly. Therefore. Casual Linkage 1. Groves . Comparative fault is a new doctrine. Example .The D hitting P didn’t increase the likelihood that the . If there is more then one option in the range or reasonableness. If insurers can’t get compensation they will just raise rates so ex-ante people will want insurance to get compensated b. it is hanging on. Mitigation a.J. Why? Both are at fault. The court finds their actions were reasonable ii. Mitigation is inconsistent with comparative negligence. Even if there is one that is slightly more reasonable. i.

Oden S. To use Tap Rock to supplement 5. D could just as easily have used Trap. Class Notes: SJ Grove. The P definitely took reasonable steps to mitigate. the court only cares that they did the reasonable thing. . Even if there is one that is slightly more reasonable but both are reasonable. It could be that he misses his flight and the next flight crashes. Make their own cement 2. D could have used Tap Rock to fulfill it’s order. Keep getting assurances from Warner 6. If there is more then one option in the range or reasonableness. Results that are not caused by an increased risk from the action should not be taken in to account. The D was to supply the P with the mixing cement but they were terrible with deliveries. The P had some options: 1. Warner 3rd Cir. The P didn’t have another alternative that would work until Tap Rock said that it could deliver the goods at the same price.plane would crash. Use Trap Rock (an alternative) (The lower court finds that the P should have used this option) 4.J. (like speeding doesn’t increase the likelihood that a tree will fall on you). Mitigation by the defendant . D breached by not bringing the goods on time.85 Facts: There was a contract to build a bridge and P was the subcontractor for some parts involving cement. • Also. 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. 1978 pp. 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. Getting hit by the car didn’t increase the likelihood that the plane would crash. the benefit of the doubt is given to the P. Groves & Sons v. To stop the work 3. • The standards is not that a mitigation should be hyper-analyzed as a way to avoid liability. P stuck with the D and then sued at the end.Even if it were more reasonable to move to Trap.

D cannot allege that harm provided lecture opportunities. D forced the choice upon the P and P chose poorly. Medical Treatment . 2.They should take the next best strategy Mitigation by the defendant: The Groves rule is frequently stated and sparsely applied. When Trap becomes accredited both parties could have used them. Therefore.expenses incurred in reasonable but unsuccessful effots to mitigate are recoverable as damages.Taking a deal that pays D more then the expectation of P Notes . Not the same interest. • It only includes benefit to the interest of the plaintiff. both courts agree that P should have kept with D.As much as could be done to mitigate 3. Why? Both are at fault. 5. it is hanging on. Mitigation has been around for a while.Nothing below the level. As a result he misses his flight. the benefits from mitigation should be counted against the recovery. Should there be liability? • D hitting P didn’t increase the likelihood that the plane would . When it is shown that the P didn’t mitigate he cannot recover anything. Casual Linkage!!!!! D harms P and breaks his leg.How much should the P do? 1. Investment Strategies . Offsetting Benefits It is like the avoidable consequences but from the other side of the coin. • Is remarriage an offsetting benefit? o Create incentive not to get married. even though they were in breach. Mitigation on the D’s Terms .The P is not required to take the D’s deal. The flight then crashes. Finding a new job .P alleges pain and suffering.• • Until Trap was accredited.Cannot mitigate because don’t have the money. out of state or in a new line of work (Ford Motor v. Equal Employment Opportunity Commission). • Comparative fault is a new doctrine. Mitigation is inconsistent with comparative negligence. Financial Inability . Failed Efforts to Mitigate . 4. Efficient Breach . Doesn’t have the money to fix the car so it gets worse. Ex .

Just like speeding doesn’t increase the likelihood that a tree will fall on you. The P is paying for expenses to help with D’s disability. This then expanded even further. personality traits. which would get too personal. set reduction. The attorney’s would argue about looks. o The collateral source often times sue the tortfeasor. o It could be that he misses his flight and the next flight crashes. • Applies to both benefits and harms!! In a wrongful death suit. o The solution is to take it into account but on a scaled. If the insurance company cannot get compensation then . 95 Facts: The P was injured when steel column fell on him. the rule was that collateral sources of income should not be taken into account in damages (collateral source rule). The lower court reduced his damages because he was receiving disability benefits from the government.) Therefore the reduction is upheld. 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. Holding: Before. etc.crash. If D receives disability expenses to help with the disability then ca neb offset • This could skew the incentives. Everyone gets the same reduction (or people of the same age get the same reduction). Getting hit by the car didn’t increase the likelihood that the plane would crash. This has been eroded gradually as exceptions have been made in the medical and dental fields. Oden v. Chemung County Industrial Development NY 1995 pp. There must be correspondence between the damages and the collateral source. Once the insurance has a subrogation claim then they will lower the premiums. • 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. This rule eliminates duplicate payments. Results that are not caused by an increased risk from the action should not be taken in to account. The D then doesn’t have the proper incentives to avoid the harm.

The economic losses could be caused by something else.money that. b. ii. Causation i. Pure Economic Loss = There are no injuries to person or property. There could be a lot of frivolous claims.the premiums will rise. the victim ex-ante wants the insurance company to be able to subrogate. If there is no stop for economic loss there would be liability forever. The juries might award less if the money is going to the insurance company then to an individual. Infinite Liability i. Why no pure economic loss a. plaintiff would never had received. b. Economic Loss v. This includes things that are recoverable. This is background risk. Difficult to fix for sure what the cause is. Economic Loss = Lots of things are economic. but employees miss work for all sorts of reasons. Employee misses work. but an injury to profit. • Therefore. but for the wrong. The employer knows how to deal with those cases. . Who is the cheapest cost avoider? i. Scope of Liability 1. c. Pure Economic Loss a. It could be argued that it is not really over-compensation because he has been paying for the insurance. Notes • What is a collateral source? Third parties that pay money to the P -. 2.

the economic loss victim needs the incentives not to rack up costs. i. Learned Hand i. d. Example: Driver drives 40 instead of 50 mph and hits someone. iii. because 75 of his 100 his taken away for his own risk. Injurers Self Risk a.ii. the benefit to the D is 25 from speeding. With the 75 harm. From that point of view it is Hand Formula justified to take the precaution. In order to be Learned Hand justified an action must create a benefit greater than the harm b. Pure economic loss usually has a delayed impact. his net precaution (burden to tortfeasor to make the precaution) should only be 25. Only when all risks are taken into account will the tortfeasor take the precaution Really. Burden (cost of precaution) Harm that could have been avoided 100 (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. Once the harm is done. he is negligent. Therefore. Offsetting losses and benefits a. a restaurant loses business. . By making the P pay it would be economic waste 3. which does not motivate him to take the precaution. This is costly and a social loss. The risk created to the injuring party should also be taken into account ii. 1. This argument misses the possibility that the victim will take precautions b/c there is essentially no liability for those losses 1. the customers will just go to another restaurant. Self Risk i. If. due to a tort to a third party. The driver didn’t have an airbag.

There could be a lot of frivolous claims. This includes things that are recoverable. If there is no stop for economic loss there would be liability forever. . Allied Chemical Virginia 1981 pp. In this case there is a physical harm but it didn’t not occur to someone that could have brought suit. The D moved to dismiss a majority of the claims because a portion of the P’s didn’t have standing. It also finds that a bunch of other parties also need relief. The others fall under the economic loss rule. It states that it has no articulatable reason to cut off damages but it just knows that it should. b. This would entitle them to relief. Why are courts reluctant to award Economic Loss 2. Not sure what the overall conclusion is. D argues that only the fishermen are those that were directly harm. They stopped liability at the water’s edge. • Pure Economic Loss = There are no injuries to person or property. Holding: The court wrestles with the question of who should be compensated. but an injury to profit. The court makes the argument that the fishermen have a quasi-property right in the fish. Pruitt v. Pure Economic Loss • Economic Loss = Lots of things are economic.102 Facts: The D polluted in a river and that pollution flowed into the bay. 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 loss o Emotional distress/non-pecuniary losses Economic Loss v.Notes: Pruitt. Infinite Liability a.

i. due to a tort to a third party. the customers will just go to another restaurant. This argument misses the possibility that the victim will take precautions b/c there is essentially no liability for those losses i.” (Should A for actions that harmed those who deal with B?) • Causation . The driver didn’t have an airbag.If you or your property don’t suffer any damage you do not have a claim. Who is the cheapest cost avoider? 1. This is background risk. the economic loss victim needs the incentives not to rack up costs. Pure economic loss usually has a delayed impact. This is costly and a social loss. The economic losses could be caused by something else.(Justice Holmes) “The general tendency… is not to go past the first step. The employer knows how to deal with those cases. a restaurant loses business. Burden (cost of precaution) 100 (for going 10mph slower) Harm that could have been avoided 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 . b. Offsetting losses and benefits a. Difficult to fix for sure what the cause is. 2.The new restatement has two rules for causation o The harms must result from the risk of the tortious act. i. By making the P pay it would be economic waste Notes • Economic Loss Rule . 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. 5. Once the harm is done. 4. Causation a. If. Employee misses work. o Darnell-Taenzer . but employees miss work for all sorts of reasons.3.

Therefore. When will courts compensate non-pecuniary losses? a. The interest protected by the contract is a personal interest .19 Non Pecuniary Losses 3. With the 75 harm then he is negligent. Self Risk 29 J.  From that point of view it is Hand Formula justified to take the precaution.S.he hits then he is looking at cost of his harms versus his benefits. Only when all risks are taken into account will the tortfeasor take the precaution Really. because 75 of his 100 his taken away for his own risk.L. (2000) pp. which does not motivate him to take the precuation. his net precaution (burden to tortfeasor to make the precaution) should only be 25. the benefit to the D is 25 from speeding.

They pay the insurance with the later dollars to protect the earlier dollars. iii. By not selling the house the P is out money. Insurance If it is about insurance then there should not be compensation for non-pecuniary losses 1. Do people want recovery for non-pecuniary losses? The answer points to the most efficient default. People do not buy insurance for nonpecuniary losses 1. If the losses are mainly economical then they don’t .The principle gain from selling a house is monetary. ii. People generally don’t take into account pecuniary losses. 4. When the majority of the losses are nonpecuniary then the parties want compensation to create efficient incentives. (see below) a. When the losses are majority emotional (nonpecuniary) then the majority of the damages will not be recovered. People could buy insurance for nonpecuniary losses if it would provide the proper incentives Example . 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). a.” • 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. Travel Agent . Marginal Utility of Money i. The principle interest in traveling Europe is the personal experience. Incentives If it is just about incentives then there should be compensation.rather than an economic loss. People buy food (most valuable) and move outward (least valuable) 2. It does not affect the marginal utility of money. not money. House Seller v. 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.Buy it from the travel agent ii.” 1. People value their first dollar more then their last dollar. When the losses are mostly non-pecuniary it is more essential to give compensation for the losses to create the proper incentives. 1. Two considerations: (a “tradeoff”) i.

A plans a trip to Europe through a travel agent. He does not need more money for the harm (as opposed to a physical injury). Right before the contract is to be performed.want compensation because of they will pay a higher fee. which dives into the marginal utility of money. where the nonsensitive ones subsidize for the really sensitive ones.  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. • B would not like the court to award pain and suffering ex-ante because it would raise the contract price. Why do people buy insurance in the first place. Courts allow damages for non-pecuniary loss when the interest . if they pay more then the risk is worth? Because people are risk averse… • Marginal utility of money o People value their first dollar more then their last dollar.A is selling B a house. The Counterargument: Why would she sometimes buy insurance emotional harm? • Hypo . A reneges and B doesn’t get the house and suffers emotional distress. • It would essentially be an emotional insurance. • Suppose the buyer has an option to pay more to get compensation for emotional harm in case of breach. 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. Notes: Non-Pecuniary Loss Why is it rare to award emotional losses in contracts? When it is appropriate? Hypo . o This could result in adverse selection. o The honest ones subsidize those who bring frivolous claims.

Two considerations: 1. It does not effect the marginal utility of money 2. the majority of the harm will be recovered by the contract for economic loss. even though there might be emotional distress. Insurance a.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. If most of the damages will be mostly non-pecuniary then they will most likely want to recover. 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. People generally don’t take into account pecuniary losses. • With a contractor. When the losses are majority emotional (non-pecuniary) then the majority of the damages will not be recovered. . o It depends in this case. Incentives a.

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