Party-Designed Remedies – Liquidated Damages

• The contract contains explicit terms specifying the remedy in the event of breach.
• Example: the contract may stipulate a sum of money (“liquidated damages) that the promise-
breaker will pay to the innocent party in the event of non-compliance of the terms in the
contract.
• Issue: Whether the Court should enforce the term stipulates damages that exceed the
actual harm caused by the breach – Penalty Clause?
• Opinion: (i) The court should enforce the Penalty Clause as it may encourage efficiency to the
extend that the Penalty Clause represents an explicit terms in allocating the risk. Penalty clause
can also convey information about promisor’s reliability and hence facilitate the creation of
efficient contract.
• (ii) Contract with Penalty Clause would lower the transaction costs. If the parties know their
obligation beforehand, they would seem less likely to engage in lawsuits to assess damages in
the event of breach.
 Court-Imposed Damages – Expectation Damages
• The Court awards damages that place the victim of breach (promisee) in the position he or she would
have been in if the other party (promisor) had performed.
• The damages granted based on the “value of expected performance” – Perfect Expectation Damages
(“PED”)
• PED leave potential victim indifferent between performance and breach.
• Issue: What would be the incentive to the promisor and/or promisee if the Court routinely award
PED?
• Opinion: PED creates incentives for the promisor to take appropriate precaution. If the promisor knows
that he/she must pay all the benefit the promisee expects (PED), then the promisor’s precaution must be
efficient.
• Level of Precaution = Level of Expected Liability from the breach
• PED may lead to inefficient overreliance on the part of the promisee, he/she knows that the Court will
order compensation meet her expectation. It will cause the promisee has no incentive to insure
himself/herself to take precaution against possible breach by the promisor.
 Court-Imposed Damages - Restitution
• In the event of breach, restitution requires the promisor (breaching party) to return what was
given by the promisee in exchange for the promise.
• As such, restitution is a minimal remedy in contract.
• Example: The buyer of a car paid the “down payment” before receiving the car. If the seller
breaches the contract to deliver the car, the Court may order the seller to return the down
payment.
• Issue: What are the advantages of Restitution?
• Opinion: Restitution has the advantages of simplicity and enforceability because it will
usually be easier for the court to order restitution than to calculate damages for breach of
contract. The Court usually will not hesitate to enforce the restitution clause on the principle of
unjust enrichment who had received benefit at the expense of another.
 Specific Performance
• Specific Performance requires the promisor to do what he or she promised in the
contract.
• The Court usually adopt specific performance as remedy involves the sale of goods for
which no close substitute exists. Examples include land, houses, work of art etc.
• In the event that the court order specific performance, the parties to the contract can
subsequently negotiate an alternative settlement e.g breach with damages paid to the
promisee.
• Issue: What is the advantage of the remedy of Specific Performance?
• Opinion: The court does not have to estimate the value of performance to the promisee.
It will reduce the error of the court in estimating the damages because assessing
damages is sometimes difficult and often subject to conflicting valuation.