Reconsidering Remedies
Here are some notes from this morning’s stimulating panel on contract remedies. Due apologies to the presenters for any notetaking errors, as those are entirely the fault of this writer.
Pictured from left: Dov Waisman, Moshe Gelbard, Jean Powers, and Shawn Bayern
Shawn Bayern (Florida State): “The Limitation of the Expectation Interest in Contract Law.” The justification for expectation damages frequently does not work out given real situations and goals of contracting parties. Reliance damages are frequently the more just means to compensate the parties, particularly where the breaching party did not “intend” to contract. Expectancy is unduly harsh as compared to the moral fault of the breaching party. Courts will do reach this result sometimes, by recognizing a mistaken contract as reversible. Unilateral mistake is the least controversial situation in which to prefer reliance damages over expectancy. A second scenario is in cases of apparent agency. A harder case for this argument is interpretive mistake–such as when the offer-and-acceptance communication is worded inartfully, causing confusion but objective contract formation occurs. Pure expectancy would disproportionately harm the breaching party as compared to the moral harm arising from breaching a promissory obligation. Where there has been little reliance, expectation does not tend to be fair. One of the great fairness benefits of expectation damages is dealing with the price changes in rapidly moving prices, but many parties don’t enter a contract for the purpose of fixing a price. They have other interests in mind, and there is less of an economic justification for the expectancy damages. The problem with any generalized rule in contract law is that it does not fit the wide variety of things that parties actually are doing when they enter into a contract. That said, reliance seems to be the better fit for protecting the parties in more cases. Expectancy damages may just be a happy coincidence in protecting the parties as a remedy. Better approach would be a generalized reliance remedy along with a limited disgorgement add-on. (“Reliance plus disgorgement.”). We many not need a forward-looking remedy to protect contracting parties. Contract law would benefit from tort-law like remedies, including moving reliance damages to the front of the line in contract remedies.
Jean Powers (South Texas): “Paying for What You Get–Restitution for Breach of Contract.” The Restatement (Third) of Restitution and Unjust Enrichment (R3UR) speaks with a forked tongue and may be causing more confusion than benefit in the field of contract remedies. It tends to reject the view of “restitution for breach” based on unjust enrichment, though elsewhere (e.g., section 36) it addresses the idea of restitution for a party not in default. Restitution tends to be the least desirable remedy in contract law, a last fallback position where nothing else is adequate. Contract law also dislikes the idea that party could get better recovery in restitution than if the contract had been performed. Section 38 of R3UR deals entirely with contract damages, which is odd, given the subject of this restatement. The R3UR tends to add confusion to remedies questions by adding new terminology and inconsistent use of contract principles. Ultimately the principles of restitution and of contract law are not incompatible, but they have complicated the question of remedies. Section 38 may undercompensate, but section 39 (opportunistic breach) may overcompensate. Section 39 seems to want to bring back the failed experiment with the tort of “bad faith breach of contract.”
Dov Waisman (Southwestern): “The Hadley Rule and After-Arising Risks.” Contract liability is narrower than tort liability based on the rule requiring foreseeability at the time of contracting (rather than the tort concept of proximate cause at the time of the tort). The rule has been justifies in many ways, including due to its fairness component in that a foreseeability standard best empowers both parties with the ability to protect themselves. The Hadley v. Baxendale rule should, however, be relaxed in the case of willful breach (intentional or recklessness in the breach). The general rationale for this modification for an after-arising risk is that the parties did not have an opportunity to protect themselves. The defendant’s fairness objection is far weaker than that of the plaintiff given a circumstance that what was unforeseeable to both at the time of the initial contracting. Extra liability would attach only if the defendant was willful in its breach and the plaintiff did not disclose the added damage risk because it had no reason to do so at the time of contracting. An example of this corrective rule is the 1992 Connecticut case of Savaroso v. Aetna–employee Savaroso was wrongfully terminated and that termination caused her greater damages because of her mental state, but her psychiatric situation was neither known nor foreseeable at the time of contracting (1982), through it was known at the time of the willful breach (1985) when Aetna wrongfully terminated Savaroso. Here, the traditional Hadley rule–and its information forcing rationale–does not work to justly compensate the parties.
Moshe Gelbard (Netanya Academic College): Panel Moderator.