Thursday, August 16, 2007

An Interesting Alternative to the Standard Approach to Contracts

Richard Brooks provides an exceptionally interesting approach to contract law in an article at the Yale Law Journal.

As a backgrounder, the standard approach to contracts is that when one party breaches, the other party gets expectation damages. As a result, some (e.g. Holmes) have characterized contract law not as putting obligations on parties to do X, but rather to do X or pay damages. Specific performance (i.e. forcing the party to do X) is a remedy which is only available in certain cases. Thus, for the most part, one is able to breach contracts, but one will be liable for it. This standard model of contract enforcement has a lot going for from an economic perspective, and its efficiency properties have been examined by numerous academics.

What Brooks does is propose to reverse the holder of the right to breach or pay. Instead of giving that power to the person breaking the contract, he suggests a model whereby that right falls to the non-breaching party, i.e. they can either receive damages or compel the party to perform the contract. It's meant to be a model of contract enforcement with identical efficiency properties to the standard model, but which accords slightly more with our moral intuitions about forcing people to actually fulfill their promises.

At first glance, I rather like it. I'm still working my way through other commentaries on it, but for the most part, I think it's an interesting proposal.

Of course, in many ways, this proposal is a second-best response to failures in the law of contract damages. (Interestingly, the tort of inducement to breach a contract is justified by many law and economics scholars as a similarly second-best solution given the failings of the law of damages) If contract damages actually fully compensated individuals, they'd be fully indifferent to the damages or the performance, in which case the status quo model wouldn't be morally problematic, especially given the availability of specific performance in certain exceptional cases. But as it is, expectation damages aren't always perfect and can leave people under-compensated. Thus, while Brooks' proposal provides a solution to this, a more direct one would be to remedy problems in the law of damages. Of course, because this may not be possible or damages may be difficult to quantify in some cases (e.g. intangible harms), Brooks' solution might be superior.

In any event, there's interesting things going on with this, and while I'm still not entirely sure what I think about it, I think it's worth further examination.

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