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Rescission, Restitution, and the Principle of Fair Redress: a Response to Professors Brooks and Stremitzer

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Valparaiso University Law Review Volume 47 Number 2 Winter 2013 pp.1-78 Winter 2013 Rescission, Restitution, and the Principle of Fair Redress: A Response to Professors Brooks and Stremitzer Steven W. Feldman Follow this and additional works at: https://scholar.valpo.edu/vulr Part of the Law Commons Recommended Citation Steven W. Feldman, Rescission, Restitution, and the Principle of Fair Redress: A Response to Professors Brooks and Stremitzer, 47 Val. U. L. Rev. 1 (2013). Available at: https://scholar.valpo.edu/vulr/vol47/iss2/22 This Article is brought to you for free and open access by the Valparaiso University Law School at ValpoScholar. It has been accepted for inclusion in Valparaiso University Law Review by an authorized administrator of ValpoScholar. For more information, please contact a ValpoScholar staff member at [email protected]. Feldman: Rescission, Restitution, and the Principle of Fair Redress: A Re Article RESCISSION, RESTITUTION, AND THE PRINCIPLE OF FAIR REDRESS: A RESPONSE TO PROFESSORS BROOKS AND STREMITZER Steven W. Feldman* I. INTRODUCTION Analyzing a remedy that the reporter for the Restatement (Third) of Restitution and Unjust Enrichment describes as having “[e]normous practical importance and theoretical interest,”1 scholars in recent years have produced a flood of articles covering contract rescission and restitution.2 In their 2011 Article in the Yale Law Journal, Remedies on and off Contract, Professors Richard Brooks and Alexander Stremitzer weigh in on the discussion.3 Relying on microeconomic theory, which reflects the perspective of rational buyers and sellers, the authors’ thesis is that current legal doctrine is too restrictive in allowing buyers’ rescission and too liberal in granting them restitution.4 Although other commentators * Attorney-Advisor, U.S. Army Corps of Engineers, Huntsville, Alabama. The author expresses deep appreciation to Dr. Gayla Feldman for her love and support, including our springtime walks discussing law and economics. Thanks to Meredith Miller and Doug Rendleman for their input and especially to Andrew Kull and Jeremy Telman for their extensive and challenging critiques. This Article is written in honor of Joseph Perillo and Stewart Macaulay, two giants in contract scholarship who also graciously provided helpful comments in its preparation. All opinions are solely those of the author. 1 Andrew Kull, Restitution as a Remedy for Breach of Contract, 67 S. CAL. L. REV. 1465, 1491 (1994). 2 See Symposium, A Conference on Restitution and Unjust Enrichment, 92 B.U. L. REV. 763 (2012); Symposium, Restitution Rollout: The Restatement (Third) of Restitution & Unjust Enrichment, 68 WASH. & LEE L. REV. 865 (2011); Symposium, The Restitution Roundtable, 65 WASH. & LEE L. REV. 889 (2008); Symposium, Restitution and Unjust Enrichment, 79 TEX. L. REV. 1763 (2001). These symposia issues are four prominent examples of the spate of articles covering contract rescission and restitution that have been produced in recent years. 3 Richard R.W. Brooks & Alexander Stremitzer, Remedies on and off Contract, 120 YALE L.J. 690 (2011) [hereinafter Brooks & Stremitzer, Remedies on and off Contract]. Richard R.W. Brooks is Leighton Homer Surbeck Professor of Law at Yale Law School, and Alexander Stremitzer is Acting Professor of Law at UCLA Law School. Both authors hold doctorates in economics in addition to their law degrees. The authors have reprised their views from their Yale Law Journal article in a contribution to the Washington and Lee Law School’s symposium, Restitution Rollout: The Restatement (Third) of Restitution and Unjust Enrichment. See Richard R.W. Brooks & Alexander Stremitzer, Beyond Ex Post Expediency—An Ex Ante View of Rescission and Restitution, 68 WASH. & LEE L. REV. 1171 (2011). 4 See Brooks & Stremitzer, Remedies on and off Contract, supra note 3, at 693. 399 Produced by The Berkeley Electronic Press, 2013 Valparaiso University Law Review, Vol. 47, No. 2 [2013], Art. 22 400 VALPARAISO UNIVERSITY LAW REVIEW [Vol. 47 in prominent journals have cited this Article with approval,5 I respectfully suggest that it has some fundamental flaws on both legal and economic grounds. In my Article, I summarize the authors’ argument, identify my concerns, and propose an alternative formulation. Brooks and Stremitzer write that a limited rescission model is “excessive” and based on a “misunderstanding” of the economic effects of these remedies.6 Their key premise is that legal authorities have exaggerated the threat to contract stability and other normative values posed by liberal access to rescission.7 Therefore, the authors posit that rational parties from an ex ante perspective would often bargain for broad rights of rescission even if damages for breach “were fully compensatory and costless to enforce.”8 While they oppose rescission where the promisee acts opportunistically to avoid unfavorable bargains, Brooks and Stremitzer contend that the existence of a buyer’s expanded ability to rescind after a breach, even if not implemented, influences contracting behavior in several ways.9 First, the seller will reduce the likelihood of promisee rescission by investing to enhance the quality of performance.10 Second, the seller will minimize the buyer’s possible use of rescission by reducing prices.11 In this regard, the authors say that allowing the buyer greater rights of rescission would actually benefit the contracting system by allowing rational parties to create efficient incentives to avoid breach.12 The authors further argue that, with regard to monetary redress, the law is trending inappropriately from “‘rescission and restitution’ toward ‘rescission and expectation’ [damages].”13 Brooks and Stremitzer’s major concern is that the Uniform Commercial Code (“U.C.C.”) allows buyers 5 See Daniel Friedmann, Does the Dead Contract Rule Restitution from Its Grave?, 92 B.U. L. REV. 811, 817 n.30 & n.32 (2012); Eric A. Posner & Alan O. Sykes, Efficient Breach of International Law: Optimal Remedies, “Legalized Noncompliance,” and Related Issues, 110 MICH. L. REV. 243, 252 n.26 (2011); Note, (In)Efficient Breach of International Trade Law: The State of the “Free Pass” After China’s Rare Earths Export Embargo, 125 HARV. L. REV. 602, 605 n.17 (2011). But see generally Michael Aikins, Off-Contract Harms: The Real Effect of Liberal Rescission Rights on Contract Price, 121 YALE L.J. ONLINE 69, 69–70 (2011) (criticizing Brooks and Stremitzer’s Yale Law Journal article solely on economic grounds and concluding that they present an incomplete analysis of the effects of rescission on the marketplace); see also infra Part III.E (discussing an additional economic critique). 6 Brooks & Stremitzer, Remedies on and off Contract, supra note 3, at 693. 7 Id. 8 Id. at 699. 9 Id. at 693. 10 Id. 11 Id. 12 Id. 13 Id. at 702. https://scholar.valpo.edu/vulr/vol47/iss2/22 Feldman: Rescission, Restitution, and the Principle of Fair Redress: A Re 2013] A Response to Professors Brooks and Stremitzer 401 returning defective goods to revoke their acceptance and to obtain expectation damages, including lost profits.14 The authors deem these cumulative remedies as especially harmful because they give the rational buyer an improper incentive to rescind as a dominant strategy.15 Yet another critique is that the disaffirming buyer receives a windfall of expectation damages if he gets to both exit the contract and obtain the same payoff (except with a losing contract) as though the bargain had been fully performed.16 This legal trend, Brooks and Stremitzer contend, ironically “poses the real threat to contractual stability.”17 Therefore, the authors suggest the law should be changed so the buyer must elect between rescission and damages.18 As another part of their proposal and to promote more efficient contracting, Brooks and Stremitzer argue that restitution after rescission should only “come at a price.”19 This concept means the relief should be limited to restoration of the purchase price or the other benefits that the buyer has conferred upon the seller.20 Therefore, the authors do not support redress for the buyer’s damages in reliance on the contract.21 They also do not endorse a remedy for disgorgement of the seller’s ill- gotten gain from the breach, such as where the defaulting seller has taken the buyer’s payment, invested it, and earned additional profits.22 Brooks and Stremitzer contend that the latter remedies conflict with sound economic theory because they disincentivize the above seller’s investments and price reductions.23 The authors also advocate that these recoveries contradict the fundamental objective of restitution as restoring the status quo ante, because these remedies can leave the seller worse off or the buyer better off than if the contract never existed initially.24 In their critique, Brooks and Stremitzer focus almost exclusively on economic issues and sources. Even though they strongly contend that current contract law undermines sound economic theory, they do not 14 Id. at 701–02 n.28. 15 Id. at 701–02. 16 Id. at 698. 17 Id. at 694. 18 See id. at 693 (“Hence, the final point of our argument: the remedy in restitution following rescission should be limited to restoration of price or other conferred benefits to the promisor under the contract.”). 19 Id. at 719. 20 Id. 21 Id. at 692–93. While in several passages the authors favor only restoration of the purchase price and other benefits conferred upon the seller, they do hedge on the buyer’s entitlement to reliance damages. See infra notes 299–312 and accompanying text. 22 Id. at 719. 23 Id. at 704–11, 719. 24 Id. at 718 n.81 and accompanying text. Produced by The Berkeley Electronic Press, 2013 Valparaiso University Law Review, Vol. 47, No. 2 [2013], Art. 22 402 VALPARAISO UNIVERSITY LAW REVIEW [Vol. 47 adequately analyze whether the restricted rescission and excessive restitution model actually exists in statutory and case law.
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