DOCSLIB.ORG

Economics 1450 Law and Economics Professor Daniel Berkowitz Spring 2005-2006

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Economics 1450 Law and Economics Professor Daniel Berkowitz Spring 2005-2006 Economics 1450 Law and Economics Professor Daniel Berkowitz Spring 2005-2006 March 14, 2006 Problem Set 4 The problems are taken from Chapter 5. We will discuss these problems in class on March 21st and I will collect these problems at the end of that class. The exam will be on March 28th. 1. Micelli, pp. 158-160, problems 1-4. 2. How does the Hadley v. Baxendale ruling correct for the moral hazard problem of over-investment in reliance expenditures by buyers in a bilateral contract? 3. How might a commercial impracticability rule which uses damages for breach of contract when costs are sufficiently low (or reasonable) and charges no damages otherwise be used so that the buyer again makes the efficient level of reliance investment? 4. When should the court employ the Hadley v. Baxendale rule over a commercial impracticability ruling a breach of contract case? When should it go a commercial impracticability rule? Selected Answers to Problem Set IV. Micelli, chapter 5, problem 1. B = buyer, S = seller, and the contract is for a good that S must produce. V = value of performance to B, R = value of reliance investment to B, P = price (payable upon delivery), and V = $1,000, R = $100, P = $650, and cost is uncertain and can take on one of the three following values: C = {$700, $900, $1,100}. (a) It is only efficient for the buyer to breach the contract when C = $1,100 since this is greater than V = $1,000. (b) Expectation damages are D = V-P = $350, so here the seller only breaches when it is efficient. Under reliance damages, D = R = $100. So, here the buyer breaches when C > P + D = P + R = $750, which includes cost realizations of $900 and $1,000. So, there is excess breaching. Under zero damages, the seller will always breach, since all cost realizations C exceed P = 650$. Micelli, chapter 5, problem 2. Suppose V is increasing in R: R V $100 $400 $200 $550, and P (payable upon performance) = $75. (a) If the performance of the contract occurs with certainty, then R = $200 maximizes the buyer’s net value of the contract, since 550 – 200 = 350 > 400 – 100 = 300 > P = 75$. (b) In this case, D = 0. If the probability of breach of contract, 1-Pr = 0.5, then the expected returns from R are (0.5)*(V – R – P) + (0.5)(-R) = (0.5)(V-P) – 0.5P: R = $100 => 0.5(V – P) - R = 0.5*($400 – $75) - $100 = 62.5$ R = $200 => 0.5(V – P) - R – 0.5*($550 - $75) - $200 = 37.5$, Thus, ignoring damages, the lower reliance investment maximizes the buyer’s expected net return. (c) In the case of unlimited expectation damages, D = V-P for either level of reliance investment. If you check equations (5.7) and (5.8) in the book, this means that the buyers will maximize V – R – P, and choose R =$200. Thus, you get the efficient level of investment under CERTAINTY, which is inefficient (according to (b)) when there is uncertainty. Micelli, Chapter 5, problem 3. In this case the defendant breached its contract and failed to send the message. The plaintiff sues for expectation damages of $7,000, while the defendant only wants to cover reliance damages of $27, which would cover the plaintiff’s costs of sending the message. The appropriate precedent for deciding this case is Hadley versus Baxendale (see Micelli), and the issue whether the plaintiff is asking for a reasonable level of damages and whether, in fact, the plaintiff over- invested in reliance and did not take into account the not so remote possibility that the code would not go through, say, because the code not be read properly or there was breakdown in systems (the book does not really provide enough information on just how to rule on this).Clearly the defendant is negligent, but the precedent makes clear that the damages awarded must be reasonable and therefore account for the possibility of a breach. Micelli, Chapter 5, problem 4. V = $2,000 = value of machine to buyer who hires the manufacturer to build the machine for delivery on a particular date. P = $1,500 = price payable upon delivery. P2 = $2,500 = price that a second buyer is offers to pay. (a) From a social perspective, the second buyer should get it because he/she has the higher valuation. (b) Expected valuation damages w.r.t to the first buyer are D = V – P = $500. So, the seller breaches only when C > P + D = V = $2,000, which is the efficient breach condition. (c) Suppose that first buyer is aware of the second buyer’s offer and the two buyers can bargain. Then, the first buyer can simply have the machine built and resell it to the second buyer and pocket the additional $500. In both cases, the second buyers obtains the machine. (d) When there is a cash award, then the seller’s payoff is C – D = C – V = C – 2000$; and the first buyer gets the the resale value of P2 – P = 1000$. In the cash of settlement, the first buyer still get the resale value of 1000$, while the seller now gets P – C = 1,500$ - C. So, the seller is worse-off in the second case while the first buyer does just as well in either case. 2. How does the Hadley v. Baxendale ruling correct for the moral hazard problem of over-investment in reliance expenditures by buyers in a bilateral contract? Now V(R), where V’ > 0 and V’’ < 0. Suppose that q = the reasonable chance that a contract will go forward, and 1 – q is the probability of a breach. Furthermore, suppose there are expectation damages rule applied for any level of reliance investment: D = V(R) – P. Thus, in this case, the seller breeches a contact if and only if this is efficient: C > V. The socially optimally level of reliance investment is determined: Choose R: Max q(V(R) – R – C) + (1-q)(-R) = Max q(V(R) – C) – R, so that R* solves qV’(R) – 1 = 0 (you can show this using a graph, and just how this condition determines and R* that is lower than the condition V’(R) – 1 = 0. Hadley-Baxendale, then, chooses R* that account for uncertainty and gives expectation damages to the plaintiff for R*” D(HB) = V(R*) – P. In this case, then the potential plaintiff would choose R: Max q(V(R) – R – P) + (1-q)(D(HB) – R) Plug in for D(HB) and rearrange: Choose R: Max q(V(R) – P) – R – (1-q)(V(R*)) Thus, R is chosen: qV’(R) – 1 = 0, and so efficient reliance investment is achieved! Note that if expectation damages are awarded for any R, then the potential plaintiff maiximzes: q(V(R) – R – P) + (1-q)(D – R) = q(V(R) – R – P) + (1-q)(V(R) – R – P) = (V(R) – R – P), and so the plaintiff would choose very upper end reliance: condition V’(R) – 1 = 0 3. See Micelli, pp. 142-144. The idea then is that there are 3 cost levels: 0 < cL < cM < cH, and 0 < cL < P < cM < V < cH. So, in this circumstance, it is socially efficient for the seller to breach when c = cH. When there are no damages (D=0), the seller breaches, however, when c = cM or cH on the grounds of commercial impracticability. Suppose that any cost outcome is equally likely: 1/3 = pr(cL) = pr(cM) = pr(cH). Then, the seller will breach 2/3rds of the time, but it is only socially efficient to breach 1/3 of the time. Suppose expectation damages are employed: D = V – P. In, this case, it is straightforward to show that seller will only breach 1/3 of the time (when c = cH). While this damage award then gets the seller to breach efficiently, it still creates the incentive for the buyers to over- invest in reliance investment. In particular, 1/3 of the time the seller breaches and so the buyer should choose R: Max 2/3(V(R) – P) – R, but with unconstrained expectation damages, the buyer chooses: Max V(R) – R – P, and over-invests. So, here we need some variation of expectation that implements both efficient breach and efficient reliance investment. The commercial impracticability rule does this by providing expectation damages at costs where contract enforcement is efficient (i.e. V > ci, for all i) and providing no damages when breach is efficient. In this case, then, D = V – P, for cL and cM, and D = 0, for c = cH. Thus, now the buyers chooses R: Max 2/3(V(R) – R – P) + 1/3(D – R). Note that 2/3 of the time the contract goes through so damages are irrelevant. The other 1/3 of the time, there is a socially efficient breach because c = cH > V, and D = 0. Thus, the buyer chooses R: Max Max 2/3(V(R) – R – P) - 1/3( R), and R is solved efficiently: 2/3V’(R) = 1. 4. This depends upon just which rule is easier for the court to implement. Choose HB when it is easier for the court to choose appropriate R and just how this affects V (value added). Choose commercial impracticability when it is easier for the court to choose threshold level costs at which breech is efficient: ci > V. .
Load more

Recommended publications
  • Expectation, Reliance, and the Two Contractual Wrongs
    Expectation, Reliance, and the Two Contractual Wrongs CHRISTOPHER T. WONNELL* TABLE OF CONTENTS L INTRODUCTION: THE PLACE OF EXPECTATION AND RELIANCE IN CONTRACTUAL DECISION MAKING ............................................. 54 A. Two ContractualDecisions in Need of Moral Assessment ................54 B. Six Motivesfor Making and Then Breaking a Particular Contract................................................................................................. 60 1. Taking Advantage of NonsimultaneousPerformances ................... 60 2. Making a Threat to Breach in the Face of Situational Monopoly Credible....................................................................... 62 3. Refusing to Carry Through on an Agreed-upon Allocation of Risk ......................................................................... 63 4. Seeking to AppropriateInformation Productively Brought to Bearon the Transactionby the Promisee..................... 66 5. Seeking to Avoid the Contract Because of a Mistake That Makes the ContractMore Burdensome to the PromisorThan Anticipated and Correspondingly More Profitableto the Promisee.................................................. 72 6. Seeking to Avoid the Contract Because of a Mistake That Makes the ContractMore Burdensome to the PromisorThan Anticipated Without Becoming CorrespondinglyMore Profitableto the Promisee........................ 75 * Professor of Law, University of San Diego School of Law. J.D. 1982, University of Michigan; B.A. 1979, Northwestern University. This Article was selected by
    [Show full text]
  • 1. the Issue Is Whether the Trial Court Erred in Awarding the Rancher, An
    STUDENT ANSWER 1: 1. The issue is whether the trial court erred in awarding the Rancher, an aggrieved party in a breach of contract claim, a $500,000 award for restoration of the Ranch when the breaching party showed by expert testimony a diminution of value of only $20,000 in the Ranch’s current condition? The trial court had already determined that an enforceable contract existed between the Rancher and Gasco, and that the contract was breached by Gasco when it failed to restore the Ranch to its pre-exploration condition by March 31. The sole issue here is the issue of damages. Specifically, whether the award of $500,000 to restore the ranch was grossly and unfairly out of proportion to the benefit to be achieved? Remedies for breach of contract seek to compensate an aggrieved party for profits that were prevented and losses sustained due to the breach of contract. Typically, three (3) types of damages are available to an aggrieved party under Common Law contract law (UCC Article 2 does not apply here since the contract does not involve the sale of good but rather a lease for real property): (1) restitution damages, (2) reliance damages, and (3) expectation damages. The first two types of damages help an aggrieved party recover the benefit bestowed upon a breaching party to prevent its unjust enrichment, which includes the recovery of out-of-pocket expenses, if foreseeable and ascertainable at the time of the breach, that were wasted by the aggrieved party in getting ready to perform. The third type of damages, expectation damages, aims to place an aggrieved party in the same financial position as if the contract had been fully performed and not breached.
    [Show full text]
  • 26 Chap 26.Qxp
    Chapter 26 CONTRACT CLAUSES MANAGING, ALLOCATING, AND TRANSFERRING CONSTRUCTION PROJECT RISKS C. Michael Shull III, Esq., Editor and Author (2007 Supplement) Holland & Hart LLP Douglas A. Karet, Esq., Editor and Author (2005 Supplement); Author (2003 Supplement) Holloway Brabec & Karet PC Buck S. Beltzer, Esq., P.E., Author (2005 Supplement) Holland & Hart LLP Robert E. Benson, Esq., Editor and Author (2003 Supplement) Holland & Hart LLP SYNOPSIS § 26.1 INTRODUCTION § 26.1.1—Overview § 26.1.2—Types Of Risks To Which Parties To A Construction Contract Can Be Exposed, And Which Risks Can Be Managed, Allocated, And Transferred § 26.1.3—The “Means” Of Parties Managing, Allocating, And Transferring Construction Project Risks § 26.1.4—Methods Of Management, Allocation, And Transfer Of Construction Project Risks By Contract § 26.1.5—The Meaningful Considerations About Risk Transfer Clauses § 26.2 PROCEDURAL CLAUSES FOR MANAGEMENT, ALLOCATION, AND TRANSFER OF RISKS § 26.2.1—Overview § 26.2.2—Choice Of Law Clauses § 26.2.3—Forum Selection Clauses § 26.2.4—Notice Of Claim Clauses § 26.2.5—Contractual Statutes Of Limitation § 26.2.6—Clauses Defining Commencement Of Statute Of Limitations § 26.2.7—Mediation Clauses § 26.2.8—Arbitration Clauses (10/07) 26-1 The Practitioner’s Guide to Colorado Construction Law § 26.2.9—Waiver Of Trial By Jury § 26.2.10—No Discovery Clauses § 26.2.11—Change Order Requirements § 26.2.12—Warranties § 26.2.13—Summary Of Procedural Clauses § 26.3 DAMAGE LIMITATION CLAUSES § 26.3.1—Overview § 26.3.2—Limitations On Types
    [Show full text]
  • Why Expectation Damages for Breach of Contract Must Be the Norm: a Refutation of the Fuller and Perdue "Three Interests&Quo
    Nebraska Law Review Volume 81 | Issue 3 Article 2 2003 Why Expectation Damages for Breach of Contract Must Be the Norm: A Refutation of the Fuller and Perdue "Three Interests" Thesis W. David Slawson University of Southern California Gould School of Law, [email protected] Follow this and additional works at: https://digitalcommons.unl.edu/nlr Recommended Citation W. David Slawson, Why Expectation Damages for Breach of Contract Must Be the Norm: A Refutation of the Fuller and Perdue "Three Interests" Thesis, 81 Neb. L. Rev. (2002) Available at: https://digitalcommons.unl.edu/nlr/vol81/iss3/2 This Article is brought to you for free and open access by the Law, College of at DigitalCommons@University of Nebraska - Lincoln. It has been accepted for inclusion in Nebraska Law Review by an authorized administrator of DigitalCommons@University of Nebraska - Lincoln. W. David Slawson* Why Expectation Damages for Breach of Contract Must Be the Norm: A Refutation of the Fuller and Perdue "Three Interests" Thesis TABLE OF CONTENTS 840 I. Introduction .......................................... Principal Institutions in a Modern Market II. The 843 Economy in Which Contracts Are Used ................ A. The Institution of the Economic Market: Contracts 843 as Bargains ....................................... Institution of Credit and Finance: Contracts as B. The 845 Property .......................................... 846 the Institutions' Needs ....................... III. Meeting 846 A. Providing a Remedy for Every Breach ............. Contracts Enforceable as Soon as They Are B. Making 847 M ade ............................................. Has Compensating the Injured Party for What He C. 848 ost ............................................... L 848 Damages Under the Expectation Measure ...... 1. 849 2. Damages Under the Reliance Measure ......... 849 a.
    [Show full text]
  • Practice Hypotheticals Contracts
    Practice Hypotheticals Contracts Evaluation Sheet: “Amy and the Convertible” 1. Threshold question: Was there a contract? Need to identify the overriding question of whether enforceable promises were made. Here there was an exchange of promise to wash and wax a car for ten weeks and a promise to pay $600. 2. If so, what kind of contract? Is it a contract for the sale of goods or services? Need to identify the nature of the parties’ agreement to determine the rule of law to apply: whether the UCC or common law. Since the nature of the agreement is one for personal services (washing the car) and not a transaction in goods, the common law is applicable 3. What are Ben’s damages? General rule: Every breach of contract entitles the aggrieved party to sue for damages. The general theory of damages in contract actions is that the injured party should be placed in the same position as if the contract had been properly performed, at least so far as money can do this. Compensatory damages are designed to give the plaintiff the benefit of his bargain. Expectation damages Rule: This interest represents the “benefit of the bargain” and would include all that Ben expected to earn over the course of the contract. It is what the injured party had expected to receive under the contract “but for” the breach, less expenses saved by not having to perform. Application: Here, Ben would have earned $600 over the life of the contract, the amount she promised to pay him. He said he needed to spend $50 for supplies, so $550 was pure profit.
    [Show full text]
  • Force Majeure and Common Law Defenses | a National Survey | Shook, Hardy & Bacon
    2020 — Force Majeure SHOOK SHB.COM and Common Law Defenses A National Survey APRIL 2020 — Force Majeure and Common Law Defenses A National Survey Contractual force majeure provisions allocate risk of nonperformance due to events beyond the parties’ control. The occurrence of a force majeure event is akin to an affirmative defense to one’s obligations. This survey identifies issues to consider in light of controlling state law. Then we summarize the relevant law of the 50 states and the District of Columbia. 2020 — Shook Force Majeure Amy Cho Thomas J. Partner Dammrich, II 312.704.7744 Partner Task Force [email protected] 312.704.7721 [email protected] Bill Martucci Lynn Murray Dave Schoenfeld Tom Sullivan Norma Bennett Partner Partner Partner Partner Of Counsel 202.639.5640 312.704.7766 312.704.7723 215.575.3130 713.546.5649 [email protected] [email protected] [email protected] [email protected] [email protected] SHOOK SHB.COM Melissa Sonali Jeanne Janchar Kali Backer Erin Bolden Nott Davis Gunawardhana Of Counsel Associate Associate Of Counsel Of Counsel 816.559.2170 303.285.5303 312.704.7716 617.531.1673 202.639.5643 [email protected] [email protected] [email protected] [email protected] [email protected] John Constance Bria Davis Erika Dirk Emily Pedersen Lischen Reeves Associate Associate Associate Associate Associate 816.559.2017 816.559.0397 312.704.7768 816.559.2662 816.559.2056 [email protected] [email protected] [email protected] [email protected] [email protected] Katelyn Romeo Jon Studer Ever Tápia Matt Williams Associate Associate Vergara Associate 215.575.3114 312.704.7736 Associate 415.544.1932 [email protected] [email protected] 816.559.2946 [email protected] [email protected] ATLANTA | BOSTON | CHICAGO | DENVER | HOUSTON | KANSAS CITY | LONDON | LOS ANGELES MIAMI | ORANGE COUNTY | PHILADELPHIA | SAN FRANCISCO | SEATTLE | TAMPA | WASHINGTON, D.C.
    [Show full text]
  • The Purpose of Compensatory Damages in Tort and Fraudulent Misrepresentation
    LENS FINAL 12/1/2010 5:47:02 PM Honest Confusion: The Purpose of Compensatory Damages in Tort and Fraudulent Misrepresentation Jill Wieber Lens∗ I. INTRODUCTION Suppose that a plaintiff is injured in a rear-end collision car accident. Even though the rear-end collision was not a dramatic accident, the plaintiff incurred extensive medical expenses because of a preexisting medical condition. Through a negligence claim, the plaintiff can recover compensatory damages based on his medical expenses. But is it fair that the defendant should be liable for all of the damages? It is not as if he rear-ended the plaintiff on purpose. Maybe the fact that defendant’s conduct was not reprehensible should reduce the amount of damages that the plaintiff recovers. Any first-year torts student knows that the defendant’s argument will not succeed. The defendant’s conduct does not control the amount of the plaintiff’s compensatory damages. The damages are based on the plaintiff’s injury because, in tort law, the purpose of compensatory damages is to make the plaintiff whole by putting him in the same position as if the tort had not occurred.1 But there are tort claims where the amount of compensatory damages is not always based on the plaintiff’s injury. Suppose that a defendant fraudulently misrepresents that a car for sale is brand-new. The plaintiff then offers to purchase the car for $10,000. Had the car actually been new, it would have been worth $15,000, but the car was instead worth only $10,000. As they have for a very long time, the majority of jurisdictions would award the plaintiff $5000 in compensatory damages 2 based on the plaintiff’s expected benefit of the bargain.
    [Show full text]
  • Commercial Impracticability - an Overview
    Duquesne Law Review Volume 13 Number 3 Article 5 1975 Commercial Impracticability - An Overview Robert Sommer Follow this and additional works at: https://dsc.duq.edu/dlr Part of the Law Commons Recommended Citation Robert Sommer, Commercial Impracticability - An Overview, 13 Duq. L. Rev. 521 (1975). Available at: https://dsc.duq.edu/dlr/vol13/iss3/5 This Article is brought to you for free and open access by Duquesne Scholarship Collection. It has been accepted for inclusion in Duquesne Law Review by an authorized editor of Duquesne Scholarship Collection. Commercial Impracticability-An Overview Robert Sommer* As shortages become more severe and prices continue to climb, both suppliers and purchasers are confronted with increasingly more burdensome performance arising from long-term, set-price contracts. As performance becomes more burdensome, greater num- bers of beleaguered promisors will turn to § 2-615 of the Uniform Commercial Code in hopes of excusing nonperformance. The pur- pose of this article is to discuss the doctrine of impracticability as codified in § 2-615. This article will discuss the historical antece- dents of the doctrine of impracticability, the mechanics set up by the Code to regulate the operation of the doctrine, case law applying the Code mechanics and, finally, a few questions left unanswered by the Code. I. HISTORICAL BACKGROUND A. Overview The early common law excused performance of duties imposed by law on grounds of impossibility but refused to excuse performance of contractual obligations on the same grounds.' The theory was that a promise was absolute unless, and only to the extent, qualified by the promisor.
    [Show full text]
  • Chapter 9 Topics in the Economics of Contract Law I. Remedies As
    Chapter 9 Topics in the Economics of Contract Law I. Remedies as incentives A. Alternative remedies Different remedies create different incentives for the parties to a contract. Our focus is how different remedies affect the incentives each party has to act in an economically efficient manner. 1. Expectation damages Perfect expectation damages (PED) are meant to leave the promisee indifferent between performance and nonperformance of the contract. The baseline is value to promisee if contract was performed. Damages then are equal to the difference between the net value of performance of the contract and no contract . 2. Reliance damages In this case, the injury that is caused by breach focuses on the costs the promisee has incurred as a result of relying on the contract. As such, perfect reliance damages (PRD) are meant to leave the promisee indifferent between no contract and breach of the contract. The baseline is no contract. Damages then are equal to the promisee’s net reliance costs. 3. Opportunity cost damages In this case, the injury that is caused by breach focuses on the costs the promisee has incurred as a result of foregoing alternative contracts. As such, perfect opportunity cost damages (POCD) are meant to leave the promisee indifferent between breach of the contract and performance of the next best contract. The baseline is value to promisee of the next best contract. Damages then are equal to difference between the net value of performance of the next best contract and no contract. 4. The typical relationship between PED, POCD and PRD and the problem of subjective value a.
    [Show full text]
  • The Phantom Reliance Interest in Tort Damages
    The Phantom Reliance interest in Tort Damages MICHAEL B. KELLY* TABLE OF CONTENTS L INTRODUCTION ................................................................................................... 169 IL THE RELIANCE INTEREST IN MISREPRESENTATION .............................................. 171 III. RELIANCE IN PERSONAL INJURY CASES ............................................................... 176 IV. WHAT DOES IT ALL MEAN? ....................................... ... .... .... .... .... ... ..... ... .... .... .. 189 I. INTRODUCTION The reliance interest has fascinated me for some time.' As a measure of damages for breach of contract,2 it seems theoretically unjustified and flawed in its implementation. In theory, it requires compensation for lost opportunities? In practice, such compensation is rarely provided'- * Professor of Law, University of San Diego School of Law. J.D. 1983, B.G.S. 1975, University of Michigan; M.A. 1980, University of Illinois. 1. Michael B. Kelly, The Phanton Reliance Interest in Contract Damages, 1992 WIS. L. REv. 1755. 2. My focus has been on contracts, full-fledged bargains, rather than promissory estoppel or other instances where the reliance interest might be applied. Much of my criticism of the reliance interest has been limited to this context. This Article will expand somewhat the scope of my criticism. 3. L.L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages: 1, 46 YALE LJ. 52, 55, 60-61 (1936); Mark Pettit, Jr., PrivateAdvantage and Public Power: Reexamining the Expectation and Reliance Interests in Contract Damages, 38 HASTINGS L.J 417,420-21 (1987). unless one counts the expectation interest as a proxy for opportunities lost in reliance on a promise.5 In theory, it justifies recoveries that may exceed expectation.6 Yet, even its progenitors refused to endorse that implication.7 Why, then, does the reliance interest have continuing appeal? One explanation has emerged from discussions with academics: the reliance interest seems apt to some because it resembles tort remedies.
    [Show full text]
  • In Defense of the Impossibility Defense Gerhard Wagner Georg-August University of Goettingen
    Loyola University Chicago Law Journal Volume 27 Article 4 Issue 1 Fall 1995 1995 In Defense of the Impossibility Defense Gerhard Wagner Georg-August University of Goettingen Follow this and additional works at: http://lawecommons.luc.edu/luclj Part of the Contracts Commons Recommended Citation Gerhard Wagner, In Defense of the Impossibility Defense, 27 Loy. U. Chi. L. J. 55 (1995). Available at: http://lawecommons.luc.edu/luclj/vol27/iss1/4 This Essay is brought to you for free and open access by LAW eCommons. It has been accepted for inclusion in Loyola University Chicago Law Journal by an authorized administrator of LAW eCommons. For more information, please contact [email protected]. Essay In Defense of the Impossibility Defense GerhardWagner* I. INTRODUCTION Generally, the common law follows the rule of pacta sunt servanda' under which contractual obligations are absolutely binding on the parties. 2 The impossibility defense is an exception to this general rule.3 Under the impossibility defense, a promisor may default with- out incurring liability for the promisee's expectation damages.4 * Akademischer Rat (Junior Lecturer) at Georg-August University of Goettingen, Germany; J.D., 1989, University of Goettingen; L.L.M., 1995, University of Chicago. The author is deeply indebted to Richard Craswell of the University of Chicago Law School for many helpful comments on an earlier draft of this Essay. 1. "Pacta sunt servanda" means "agreements (and stipulations) of the parties (to a contract) must be observed." BLACK'S LAW DICTIONARY 1109 (6th ed. 1990). 2. For an erudite discussion of pacta sunt servanda, see generally Richard Hyland, Pacta Sunt Servanda: A Meditation, 34 VA.
    [Show full text]
  • Good Faith and Reasonable Expectations
    Good Faith and Reasonable Expectations Jay M. Feinman* I. INTRODUCTION The recognition that there is an obligation of good faith in every contract has been regarded as one of the most important advances in contract law in the twentieth century. Nevertheless, a half-century after the doctrine’s incorporation into the Restatement (Second) of Contracts and the Uniform Commercial Code, great controversy and confusion remain about it. Recent articles describe the doctrine as “a revered relic,” “a (nearly) empty vessel,” and “an underenforced legal norm.”1 A scholarly dispute about the nature of the doctrine framed more than thirty years ago has hardly been advanced, much less resolved.2 More importantly, although nearly every court has announced its support of the doctrine, often using similar language and familiar sources, many judicial opinions are confusing or confused.3 The controversy and confusion stem from a fundamental misunderstanding about the nature of the good faith obligation. That misunderstanding is a belief that good faith is a special doctrine that does not easily fit within the structure of contract law. Indeed, the doctrine is seen as potentially dangerous, threatening to undermine more fundamental doctrines and the transactions that they are designed to uphold. As a result, good * Distinguished Professor of Law, Rutgers School of Law‒Camden. The author thanks David Campbell and especially Danielle Kie Hart for their comments. This article is for Arkansas lawyer David Solomon and his son, Ray. 1. See generally Harold Dubroff, The Implied Covenant of Good Faith in Contract Interpretation and Gap-Filling: Reviling a Revered Relic, 80 ST.
    [Show full text]