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University of Toronto St. George
Robert Barber

Chapter 7 Topics in the Economics of Contract Law CONTRACT REMEDIES: - Optimal remedy for breach secures optimal commitment to the contract (efficient formation, performance and reliance) Remedies As Incentives - 3 types: Party-designed, court-imposed, specific performance Alternative Remedies: 1. Expectation Damages: positive damages, victim of breach is better off than if no contract was in place, perfect expectation damages: promisee indifferent between performance and breach Sellers Breach: Calculating perfect expectation damages: Xk(Ps Pk) if initially purchased Pk, breached, thus had to purchase Ps, amount X Buyers Breach: Xk(Pk Ps) Buyers Breach w Unique Good: Vk-Va, if Vk > Va, but breached and Va delivered, Vk expected 2. Reliance Damages: - investing in reliance increases lost as a result of breach, perfect reliance damages: indifferent between no contract and breach Sellers Breach w Substitute: 0 Buyers Breach: Xk(Pw Ps) 3. Opportunity Costs: - perfect OC damages leave victim indifferent (negative damages) if current contract was not available, what other contract could have been performed, this is the measure of opportunity cost Xk(Ps Po), difference between spot price and best alternative 4. Problem of Subjective Value: Hawkins vs. McGee - Hawkins suffered childhood accident left scar on his hand - Skin from plaintiffs chest was taken for his hand, result was hideous, small scar was large and irreversibly worse and became covered with hair - Expectation damages: if 25 percent was performed, 75 percent needs to be accounted for (shortfall) (assumption: $10,000 w 25% = perfect hand), IC drawn hits horizontal axis at 100% - Reliance damages: Uninjured state is condition without contract, 50% hand is uninjured state, operation brought it to 25%, therefore 25% needs to be accounted for (assumption: $5,000 w 25% = 50% hand) IC drawn hits horizontal axis at 50% - Opportunity cost measures: lost opportunity for successful operation, if another doctor could have brought to 75%, then must measure difference between 25% and 75%, in this case $8000, IC drawn hits horizontal axis at 75% ($8000 and 25% hand = 75%) TOTAL DAMAGES: $10,000 + $8,000 + $5,000 = $23,000 (Expectations + reliance + opp cost) www.notesolution.com
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