On Measuring Damages Where a Contract Breach Benefits the Promisee: Response to Mark Giancaspro, Quantifying Damages in Cases of Advantageous Breach: The Curious Case of McDonald’s Milkshakes Article (Online)
Date of Publication:
Marco Jimenez, On Measuring Damages Where a Contract Breach Benefits the Promisee: Response to Mark Giancaspro, Quantifying Damages in Cases of Advantageous Breach: The Curious Case of McDonald’s Milkshakes (2021)Clicking on the button will copy the full recommended citation.
Retribution in Contract Law Article
Date of Publication:
Marco Jimenez, Retribution in Contract Law, 52 U.C. Davis L. Rev. 637 (2018)Clicking on the button will copy the full recommended citation.
For the last several centuries, there has been a powerful clash between two very different ways of understanding what contract law and contract remedies ought to accomplish. The older view, which found its most powerful philosophical expression in Kant and has been advanced by modern scholars like Charles Fried, is firmly rooted in the principle of respect for individual autonomy, and holds that parties have an obligation to keep their promises because they have invoked a convention (i.e., contract law) whose very purpose “it is to give grounds — moral grounds — for another to expect the promised performance.” According to this view of contract law, when a party invokes such a convention but nevertheless breaches their contract, not only do they wrong the other party by failing to properly value and respect them as autonomous agents, but their wrong frequently harms the other party as well, thereby creating a normative imbalance between the parties that seems to demand rectification on the ground of corrective justice. It is for this reason that, where such breaches occur, contract law remedies are typically fashioned to restore the equality that existed between the parties prior to the breach by requiring the wrongdoer to “hand over the equivalent of the promised performance,” which is typically measured by an award of expectation damages or, where appropriate, specific performance. By forcing the breaching party to render to the promisee the actual promise owed by way of specific performance, or to pay its equivalent by way of expectation damages, these remedies fit perfectly with Aristotle’s conception of corrective justice, which seeks to restore the balance between the parties by taking from the wrongdoing party, and giving to the injured party, that which rightfully belongs to the latter.
Juxtaposed against this older view is a more recent (and largely incompatible) theory about the way in which courts should think about, and therefore award remedies for, contract breaches. Specifically, this newer view, powerfully articulated by Oliver Wendell Holmes Jr. towards the end of the nineteenth century, holds that courts should not focus (primarily, anyway) on enforcing promises to prevent wrongs or to protect party autonomy. Rather, courts should focus on promoting economic efficiency, which is best accomplished by allowing the promisor to choose between performing the contract, on the one hand, or breaching and paying money damages to the injured party, on the other, depending not on which course of action is the most moral, which usually consists in performing one’s obligations, but on which course of action is the most efficient. According to this newer theory, the purpose of a contract is to fashion it in such a way that it encourages parties to perform their duties where such performance is efficient, and to breach their obligations where performance is inefficient. This idea has been picked up by many scholars and judges working within the law and economics tradition, who have suggested that contract remedies should not be primarily concerned with compensation, but with providing the contracting parties with the right economic incentives.
This Article argues that, as a descriptive matter, if we are to judge courts by what they actually do, rather than by what many commentators and judges say they do, then each of the previously-described theories of contract law remedies are incomplete at best, and misleading (to both the public and other judges following precedent) at worst. Specifically, this Article will argue that, when one looks at the way in which courts actually decide cases, the wrongfulness of the promisor’s breach plays an important role in a court’s determination of the remedy it ultimately awards. The problem with the two leading theories of contract law remedies is that they fail to take the promisor’s wrongfulness into account, and in doing so, fail to capture something quite surprising (to traditional ways of thinking about contract remedies, anyway) about the way many judges actually think about contract remedies. Indeed, contrary to frequent claims made by courts and commentators alike, this Article argues that the notion of retribution, or punishing promisors more severely for wrongful breaches than for innocent breaches, plays an important role in a court’s calculation of contract damages, though it has been scarcely recognized in the literature.
By marshalling evidence from breach of contract cases in which judges are confronted with a choice between awarding two or more different remedies to “compensate” the injured party, this Article argues that the court’s inquiry into the wrongfulness of the promisor’s breach, which traditional contract doctrine maintains courts simply do not (and should not) do, will frequently play an important role in the judge’s choice of remedy, with a larger remedy being awarded in proportion to the degree that the promisor’s actions are deemed “wrongful.” This behavior suggests that judges are not merely trying to compensate injured parties, but that they are trying to punish breaching parties for particularly wrongful breaches. More specifically, the cases seem to show that courts are concerned with the idea of proportional retribution, or with punishing the wrongdoer in proportion to both the wrongfulness of his or her acts, and the damages that are caused to the injured party by such acts.
This Article will proceed in three Parts. Part I discusses the ways in which traditional contract law is typically said to be unconcerned with the wrongfulness of the breaching party’s behavior. Part II will discuss the leading theories regarding how contract damages ought to be awarded, paying particular attention to the corrective justice view emphasizing compensation and the law and economics view emphasizing efficiency. At this time, the retributive view will be introduced as an alternative theory by which courts tend to think about contract damages, and will define more clearly what, exactly, is meant by retribution in the context of contract law. Finally, in Part III, this Article will examine a number of contracts cases across several different remedial frontiers to show how courts frequently consider the wrongfulness of the promisor’s breach when determining which “compensatory” remedy to award, which, of course, suggests that what they are really doing is not really compensation at all, but retributively punishing the breaching parties for their wrongful conduct.
Bridging the Property-Contract Divide: Testing the Endowment Effect in Contract Law Article
Date of Publication:
Marco Jimenez, Bridging the Property-Contract Divide: Testing the Endowment Effect in Contract Law, 68 DePaul L. Rev. 27 (2018)Clicking on the button will copy the full recommended citation.
This Article examines the relationship between contract and property law by examining the extent to which parties tend to conceptualize and treat contracts as property. In doing so, this Article seeks to answer a question residing at the intersection between contract and property law, namely, whether the promises underlying contracts merely constitute a form - an empty vessel into which substantive property rights are poured - or whether they constitute something more substantial, perhaps even a species of property itself. If it is the latter, which I suspect it is, this suggests that, at the very least, one can understand contract law and some of its more pressing problems much better (such as whether to allow efficient breach, or whether to continue the common law's expressed preference for money damages over specific performance) by viewing them, at least in part, through a property-based lens. More ambitiously, if the promises in contracts can be shown to be valued as a type of property, then policy makers would do well to consider various property-based solutions to contract law previously thought to be unavailable or inappropriate.
To test whether, and to what extent, contract law has its basis in property, I conducted an experiment to examine whether the endowment effect - a key component of property law and one of the most important findings in behavioral economics - plays a role in the way parties tend to think about contracts. The endowment effect, which has been called “the most significant single finding from behavioral economics for legal analysis to date,” holds that individuals tend to value those things they happen to own more than they would have valued those same things if they happened not to own them. So, for instance, the endowment effect has shown that individuals who tend to value a particular item (e.g., a candy bar) at $1 will frequently place a greater value on that item (more than $1) once it is given to them and they come to think about that item as their private property. This strange result not only challenges our understanding of how value is traditionally measured, but it stands in stark contrast to one of the most important tools of legal analysis: the Coase theorem.
According to the Coase theorem, an individual who places a one-dollar value on an item such as a candy bar should value that candy bar at $1 whether it is in the store or in their pantry: the mere ownership of an item should not change a party's valuation of that item one way or another. More formally, the Coase theorem predicts that “the allocation of resources to individuals who can bargain and transact at no cost should be independent of initial property rights.” Consequently, where bargaining is costless, the price an individual is willing to pay (WTP) to acquire an item (such as a candy bar) should be equal to the price an individual is willing to accept (WTA) to part with that same item. The endowment effect provides empirical evidence against the Coase theorem's prediction by revealing that, in fact, individuals frequently provide very different answers to the questions “how much would you buy item X for if you did not own it” and “how much would you sell item X for if you did own it.” The difference between the two values offered for “X” has come to be called the “willingness to pay” versus “willingness to accept” gap (or the WTP-WTA gap), and has also been referred to as the “offer-asking problem.”
While there is substantial research supporting the endowment effect in property law, there have been few tests, and little direct evidence, of such an effect in contract law. This seems strange, because contract law is a place where the WTP-WTA gap would, if it existed, seem to be of the greatest practical importance. This is because the offeree's WTP and the offeror's WTA is what accounts for the desire of parties to enter into contracts in the first place, and is therefore at the heart of the types of transactions with which contract law is concerned! Stated simply, unless a party believes it will increase its utility (broadly defined) by entering into a bargain with another party to exchange property rights, that party will refuse to contract. Instead, the party will prefer to maintain the status quo.
Not only is it strange, but the fact that the endowment effect has not been directly tested on the promises making up contract law is also unfortunate. As other scholars have argued, contract law seems to share a number of other important characteristics with property law, and both fields might benefit by bridging this theoretical divide. Specifically, if the presence of an endowment effect, which has heretofore only been associated with the ownership of property, can also be detected in contract law, it would seem to indicate that, on at least some level, that contract law behaves like and possesses characteristics of property law as well. This finding would not only help bridge these seemingly distinct areas of law, but would allow important insights gleaned from one area to be transferred to the other, as discussed more fully in the Article's conclusion.
Therefore, this Article fills this empirical gap and tests whether, and to what extent, the endowment effect applies directly to the promises to exchange goods (i.e., contracts), rather than to the property that is frequently exchanged through the medium of contract. More specifically, the question explored in this Article is whether an individual who does not yet “own” an item, but merely has some contractual right to obtain that item at some future date would also experience something like the endowment effect in the promise itself.
Contract Law: A Case and Problem Based Approach Book
Date of Publication:
Marco Jimenez, Contract Law: A Case and Problem Based Approach (Aspen Publishers, 2016)Clicking on the button will copy the full recommended citation.
Distributive Justice and Contract Law: A Hohfeldian Analysis Article
Date of Publication:
Marco Jimenez, Distributive Justice and Contract Law: A Hohfeldian Analysis, 43 Fla. St. U. L. Rev. 1265 (2016)Clicking on the button will copy the full recommended citation.
According to Aristotle, justice consists of giving each person his due: equal members of society should be treated equally, and unequal members, unequally. This justice, in turn, comes in two flavors: distributive and corrective. Distributive justice — which has as its purview society at large — is concerned with distributing society’s shares to individuals according to merit. Whereas, the purview of corrective justice concerns voluntary (e.g., contracts) and involuntary (e.g., torts) transactions, and it seeks to rectify unjust alterations in the distributive scheme by returning the parties to the position they occupied before the distributive scheme was altered, which is to say, before a particular harm occurred.
Even today, Aristotle’s classification of these two types of justice holds a firm grip on the judicial imagination, and perhaps nowhere is this truer than in contract law. There, it is taken for granted that the distributive shares held by members of society are determined both prior to, and outside of, contract law. The distributive question having been settled, it is believed that the proper role of contract law is merely to (a) facilitate the just exchange of these distributive shares by allowing parties to bargain and form agreements with one another and (b) rectify any unjust alteration to these previously established distributive shares. To couch this in Aristotelian terms, contract law should be concerned with enforcing the rules of corrective justice — which will facilitate and rectify the just exchange of previously allocated distributive shares — but should not be concerned with the initial distribution of those shares.
This Article challenges that view, and argues that the seemingly value-neutral rules of contract law are fundamentally distributive in nature, and that to ignore these distributive considerations is more than just bad policy — it is to misunderstand how the fundamental building blocks of the law are arranged to form contract law in the first place. Indeed, given the distributive nature of contract law, even the most non-activist judge imaginable, who sees it as his or her role to simply apply the law as written, and who views it as entirely improper to consider notions of distributive justice for the purpose of achieving a fairer distribution of wealth among members of society, nevertheless cannot help but make distributive decisions whenever he or she selects among or administers the rules of contract law, which have embedded within their very structure a deeply entrenched view of distributive justice.
This is because every determination of law, including the determination of which rights ought or ought not to exist, or ought to be applied in a particular contractual setting, is the product (intentional or otherwise) of a policy decision regarding not whether the legal relationship in question ought or ought not to be regulated, but how that relationship should be regulated. And this regulation, in turn, requires that judges — even judges who adamantly view themselves as non-activist judges — make an ex ante distributive decision regarding which rights ought and ought not to exist, which rules ought and ought not to apply, and how those rights and rules ought and ought not be protected. These decisions, in turn, must all be made as a matter of policy rather than law.
Teasing out the implications of these insights can fundamentally alter the way we view and understand contract law. For instance, once we realize that the various legal rules that govern contract law are made up of a conglomeration of policy decisions regarding how to regulate (rather than whether to regulate) the relationship between the contracting parties, one of the largest obstacles to regulation — that of the perceived judicial interference with the rights of the parties — is removed as the need for regulation is now seen as mandatory rather than permissive. And because regulation is mandatory, the real question ought to be how we should understand, if not change, the manner in which the selection, application, and interpretation of contract rules affects the distributive arrangements between the parties to a contract.