You Do Have to Keep Your Promises: A Disgorgement Theory of Contract Remedies

Abstract

Contract law is generally understood to require no more of a person who breaches a contract than to give the injured promisee the “benefit of the bargain.” The law is thus assumed to permit a promise-breaker to keep any profit remaining from breach (after putting the victim in the position he would have been in had the contract been performed). This conventional description is radically wrong: across a wide range of circumstances, standard contract doctrines actually do require people to keep their promises, or to disgorge their entire profit from breach if they don’t. Rather than protecting the expectation interest of injured promisees, therefore, the law of contract remedies is better characterized as enforcing “promisor expectation” or disgorgement, a regime that puts breaching promisors in the position they would have been in had they performed, even when that means overcompensating injured victims.

We offer two explanations for why we so often see “promisor expectation” remedies, even though contracting parties would prefer the remedy of perfect promisee expectation damages. First, promisor expectation is often much easier for courts to compute or implement than promisee-based remedies. Second, promisors themselves prefer to be subject to the promisor expectation regime because it allows them to commit credibly to perform their promises. Such commitments are valuable, but cannot be sustained if the law awards damages that fall short of perfect promisee expectation, as it invariably does. By agreeing to a remedial scheme that makes it unprofitable or impossible for them to profit from breach, promisors can credibly commit to perform, and thus realize a higher contract price ex ante. An “overcompensatory” remedy thus paradoxically serves the interests of promisors by providing them a valuable bonding mechanism.