Restitutionary Disgorgement as a Moral Compass for Breach of Contract

Abstract:     
A quiet revolution is underway. A new rule proposed in the forthcoming Restatement (Third) of Restitution seeks to deter conscious wrongdoers from retaining profits from "opportunistic" breaches of contract. The proposed disgorgement remedy for defendant's opportunistic breach of contract will have fundamental consequences for contract theory and practice. This contractual remedy is gain-based rather than compensatory. Restitutionary disgorgement, rooted in unjust enrichment, may shift the conventional paradigm of contract law.

This article examines whether a restitutionary disgorgement remedy for certain breaches of contract is compatible with traditional contract principles such as Justice Holmes's choice principle. Recall his oft-repeated declaration, "The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it, - nothing else." Disgorgement calls for certain value choices, including moral blameworthiness and promise-keeping. Furthermore, the underlying rationale for disgorgement is in tension with efficient breach theory. This article assesses whether disgorgement can coexist with conventional contract theories, and, if not, whether disgorgement's values should be preferred. Ultimately, restitutionary disgorgement for opportunistic breach of contract is a promising development for contract law and restitutionary theory. There is, however, room for further refinement before the ink is dry on the pending Restatement.

Number of Pages in PDF File: 43

Keywords: contract, restitution, unjust enrichment, remedies, disgorgement, Restatement, Holmes, morality, efficient breach

JEL Classification: K12

working papers series