Threatening Inefficient Performance of Injunctions and Contracts
Yale University - Yale Law School; Yale University - Yale School of Management
Kristin M. Madison
Northeastern University - School of Law; Northeastern University - Bouvé College of Health Sciences
Yale Law and Economics Working Paper No. 233; and Stanford John M. Olin Working Paper No. 180
Contract scholars have long understood that inefficient behavior might arise when promisors threaten to breach, but a parallel problem has gone virtually unnoticed: threatening to perform. A potential plaintiff owed a duty by another (such as a contractual promisee) may seek inefficient injunctive relief instead of damages to induce the defendant to pay an amount higher than court awarded damages. Threats of inefficient performance can produce inefficiency in the form of negotiation costs, failure to reach a bargain, and inefficient ex ante actions. We consider a legal reform that would undermine the credibility of inefficient threats by giving defendants two options: an option to make any injunctive relief inalienable, and an option to commit to paying higher damages. These options would retain the prime benefit of an alienable injunction, the elimination of the threat of undercompensation, while reducing the inequitable risk of overcompensation. As an alternative method of undermining threats, we suggest that judges consider imposing a settlement cap, or subjecting all injunctive settlements to the same type of remittitur analysis to which a jury award would be subjected.
Number of Pages in PDF File: 116
JEL Classification: K00
Date posted: January 18, 1999
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