The Shadow Code

Abstract:     
Lying in the shadow of contract law are unifying principles for calculating damages. These principles integrate the purposes motivating rules formalized in Article 2 of the Uniform Commercial Code and the Restatement (Second) of Contracts and their computational methods. Neither the UCC nor the Restatement rules reflect these principles in any way that is apparent on their face. On the contrary, the damage rules in Article 2 of the UCC offer apparently distinct formulas for each type of contract breach that depend on whether the non-breaching party was a buyer or seller, obtained partial performance, or arranged a substitute performance. The Restatement offers different formulas depending on the unhelpful and ultimately irrelevant distinction between the expectation and reliance interests. The Shadow Code offers an approach to contract damage calculation that explicitly reflects the well-recognized compensatory goal.

The Shadow Code restates the law of damages in a single section applicable to all breaches of contract. That section is based on the notion that people contract in order to improve their well-being. Each party ordinarily hopes for some improvement or "surplus" of benefits over costs as a result of contracting. The principle that a party injured by another's breach is entitled to be put in the position he or she would have occupied had the other performed as promised is not novel. It lies at the heart of the UCC and the Restatement. The surplus-based approach to damages recognizes an injured party's entitlement to the difference between the surplus he or she would have realized had the other performed as promised and the actual surplus obtained. It applies to all types of parties injured in all types of partial and total contract breaches, whether consumers or merchants, buyers or sellers.

Number of Pages in PDF File: 42

Keywords: contract law, remedies, contract damages, Uniform Commercial code, Restatement of Contracts, contract breach

JEL Classification: K12, K20, K00

Accepted Paper Series