Threatening Inefficient Performance of Injunctions and Contracts

Yale Law and Economics Working Paper No. 233; and Stanford John M. Olin Working Paper No. 180

116 Pages Posted: 18 Jan 1999  

Ian Ayres

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 1999

Abstract

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.

JEL Classification: K00

Suggested Citation

Ayres, Ian and Madison, Kristin M., Threatening Inefficient Performance of Injunctions and Contracts (July 1999). University of Pennsylvania Law Review, 1999. Available at SSRN: https://ssrn.com/abstract=146287 or http://dx.doi.org/10.2139/ssrn.146287

Ian Ayres (Contact Author)

Yale University - Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-7101 (Phone)
203-432-2592 (Fax)

Yale University - Yale School of Management

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Kristin M. Madison

Northeastern University - School of Law; Northeastern University - Bouvé College of Health Sciences ( email )

416 Huntington Avenue
Boston, MA 02115
United States

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