17 Pages Posted: 25 Aug 2011 Last revised: 12 Apr 2012
Date Written: August 24, 2011
In The Myth of Efficient Breach: New Defenses of the Expectation Interest, Daniel Markovits and Alan Schwartz argue that contractual promises between sophisticated parties are best interpreted as disjunctive promises to perform or pay damages. They further argue that this dual performance hypothesis answers moral critics of the expectation remedy. This comment makes three claims about Markovits and Schwartz's argument. First, although the dual performance hypothesis is supported by Markovits and Schwartz's instrumentalist model, they do not have a good argument that it is empirically correct - that it is the best interpretation of what sophisticated parties actually intend. Such an argument is necessary to fully answer the moral critics. Second, the dual performance hypothesis is still worth taking seriously, as it casts new light on the implications of the theory of efficient breach and the economic model that stands behind it. In particular, the hypothesis helps explain why punitive damages can make sense when breaching parties attempt to evade their obligation to pay damages. Finally, the dual performance hypothesis is not the best answer to moral critics of expectation damages. Rather than reinterpreting the content of contractual promises, we should reject the premise that parties' moral obligations are best understood on the model of promises. We should also reject the assumption that contract law serves morality only if it enforces parties' first-order moral obligations. A contract law might serve morality instead by serving corrective justice or by supporting the social practice of entering into and keeping agreements.
Keywords: contract, efficient breach, promise, punitive damages
JEL Classification: K12
Suggested Citation: Suggested Citation
Klass, Gregory, To Perform or Pay Damages (August 24, 2011). Virginia Law Review, Vol. 98, pp. 143-158, 2012; Georgetown Public Law Research Paper No. 11-118; Georgetown Law and Economics Research Paper No. 11-20. Available at SSRN: https://ssrn.com/abstract=1916332