The Expectation Measure and Its Discontents

Abstract

Under the indifference principle in contract law, the remedies for breach of contract should “leave the [promisee] absolutely indifferent, in subjective terms, between having the defendant breach and pay damages or having the defendant perform.” This principle underlies the expectation-based remedies that are central to contract law -- in particular, the expectation measure of damages, which serves as a surrogate for the “indifference principle.”

Traditional economic analysis recognized that the expectation measure is supported by strong reasons of efficiency. Recently, however, some law-and-economists have criticized the expectation measure, and by implication the indifference principle, on instrumental grounds. The criticisms fall into two categories. Some critics argue that the goals of the indifference principle would be best served by modifying the expectation measure. Other critics argue that contract law should aim to achieve other goals entirely and then develop alternative economic models and remedial regimes based on those goals. Part I of this Article briefly summarizes the strengths of the indifference principle and the expectation measure. Parts II and III consider prominent alternative models and remedial regimes.

This Article has a substantive and a methodological aspect. The substantive aspect analyzes the validity of the alternative models and regimes apart from questions of administrability and institutional issues. The methodological aspect examines the administrability of these models and regimes and the congruence between the models and regimes, on the one hand, and institutional considerations, on the other.

Keywords: contracts, contract law, remedies, expectation damages, efficiency, indifference principle, administrability

JEL Classification: K00, K12