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The Secrecy Interest in Contract Law

Posted: 15 Jun 2001  

Omri Ben-Shahar

University of Chicago Law School

Lisa Bernstein

University of Chicago - Law School

Abstract

This Essay adds to the existing literature on expectation damages. It suggests that this literature is implicitly based on the assumption that, in the event of breach, the breached-against party will readily reveal the information necessary to establish the magnitude of expectation damages. It explores the implications of the opposite assumption, namely that an aggrieved party might often prefer to keep the information necessary to establish the magnitude of expectation damages private. More specifically, it suggests that while the traditional literature on remedies has focused on the aggrieved party's interest in being made whole (her "compensatory interest"), there is another, potentially conflicting interest that needs to be taken into account, namely her desire to keep information private (her "secrecy interest"). When the secrecy interest is sufficiently strong, the cost of revealing the underlying private information may well exceed the aggrieved party's expected recovery at trial. As a consequence, the aggrieved party may not file suit and may therefore receive no compensation. If the existence of a promisee's secrecy interest is known to a promisor who is contemplating breach, the secrecy interest might undermine the credibility of the promisee's threat to sue. Thus, in the presence of a secrecy interest, both the remedial goal of full ex post compensation and the economic goal of efficient breach-or-perform incentives are unlikely to be achieved.

The Essay develops the concept of the secrecy interest in more detail and considers how taking it into account might contribute to the debate over the desirability of several of the Code's remedial provisions, the remedial structure of the new proposed Code, and aspects of existing adjudicative procedures. It demonstrates the secrecy violations involved in adjudication under current contract law doctrine. It argues that the Code and the rules of civil procedure should enable aggrieved parties to opt for damage measures and discovery procedures that do not involve information revelation, such as specific performance, liquidated damages and uncapped market difference damages.

JEL Classification: K12

Suggested Citation

Ben-Shahar, Omri and Bernstein, Lisa, The Secrecy Interest in Contract Law. Yale Law Journal, Vol. 109, June 2000. Available at SSRN: https://ssrn.com/abstract=272466

Omri Ben-Shahar (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

Lisa E. Bernstein

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

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