Over-Reliance Under Contractual Disgorgement

Abstract

A well-known result in economic analysis of contract law is that expectation damages lead to over-reliance by the non-breaching party. Recently, the contractual disgorgement remedy has attracted much attention from scholars, yet no attempt has been made to analyze reliance investment under this remedy. In this paper, we develop a model showing that under disgorgement a problem arises that is the mirror image of the problem that arises under expectation damages. While expectation damages lead to over-reliance by the non-breaching party, the disgorgement remedy leads to over-reliance by the breaching party. Therefore, the choice between these two contractual remedies should depend on which over-reliance problem is more costly. We also highlight other factors that can guide the choice between these two remedies.