Breach Inducement Activities and Performance of Breach Remedies

Abstract

We study different breach remedies, considering the possibility of breach inducement activities -- actions taken by one contract party to make it more costly for the other party to perform the contract. We analyze the performance of each remedy in suppressing breach inducement activities and eliciting efficient (selfish) relationship-specific investment when ex-post renegotiation is allowed. We find that (1) expectation damages perform best, always achieving the optimal outcome; (2) specific performance and liquidated damages cannot always achieve the optimal outcome; and (3) liquidated damages may or may not perform better than specific performance, inducing less or more breach inducement activity. These rankings offer an alternative justification for the court to implement expectation damages rather than specific performance and explain many disputes on liquidated damages involving breach inducement activities.

Keywords: Breach Inducement, Expectation Damages, Specific Performance, Liquidated Damages

JEL Classification: D20, K12, L23