Breach Inducement Activities and Performance of Breach Remedies

48 Pages Posted: 31 Aug 2018 Last revised: 4 Aug 2020

See all articles by Chong-En Bai

Chong-En Bai

Tsinghua University - School of Economics & Management

Wenzheng Mao

The University of Hong Kong

Zhigang Tao

The University of Hong Kong - School of Business

Date Written: August 4, 2020

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

Suggested Citation

Bai, Chong-En and Mao, Wenzheng and Tao, Zhigang, Breach Inducement Activities and Performance of Breach Remedies (August 4, 2020). Available at SSRN: https://ssrn.com/abstract=3236925 or http://dx.doi.org/10.2139/ssrn.3236925

Chong-En Bai

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Wenzheng Mao (Contact Author)

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Zhigang Tao

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China
(852) 2857-8223 (Phone)
(852) 2858-5614 (Fax)

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