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The Myth of Optimal Expectation Damages

posted by Mitu Gulati

Roughly eighty years ago, Lon Fuller and William Perdue (the former, then a faculty member at Duke Law, and the latter, a 3L), wrote two of the most famous articles in contract law (here). One of the puzzles they posed -- about why the law favors the expectation damages measure -- resulted in an entire body of scholarship, including the theory of efficient breach. And although there are a number of superb articles that have been written on this matter (Craswell, Scott, Goetz, Triantis, Posner, Klass and more), I confess that I have always had a strong distaste for this body of optimal damages scholarship because it was too complicated for me. I have, however, been most grateful to Fuller and Perdue because, in the wake of their famous collaboration, they set up a scholarship at Duke to fund faculty-student research collaborations that I have frequently applied for funding to. Last summer, I finally had to pay the price though, because three of my Duke students (one former and two current) asked if we could work on a legal realist examination of the Fuller-Perdue optimal damages question itself. I was resistant, but Jamie Boyle (who has written a fabulous piece linking Fuller's work in both public and private law (here)), urged that the students were right about this being a fun project. 

Jamie and the students were right about this being a fun project, in spades (we owe a special debt to Mark Weidemaier, who is a saint in terms of his generosity with comments and advice). All credit to Theresa, Amanda and Madison (errors are mine).

With thanks to Lon Fuller and William Perdue, the paper is here, and the abstract is below:

One of the most debated questions in the literature on contract law is what the optimal measure of damages for breach should be.  The standard casebook answer, drawing from the theory of efficient breach, is expectations damages.  This standard answer, once considered a major contribution of the law and economics field, has increasingly come under attack by theoreticians within that field itself. To shed an empirical perspective on the question, we look at data in one setting (prepayment clauses in international debt contracts) on what types of damages provisions parties contract for themselves. We find little evidence of a preference for the expectations damages measure.

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