Post by Siegelman Thel on Mar 31, 2009 21:00:16 GMT 4
The Role of Disgorgement in Contract Law
Peter Siegelman
University of Connecticut - School of Law
Steven Thel
Fordham University - School of Law
Fordham Law Legal Studies Research Paper No. 1353402
Abstract:
Contract damages are almost always defined and evaluated based on how they compensate injured promisees. We argue that across a wide variety of contractual settings, however, the remedies actually deployed by courts are not based on compensation, but rather embody a disgorgement rationale that forces the breaching promisor to surrender her profits earned from breach, regardless of the harm inflicted on the promisee. In other words, and contrary to conventional wisdom, breaching promisors are not free to breach so long as they pay their disappointed promisees' expectation. After demonstrating that this is so, we propose two explanations for why we so often see disgorgement, even though the ideal remedy is perfect expectation damages. First, disgorgement is often much easier for courts to compute or implement than promisee-based remedies. But there is an efficiency-based rationale for disgorgement as well. Given that awarded contract damages invariably fall short of perfect expectation, for a variety of reasons, promisors will sometimes find it in their interests to breach, even when performing is efficient, because it is cheaper to pay damages than to perform. Promisees accordingly expect more frequent breaches and insufficient compensation if breach does occur, and will thus offer a lower contract price. By agreeing to disgorge profits from breach, promisors credibly commit to perform, and thus realize higher contract prices ex ante. Disgorgement thus provides an important bonding benefit to promisors: it allows them to profit by making credible commitments to perform when performance is efficient.
see: papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1353402_code13156.pdf?abstractid=1353402&mirid=1
Peter Siegelman
University of Connecticut - School of Law
Steven Thel
Fordham University - School of Law
Fordham Law Legal Studies Research Paper No. 1353402
Abstract:
Contract damages are almost always defined and evaluated based on how they compensate injured promisees. We argue that across a wide variety of contractual settings, however, the remedies actually deployed by courts are not based on compensation, but rather embody a disgorgement rationale that forces the breaching promisor to surrender her profits earned from breach, regardless of the harm inflicted on the promisee. In other words, and contrary to conventional wisdom, breaching promisors are not free to breach so long as they pay their disappointed promisees' expectation. After demonstrating that this is so, we propose two explanations for why we so often see disgorgement, even though the ideal remedy is perfect expectation damages. First, disgorgement is often much easier for courts to compute or implement than promisee-based remedies. But there is an efficiency-based rationale for disgorgement as well. Given that awarded contract damages invariably fall short of perfect expectation, for a variety of reasons, promisors will sometimes find it in their interests to breach, even when performing is efficient, because it is cheaper to pay damages than to perform. Promisees accordingly expect more frequent breaches and insufficient compensation if breach does occur, and will thus offer a lower contract price. By agreeing to disgorge profits from breach, promisors credibly commit to perform, and thus realize higher contract prices ex ante. Disgorgement thus provides an important bonding benefit to promisors: it allows them to profit by making credible commitments to perform when performance is efficient.
see: papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1353402_code13156.pdf?abstractid=1353402&mirid=1