I am still bothered by the macro-social costs in the event of a breach of contract. I just finished tomorrow's reading and it furthered my uneasiness. Consequential damages seem to be awarded when the contract breacher could reasonably forsee special damages that would be suffered by the plaintiff in the event of the breach. In Hadley, the court finds that defendant is not responsible for the extra loss of revenue because it was not a given that a broken shaft would result in the mill shutting down (e.g. other machinery could also have been broken and been on route to being fixed, plaintiff might have had a back-up shaft, etc.).

This case seems to place contracts in a vaccuum. People enter contracts for a reason, and then make all sorts of decisions based on the expectation that the contract will be honored. Even if the specific expectations are not forseeable, it seems common sensical that a defendant would know that its actions (or lack there of) would have a series of negative consequences -- perhaps as simple as additional transaction costs in litigation a breach of contract claim, expending time and effort to cover a breach, etc., or as complex as other business dealings based on the fulfillment of the first contract.

How do you guys see this question of consequential damages?

Jenn

-- Anonymous, October 25, 1998

Answers

Personally I think that cases like Hadley (as an example) have for the most part been decided correctly. Contract breaches don't always have negative consequences. Take for example Acme Mills. Here a breach acually ended up benefiting the plaintiff. So I am not sure if there are always common sensical reasons for the defendant to know that his breach will lead to harm. Furthermore, in cases with special circumstances the defendant is to be expected to know even less about the harm they may or not be harming. Breaches are sometimes efficient, and in this sense they would be good for society. A promisor who has no information otherwise as to the specialness of circumstances should be able to breach while making all three parties just as well off or better. It just seems fair that the promisor be allowed to breach if he/she can pay back the promisee for the breach and still come out ahead. But, if the promisor does not know about special circumstances (and there is a situation such that in 90% of similar cases a breach only harms the promisee $5 worth) causing a breach to harm the promisee $50 worth, then a smart promisor would take $30 from a third party and pay damages of $5 to the original promisee. The promisee would assume that since the original promisee did not mention otherwise, that they were part of the $5 group and that it would then be efficient to breach. The promisor should not have to make an expected utility calculation (.9*5 + .1*50)=9.5 in order to decide whether or not to breach...THIS WOULD EXLUDE EFFICIENT BREACHES IN CASES WHERE THE THIRD PARTY IS WILLING TO PAY BETWEEN 5 AND 9.5. Therefore, one of the parties, preferably the one who has full information (the promisee) should say up front whether or not te have a special circumstance. Because here communications only need take place %10 of the time, if the burden is on the promisor communication need take place %100 of the time. Only with this rule in effect can the full range of efficient breaches be realized... Hope that helped?

-- Anonymous, October 27, 1998

Let,s begin a story: We live in an absolutely moral world, so every breacher should take the responsibility for the consequential loss due to the breaching of contract. One day, Professor Lessig received an invitation from the Present of America to give a speech about contract law at the White House. And the President would pay him $ 100,000. Professor Lessig decided to rent a car form me and drove to D.C.. After negotiation, we got a deal that he would pay me $ 500 and I would prepare a Porsche for him. But unfortuniately, the next day when he came, the Porsche was broken. So, I had no choice becoming a breacher. So, he decided to take a taxi to Logan airport. Saddly, they had a traffic accident and poor Professor Lessig broke his leg and lay in a hospital for three days. Then because of that delay, Professor Lessig lost the opportunity to be a guest speaker in White House and to get a national-wide reputation. With that reputation, he can make millions of dollars by selling his contract textbooks. With that good reputation, he will become Dean of Harvard Law School in 2001. But due to my breach, Professor Lessig lost those things. As we live a absolutely moral world, I should be punished for my breach and cover all the losses of Professor Lessig should have and lost(including his broken leg). Although I had no idea about the fact that Professor Lessig would be a speaker in the White House and will be a millionaire and Dean of Harvard Law School, I still need to take the responsibility for all the negetive consequences because I am an evil breacher.

Dear colleagues, can you imagine how terrible it is to live in such an "absolutely moral world?"

-- Anonymous, October 27, 1998