The Goals of Contract Remedies
This article offers a general account of the rules that regulate exit and loyalty in contract disputes to make some fundamental points about the goals of contract remedies. The dominant goal of these rules, like all of contract remedies, is vindicating contracting rights. When contract rights give way it is almost always for one of two reasons. Rights sometimes give way to advance the goal of efficient performance. This goal is familiarly expressed by the mitigation principle and, in American contract law, by the theory of efficient breach. Rights also give way to advance the goal of remedial simplicity. In a nutshell, the rules that regulate exit and loyalty in contract disputes, like all of contract remedies, vindicate contract rights at the least cost and with the least fuss. This should be utterly unsurprising.
More interesting are the trade offs made when these goals conflict. A contract right’s certainty is of crucial significance. I define a contract right as certain when the right to a performance from another is indisputable. There is an important distinction between the right to a performance and the worth of that performance to the right-holder. Often the right a performance is certain while its worth to the right-holder is uncertain. When a contract right is certain or indisputable contract law permits a right-holder to take a self-help measure, such as exiting from a contract, to avoid suffering an uncompensated loss even though the measure inflicts a disproportionate loss on the defaulter. In other words, the goal of vindicating rights trumps the goal of efficient performance when it comes to self-help remedies that do not unduly tax courts. More bluntly, the theory of efficient breach is bunk as a descriptive matter when it comes to the rules that regulate self-help responses to an indisputable default.
The goal of efficient performance drives other aspects of contract remedies. Trivially, the mitigation doctrine and other rules compel a party to vindicate a right in the cheapest way possible. More interestingly, the goal of efficient performance explains the law’s response to loyalty in the face of contract uncertainty. By this I mean when a party performs a disputed obligation or accepts performance of disputed adequacy. I show that performance of a disputed obligation (or acceptance of performance of disputed adequacy) does not preclude the later assertion of a claim of a lesser obligation (or of a greater right), but only if performance (or acceptance of performance) avoids a loss. This point, which I believe is novel but seems obvious once you think about it, systematizes what now is a very tangled thicket of law.
There is scant authority on the related question whether contract uncertainty warrants withholding or refusing performance. I think this is because courts have not had to confront the question directly. It tended not to arise under traditional common law rules, which made contract rights and obligations certain or unenforceable. This is changing. I highlight a fascinating decision by Judge Posner that confronts the question and answers that contract uncertainty does warrant exit, indeed his reasoning suggests uncertainty may require exit. Judge Posner is on to something important. However, putting the issue in a broader frame shows that the power to exit from an uncertain contract is cosseted by other rules that discourage exit when it would result in a consequential loss.
Contracts | Legal Remedies
Date of this Version
Mark P. Gergen, "The Goals of Contract Remedies" (April 16, 2004). bepress Legal Series. bepress Legal Series.Working Paper 250.