The Law and economics movement has paid a lot of attention to carefully analyzing various doctrines of contract law. Yet, with few exceptions, the doctrine of anticipatory breach seems to have escaped law and economics scholars' scrutiny. Specifically, the question of optimal choice of remedies has escaped scholars' eyes. While traditionally in England the party who files a law suit can get only damages, in the US the party can not only ask for assurances for performance, but also, in appropriate cases, get specific performance. Which regime is better? Can parties opt in and out of those regimes? Is there a legal regime which is superior to both the English and American regimes? In this paper we attempt to start filling in this gap by studying the relationship between various regimes of remedies. Specifically, we start by studying the conditions in which the American legal regime (which grants the non-breaching party an option to choose, in appropriate cases, between specific performance and actual damages) is superior to the English regime (which allows the non-breaching party to seek only actual damages). We then explore a third regime, which as far as we know does not exist, and show that it is unconditionally Pareto Superior to both the English and American legal regimes. Our analysis in this paper informs transactional lawyers of the relevant economic factors they should consider when deciding between remedies in a given anticipatory breach context. We focus on the ex-ante design of the contract in light of new and asymmetric information that the parties anticipate they will gain after they draft the contract. We assume fist, for simplicity, that no renegotiation or investments are involved. We demonstrate the optimal way to design contract clauses which takes advantage of the information that the seller and the buyer receive between the time they enter into the contract and the time of the breach. We present two models. One is for non-market goods and the other is for market-goods. The law is different with respect to the way damages are calculated for these two classes of goods. We thus model both types of transactions. Section two describes the legal background against which we have designed our models. Section three surveys the literature that evaluates contract remedies in the context of anticipatory breach context from an economic perspective. Section four presents two simple models with incomplete two-sided asymmetric information. In section four, we compare the performance of the American legal regime with that of the English one. Section five discusses some interesting extensions meant to approach the first-best allocative efficiency. The appendix provides a more rigorous mathematical demonstration of the model.
Date of this Version
Ronen Avraham and Zhiyong Lin, "Remedies for Anticipatory Breach of Contract with Two-Sided Asymmetric Information: A Comparison of Legal Regimes" (February 2005). Law and Economics Papers. Working Paper 15.