Efficient breach

Abstract: This article studies rules of "damage measures" that determine how much money must be paid by a party who defaults on a contract to the other party to the contract. The theme of the article is that damage measures serve as a substitute for completely specified contracts. In particular, it is shown that under an incompletely specified contract damage measures can induce parties to behave in a way that approximates what they would have explicitly agreed upon under a fully specified contract. Moreover, it is argued on familiar lines that because it is often costly or impossible to make contractual provisions for contingencies at a very detailed level, there is an evident need for such substitutes for well-specified contingent contracts as are afforded by damage measures

Abstract: The treaty creating the World Trade Organization (WTO) replaced the General Agreement on Tariffs and Trade (GATT) dispute resolution system, which contained no formal sanctions for breach of agreement as a practical matter, with a system that results in centrally authorized sanctions against recalcitrant violators of WTO trade agreements. We examine the important features of the new system and argue that the institutionalization of a sanctioning mechanism was not motivated by a perceived need to increase the penalty for violations, but rather by a need to decrease the penalty. In particular, the GATT system relied on unilateral retaliation and reputation to police the bargain. Toward its end, unilateral retaliation became excessive and interfered with opportunities for efficient breach. The WTO mechanism for arbitrating the magnitude of proposed sanctions is the major innovation under WTO law and ensures that sanctions are not set too high.

Abstract: The treaty creating the WTO replaced the GATT dispute resolution system, which contained no formal sanctions for breach of agreement as a practical matter, with a system that results in centrally authorized sanctions against recalcitrant violators of WTO trade agreements. We examine the important features of the new system, and argue that the institutionalization of a sanctioning mechanism was not motivated by a perceived need to increase the penalty. In particular, the GATT system relied on unilateral retaliation and reputation to police the bargain, and toward its end unilateral retaliation became excessive, interfering with opportunities for efficient breach. The WTO mechanism for arbitrating the magnitude of proposed sanctions is the major innovation under WTO law, and ensures that sanctions are not set too high.

Abstract: So wrote Oliver Wendell Holmes in his seminal discussion of contract remedies in The Common Law. That position, while widely discussed, is not acceptable as a normative (nor, as will be shown, as a positive) account of the question of contract remedies. Stated in a phrase, the weakness of Holmes's approach lies in its conclusion that the remedy provides a perfect substitute for the right, when in truth the purpose of the remedy is to vindicate that right, not to replace it. Holmes's analysis mistakenly converts the remedy into a kind of indulgence that the wrongdoer is unilaterally always entitled to purchase. As with any unifying ideal, Holmes's proposition is difficult to confine to the contract cases to which it was originally applied. Why not generalize the proposition so that every person has an "option" to transgress another's rights and to violate the law, so long as he is willing to suffer the consequences?2 The legal system could thus be viewed only as establishing a set of prices, some high and some low, which then act as the only constraints to induce lawful conduct.