Cost-of-Completion versus Diminution-of-Value Damages for Deliberate Breach: An Economic Analysis

Abstract

Whether to measure expectation damages by the cost of completing the contract or the buyer's loss in value is a central, unresolved issue in contract law. This paper analyzes the issue assuming that the buyer places unobservable, idiosyncratic value on performance. While cost of completion deters efficient breach, diminution of value induces inefficient breach. The latter is more severe the more likely is large idiosyncratic value. Cost of completion also tends to be superior if the event (low market value/high cost) leading to the breach is very likely, because then the existence of the contract itself indicates substantial idiosyncratic value.