The evolution of contract remedies (and why do contracts professors teach remedies first?)

Abstract

This essay traces the evolution of the scholarly understanding of contract remedies, beginning with the era in which the compensation principle and expectation damages dominated. Fuller and Perdue's classic articles in 1936/1937 and the theory of efficient breach in the 1970s each offered important justifications for the principle. However, as economic analysis extended to incorporate a wider range of incentive and risk-bearing goals, support for the compensation principle became increasingly frayed. The emergence of the incomplete contracts theory further weakened its normative significance. In practice, the cutting-edge uses of contract damages pursue several other objectives unrelated to compensation. In particular, damages promote contracting goals by (a) providing prices for embedded options or (b) setting the stakes, and thereby incentives, for future litigation. Finally, the essay discusses the design of ‘tiered’ damages within a single contract that are triggered by different contingencies. In thi...