The Missing Elements of Contract Damages
Volume 84, No. 1, Fall 2011
By Mitchell L. Engler & Susan B. Heyman [PDF]

In this Article, we juxtapose two classic contract doctrines to expose a subtle, but dramatic, anomaly of damage law. After Jack Dempsey breached a contract to pursue another championship boxing match, the spurned promoter sued for all his costs but the court allowed only the postcontract costs, thereby wiping out precontract expenses. Separately, though, the Red Owl promissory estoppel line of cases allows recovery of costs reasonably incurred in reliance on a precontractual promise despite the lack of a finalized agreement. Our linkage of Dempsey and Red Owl uncovers the striking possibility that an aggrieved party on a finalized contract might receive less than if he had failed to finalize the deal.

Beyond this first anomaly, our critical analysis of a Judge Posner opinion reveals another unrecognized inconsistency. We show how an aggrieved party recovers precontract and fixed overhead costs on final contracts that provide in advance a fixed return, but not on those with variable returns. Yet Judge Posner curiously defends the current law as providing “symmetrical” results.

In response to the more general undercompensation possibility in contract law, some scholars have proposed transferring all the breaching party’s gains from breach to the aggrieved party. We utilize the movie Rocky to demonstrate the excesses of this disgorgement remedy. Suppose a small-time boxer breached a club fight contract for the opportunity to fight for the championship. Why deprive the boxer of all his hard-fought revenue regardless of the promoter’s harm?

Finally, we propose an innovative solution in lieu of disgorgement for variable return contracts: a presumptive recovery of all costs plus a reasonable risky rate of return over the investment period. Our proposal essentially extends the well-established presumption that the aggrieved party can recover postcontract costs in lieu of lost revenue. Our default presumption could be rebutted upon a proper showing of lesser value by the breaching party.

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