Document Type

Working Paper

Publication Date



If the buyer breaches a sales contract, and if the seller can be characterized as a lost volume seller, courts and commentators have argued that the seller should be made whole by compensation for its lost profits. This paper argues that framing the problem in this way leads to an absurd result. The buyer has a termination option and the remedy should be the implicit option price. The lost profit remedy sets a price on that option, a price that bears no relation to reality. Examination of the case law suggests three conclusions: (a) the remedy often sets an excessive implicit option price; (b) courts sometimes give inadequate weight to the explicit option price; and (c) courts will sometimes leap to the lost profit remedy when an adequate remedy already exists.?


Contracts | Law | Law and Economics