Document Type

Working Paper

Publication Date

2018

Center/Program

Center for Contract and Economic Organization

Center/Program

Center for Law and Economic Studies

Abstract

If a buyer breaches a contract but the market price has remained unchanged, English courts and the treatises have treated the seller as a “lost volume seller.” The seller, it is argued, could have had two sales, not one, so it lost the profit on the second sale. This paper recognizes that the buyer has an option to terminate and that the contract prices that option. The implicit option price of the lost volume remedy results in an absurd contract, setting the option price high when it should be low and vice versa. The default rule ought to be the contract-market differential (zero in these cases) with the parties determining the appropriate option price with a nonrefundable deposit or liquidated damages.

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