Center for Contract and Economic Organization
Program in the Law and Economics of Capital Markets
An old and cardinal rule of contract law requires that expectancy damages for breach of contract put the injured party in the position she would have occupied had the contract been performed. Courts and commentators have accepted this full performance compensation principle as the central objective of the expectancy remedy, pursuant to which they have developed many more precise formulas for various types of cases. But the simplicity of the full performance principle disguises substantial problems in its application. One of the least recognized of these problems is the tendency of courts and commentators to determine the contractual expectancy ex post (from circumstances that exist at the time for performance) rather than ex ante (from economic opportunities fixed at the moment of contract).
Consider the choice between market damages and lost profits in breached contracts for the sale of goods traded in well-developed markets. Where a contract calls for delivery of goods traded in a fluctuating market, the market itself fixes the value of the supplier's performance. Thus, common law courts and subsequent statutory codifications typically have regarded the difference between the contract price and the market price at the time of delivery as the proper measure of recovery. This sum, combined with the proceeds of any market purchase or resale, will ordinarily equal full performance compensation.
In some situations, however, had the seller delivered the goods and the buyer accepted them, the injured party would not have derived its economic gain from the fluctuation in market value. Such was the case in Nobs Chemical, U.S.A., Inc. v Koppers Co., Inc., where the seller entered into a fixed-price supply contract with a Brazilian firm to acquire the contract goods for the buyer. The contract guaranteed the seller a $95,000 profit on the deal. Thereafter, the market price for the contract goods fell dramatically. Before the seller acquired the goods from the supplier, the buyer breached. After the seller secured a release from the supplier, it sued for damages of $300,000 measured by the difference between the contract price and the market price at the time for performance. Finding the claim for market damages excessive, the court limited the seller to the $95,000 profit it would have earned had the contract been performed.
Robert E. Scott,
The Case for Market Damages: Revisiting the Lost Profits Puzzle,
U. Chi. L. Rev.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/309