The Evolution of Contract Remedies (and Why Do Contracts Professors Teach Remedies First?)

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 1936-7 and, later, the theory of efficient breach both offered important justifications for the principle. However, as economic analysis extended to incorporate a wider range of incentive and risk-bearing goals, the support for the compensation principle became increasingly frayed. Subsequently, 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 the price for embedded options or (b) setting the stakes and thereby incentives for future litigation. Finally, the paper discusses the design of “tiered” damages within a single contract that are triggered by different contingencies. In this sense, damages and conditions act as complements as well as substitutes. In light of the complex role played by contract remedies, the essay suggests that this topic should be taught near the end rather than beginning of the first-year contracts course