The Myth of Optimal Expectation Damages

40 Pages Posted: 6 May 2020 Last revised: 21 Sep 2020

See all articles by Theresa Arnold

Theresa Arnold

McGuireWoods LLP

Amanda Gray Dixon

Duke University School of Law, Students

Madison Sherrill

Duke University School of Law, Students

Mitu Gulati

University of Virginia School of Law

Date Written: September 20, 2020

Abstract

A much-debated question in contract law scholarship is what the optimal measure of damages for breach should be. The casebook answer, drawing from the theory of efficient breach, is expectation damages. This standard answer, which was a major contribution of the law and economics field, has come under attack by theoreticians within that field itself. To shed an empirical perspective on the question, we look at data on what types of damages provisions parties contract for themselves in international debt contracts. Specifically. we examine issuer call provisions, which are economically equivalent to damages for prepayment, yet not viewed as legally problematic in the manner an actual liquidated provision might be. We find little evidence of a preference for the expectations damages measure.

Keywords: contract, expectation damages, make-whole premium, efficient breach

JEL Classification: K12, K22

Suggested Citation

Arnold, Theresa and Dixon, Amanda and Sherrill, Madison and Gulati, Mitu, The Myth of Optimal Expectation Damages (September 20, 2020). Marquette Law Review, Forthcoming, Duke Law School Public Law & Legal Theory Series No. 2020-24, Available at SSRN: https://ssrn.com/abstract=3572640

Theresa Arnold (Contact Author)

McGuireWoods LLP

434 Fayetteville Street
Suite 2600
Raleigh, NC 27601
United States

Amanda Dixon

Duke University School of Law, Students ( email )

Durham, NC
United States

Madison Sherrill

Duke University School of Law, Students ( email )

Durham, NC
United States

Mitu Gulati

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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