The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies

The purpose of this essay is to begin the development of an integrated theory of contract remedies by delineating the circumstances under which courts should simply enforce a stipulated remedy clause or grant relief to the innocent party in the form of damages or specific performance. The conclusion, in brief, is that in the absence of stipulated remedies in the contract that survive scrutiny on the usual formation defenses, specific performance is more likely than any form of money damages to achieve efficiency in the exchange and breach of reciprocal promises. If specific performance is the routine remedy for breach, there are strong reasons for believing, first, that more mutually beneficial exchanges of promises will be concluded in the future and that they will be exchanged at a lower cost than under any other contract remedy, and, second, that under specific performance postbreach adjustments to all contracts will be resolved in a manner most likely to lead to the promise being concluded in favor of the party who puts the highest value on the completed performance and at a lower cost than under any alternative.

In Part I the notion of an efficient breach is explained and the theoretical literature on the efficiency aspects of remedies for breach other than specific performance are explored. In Part II, I discuss the role of certain nonlegal, market forces (such as reputation) in obtaining efficient breach, the efficacy of self-help measures such as bonding, arbitration, and liquidated damages, and then, in Part III, the traditional measures of money damages – restitution, reliance, and expectation. Part IV makes the case for specific performance as the routine remedy for breach by discussing its effect on contract formation costs and on post-breach negotiation costs. I also discuss what defenses a promisor might be allowed to mount against specific performance and, therefore, under what circumstances courts should award money damages rather than grant equitable relief to the nonbreaching party.