Tuesday, March 7, 2023
Contracts Remedies and the Indifference Principle
Jennifer S. Martin
It is an honor to participate in this symposium on Professor Mel Eisenberg’s book, Foundational Principles of Contract Law (2018). I’ve long been a fan of Professor Eisenberg’s work on contract remedies, and, yes, I have my favorites to recommend, starting with Actual and Virtual Specific Performance, the Theory of Efficient Breach, and the Indifference Principle in Contract Law, 93 Cal. L. Rev. 975 (2005) (“Actual and Virtual Specific Performance”), and also Conflicting Formulas for Measuring Expectation Damages, 45 Ariz. St. L.J. 369 (2013) (“Conflicting Formulas”). In considering my personal approach to contract remedies, I am drawn to Professor Eisenberg’s articulation of an “indifference principle” underlying contract remedies. That is, “the remedial regime for breach of bargain contracts should make promisees indifferent between performance and legal relief.” (Actual and Virtual Specific Performance at 977). He cautions what is apparent in that expectation damages do not routinely award an amount that makes the non-breaching party indifferent to breach or performance by the breaching party. Accordingly, Professor Eisenberg recognizes the “shortfall” that arises with expectation interest as employed in practice such that parties do not expect performance “is fully or even substantially insured by the expectation measure.” (Id. at 983.) Ultimately, he argues in favor of a more liberal approach to specific performance (virtual or actual) to more effectively approach indifference. (Id. at 1018).
In Foundational Principles of Contract Law, Professor Eisenberg sets out the common building blocks for any approach to expectation damages that are framed by the indifference principle. (See also, Conflicting Formulas at 369-70).
- Replacement Cost, being “the difference between the contract price and the actual or imputed cost of a replacement transaction.” (Foundational Principles, at 179).
- Diminished Value, being “the difference between the value of the performance that a breaching seller rendered and the value of the performance that she promised to render.” (at 179).
- Lost Profit, being “the difference between the contract price a breaching buyer agreed to pay and the seller’s variable costs.” (at 179).
Yet, these building blocks are challenged in contract law’s use of both expectation and reliance measures. Of course, an expectation measure of damages would more approach indifference as it permits the non-breaching party to obtain a position whereby the full contract performance can be obtained in some cases, albeit absent some losses that are not recoverable in contract (i.e., subjective values, attorneys’ fees). Eisenberg acknowledges that this would be true even if a contracting party has suffered no actual loss and requires no compensation per se, presumably because a non-breaching party is rarely indifferent to contractual breach. Moreover, contractual rules most often use expectation as it achieves a fairer result in most cases, as compared to reliance.
Professor Eisenberg asserts, though, that due to known limitations on expectation damages, specific performance as a remedy better achieves indifference to breach as “it potentially gives the promisee the very performance bargained for.” (at 297). Of course, specific performance (actual or virtual) still neglects some losses that remain uncompensated, such as attorneys’ fees. Putting that aside, it is helpful to consider to what extent courts have considered in practice Eisenberg’s position on the merits of specific performance. Let’s take a look at two recent cases as illustrative of court positions on the provision of specific performance. Both of these are sales cases subject to UCC § 2-716, which is arguably more friendly to the provision of this relief (“[s]pecific performance may be decreed where the goods are unique or in other proper circumstances”). Not unusually, the results of the cases were split on the provision of specific performance, as the availability of this remedy is sometimes limited on practical grounds. However, as noted by Eisenberg, notwithstanding the pessimism expressed at times toward the traditional doctrine of specific performance, courts are open to granting this type of relief that more reflects the indifference principle. (at 296).
In the case of Cheng v. Continental Classic Motors, Inc., Continental Classic Motors (“Continental”) agreed on March 2, 2022, to sell a Ferrari F8 Tributo to Cheng for $475,994. (22 CV 2704 (N.D. Ill. Dec. 5, 2022)). Cheng argued that Ferrari was rare and unique, was the only one like it in the world, the only one in the Rosso Fiorano color, and Ferrari no longer makes this particular car. On March 5, 2022, Continental sold the car to another buyer. Cheng brought suit for breach of contract against Continental, requesting relief that included specific performance and monetary relief. Continental moved to dismiss the claim for specific performance. The court noted that “[c]ourts generally disfavor granting specific performance unless monetary damages are inadequate.” (Id. at *2). Notwithstanding that position, the court was open to the remedy of specific performance, finding the car is unique and that specific performance might be available to Cheng. Ultimately, however, it seems that specific performance would not be available to Cheng if a bona fide purchaser had the car.
This conclusion can be compared to the result in Jet Experts, LLC v. Asian Pac. Aviation Ltd., where Jet Experts, LLC (“Jet Experts”) contracted with Asian Pacific Aviation Limited (“Aviation”) to purchase a used aircraft that would be used for organ transplant transportation. (22 Civ. 02426 (LLS) (S.D.N.Y. May 4, 2022)). Aviation canceled the contract after it found a buyer willing to pay a higher price. Jet Experts filed suit for breach of contract and requested specific performance. The court observed that “[t]he law has been slow to order specific performance of a disowned contract in cases where the performance consisted in turning over an article which is mass-produced.” (Id. at *5). The court agreed with Jet Experts that there was not an available aircraft that served the organ transplant needs and that the general characteristics were unique with “low flight hours, overhauled engines, three-piece divan, already inspected APU, completion of all required inspections, including its 96-month inspection.” (Id. at *9). Moreover, Jet Experts worked with Aviation for significant restoration of the aircraft such that there were no other similar aircrafts and, therefore, Jet Experts was entitled to specific performance. (Id. at *6).
These cases reflect a judicial philosophy that is adverse to the award of specific performance, yet one that remains flexible to its award in a proper case. This may reflect, as Eisenberg notes, a judicial recognition of the limitations of expectation as a remedy. (Foundational Principles, at 295). While a higher standard is required to access specific performance, at least when we are referring to the actual type, these cases seem to suggest a recognition of the superiority of the specific performance remedy. For instance, the case of Jet Experts involved the need for an aircraft for organ transplant transportation. This case, and cases like it, demonstrate Professor Eisenberg’s observations about the adequacy of an expectation remedy where the buyer would not be indifferent to obtaining the aircraft when there was not a suitable replacement aircraft and significant time and effort had been put into restoring the plane for its intended use. While specific performance might be more compelling in a case involving organ transplant transportation, the Cheng court also displayed a willingness to consider the remedy. Though there is still a fact-intensive hurdle for actual specific performance, courts seem to acknowledge that the remedy is available and perhaps superior. While the courts did not cite Professor Eisenberg or mention indifference, the inadequacy of an expectation remedy is apparent when reading these cases. The indifference principle as a remedial goal is in practice, even if contractual remedies continue to fall short of achieving this.
Previous posts in the Symposium:
Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part V: Introducing the Second Week