I have always been suspicious of this rationale for profits-based recovery for breach of contract. I do not deny such a recovery where the profits that the promisor obtained from her breach can help assess the promisee's lost profits (for example, where both parties operate in similar markets and with comparable skills). But in these cases traditional common law grants such an award under the heading of the expectation interest. The difficult cases, which were the focus of our attention in recent years, are ones in which the promisor's profits are not a good (or even reasonable) proxy of the promisee's loss. In such cases -- such as where the promisor sells in a different market or where by the time the promisee covers in the market, the market price equals the contract price -- a profits-based recovery is, I would argue, inappropriate. Because it cannot serve as the second-best to lost profits, looking at the promisor's profits cannot reasonable help us solve the problem of undercompensation. The proper solution for undercompensation in these cases is liquidated damages that allow a promisee to assess (ex ante) the circumstances in which she may be undercompensated due to loss that can be verified ex post only at a prohibitively high cost.

Furthermore, not only that difficulties of proof do not provide the rationale for awarding profits-based recovery for uncompensated losses, but in fact I believe that proof difficulties -- this time difficulties in proving the promisor's profits -- generally render such a measure of recovery an undesirable pecuniary remedy. To see why, notice that while traditional contract remedies, aimed at compensating a promisee for her loss, require information that tends to be available to the promisee-plaintiff, the data required for establishing the promisor's profits are much more difficult to produce. Not only that a promisee needs to get information regarding the promisor's affairs; she needs to resolve difficult questions of causation and attribution. Contractual entitlements -- such as the entitlement to the promisor's profits -- that rely on information that can be verified only at a prohibitively high cost are inefficient. More importantly, such entitlements create the very kind of uncertainty that commercial parties dislike. Therefore, in most cases employing a profit-based measure of recovery would undermine the probable intent of most such commercial parties. Such inefficient defaults are not only undesirable from the promisor's point of view, of course. They are also (ex ante) undesirable from the promisee's perspective, at least insofar as commercial parties are concerned, because the cost that the promisor is expected to incur -- and, hence, the additional price she will charge the promisee -- due to such an inefficient sanction for non-performance is, by definition, greater than the expected benefit the promisee is likely to derive from such a remedy.

Hanoch

Hanoch Dagan
Affiliated Overseas Professor
University of Michigan School of Law
625 South State Street
Ann Arbor, MI 48109-1215
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