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UNJUST ENRICHMENT AND QUASICONTRACTS

 UNJUST ENRICHMENT AND QUASICONTRACTS

Christopher T. Wonnell

Professor of Law, University of San Diego School of Law

© Copyright 1999 Christopher T. Wonnell

 

Abstract

This chapter presents an economic analysis of some of the most typical cases

involving the law of restitution. It questions the economic utility of a

generalized theory of unjust enrichment, but defends the economic wisdom of

three of the most common categories of relief that have gone under that

umbrella term (rescue situations, transfers that were not fully voluntary or

informed, and benefit-based remedies for wrongs committed).

JEL classification: K19

Keywords: Duty to Rescue, Unjust Enrichment, Restitution, Hypothetical

Contracts

 

1. Scope of the Chapter

 

This chapter presents an economic analysis of some of the most typical cases

involving the law of restitution, which is generally defined as the class of all

claims grounded in the unjust enrichment of the defendant (Goff and Jones,

1993, p. 3). Actions that seek damages based upon restitutionary principles at

law are frequently characterized as quasi-contractual in nature. However,

restitutionary remedies are also available in equity, as with the constructive

trust that a court can impose on property to avoid the defendant’s unjust

enrichment. This article will question the economic utility of a generalized

theory of unjust enrichment, but defends the economic wisdom of three of the

most common categories of relief that have gone under that umbrella term.

 

The first of these sources of restitutionary or quasi-contractual relief

involves plaintiffs who did something that purposely but unofficiously

benefitted defendants, such as a physician who provided emergency medical

services to an unconscious patient (Cotnam v. Wisdom, 104 S.W. 164 (Ark.

1907); In re Crisan Estate, 107 N.W.2d 907 (Mich. 1961)). An economic

rationale could be that the law is seeking to provide an incentive for providers

to render services that the recipients value more than their cost but that cannot

be negotiated contractually by virtue of high transaction costs.

 

If the rescue is indeed efficient, one question is whether the potential

rescuer should be under an affirmative duty to provide the service (Epstein,

1973, p. 190). Thus, this article will explore both restitutionary ‘carrots’ for

rescuers and potential tort or criminal ‘sticks’ that might be imposed on

nonrescuers.

 

The rescue situation, however, is by no means the only scenario in which

restitutionary relief is available. This article will discuss two other broad

patterns of cases. One pattern concerns transfers that were not fully voluntary

or informed, as with payments of money by mistake or pursuant to a contract

that has become impossible to perform. In such situations, plaintiff’s can often

recover restitutionary recoveries from defendants, although defendants may be

able to interpose defenses such as changed circumstances in reliance on the

payments made. The economic theory here is that full divestiture of the

plaintiff’s property as a consequence of mistake would encourage excessive care

in the avoidance of mistakes or in the contractual transfer of possession. If the

social cost of a mistaken or contractual transfer is small, it would not be wise

to allow the private cost of the transfer to be large.

 

A third common restitutionary pattern is the benefit-based remedies for

wrongs committed. For example, if the defendant converts property belonging

to the plaintiff and uses the property to make some profit, the plaintiff may be

able to ‘waive the tort and sue in assumpsit’ to recover the gain the defendant

has made. The economic theory here is essentially one of deterring a defendant

from bypassing market transactions where transaction costs are low enough to

make such transactions feasible.

 

2. The Anomaly of Benefit-Based Liability

 

The essence of restitutionary claims is often said to be the focus on the

defendant's gain as opposed to the plaintiff’s loss (Dobbs, 1993, Sec. 4.1). From

an economic perspective, this is immediately anomalous. Economic analysis

generally sees legal intervention as a response to conduct that imposes harm,

seeking to sanction or ‘price’ that behavior so as to reduce its incidence to more

optimal levels. Barring some argument based upon envy or spite, the presence

of a gain as such is not a reason for the law to become concerned (Wonnell,

1996, pp. 177-190). To the contrary, the defendant’s gain is normally a factor

that cuts against the wisdom of trying to impose sanctions on the defendant for

harms that the defendant may have caused.

 

For example, one imposes sanctions on a contract breacher because of the

harm that breach inflicts on the promisee, but one might worry about

excessively large sanctions that would deter even efficient breaches where the

defendant’s gain from breach exceeded any harm caused (Posner, 1986, p.

882). Similarly, one imposes tort liability on an ultrahazardous activity because

of its predictable harms or costs, but one is not led to embrace criminal

sanctions, injunctions, or benefit-based liability against the blaster precisely

because of the gains that the defendants (and their contractual partners) are

making from their blasting activity. And, of course, under Learned Hand’s

famous test of negligence in the Carroll Towing case, an action can be

considered non-negligent and therefore escape liability precisely when the

benefits from not taking care were larger than the expected harm (United States

v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir. 1947). Finally, the paradigm

case of damnum absque injuria is the losses caused by fair competition, losses

which are not compensable precisely because the gains made by defendants and

their contracting partners from the ability to compete freely are so large.

 

These facts strongly suggest that ‘unjust enrichment’ is never going to have

the unity as a field that might be possessed by other great categories of the law

such as tort and contract (Wonnell, 1996). The conclusory label ‘unjust’ hides

the nature of the harm that warrants legal intervention. And there must be some

special, rather than general reason, to regard ‘enrichment’ as an integral part

of the wrong rather than as a factor in complete or partial mitigation of the

wrong.

 

This article suggests that ‘unjust enrichment’ is really a shorthand for three

essentially different concepts. The first is the theory of rewarding those who

intentionally confer positive externalities on others with the fruits that could

have been earned by contract had transaction costs been lower. The second is

the idea of incomplete divestiture of property. The third is the notion of

deterring the conscious bypassing of available market options.

 

3. Hypothetical Contracts for Rescuers; Duty to Rescue

 

One situation in which the law has awarded ‘restitutionary’ remedies involves

the plaintiff who rescued the defendant’s person or property and seeks

compensation for costs incurred in the rescue. Physicians are frequently

awarded their reasonable fee when they render emergency medical services to

unconscious patients. Other situational rescuers are sometimes given

compensation for their out-of-pocket costs, although many providers of services

are denied compensation for having acting ‘officiously’ (Dawson, 1961). If tort

law penalizes the imposition of negative externalities, this branch of restitution

law rewards the creation of positive externalities (Epstein, 1994, p. 1377).

 

Dramatic rescues from death or serious bodily injury are not the only

example of this class of remedies. In continental countries, a party can recover

in ‘negotiorum gestio’ for costs incurred in repairing storm damage to the

house of a neighbor who was out of the country. Co-owners of property are

often allowed to make necessary repairs or maintenance expenses on the

common property and to bring actions against their co-owners for

compensation. A party who creates a common fund, such as a class-action

plaintiff or her attorney, can often recover in restitution from others benefited

by the plaintiff’s action. Although less dramatic than the rescue cases, the

essential principles of these cases are the same. Transaction costs of a voluntary

transaction are high, whether because of unavailability of a party or bilateral

monopoly conditions, and the Kaldor-Hicks efficiency of the service is

sufficiently obvious that the risk of judicial error appears tolerably low

(Bouckaert and De Geest, 1995, p. 485). It is certainly true that not all

providers of valued services are entitled to compensation from the enriched

recipients. Courts tend to deny recovery to those who ‘intermeddle’ or provide

services officiously. When transaction costs are low enough to enable a

voluntary transaction, there is no efficiency advantage to allowing parties to

provide services without consent and then to demand compensation after the

fact.

 

It is somewhat doubtful that the principle involved in the rescue cases is one

of benefit-based liability at all (Levmore, 1994, p. 1427). The physician who

performs emergency medical services is not really asking for a benefit-based

remedy. If the service was ineffective, the plaintiff can recover although the

defendant derived no benefit. And if the service was effective, the benefit

derived is the value of the defendant’s extended life, which is not awarded. Nor

should it be, from the standpoint of efficiency, for such a ‘rescue’ which

provided no benefit to the defendant would encourage the defendant, who

controls the regular use of herself and her property, to exercise excessive care

to avoid the need to be ‘rescued’ (Wittman, 1985, p. 182). The plaintiff’s

regular fee is normally a good measure of the defendant’s benefit because it is

a reflection of alternatives available to the defendant; if many people are

willing to perform a service for a particular fee, any one service provider cannot

benefit the defendant by more than the fee she could have paid instead.

However, in the rescue context, there may have been no other service providers,

so the plaintiff’s regular fee is no longer an indication of the extent of the

defendant’s benefit (Wonnell, 1996, pp. 169-171).

 

Instead, the principle of the rescue cases is essentially one of hypothetical

contract, imposing on the defendant the contract which would have been

consented to had the transaction costs been lower (Long, 1984, pp. 415-416).

It is properly denied when the plaintiff had no contractual intent, as when the

services were offered with the intention of extending them as a gift. The label

‘quasi-contract’ has a bad reputation with restitution scholars, because the

notion of ‘contract’ is so misleading in describing why the defendant is liable

in the case of mistaken transfers or in the case of willful conversions (Goff and

Jones, 1993, p. 6). In the rescue setting, however, the contract analogy seems

apt, as long as one remembers that the consent is hypothetical and indicative

only of how the parties would have contracted had the opportunity been

available.

 

Rescuers are not always treated well by the courts. Courts may dismiss

rescuers as intermeddlers too frequently, leading to an inefficiently low number

of rescue attempts (Wade, 1966, p. 1212). One situation in which rescuers fare

somewhat better is in admiralty, where successful rescuers are often awarded

a considerable fee for their efforts. The need for professional rescuers to engage

in investments in rescue-related equipment may partially explain the sympathy

accorded to such rescuers in admiralty. It has been argued that the structure of

compensation for rescuers in admiralty closely approximates the terms of a

transaction that the parties would have made with the rescuer had a transaction

been possible (Landes and Posner, 1978, pp. 103-104).

 

An interesting question is whether rescues, if they are clearly efficient,

should be required rather than left to the law of quasi-contract. An award that

was substantial enough to clearly exceed the plaintiff’s costs should be

sufficient to inspire rescue. If restitutionary awards are generous, a duty to

rescue could be superfluous, but by the same token it would appear to be a

harmless supplemental incentive.

 

The most serious problem with penalties (especially when pursued to the

exclusion of liberal restitutionary awards) is their indirect effects on incentives.

A person who realizes that her talents and properties can be conscripted to help

others will not have as much incentive to develop those talents and properties

in the first place or have them in a place where they could be useful to others,

although the empirical significance of this problem will vary with the

circumstances (Levmore, 1986, pp. 889-892). This problem might be quite

unimportant where the cost of the rescue was trivial, as with the paradigm case

of the person who refused to throw a rope to a drowning swimmer.

 

The incentive problem with mandatory rescue as opposed to restitutionary

regimes is essentially a problem of governmental knowledge. To impose an

efficient duty to help, one would need to know about the previous choices

available to potential rescuers and what effect the prospect of liability might

have on those choices. To create a hypothetical contract, one can instead ignore

past choices, as a mutually beneficial transaction should not deter others

similarly situated from making the choices which would place them in a

position to be of service to others.

 

This is not to say that a duty to rescue would always be inefficient. Where

one party is both a better avoider of the loss and a better insurer against

uncertain outcomes, it may be an express or implied part of a contract that one

will provide rescue services when needed by the other. This may explain why

the law sometimes imposes a duty to rescue between parties in a ‘special

relationship’ with each other such as common carriers or innkeepers and their

guests (Prosser and Keeton, 1984, Sec. 56, pp. 376-377). Another possible case

for an efficient rescue duty would be a setting in which one was equally likely

to be a rescuer or a rescuee. In that case, a party may actually be encouraged to

be in a position where she can be of service, as an unintended byproduct of

wanting to be somewhere that others would have a duty to rescue if one got into

trouble (Hasen, 1995, p. 141).

 

Another potential problem with a duty to rescue is that the would-be rescuee

loses some of her incentive not to be in a position that would require rescue

(Wittman, 1981, p. 89). In principle, this should be accounted for in saying that

the duty is truly an efficient one, for if the rescuee is a cheaper cost-avoider, the

would-be rescuer’s duty would not be efficient (Calabresi and Hirschoff, 1972,

pp. 1060-1061). However, this would once again require considerable

knowledge on the part of the state as to the steps that could have been taken by

would-be rescuers and rescuees.

 

If knowledge of decisions available in prior periods is unavailable, the safer

course may be to try to construct mutually beneficial bargains by generous

rewards extended to rescuers, at least where there is no reason to fear that a

plaintiff may have induced the demand for her own rescue services (Levmore,

1986, p. 886). It is true that a restitutionary award, by making rescues more

likely, will increase the incentive of potential rescuees to act in ways that will

require their rescue, but because rescuees will be forced to pay for the service

rendered to them, the effect will be considerably smaller than that generated by

a duty to rescue.

 

Still another potential problem with the duty to rescue concerns

administrative costs. Parallels can be drawn to the great costs of trying to

enforce against consensual or victimless crimes, where lack of evidence is a

serious problem unless one resorts to very aggressive law enforcement

techniques. The person who was not rescued may be deceased and unavailable

as a witness, while other witnesses to the nonrescue may be equally culpable as

nonrescuers and thus unwilling to bring forward their information (Rubin,

1986, p. 274). And if multiple nonrescuers were involved, there will be

difficulties in assessing relative responsibility. There may be some incentive

gain from the purely symbolic effect of creating a largely unenforceable legal

duty to rescue, although this would have to be traded off against any losses that

might occur in the feelings of altruism or heroism that might result from the

perception that one was performing only a legal duty (Rubin, 1986, p. 275).

 

The economic argument for a duty to rescue - somewhat uncertain, as noted

above, at least for rescues of nontrivial cost - should be distinguished from the

broader social or utilitarian argument for redistribution from those with surplus

resources to those with greater need for the resources. The economic argument

asserts that each rescue is a Kaldor-Hicks efficient transaction, and can add that

rescue situations are sufficiently unpredictable that a general duty of rescue

might well be in everyone’s ex ante interest to accept. The redistributive

argument would assert that people have a duty to do their part for others in dire

need even if the economic value of their resources (as contrasted with their

utility) is not higher in the rescuee’s hands, and despite the fact that the rescuer

may have no reasonable expectation of receiving reciprocal benefits. In normal

circumstances, a welfare state would be the sensible mechanism for

coordinating such a duty, but in rare emergency cases the person who should

act might be sufficiently individuated that a private law rescue duty could

supplement the system of taxation and public protection. At least some

commentators appear to make both the economic and the redistributive

arguments for a duty to rescue (Weinrib, 1980, pp. 272, 292). The redistributive

argument of course suffers from the more general moral hazard problems of

welfare states in altering behavior by shielding people from the consequences

of their choices.

 

4. Incomplete Divestiture

 

Suppose that the plaintiff pays money to the defendant by mistake, perhaps

having miscounted the money or misidentified the defendant’s account number.

What is the economic rationale for requiring the defendant to return the

money?

 

The essential idea is that the plaintiff is in a position to make decisions over her

own property, and the law should create an incentive to optimize these

decisions. There may be a modest social cost created if the plaintiff is careless

in directing her money, as the mistake must then be identified and corrected at

some administrative effort. Ideally, the property holder should be liable for

these costs in order to ensure that she takes proper care to avoid mistakes.

However, it would not be efficient to punish mistakes with full divestiture of the

plaintiff’s rights to the value of the money. Such a rule would impose a private

cost on the plaintiff much larger than the social cost of correcting a mistake.

The plaintiff would be induced to exercise too much care to avoid her mistake

(Huber, 1988, p. 99). Moreover, the defendant would have a perverse incentive

not to correct, or even potentially to cause, the plaintiff’s mistake.

 

In the case of money, the social cost of the mistake is usually small,

although it may be large if the defendant took actions in detrimental reliance

on what reasonably appeared to be new wealth. In other situations, the social

cost of mistake may be quite substantial. A common pattern involves a plaintiff

who constructs a building by mistake on the defendant’s land (Madrid v.

Spears, 250 F.2d 51, 54 (10th Cir. 1957); Rzeppa v. Seymour, 203 N.W. 62, 63

(Mich. 1925)). As the defendant did not ask for the building, it may be worth

considerably less than the value of the plaintiff’s labor and materials invested

in the project (Dickinson, 1985, pp. 62-63).

 

Older cases tended to deny recovery to the plaintiff builder on the theory

that the defendant should not be made worse off by being required to pay for an

improvement she did not want (Producers Lumber & Supply Co. v. Olney Bldg.

Co., 333 S.W.2d 619 (Tex. Civ. App. 1960)). This approach, however, does

create an incentive for the plaintiff to exercise excessive care in avoiding

mistakes, and for the defendant to exercise insufficient care to avoid such

mistakes by the plaintiff.

 

Many recent cases have granted a restitutionary recovery for the plaintiff

who constructs a building on the defendant’s land by mistake. The problem

with this approach is that the social cost of the mistake is difficult to measure.

The illiquidity of the newfound wealth imposes different costs on different types

of parties, depending upon their overall preferences and financial situation

(Kull, 1997). Perhaps the best approach would be for the courts to make

generous assumptions about the amount of harm that will be caused by the

illiquidity, and to award the plaintiff an amount that one can assert with

considerable confidence will not make the defendant worse off from the overall

transaction.

 

The essence of the plaintiff’s claim is not that the defendant has been

enriched. If for some reason the plaintiff’s building looked particularly good on

the defendant’s land, there is no reason to require the defendant to disgorge the

gains received in excess of the costs the plaintiff has incurred (Madrid v.

Spears, 250 F.2d 51, 54 (10th Cir. 1957); Rzeppa v. Seymour, 203 N.W. 62, 63

(Mich. 1925)). Rather, the plaintiff’s essential claim is harm caused by the

incomplete divestiture of property.

 

It would clearly be undesirable to allow the plaintiff to retain formal title to

the building while the defendant retained formal title to the underlying land.

This would create serious problems of bilateral monopoly and accompanying

high transaction costs of breaking the compulsory (Wonnell, 1996, p. 197).

Property, however, is a bundle of severable sticks, and the fact that necessity

compels the divestiture of the plaintiff’s physical rights to the property does not

mean that the plaintiff must also lose her rights to the value of that property.

 

Incomplete divestiture is the counterpart to the more familiar idea of

incomplete privilege (Bohlen, 1925). A defendant who is caught in a storm

and needs to use the plaintiff’s docking facilities is not confronted with legal

rules designed to prevent use of the plaintiff’s property, such as criminal

sanctions, injunctions, or benefit-based liability. However, the defendant

remains liable for the costs imposed, as an incentive for the defendant to take

the potential for such emergencies into account in evaluating how to make use

of her own property. (Vincent v. Lake Erie Transportation Co., 124 N.W. 221,

222 (Minn. 1910)). Necessity compels the yielding of exclusive physical rights

to the property (and the right to charge any price made possible by free

contract) but it does not compel the yielding of the plaintiff’s rights to the value

of the property. ‘Restitution’ in these cases is essentially the same principle, but

where the plaintiff rather than the defendant is the active party, and accordingly

where the law must remain alert to the possible harms caused by the activity in

question.

 

Contracts provide the backdrop for many restitutionary remedies. In some

circumstances, especially important in losing contracts, the courts may allow

a restitutionary recovery as an alternative to standard expectation principles of

damages. This is quite a problematic idea, as it allows the plaintiff to escape the

allocation of a risk that the contract may have efficiently placed (Kull, 1994,

pp. 1465-1470). It also gives the plaintiff a perverse incentive to induce the

defendant to breach a contract, or to jump on breaches of uncertain materiality

as excuses for rescission. However, in some situations it seems likely that the

parties would have wanted a restitutionary recovery, especially where the

defendant completely failed to perform and the plaintiff’s restitutionary interest

is much easier to calculate than her expectation (Kull, 1994).

 

Restitution is also granted in many cases to the breaching party to a contract

(Restatement of Restitution, 1937, Sec. 108(b)). As a general idea, this is

simply a way of ensuring that the non-breaching party receives her expectation

interest, but only her expectation interest, upon breach. It is therefore justified

by the general economic argument that favors expectation damages and

disfavors punitive damages, involving the principle of efficient breach and the

desire to avoid high-transaction-cost bargaining over the surpluses from breach

between bilateral monopolists (Posner, 1986, pp. 106-107). On the other hand,

in some circumstances it may be difficult to calculate the expectation interest,

with the result that a restitutionary recovery for the breaching party threatens

to undercompensate the nonbreacher and thereby underdeter breach.

 

Parties sometimes provide for forfeitures of down payments without regard

to actual damages as an implicit recognition of this phenomenon of

restitutionary awards leading to undercompensation of the nonbreaching party.

The general argument that contracts are presumed efficient (at least between

informed parties) would argue for the enforcement of such bargained for

forfeitures.

 

Finally, restitution is often granted in the case of broken contracts, such as

those held to be unenforceable under the Statute of Frauds (Boone v. Coe, 153

Ky. 233, 154 S.W. 900 (1913)), or those that become impossible to perform

through some intervening condition or statute. Again, we face a case of

incomplete divestiture of property. The parties parted with their goods or

services on assumptions that have proved to be invalid. If the court were to

simply leave the parties where it finds them, the parties would have incentives

to strategically and uneconomically delay the transfer of physical possession of

resources involved in the contracting process (Bouckaert and De Geest, 1995,

p. 475).

 

To induce parties to use optimal timing in contracts, transfers should be

undone if no social harm has been caused (by, for example, affixing resources

to projects that no longer have value). If harm has been done, the problem is

more complex, and might be addressed by asking which of the parties is more

efficiently situated to have prevented or insured against that harm (Posner and

Rosenfield, 1977, p. 83).

 

5. Disgorgement for Bypassing Viable Market Options

 

Another use of the restitutionary idea is as an alternative remedy for wrongs.

For example, a person who intentionally converts property belonging to another

is liable in tort for the harm caused, but may also be liable in restitution for the

benefit received from her own use of the ill-gotten property. It is said that the

plaintiff can ‘waive the tort and sue in assumpsit’ to recover gains larger than

the plaintiff’s loss (Palmer, 1978, Sec. 2.10). Restitution can be awarded

against those who procured the plaintiff’s property ‘through imposition

(express or implied), or extortion; or oppression; or an undue advantage taken

of the plaintiff’s situation, contrary to laws made for the protection of persons

under those circumstances’ (Moses v. Macferlan, 2 Burr. 1005, 97 Eng. Rep.

676 (1760)). Willful takers of intellectual property belonging to the plaintiff

have often found themselves affected by this principle (Gordon, 1992).

 

Is this remedy an exemplar of the broader principle that a person should not

‘profit from a wrong’? (Restatement of Restitution, 1937, Sec. 3). From an

economic perspective, this depends greatly on how ‘wrong’ is defined. If wrong

is confined to well-defined, easily avoidable conduct that unambiguously

imposes more harm than benefit, it would certainly be true that efficiency

would require that the defendant not be permitted to profit from the wrong. The

law needs to deter such conduct, and disgorgement is the minimum sanction

sufficient in principle to effectuate such deterrence. Of course, in this case,

economic analysis would see no reason for trying to put the defendant on her

own indifference curve between right and wrong conduct (Wittman, 1985, p.

182). If the behavior is clearly defined and unambiguously inefficient, punitive

damages or criminal sanctions may be in order, or certainly liability for harm

caused (by definition larger than the benefit received). Thus the disgorgement

principle, while valid, would be properly submerged in the law beneath more

severe penalties.

 

On the other hand, if wrong is defined as conduct that the law ought to

sanction, it is no longer true that we would want a rule that a person should not

‘profit from a wrong’. In economic theory, sanctions are imposed because the

behavior in question might be inefficient, or because the precise behavior

involved is inefficient but is difficult to distinguish before the defendant’s

action is taken from other behavior, the inefficiency of which is less clear. In

such cases the liability needs to be measured by harm caused rather than benefit

derived. Harm-based liability gives the defendant the incentive to undertake the

activity if and only if her benefits truly exceed the harm caused. Benefit-based

liability would make the defendant indifferent to the costs imposed on the

plaintiff (as these did not affect remedies) and to the benefits she herself

derived (as these would be taken away in any event) (Wittman, 1985, p. 173).

 

One should not expect, therefore, any robust general principle of law that

involves disgorgement of gains received. Gains in themselves are not

objectionable; they serve to mitigate wrongdoing. Gains should be disgorged

in cases where the actual remedies are likely to be considerably more severe, so

that the disgorgement idea is unnoticed. When other penalties are

inappropriate, this is usually because of factors that make the disgorgement

idea inappropriate as well.

 

There is one situation, however, where disgorgement is clearly appropriate.

This is the conscious bypassing of readily available market alternatives. This

behavior is clearly inefficient, because even if the defendant had more valuable

uses for the property in question than the plaintiff, she could, by definition,

have obtained those efficiencies by consensual means. Moreover, many takings

are clearly inefficient, and the litigation costs of distinguishing those that are

from those that are not are likely to dwarf the transaction costs of a voluntary

move of the property.

 

An interesting question is whether this principle should result in a

defendant’s duty to disgorge gains made by a breach of contract (Farnsworth,

1985, p. 1369). The theory would be that a promise constitutes property of the

plaintiff, and that the defendant has converted that property by retaining the

benefits of refusing to perform. On the other hand, the contract breach setting

is one of bilateral monopoly, and the parties might have considerable difficulty

agreeing on a voluntary distribution of the gains from breach. Where that

situation obtains, a disgorgement rule might threaten to undermine the gains

from breach entirely, or result in their dissipation through haggling over their

distribution (Posner, 1986, p. 118). The traditional rule disfavoring

disgorgement remedies for breach of contract may well be efficient for that

reason, although it should certainly yield in the face of evidence that the

contracting parties intended a disgorgement remedy to apply.

 


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