http://www.jus.unitn.it/cardozo/Review/Contract/Alpa-1995/alpa.html Guido Alpa and Al!erto Giampieri "ro#essor o# "rivate $aw at %niversit& o# Rome '$a (apienza'.

$aw at %niversit& o# Rome '$a (apienza'. $ecturer o# "rivate

Law and Economics and method analysis: the contractual damages issue Contents

1. )he contractual dama*es: common principles to civil and common law. +. )he di##erent approaches. ,. $aw and economics and voluntar& !reach. -. .odels o# dama*es assessment. 5. Applica!le law. /. Conclusions.

1. The contractual damages: common principles to civil and common law. 0ith respect to the !reach o# contract1 it is possi!le to indicate some common principles to the di##erent law s&stems: 2i3 the contractin* part& cannot avoid the per#ormance o# the contractual o!li*ations without incurrin* in an& ne*ative conse4uence5 2ii3 the injured part& cannot ta6e advanta*e o# the !reach !& *eneratin* a dama*e to the !reachin* part&5 2iii3 the remedies to the !reach o# contract can !e provided either !& contract 2e.*.1 penalt& clause1 etc.3 or !& the Courts5 2iv3 the latter include either the recover& o# dama*es or the speci#ic per#ormance5 2v3 the recover& o# dama*es includes the loss su##ered !& the injured part&1 as well as the loss o# *ains5 2vi3 in an& case1 the onl& recovera!le dama*es are the #oreseea!le dama*es1 e7cept #or speci#ic cases5 2vii3 the moral dama*es1 in principle1 are not recovera!le5 2viii3 the injured part& should tr& to reduce the dama*es !& actin* in *ood #aith5 2i73 also the injured part& is lia!le #or dama*es 2i.e.1 the dama*es incurred ma& !e reduced31 in case that same part& contri!uted to cause them. )his 'common core' o# contract law has !een correctl& re#lected and reproduced !& %nidroit in its "rinciples o# 8nternational Commercial Contracts 2Rome1 199-1 ch. 91 :on"er#ormance31 in which the matter is divided into several *eneral rules 2(ec. 1: :on"er#ormance in General3 and other rules related to the ri*ht to per#ormance 2(ec. +: Ri*ht to "er#ormance31 to termination 2sec. ,: )ermination31 to the recovera!le dama*es 2(ec. -: ;ama*es3. (imilarl&1 the so-called Commission on <uropean Contract $aw1 directed !& =le $ando1 has dra#ted some common rules to di##erent law s&stems 2see1 )owards a <uropean Civil Code1 ;ordrecht1 >oston1 $ondon1 199-5 )he "rinciples o# <uropean Contract $aw1 $ando and >eale eds.1 $ondon1 199-3.

>ased on the a!ove1 it mi*ht !e maintained that the a#oresaid common core ma& o##er the opportunit& to create models o# economic anal&sis which ma& !e circulated1 that is models which ma& !e suita!le #or an& law s&stem. ?owever1 even on the !asis o# a preliminar& anal&sis1 this e7perience seems to !e #rustrated !& the di##erent approaches ta6en !& the common law&ers as opposed to the civilians1 and viceversa. 2. The different approaches. )he #irst divertin* approach1 the economic conse4uences o# which cannot !e addressed herein1 re#ers to the criteria #or the imputation o# dama*es. 8n @rench1 German and 8talian law s&stems1 the imputa!ilit& o# contractual dama*es is !ased on ne*li*ence1 whereas in common law s&stems the ne*li*ence o# a !reachin* part& is neutral. <ven in the continental e7perience1 the application o# strict lia!ilit& rules has !een promoted 2see1 #or e7ample1 ". )rimarchi1 (ul si*ni#icato economico dei criteri di responsa!ilitA contrattuale1 pu!lished in Alpa1 "ulitini1 RodotA1 Romani1 8nterpretazione *iuridica ed analisi economica1 .ilan1 199+1 p. +B, and #ollowin*3. ?owever1 the case-law is currentl& #avora!le to #ind the lia!ilit& and1 there#ore1 to award the recover& o# dama*es onl& i# the !reach o# contract is caused at least !& ne*li*ence. )he second1 and more relevant #or our purposes1 di##erent position pertains to the so-called 'voluntar& !reach'. )he contractin* part& has no choice !etween per#ormance and !reach o# contract: same part& must1 in an& case1 #ul#ill the o!li*ation1 e7cept in case the !reach is caused !& #orce majeure1 upcomin* impossi!ilit&1 un!eara!le upcomin* material disadvanta*e1 that is !& causes independent #rom the part&Cs willin*ness1 interests1 or !usiness or*anization. )he voluntar& !reach1 under the continental law s&stems1 is ne*ativel& considered !& the le*islators: under the 8talian Civil Code1 art. 1++5 provides that 'i# the !reach or the dela& does not depend on de!torCs #raud1 the recover& is limited to the dama*e which could !e #oreseen at the moment in which the o!li*ation has !een underta6en'5 this is an ancient rule1 which was alread& included in the @rench Code :apoleon 2see1 art. 115D: '$e de!iteur nCest tenu 4ue des domma*es et interets 4ui ont EtE prevus ou 4uCon a pu prevoir lors du contrat1 lors4ue ce nCest point par son dol 4ue lCo!li*ation nCest point e7ecutEe'3. )here are several reasons #or such approach: 2i3 #irst o# all1 the need to con#irm the !indin* e##ect o# the a*reement5 i# the de!tor could !e in !reach !ein* su!ject to the sole recover& o# dama*es1 and same ma& o!tain an advanta*e !& per#ormin* the o!li*ation underta6en in #avor o# a third part&1 there would not !e an& certaint& in the contractual relationships: an&one1 who has carried out a transaction and1 there#ore1 has entered into an a*reement1 would not have the certaint& o# the e##ectiveness o# the transaction and1 there#ore1 o# the o!li*ation1 since he would alwa&s !e su!ject to a possi!le !reach o# the other contractin* part&5 the !reach o# contract is considered as an e7ceptional event1 connected with events not in#luenced !& the e7pectactions o# the part& who is in !reach5 2ii3 secondl&1 #rom a *eneral point o# view1 the need to ensure a correct per#ormance o# the trade transactions5 the operators1 !ein* su!ject to the ris6 o# potential !reaches o# contract1 could !e induced not to enter into an& trade transaction lac6in* a certain de*ree o# certaint&5 2iii3 the need to moralize the mar6et1 in which *ood #aith and #air dealin* are the standards to which the operators should con#orm5 2iv3 the need to reduce the costs o# the transactions1 since the parties1 #oreseein* potential mutual !reaches1 can either contractuall&

provide #or the possi!le relevant remedies 2such as penalt& clause1 termination1 etc.31 or o!tain !an6 *uarantees or insurance policies1 etc.5 all the a!ove !ein* use#ul1 !ut e7pensive remedies5 2v3 the speci#ic per#ormance is deemed not as a residual remed&1 !ut as a natural remed&. =n the contrar&1 in common law s&stems1 the ?olmesC statement: ')he dut& to 6eep a contract at common law means a prediction that &ou must pa& dama*es i# &ou do not 6eep it - and nothin* else' 2)he "ath o# the $aw1 1B991 ?arv. $. Rev.1 p. -/+3 is #undamental. <n*lish and :orth-American scholars and case-law are consistent in holdin* that the voluntar& !reach o# contract is not to !e sanctioned with remedies di##erent #rom those t&picall& provided under contractual structures. 8n <n*lish common law1 Collins1 in a comment to ?olmes1 notes that 'althou*h this dictum e7a**erates the e7tent to which orders #or compulsor& per#ormance are e7cluded #rom actions #or !reach o# contract1 it does indicate how dama*es are 4uite #re4uentl& the sole option #or the injured part&. )he 4uestion to !e addressed here is how o# dama*e is calculated' 2)he $aw o# Contract1 $ondon1 199,1 p. ,9+35 and1 in :orthAmerican common law1 @arnsworth states that 'the s6eptical reader ma& well as6 whether persons o# judical temperament are immune #rom the temptation to depart #rom a rule o!livious to !lame1 and some e7ceptions to the rule will !e su**ested in the pa*es that #ollow. :evertheless1 contract law is1 in its essential desi*n1 a law o# strict lia!ilit&1 and the accompan&in* s&stem o# remedies operates without re*ard to #ault' 2Contracts1 >oston)oronto1 19B+1 p. B-+3. )he reasons #or this disre*ard to voluntar& !reach are several: 2i3 in common law the !reach o# contract is not *enerated !&1 and is not connected to ne*li*ence o# the !reachin* part&5 2ii3 in common law a #actual approach prevails on a moralistic approach to the matter: an& transaction implies certain ris6s1 and whoever penetrates a mar6et and operates on it must !ear the ris6 o# other partiesC !reaches5 moreover1 i# he allocates his products or services to di##erent parties #or more convenient prices1 he is in !reach and #ul#ill the o!li*ations underta6en with third parties5 2iii3 the same mar6et rules re4uest a !etter allocation o# the resources and1 there#ore1 the sanction imposed on the !reachin* part& is represented onl& !& the contractual remedies pursuant to the principle o# the 'e##icient !reach'5 2iv3 the part& who is not prepared to run the a!ove ris6s1 ma& ta6e advanta*e !& enterin* into ad hoc clauses 2such as a penalt& clause1 etc.3 with the other contractin* part&. )here#ore1 #rom a law and economics viewpoint1 the a!ove position is the startin* point #or #urther developments. 3. Law and economics and voluntary breach. )he law and economics scholars are inspired !& ?olmes. @or e7ample1 "osner notes that: '0hen a !reach o# contract is esta!lished1 the issue !ecomes one the proper remed&. A startin* point #or anal&sis is ?olmesCs view that is not the polic& o# the law to compel adherence to contracts !ut onl& to re4uire each part& to choose !etween per#ormin* in accordance with the contract and compensatin* the other part& #or an& injur& resultin* #rom a #ailure to per#orm. )his view contains an important economic insi*ht.' 2<conomic Anal&sis o# $aw1 >oston-)oronto1 19991 p. BB3. 8n accordance with the a!ove reasonin*1 Cooter and %len1 in turn1 state: '0e de#ine an e##icient !reach as #ollows: a !reach o# contract is more e##icient than per#ormance o# the contract when the costs o# per#ormance e7ceed the !ene#its to all the parties'.

'8n summar&1 !reach is e##icient when1 as a result o# a wind#all or an accident1 the resources needed #or per#ormance are more valua!le in an alternative use. 8ncentives #or !reach are e##icient when the trans#er o# resources to the hi*hest-valued use is accomplished at the lowest transaction costs and in such a wa& that no one is made worse o## !& the trans#er and at least one person is made !etter o##.' 2$aw and <conomics1 19BB1 p. +9D-+913. )here#ore1 the same dama*es raise issues with respect to the circulation o# the relevant economic models: it is even possi!le to a*ree with "osner1 Cooter1 %len and all the scholars who anal&zed the a!ove issues5 however1 in the civil law e7perience1 such models remain a!stract and inapplica!le ar*uments. . !odels of damages assessment. <ven with re*ard to the assessment o# dama*es1 the common law and civil law s&stems provide #or di##erent options. 0e have outlined a!ove the analo*ous solutions provided #or with re#erence to the recover& o# an& loss su##ered !& the injured part& and the loss o# *ains. ?owever1 these *eneral principles impl& two di##erent methods o# assessment. )he most common method consists in considerin* the injured part& in the position in which same part& would have !een1 i# the a*reement had !een properl& #ul#illed 2so-called ;i#erenztheorie: see1 par. +-9 o# >.G.>.1 pursuant to which 'a person who is o!li*ed to ma6e compensation shall restore the situation which would have e7isted i# the circumstance renderin* him lia!le to ma6e compensation had not occurred'3. )his theor& is adopted in @rance and in 8tal&1 as an addition to the te7t o# the Codes 2see1 respectivel&1 art. 11-9 and art. 1++,31 which *enerall& ma6e re#erence to the loss su##ered !& the injured part& and the loss o# *ains. <ven common law s&stems adopt the a!ove indicated method1 which is 6nown as recover& o# dama*e consistin* in the so-called e7pectation interests. 8n <n*lish law1 without #urther case-!&-case e7planations on the application o# the rule1 it is possi!le to select cate*ories o# dama*es analo*ous to those pertainin* to the civil law e7perience 2see1 #or e7ample1 )reitel1 )he $aw o# Contract1 $ondon1 19911 p. B+- and #ollowin*35 the same conclusion is applica!le with re#erence to the %.(. law s&stem 2see1 #or e7ample1 @arnsworth1 cited a!ove1 p. B,9 and #ollowin*3. ?owever1 a second method 2the so-called reliance interests31 which is !ased on the recover& o# dama*es considerin* the position which the injured part& would have had i# same had never enter into the a*reement1 has !een adopted #or some decades. )he a!ove method is not permitted in the civil law s&stems. 8n 8tal&1 such a method is applied onl& with respect to the ne*otiations 2so-called 'pre-contractual lia!ilit&'31 when either o# the parties has withdrawn #rom the ne*otiations without a valid reason1 or has caused a *round o# invalidit& o# the a*reement to !e entered into. )here#ore1 the whole ar*ument concernin* the reliance interests is not applica!le to the civil law s&stems. )he %nidroit "rinciples1 in order not to limit the options o# the jud*es/ar!itrators1 have not ta6en an& position in point: the harm 'includes !oth an& loss which Fthe injured part&G su##ered and an& *ain o# which it was deprived' 2art. 9.-.+3. ". #pplicable law.

)he considerations on the dou!le recover& method 2availa!le to common law&ers !ut not to civilians3 are use#ul #or a practical reason: in case o# possi!ilit& o# choice o# the law applica!le to the a*reement1 it would !e pre#era!le to su!ject same to either a civil law s&stem or a common law s&stem dependin* on the willin*ness to e7clude the recover& o# reliance interests or to admit them 2at least1 in principle3. ?owever1 even in this case1 it is clear that the law and economics1 as #ar as the civil law s&stems are concerned1 must !e limited to the #irst method: the second could !e ta6en into consideration onl& in case o# either a le*islative amendment or a completel& di##erent approach o# the case-law rules1 which seems to !e1 #or the time !ein*1 a ver& unli6el& event. $. Conclusions. )he anal&sis o# some o# the rules related to the !reach o# contract and the relative dama*es recover& techni4ues shows that the models o# law and economics cannot !e alwa&s applied: the& are alwa&s !ased either on a certain law s&stem or on le*al concepts t&pical to a peculiar e7perience5 the adoption o# a per#ect1 ideal1 a!stract model ma& !e use#ul as a *eneral #ramewor61 !ut1 in order to achieve practical results1 it is necessar& to carr& out an anal&sis in li*ht o# the applica!le law1 ta6in* into account the interpretation *iven !& the jurisprudence and the concepts on which same is *rounded.