Efficient Breach and Penalty Clauses: Lake River – Constructing Arguments

September 8th, 2010

Shift focus (a. from micro to macro)
“Penalty clauses provide an earnest of performance”
“On the other side . . . raising the cost of a breach . . . could amplify the business cycle”

(b. to other parties)
“On the other side . . . raising the cost of a breach . . . increases the risk to his other creditors”

Invert valences
Enforcing the clause deters beaches thereby:
inducing parties to contract (“Penalty clauses provide an earnest of performance”) or
“may discourage efficient [pareto-optimal].
. . breaches.”

Personalize
My client wouldn’t have entered into the contract without this clause because he was worried that the other party would breach and demanded and got this assurance.
A judicial remedy (rather than the party chosen one) protects what both of us desired and expected from the full performance of the contract.

Emphasize Roles
Parties have the freedom to choose the terms on which they contract and it is the function of the court to enforce it. Parties write contracts, not the courts.
The court must enforce the remedy, including by using the force of the sheriff, and therefore the determination of the proper remedy is a judicial function.

Relate to Other Bodies of Law
Because the parties do not have the option of specifically ordering the performance they expect, the court should enable them to specify the monetary value of failed performance.
Enforcing the clause eliminates the need for the non-breaching party to mitigate its damages.