The Case for Market Damages: Revisiting the Lost Profits Puzzle

Scott, Robert E.

This article argues that the modern development is unfortunate and results from an incomplete understanding of the function of damage rules and the meaning of full performance compensation. Damage rules are contract terms. They do not merely measure losses differently; they allocate risks between the parties differently. Lost profits damages reflect an ex post perspective. They measure the value of the completed contract based on what the parties actually did. Market damages, on the other hand, apply a measure of events extrinsic to the parties' behavior. Before one measures damages, therefore, one must first decide how the parties expressly or impliedly allocated the relevant market risks. The question is not which damage rule better protects a given economic advantage. Rather, the question is what economic advantage the contract protects. In short, before one can place the injured party in the same position as if the parties had performed the contract, one must know which perspective on risk allocation the contract adopts. Part I reviews the current debate over alternative damage rules. Part II advances the hypothesis that most parties to fixed price market contracts would prefer the risk allocation implicit in a market damage award. Part III uses the risk allocation perspective as a guide for interpreting the damage rules specified in Article 2 of the Uniform Commercial Code.


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The University of Chicago Law Review

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University of Chicago Law Review
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January 28, 2016