Contract Remedies and Search Efforts

Contract theorists typically assume that efficient breach opportunities are  exogenous and traditionally favor using expectation damages over the disgorgement rule. This paper challenges that assumption by introducing a model in which parties exert search efforts to locate better contractual alternatives. Endogenizing efficient breach opportunities yields a novel perspective on contract remedies. I propose two new rules: conditional disgorgement, which grants the breach sur-plus to the party who located the better alternative; and partial disgorgement,which divides the surplus by a predetermined share.

I show that these novel remedies generally outperform extant regimes in inducing optimal search efforts. Because each party benefits regardless of her breaching status, both selfish and cooperative searches are incentivized. The paper derives conditions for the optimality of each proposed rule and discusses these findings in light of existing contract doctrine and commercial practice.