Tortious interference and the law of contract: the case for specific performance revisited.

• Author: Varadarajan, Deepa

1. INTRODUCTION

   What is the role of contract law in remedying breach? The question of the appropriate legal remedy, specific performance versus money damages, has provided adequate fodder for three decades of debate in the law and economics discourse. In the legal discipline at large, the topic has spurred centuries of debate, as illustrated by Oliver Wendell Holmes's famous line: "The only universal consequence of a legally binding promise is, that the law makes the promisor pay damages if the promised event does not come to pass." (1) Holmes's approach to contractual remedy would evolve during the latter half of the twentieth century into the "efficient breach" theory, which advocates the remedy of expectation damages upon breach in order to encourage the promisor's breach where the resulting profits to the promisor exceed the loss to the promisee. (2) Although this favorite doctrine of law and economics scholars more or less describes the norm in Anglo-American contract law, in which damages are routinely available and specific performance rarely granted, it has met and continues to meet with criticism on a variety of grounds. (3)

   Alan Schwartz, in his seminal article, The Case for Specific Performance, (4) argues for the routine availability of the specific-performance remedy in the event of breach. His argument centers around two main points. First, he claims that the damages remedy is often undercompensatory. Second, he refutes the claim that making specific performance routinely available will result in efficiency losses or interfere with the liberty interest of promisors.

   Schwartz's arguments have the potential to shed light on another, closely related cause of action: the tort of interference with contract and business relations. Consider the following scenario: A enters into a contract with B, and a third party, C, who has knowledge of the existing contract, induces breach and receives more or less the same performance that the original promisee would have received. In such a case, the tort of interference allows the promisee to recover damages from a third-party inducer, often in addition to an award of damages from the promisor under a breach-of-contract claim. This has puzzled proponents of efficient-breach theory because it does in the three-party context what is rarely done in the two-party context under contract law: It protects the promisee's contractual right with a property rule. (5) In fact, the inducement tort "implements even broader protection than Promisee's property-rule remedy [i.e., specific performance] against Promisor, for it consists of rights that run in favor of Promisee against the world." (6) Reconciling this legal remedy with the theory of efficient breach, which encourages the Pareto superior transfer of goods to those who value them most, has proven exceedingly difficult for even its staunchest defenders. Although some legal scholars have addressed this inconsistency by questioning the very legitimacy of the tort of interference with contract, others have tried to resolve the inconsistency in a variety of ways. (7)

   In Part II of this Note, I provide an overview of Schwartz's arguments in favor of the routine availability of specific performance. In Part III, I briefly address the historical development of the interference tort, focusing specifically on the inducement context. The tort's origins and evolution shed light on its close relationship with the availability and adequacy of contract remedies. In Part IV, I present the attempts of various scholars to explain what appear to be the analogous efficiency objectives of the interference tort and contract law, and offer criticisms particular to each framework. Ultimately, the only convincing arguments, as a positive matter, rest on a conception of the interference tort as filling in the gaps of contract law, where traditional remedies are inadequate. But if this is the case, then would it not be more coherent to restructure the system of remedy under contract rather than create this remedy through the back door of tort? In Part V, I suggest that the expansion of the specific-performance remedy for breach of contract, as advocated by Schwartz, provides a potential solution to the doctrinal confusion and controversy surrounding the inducement-tort remedy.

2. THE CASE FOR SPECIFIC PERFORMANCE

   Contract law recognizes two methods for making a disappointed promisee whole upon breach. Either the breaching promisor must pay money damages, which would enable the promisee to purchase a substitute performance or to replace lost gains that performance would have generated, or the breaching promisor must perform under the terms of the contract. Under current law, the damages remedy is routinely available, but the specific-performance remedy is considered extraordinary, awarded on a discretionary basis by courts. (8) The paradigmatic cases in which courts grant specific performance involve sales of "unique" goods. (9) Moreover, courts often refuse to enforce contracts providing for remedies that differ from what courts would ordinarily give in the absence of such a clause. For example, liquidated damages clauses with damage provisions sizeable enough to guarantee performance by the promisor are generally regarded as penalties, and thus not enforced by courts. (10)

   1. The Compensation Goal

      Schwartz begins with the assertion that specific performance is the most accurate way to achieve the goal of compensation--namely, the promisee is neither under- nor over-compensated because she gets the precise performance for which she contracted. (11) If this is the case, however, then why is specific performance not the norm? One explanation offered by advocates of the current system of remedy is that damages are fully compensatory, and a specific-performance rule might give opportunities for promisees to exploit promisors without actually furthering the goal of compensation. (12) Schwartz responds by first arguing that there are cases aside from those involving unique goods in which the damage award is actually undercompensatory. Factors causing undercompensation include the difficulty of calculating incidental costs (often associated with making another deal); the emotional costs associated with breach, which are not recoverable; the inaccurate calculation of substitution damages; and the problems of predicting what would make a promisee whole. All of these factors result in courts' unwillingness to award speculative lost profits. (13)

      Second, Schwartz argues that the very fact that a promisee would request specific performance reflects the inadequacy of damages because of the costs to her associated with the performance remedy. (14) For instance, in the case of a construction contract, a promisee might have to expend monitoring costs to ensure the adequate performance of a reluctant breacher. In such a case, if damages were fully compensatory, then the promisee would have strong incentives to opt for damages rather than to seek a specific-performance award. In addition, promisees, and not the courts, are in the best position to decide whether they will be adequately compensated by damages and to assess the difficulties of compelling performance. (15)

   2. Efficiency Concerns

      Another explanation for the absence of specific performance as a routinely available remedy is that the transaction costs associated with its expansion would exceed the costs of undercompensation under the current system. Two primary arguments support this explanation. One concerns pre-breach negotiations, and the other concerns post-breach negotiations.

      1. Pre-Breach Negotiations

         Anthony Kronman argues that the existing regime of contract remedy, in which damages are the norm and specific performance the exception, makes "economic sense" (16) because it is consistent with the parties' intentions. Often called an "intention-justification theory," this argument suggests that the uniqueness test "draws the line between specific performance and money damages in the way that most contracting parties would draw it were they free to make their own rules concerning remedies for breach and had they deliberated about the matter at the time of contracting." (17) The effect of making specific performance routinely available would be that the parties would negotiate contract provisions restricting its use, thus incurring additional pre-breach negotiation costs. (18)

         Schwartz argues, however, that in a large number of cases, Kronman's characterization of parties' intentions is in fact untrue. For example, a promisor of unique goods often cares more about preserving her right to breach than Kronman allows in his analysts, because she has good reason to believe that even if later offers may be random and few, they are likely to be much higher than earlier ones. (19) Moreover, in the "undeveloped" unique goods market, exogenous shocks--or sudden increases in demand--have the most pronounced effect on price because supply is often inelastic. (20) Thus, Schwartz contends that a single characteristic like uniqueness is hardly determinative of parties' preferences.

      2. Post-Breach Negotiations

         The second efficiency argument against making specific performance routinely available concerns the costs of post-breach negotiations. (21) Suppose B, contracts with S to buy a lawnmower for $100 and, before delivery, the demand for lawnmowers increases. Then, [B.sub.2], a buyer averse to shopping around, offers the seller $150, while the new market equilibrium price for the lawnmower is $125. If [B.sub.1] has a specific-performance option, she is likely to demand it to force S to share some of his profit from breach. Since this post-breach negotiation between [B.sub.1] and S does not generate additional social wealth but only redistributes it, the negotiation costs incurred represent a deadweight efficiency loss that could be avoided by a damages remedy. This ex post efficiency argument is the...