Instead of awarding damages, courts may order the breaching party to actually perform its promise. This is known as specific performance and it's the subject of today's lecture. Today, we're going to be talking about Northern Indiana Public Service Company versus Carbon County Coal, decided by the Seventh Circuit in 1986. In that case, northern Indiana Public Service Company, or NIPSCO, entered into a 20-year contract to buy about one and a half million tons of coal from Carbon County every year for 20 years at a price of $24 per ton, subject to a price escalation clause. The contract price eventually escalated to $44 per ton. But because of a large drop in the price of oil, NIPSCO was able to buy electricity at prices below the cost of generation with coal. NIPSCO, the plaintiff, sodded declaratory judgment that it was excused from the contract. Carbon County counterclaim for a specific performance. The trial court denied specific performance and entered a jury verdict for the defendant for $181 million. Both parties appealed, and the instant court affirmed. The central issue as this, was Carbon County entitled to specific performance? In an opinion written by Judge Richard Posner, who, as I've mentioned before, is known for his economic analysis of law, the court held that Carbon County was not entitled to specific performance and affirmed the damage awarded by the trial court. Posner explained that, "Like other equitable remedies, specific performance is available only if damages are not adequate remedy, and there is no reason to suppose them inadequate here." Basically, the test is, you don't give specific performance if awarding dollars would be sufficient to compensate. Further, Posner noted, that Carbon County did not even argue that the award was not a reasonable estimate of damages. Rather, it complained that, without specific performance, the miners employed by Carbon County will lose their jobs. Posner dismissed this reasoning saying that, "Since the employees are not parties to the contract, their losses are irrelevant." Indeed, continued Posner with his characteristic economic tilt, "Specific performance would be improper as well as unnecessary here because it would force the continuation of production that has become uneconomical. And continuing to produce coal under compulsion of an order of specific performance would impose costs on society greater than the benefits." Posner also predicts that, were he to grant specific performance, the miners would lose their jobs anyway, because Carbon County would merely use the threat of specific performance as a bargaining chip in order to extract a larger settlement payment from NIPSCO. Note that Posner's argument here is an application of the Coase Theorem. Whether or not the court grants specific performance, the efficient economic outcome is the closing of the mind and the Coase Theorem suggests that it's going to occur whether or not specific performance is ordered, and the parties will simply negotiate how to split the economic savings. As this case makes clear, specific performance is only a last resort available only if damages provide an inadequate remedy. In other words, the law does not actually require a promise or to keep his promise, as long as a promise or is willing to compensate the injured promisee with cash. To paraphrase Oliver Wendell Holmes, a contractual duty is a duty to perform or pay damages. Those who believe it is immoral to break the promise, may find this troubling. The law's ethically neutral approach to breach of contract is often justified by the theory of efficient breach. Under the theory of efficient breach, a promisor should be allowed to breach his promise as long as he compensates the promisee. Because a promisor will only tend breach when the benefits from her breach are greater than the promisee's benefit from the promisor's performance. The theory of efficient breach can be illustrated with an example. Suppose Acme contracts to sell a machine to big company for $100,000. The machine is worth $110,000 to Big who plans to use it to manufacture widgets. However, prior to the delivery date, Custom Manufacturing offers to buy the machine from Acme for $120,000. Instead of delivering the machine to Big as promised, Acme sells the machine to Custom Manufacturing for 120,000. What are Big's damages? Well, Acme must pay Big $10,000 in damages, the value of the machine to Big less the price it would have to pay. Even after paying damages, Acme, who received $20,000 more by breaching, still comes out ahead. This is considered an efficient breach because the machine was ultimately sold to Custom Manufacturing, the party that apparently valued the machine the most. However, there is a potential flaw in using the theory of efficient breach to justify specific performance for the sale of the good. If instead of damages, Big was granted specific performance, Acme would have to sell the machine to big for $100,00. But Acme would then have an incentive to bargain with Big to modify Acme's performance duty. Posner would predict that Big would be willing to pay Acme somewhere between 10 and $20,000 in order to avoid the court's order to inefficiently perform. Let's review. Today, we learned that courts favor monetary damages over a specific performance. Generally, specific performance is available only if monetary damages are an inadequate remedy.
