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\noindent \textbf{Tortious Interference  with Contracts: Why Punish It?   }



\noindent May 5, 2004. Eric Rasmusen, 

Erasmuse@indiana.edu, Php.indiana.edu/$\sim$erasmuse,\\

Php.indiana.edu/$\sim$ erasmuse/papers/tortious-rasmusen.pdf. 





 



  

   

  {\it Tortious Interference with Contract.  } 

   Promisor breaches a contract in which he promised to perform in

Victim's theatre,    causing damage of  \$10   to Victim.  Promisor does

this because Inducer, who was aware of the contract, made him a better

offer to perform that night.   What damages  should the court require

Promisor and Inducer  to pay to  Victim?

 

  

  



 

Four possible justifications for  the

doctrine of tortious  interference with contract are

malice, judgement-proofness, transaction costs, 

and foreseeable court error.



 \noindent 

{\it The Information Story } 



 

 



(1) Nature chooses the Victim's  investigation cost, $x \geq 0$, using the density $f(x)$ (denote the cumulative probability by $F(x)$).  



(2) The Victim pays $x$ if he wishes  and learns which one of a    large population of possible performers  with  average value $v=a$ actually has the higher value $v=a+b$.  



(3) The Victim chooses a performer with whom to negotiate. 



(4) The Victim and the chosen  Performer bargain to choose a performance price $p_1$, which will be  either $p_1=a$ (if $v$  is unknown) or some $p_1$ in the interval $(a, v)$.



(5) If the  Inducer chooses to induce breach, the Inducer and the Performer bargain to choose a performance  price $p_2$ in the interval  $(p_1, v)$.



(6) If the Inducer induced breach, the  court forces the Inducer to pay damages of $d$ to Victim. 



(7) If the Inducer did not induce breach, the  Performer may breach anyway. The court then forces him to pay expectation damages to Victim, which are zero  in this case because $p_1>a$. 









\noindent 

{\it  Payoffs:}  

The   Victim's payoff is $v-p_1$ if no breach occurs, minus $x$ if he discovered $v$ in advance.  If the contract is breached, his payoff is  $d$, or $d-x$ if he discovered $v$ in advance. 



The Performer's payoff is the price he gets (either $p_1$ or $p_2$).



The Inducer's payoff is  0 if no breach occurs. Otherwise, it is $v - p_2 -d$. 





 \newpage

 



 \noindent 

{\bf The Investment Story }  



   

 



(1) The Victim invests $x$ in the project, adding $f(x)$ to the base value of $a$ so that the value becomes $v=a+f(x)$.  



(2) The Victim and the  Performer bargain to choose a performance price $p_1$ in the interval $[a, a + f(x)]$.



(3) If the  Inducer chooses to induce breach, the Inducer and the Performer bargain to choose a performance  price $p_2$ in the interval  $[p_1, v]$.



(4) If the Inducer induced breach, the  court forces the Inducer to pay damages of $d$ to Victim. 



(5) If the Inducer did not induce breach, the  Performer may breach anyway. The court then forces him to pay expectation damages to Victim, which are zero  in this case because $p_1>a$. 









\noindent 

{\it  Payoffs:} The Performer's payoff is the price he gets (either $p_1$ or $p_2$). 



The   Victim's payoff is $v-p_1-x$ if no breach occurs.  If the contract is breached, his payoff is  $d-x$.



The Inducer's payoff is  0 if no breach occurs. Otherwise, it is $v - p_2 -d$. 









   BeVier, Lillian R.   (1990) ``Reconsidering Inducement,''   {\it

Virginia Law Review},  76:  877.



 





Epstein, Richard A.   (1987)  ``Inducement of Breach of Contract as a

Problem

of

Ostensible Ownership,''

  {\it Journal of   Legal Studies}, 16: 1, 3  ( 1987).  



  





McChesney, Fred S. (1999)  ``Tortious Interference with Contract versus

'Efficient' Breach: Theory and Empirical Evidence,''  {\it Journal of

Legal Studies},

  28, 1:  136-186. (January 1999).



  Landes, William M. \& Richard A.  Posner  (1980) ``Joint and Multiple

Tortfeasors:

An Economic Analysis,''

  {\it Journal of   Legal Studies},  9: 517  (app.  II). 





 

Rasmusen, Eric (1995)  ``Predictable and Unpredictable Error in Tort

Awards: The Effect of Plaintiff Self Selection and Signalling," {\it 

International Review of Law and Economics }  15: 323-345 (September

1995).



 



{\it Lumley v.  Gye}, 2 El.  \& Bl.  216, 118 Eng.  Rep.  749 (1853).













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