Threatening Inefficient Performance of Injunctions and Contracts

Abstract

Threats are often conditional promises to act inefficiently. The threatener in effect says: "I will do something that hurts you more than it helps me unless you pay me not to." Threatening inefficient action often in turn produces inefficiency because either the threatener follows through on her threat, resources are squandered in negotiating to avoid the threatened behavior, or the contracting parties take overly cautious steps to avoid being threatened. Contract scholars have long understood that this problem might arise when promisors threaten to breach. If contract damages are not sufficient to fully compensate a promisee for lack of performance, a promisor may threaten to breach in order to extract more favorable terms. For example, a seller may threaten to breach a supply agreement—even when it is clear that performance is efficient—solely to renegotiate a higher price. Because such renegotiations are often thought to be presumptively inefficient, the rules invalidating bad faith or opportunistic renegotiation attempt to deter promisors from making the initial threat. A parallel problem has gone virtually unnoticed: threatening to perform. In this article, we will present two broad contexts where parties threaten inefficient performance of contractual promises or other legal duties solely to gain bargaining power in a subsequent negotiation: 1. A potential plaintiff who is owed a duty may, at times, seek inefficient injunctive relief instead of damages merely to induce a defendant (the person owing the duty) to pay an amount higher than expected court-awarded damages. 2. And, more perversely, a potential defendant who owes a duty to another may, at times, threaten to perform an inefficient duty merely to induce the plaintiff (the person owed the duty) to accept an amount less than expected court-awarded damages.