Threatening inefficient performance

Contract scholars have long understood that inefficient behavior might aris e when promisors threaten to breach, but a parallel problem has gone virtua lly unnoticed: threatening to perform. A potential plaintiff owed a duty by another (such as a contractual promisee) may seek inefficient injunctive r elief instead of damages to induce the defendant to pay an amount higher th an court-awarded damages. Threats of inefficient performance can produce in efficiency in the form of negotiation costs, failure to reach a bargain, an d inefficient ex ante actions. We consider a if gal reform that would under mine the credibility of inefficient threats by giving defendants two option s: an option to make any injunctive relief inalienable, and an option to co mmit to paying higher damages. These options would retain the prime benefit of an alienable injunction, the elimination of the threat of undercompensa tion, while reducing the inequitable risk of overcompensation. As an altern ative method of undermining threats, we suggest that judges consider imposi ng a settlement cap, or subjecting all injunctive settlements to the same t ype of remittitur analysis to which a jury award would be subjected. (C) 20 00 Elsevier Science B.V. All rights reserved. JEL classification: K00; K11; K12; K42.