Reevaluating Recovery in Contract Breach: Lost Profits vs. Chances, Study Guides, Projects, Research of Law

Download Reevaluating Recovery in Contract Breach: Lost Profits vs. Chances and more Study Guides, Projects, Research Law in PDF only on Docsity! LOST PROFIT OR LOST CHANCE: RECONSIDERING THE MEASURE OF RECOVERY FOR LOST PROFITS IN BREACH OF CONTRACT ACTIONS “Courts have in the past invented alternative methods of measuring damages. There is nothing to prevent them from adopting some new method” as long as it is “consistent with the generally approved purposes of giving a remedy in damages.”1 I. INTRODUCTION Lost profits must be reasonably certain2—so concurred the majority of American courts adjudicating breach of contract actions throughout the twentieth century.3 Over the last few decades several commentators have attacked the results of this standard, sometimes even mentioning the loss of chance remedy as an attractive alternative to the all-or- nothing rule that conventionally applies.4 Yet none of these periodic critiques has led to a dynamic shift in the determination of contract damage awards; the inertia against change inherent in our legal system has been a formidable opposing force to the extension of this remedy outside of contest and prize scenarios.5 Because the loss of chance remedy is already applied in those unique types of cases, opening this note with Corbin’s quote may be somewhat misleading. The “new method” this note advocates is, in reality, the application of a known and accepted remedy—loss of chance—to a different situation. It is not a radical departure from the conventional understanding and application of the law of contracts, but rather fits squarely within its traditional principles of compensation. For start-up companies and one-time-only event providers—the two plaintiffs who typically suffer from the results of the common all-or-nothing approach—results of this new application would be extraordinary. Ultimately any argument addressing the issue of damages must justify the calculus it advocates. Therefore an articulation of the 1 ARTHUR L. CORBIN, 11 CORBIN ON CONTRACTS 232–33 (Joseph M. Perillo ed., rev. ed. 2005). 2 Mo. Retail Hardware Ass’n v. Planters’ Operating Co., 294 S.W. 755, 756 (Mo. Ct. App. 1927). 3 See infra note 33. 4 Melvin Aron Eisenberg, Probability and Chance in Contract Law, 45 UCLA L. REV. 1005, 1056 (1998); Elmer J. Schaefer, Uncertainty and the Law of Damages, 19 WM. & MARY L. REV. 719, 738 (1978). 5 The first clear use of the remedy in a breach of contract action is found in Chaplin v. Hicks, (1911) 2 K.B. 786. See discussion infra Part III.A. A different form of the remedy is used for tort claims, particularly in medical and malpractice actions. See Polly A. Lord, Loss of Chance in Legal Malpractice, 61 WASH. L. REV. 1479, 1485–94 (1986). 558 REGENT UNIVERSITY LAW REVIEW [Vol. 19:557 underlying presupposition concerning the purpose of awarding contract damages is demanded. This is a subject of considerable debate.6 No commentator doubts the occurrence of a legally cognizable wrong; but exactly what that wrong is, and how to calculate it, has been a subject of controversy. This note will assume, just as the majority of opinion does, that in most cases the goal of contract damages is restorative. In other words, the aggrieved party should be placed back in the position he would have been in had the contract not been breached. This restorative goal requires a recovery for the loss of any consequential damages that stem from the breach. It will argue, however, that in cases where the defendant’s acts have caused lost profits, the only reasonably certain injury to a start-up company or one-time-only event provider is the loss of an opportunity, not the fruits of that opportunity. Thus the calculation of damages should not focus on what the plaintiff would have earned had the contract been performed, but rather on what the contract was worth at the time of breach. This shift is more equitable according to a fairness norm,7 because it prevents the twin injustices of giving a plaintiff either more than he deserves when he meets the reasonable certainty requirement or less than he deserves when he fails to satisfy the standard.8 The remedy of lost chance furthers the restorative goal and, in light of the modern advances made in the field of statistics, would be relatively easy to apply. The lost chance remedy affirms that the harm done to the plaintiff is not the loss of profit or gain that he would have realized had the breaching party performed, but instead is the loss of the opportunity to carry out the contract itself. This chance or opportunity is 6 See P.S. ATIYAH, THE RISE AND FALL OF FREEDOM OF CONTRACT (1979); CHARLES FRIED, CONTRACT AS PROMISE (1981); RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 81 (3d ed. 1986) (“[T]he fundamental function of contract law (and recognized as such at least since Hobbes’s day) is to deter people from behaving opportunistically toward their contracting parties, in order to encourage the optimal timing of economic activity and make costly self-protective measures unnecessary.” (footnote omitted)); Peter Benson, The Unity of Contract Law, in THE THEORY OF CONTRACT LAW: NEW ESSAYS 118 (Peter Benson ed., 2001); L.L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages: 2, 46 YALE L.J. 373 (1937) (arguing that the goal of contract damages is the stabilization of social relationships); Note, Damages Contingent Upon Chance, 18 RUTGERS L. REV. 875 (1964). 7 By this I simply mean that it awards to each party what is his right. See 1 HENRICI DE BRACTON, DE LEGIBUS ET CONSUETUDINIBUS ANGLIAE [THE LAWS AND CUSTOMS OF ENGLAND] 13, 15, 17 (Sir Travers Twiss ed., William S. Hein & Co. 1990) (1569), reprinted in JEFFREY A. BRAUCH, IS HIGHER LAW COMMON LAW? 33–34 (1999); see also RANDY E. BARNETT, PERSPECTIVES ON CONTRACT LAW 3 (3d ed. 2005) (“Fairness to both parties argues against both overcompensation and undercompensation.”). 8 See CHARLES T. MCCORMICK, HANDBOOK ON THE LAW OF DAMAGES 119 (1935) (noting that the “all or nothing” rule results in either “overlavishness” or “niggardliness”). 2007] RECONSIDERING THE MEASURE OF RECOVERY 561 were exceptionally lucrative.19 Dempsey also agreed not to engage in any other boxing matches before the Wills bout.20 The Club had already secured the promise of Wills, and had decided to hire an experienced marketing expert to promote the fight.21 Shortly thereafter the Club notified Dempsey of its intention to send insurance representatives to his training facility for a physical examination.22 His subsequent caustic repudiation was not only a classic example of anticipatory breach, but also led directly to a suit for the recovery of lost profits by the Club.23 It is hard to imagine a scenario that could more evoke a court’s sympathy to a plaintiff’s case than one in which the defendant is an arrogant celebrity who breaches his contract by sending a rude telegram from across the continental divide. Yet the trial court barred the expert testimony the Club sought to introduce with no reservations, and the appellate court had no qualms in sustaining the lower court’s determination and awarding only nominal damages. In the words of the court, “[I]t would be impossible to produce evidence of a probative character sufficient to establish any amount which could be reasonably ascertainable by reason of the character of the undertaking. . . . [T]he damages, if any, are purely speculative.”24 Decided in 1932, Dempsey is an example of the jurisprudential understanding of contract damages in the classical period. It clearly affirms the supremacy of the reasonable certainty requirement in limiting contract damage awards, and supports Professor McCormick’s assertion that the requirement of reasonable certainty is “probably the most distinctive contribution of the American courts to the common law of damages.”25 For purposes of this note, Dempsey clearly exemplifies the two fundamental problems with the current application of the reasonable certainty requirement: the perverse incentive to breach, and the inequity of allowing the perpetrator of a wrong to escape liability. It is time to rethink the approach to contract damages when the law provides no meaningful disincentives for conduct like that of Jack Dempsey. 19 Dempsey, 265 Ill. App. at 545. 20 Id. 21 Id. at 546. 22 Id. at 547. 23 Id. Dempsey’s repudiation took the form of a telegram, as follows: “President Chicago Coliseum Club Chgo Entirely too busy training for my coming Tunney match to waste time on insurance representatives stop as you have no contract suggest you stop kidding yourself and me also Jack Dempsey.” Id. 24 Id. at 549. 25 MCCORMICK, supra note 8, at 124. 562 REGENT UNIVERSITY LAW REVIEW [Vol. 19:557 Almost as famous as Dempsey is the case of Kenford Co. v. County of Erie.26 The fact pattern in Kenford is similar to that in Dempsey until the parties reach the courthouse. While the trial court in Dempsey refused to hear the expert testimony, the Kenford trial court not only allowed it in, but ruled in the plaintiff’s favor because of it.27 The Kenford Company (Kenford) and Dome Stadium, Inc. (DSI) entered into a contract with the County of Erie (County) in which the County agreed to construct a new domed stadium while Kenford and DSI agreed to lease the stadium at a price to be determined after the County had obtained a cost estimate.28 Under the terms of the agreement, the County was to begin construction of the stadium within twelve months of the contract date. When the County failed to begin construction, Kenford and DSI brought suit for lost profits. A jury trial, which was limited to the issue of damages, resulted in a multimillion dollar verdict against the County including damages for loss of future profits. The appellate division, however, reversed that portion of the award attributable to loss of profits on account of its speculative nature.29 The court of appeals affirmed, even after explicitly noting that Kenford and DSI’s quantity of proof is massive and, unquestionably, represents business and industry’s most advanced and sophisticated method for predicting the probable results of contemplated projects. Indeed, it is difficult to conclude what additional relevant proof could have been submitted by DSI in support of its attempt to establish, with reasonable certainty, loss of prospective profits.30 Fifty years separate Kenford and Dempsey. Despite the court of appeals’ failure to ultimately accept the expert’s calculations, it recognized the significant gains made in the fields of statistics and probability. The court’s attitude of openness towards this testimony is indicative of a shift away from rigid adherence to the reasonable certainty requirement. However, the court of appeals also recognized that any calculation of projected profits, no matter how sophisticated, was not sufficiently certain when based on assumptions not yet realized.31 26 493 N.E.2d 234 (N.Y. 1986). 27 Id. at 235. 28 Id. at 234–35. 29 Id. 30 Id. at 236. 31 Id. (“We of course recognize that any projection cannot be absolute, nor is there any such requirement, but it is axiomatic that the degree of certainty is dependent upon known or unknown factors which form the basis of the ultimate conclusion.”). Some commentators note that the reasonable certainty requirement is just a proxy for the judge’s notion of the business’s likelihood of success. See Note, supra note 6, at 878. Because this standard is subjective, the level of certainty required could range anywhere from 51% to 100%, depending on the judge. 2007] RECONSIDERING THE MEASURE OF RECOVERY 563 Some have suggested that courts shy away from allowing expected profits for a start-up company or a single-event promoter in order to prevent excessive recoveries, and because of the difficulty inherent in determining what the profits might have been.32 Unlike situations where the plaintiff is selling fungible goods for which a readily discernible market price exists, there is no market from which to derive the value of a start-up company’s goods or services. In other words, the primary risk that start-up companies and one-time-only event providers take is different from that taken by standard goods vendors because it is not known what the public will pay for their product, or even if there will be a paying public. While this risk does diminish the value of contracts involving such parties, it does not mean that they are worth nothing. B. The Modern Dilemma The current state of affairs among American courts for the recovery of lost profits could be described as moderately schizophrenic. The vast majority of courts cling to the reasonable certainty requirement despite its unsatisfactory results,33 while a few have stretched beyond this limitation to award at least some damages when the defendant is directly responsible for the plaintiff’s lost profits.34 In either case, however, the result tends to be inaccurate because it either gives too much or too little to the plaintiff. Thus where the plaintiff is a start-up company or one-time-only event provider, it would seem that the time is ripe for courts to begin to employ the remedy of lost chances in breach of contract actions. However, as Schonfeld v. Hilliard35 demonstrates, 32 Schaefer, supra note 4, at 739–40; Note, supra note 6, at 883–85. 33 See Lowe’s Home Ctrs., Inc. v. Gen. Elec. Co., 381 F.3d 1091 (11th Cir. 2004) (applying Georgia law to conclude that lost profits from a commercial venture are generally not recoverable); Kyocera Corp. v. Prudential-Bache Trade Servs., Inc., 299 F.3d 769 (9th Cir. 2002) (holding that in California evidence to establish lost profits cannot be speculative); Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., No. 03 Civ. 6731 (HB), 2005 WL 146807 (S.D.N.Y. Jan. 21, 2005) (affirming that lost profits are recoverable only if shown with reasonable certainty); Kinesoft Dev. Corp. v. Softbank Holdings, Inc., 139 F. Supp. 2d 869 (N.D. Ill. 2001) (holding that a new business cannot recover lost profits); Vescio v. Merchs. Bank, 272 B.R. 413 (D. Vt. 2001) (finding that the plaintiff must show an established history of profits in order to recover lost profits); PBM Prods., Inc. v. Mead Johnson & Co., 174 F. Supp. 2d 424 (E.D. Va. 2001) (holding that the “new business rule” requires that damages be certain); W. Publ’g Co. v. Mindgames, Inc., 944 F. Supp. 754 (E.D. Wis. 1996) (holding that a short track record of profits precluded the recovery of lost profits). 34 See, e.g., United Int’l Holdings, Inc. v. Wharf (Holdings) Ltd., 210 F.3d 1207 (10th Cir. 2000); United States ex rel. CMC Steel Fabricators, Inc. v. Harrop Constr. Co., 131 F. Supp. 2d 882 (S.D. Tex. 2000) (allowing the recovery of damages that were shown with reasonable certainty); Marathon Oil Co. v. Collins, 744 N.E.2d 474 (Ind. Ct. App. 2001). 35 218 F.3d 164 (2d Cir. 2000). 566 REGENT UNIVERSITY LAW REVIEW [Vol. 19:557 Cox had discounted the value of the chance to provide the BBC’s programming in consideration of the speculative nature of the future profits. Although seemingly schizophrenic, the final outcome in Schonfeld is perfectly rational. The Second Circuit’s reasoning appears convoluted because it gives the impression that it is compensating for an asset that is completely distinct from the lost profits. In fact it is simply treating the contract as it should be treated in this context: as an asset with a market value.46 Contracts are used as assets in much the same way as any other form of capital.47 A contract’s value as an asset comes from its ability to constrain the actions of another in the future. The prime difference between the value of a contract and more conventional assets is that the contract’s value is typically subject to a great deal more risk.48 When someone buys a piece of machinery for a factory, the value of that asset to its purchaser is subject to a slight degree of risk because the seller may not deliver the machine or it may not function properly or it may break down unexpectedly.49 The price of the asset reflects this risk. If, for example, less risk were involved as a result of an extended warranty, then the asset would cost more.50 Courts intuitively sense that the value of a contractual right is much less than the hypothetical or potential value of the profits that may come from it—hence their reluctance to allow recovery on the basis of these projections. It is the same reluctance that would attend an argument asserting that the value of the right to use a factory was equal to the anticipated profits for the subsequent year. The two are simply not the same. It is unfortunate, but quite understandable, that the result of this intuition is typically a complete denial of any recovery. As a 46 See infra notes 94–97 and accompanying text. Professor Eisenberg draws the same conclusion. See Eisenberg, supra note 4, at 1062 (“The damages the promisee suffers . . . are not his lost profits as such, but the loss of the value of an asset that consists of the promisee’s right to earn profits under the contract.”). 47 Promissory notes, bonds, and bundles of consumer debt instruments are traded everyday by investors. For a number of examples, see generally Viva Hammer & Ann Singer, Insurance Derivatives: A Tax Angle, in TAX STRATEGIES FOR CORPORATE ACQUISITIONS, DISPOSITIONS, SPIN-OFFS, JOINT VENTURES, FINANCINGS, REORGANIZATIONS & RESTRUCTURINGS 263, 299 (Louis S. Freeman ed., 2004). 48 Or sometimes less. Consider again the loan contracts mentioned in Schonfeld, 218 F.3d at 177. Credit agencies provide ratings to banks and other lending institutions on the basis of the borrower’s financial status and history. These ratings in turn dictate the amount of interest that the lending institution charges to the borrower as essentially a risk premium. Contracts for loans made to borrowers with excellent credit ratings are not typically subject to much risk at all. See Frank Partnoy, The Siskel and Ebert of Financial Markets?: Two Thumbs Down for the Credit Rating Agencies, 77 WASH. U. L.Q. 619 (1999). 49 See generally Daniel Keating, Measuring Sales Law Against Sales Practice: A Reality Check, 17 J.L. & COM. 99, 114–19 (1997). 50 Id. at 116–17. 2007] RECONSIDERING THE MEASURE OF RECOVERY 567 resolution for the tension between the demonstrable reality of a contract’s value and this intuitive bar to recovery, the loss of chance remedy allows a court accurately to predict the value of a contract as an asset and permit a recovery for the true value of the plaintiff’s loss, not the fanciful dreams he had hoped that the asset would produce. III. THE LOST CHANCE REMEDY A. Origins The first and best known case to apply the lost chance remedy is Chaplin v. Hicks,51 an English case in which the plaintiff was selected as one of fifty finalists in a beauty contest of over six thousand applicants.52 Upon selection, the director of the competition scheduled an interview with the plaintiff but failed to give her timely notice of it. As a result, she was unable to attend.53 The director subsequently eliminated the plaintiff from the competition, and she brought suit for breach of contract. Despite her inability to prove with reasonable certainty that she would have won the contest had she remained a contestant, the court awarded her damages based on her unadjusted numerical possibility of winning.54 Courts in the United States have intermittently followed the Chaplin analysis but typically only when the plaintiff has suffered a similar injustice, such as the loss of the chance to win a magazine subscription contest,55 a hog showing contest,56 or an encyclopedia puzzle contest.57 Within the narrow realm of breaches of contract that occur in potential prize winning contests, the remedy of lost chance is a commonplace alternative. Outside this situation, however, the remedy is seldom considered. The first American case to apply the loss of chance remedy to a scenario other than contests was Taylor v. Bradley,58 an 1868 decision by the Court of Appeals of New York. Taylor was a farmer who had entered into a contract to farm land for three years with Bradley, who was only a prospective purchaser of the parcel of farmland which Taylor would farm pursuant to the contract.59 Bradley decided not to purchase the farmland 51 (1911) 2 K.B. 786. 52 Id. at 787. 53 Id. at 788. 54 Id. 55 Wachtel v. Nat’l Alfalfa Journal Co., 176 N.W. 801 (Iowa 1920). 56 Kansas City, M. & O. Ry. Co. v. Bell, 197 S.W. 322 (Tex. Civ. App. 1917). 57 Mange v. Unicorn Press, Inc., 129 F. Supp. 727 (S.D.N.Y. 1955). 58 39 N.Y. 129 (1868). 59 Id. at 129–30. 568 REGENT UNIVERSITY LAW REVIEW [Vol. 19:557 and was therefore unable to keep his contractual obligations to Taylor.60 Taylor sued for breach of contract, but because the only consideration he received for the contract was the opportunity to farm the land, he was unable to identify any damages other than loss of potential profits. In finding for Taylor (and reversing the trial court), the Court of Appeals determined that justice required Taylor receive the value of his contract—the value of the opportunity to farm the land.61 Taylor is something of an anomaly in the history of cases dealing with contract damages awards. Since it was decided in 1858, almost no other courts, including those in New York, have followed it. Yet it clearly states the principle on which the loss of chance remedy is based: the plaintiff has lost an opportunity, and that opportunity has value that deserves compensation. Despite the initial lackluster response generated by Taylor, the U.S. Supreme Court took note of the case seventy years later in Story Parchment Co. v. Paterson Parchment Paper Co.62 The Court was trying to determine the proper amount of damages due under the Sherman Antitrust Act for an alleged conspiracy by Paterson to monopolize the interstate market for vegetable parchment.63 The district court accepted a jury verdict for $65,000 based on lost profits which the circuit court reversed.64 Reinstating the jury’s award, the Court affirmed the approach in Taylor on two primary grounds. First, the Court trumpeted the merits of excluding an all-or-nothing type of recovery and, second, it applauded preventing a wrongdoer from profiting from his actions.65 B. Contemporary Status With the Supreme Court’s endorsement, it might have seemed that the lost chance remedy was finally ascending and superceding the requirement of reasonable certainty in those cases where the plaintiff was unable to prove lost profits. Unfortunately this was not the case. Story was decided under federal statutory law, and despite its reliance on Taylor, a pure breach of contract action, few courts adopted the alternative measure of recovery for determining contract damage 60 Id. at 130. 61 Id. at 143–44. [T]he plaintiff is entitled to the value of his contract. He was entitled to its performance; it is broken; he is deprived of his adventure; what was this opportunity which the contract had apparently secured to him worth? . . . His damages are what he lost by being deprived of his chance of profit. Id. at 144. 62 282 U.S. 555 (1931). 63 Id. at 559. 64 Id. 65 Id. at 562–63. 2007] RECONSIDERING THE MEASURE OF RECOVERY 571 review articles and some cases from the early twentieth century. Although this lack of support reveals the shaky ground of the court’s assertion, it does not belie the correctness of its decision. Even so, the precedent in Miller, like Taylor, has not been followed by many courts and is one of the few clear victories for the loss of chance remedy nationwide. This is probably so because the court did not provide any reliable guidelines for its application in practice. One is left wondering how even the most sophisticated statistical analysis could provide an accurate value for the loss of the chance to bring a lawsuit. In addition, the particular facts of the case in Miller are certainly unusual and thus make it easily distinguishable from the majority of other situations where the remedy could be used. C. Restatement and Codification In addition to the intermittent case law, the loss of chance remedy also finds support in the Restatement (Second) of Contracts (Restatement) and the Uniform Commercial Code (UCC). Section 348(3) of the Restatement states that “[i]f a breach is of a promise conditioned on a fortuitous event and it is uncertain whether the event would have occurred had there been no breach, the injured party may recover damages based on the value of the conditional right at the time of breach.”82 The official comment to this section of the Restatement makes it clear that this remedy is limited in its application to those promises that are aleatory in nature and does not apply where the injured party’s performance is not based on some fortuitous event.83 It also implies that its use is restricted to situations where the plaintiff has lost a chance of winning a prize or a contest.84 By limiting the loss of chance remedy’s application to aleatory and prize winning scenarios, the drafters provided defendants seeking to escape liability with a persuasive argument. Indeed, it was precisely this argument on which Allstate relied in Miller.85 As the court noted, however, the restriction of the Restatement has been questioned by commentators as a condition without justification.86 It does not make sense to restrict its application to only aleatory contracts when the remedy could be applied in any situation where the plaintiff has lost an opportunity. In contrast to section 352 of the Restatement, which holds that new or unestablished businesses, like any other injured party, can 82 RESTATEMENT (SECOND) OF CONTRACTS § 348(3) (1981). 83 Id. § 348 cmt. d. 84 Id. (“[H]e also has the alternative remedy of damages based on . . . what may be described as the value of his ‘chance of winning.’”); see also id. § 348 cmt. d, illus. 5 (using a horse race as an example of when the remedy could be applied). 85 Miller v. Allstate Ins. Co., 573 So. 2d 24, 29–30 (Fla. Dist. Ct. App. 1990). 86 JOSEPH M. PERILLO, CALAMARI AND PERILLO ON CONTRACTS 580 (5th ed. 2003). 572 REGENT UNIVERSITY LAW REVIEW [Vol. 19:557 only recover lost profits if they can be proved with reasonable certainty,87 the application of the loss of chance remedy under section 348 allows plaintiffs to recover the true value of what they have lost, rather than force them to suffer the result of a rule that probably undercompensates them. Moreover, it would prevent the breaching party from escaping liability and correct the perverse incentives created under section 352. Section 2-715 of the UCC broadens the approach of the Restatement to provide consequential damages for “any loss . . . the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise.”88 The official comment specifically addresses any ambiguity in the code language for determining the damage amount by rejecting “any doctrine of certainty which requires almost mathematical precision in the proof of loss,” and asserting that “[l]oss may be determined in any manner which is reasonable under the circumstances.”89 Any reasonable calculation would certainly include the loss of chance remedy. The drafters of the UCC obviously intended to reject an all-or-nothing rule and provide injured buyers with the certainty of at least some damage award in situations where there are no past performance reports to guide a court’s decision. Although the UCC provides a remedy when the plaintiff cannot prove damages with reasonable certainty, the remedy is usually unnecessary under the UCC because the UCC only applies to the sale of goods, and traditionally goods have a going market value that is easy to calculate. IV. EXTENDING THE LOST CHANCE REMEDY A. A Model Solution In 1988, the Supreme Court decided Basic Inc. v. Levinson.90 A true win for the small shareholder and an even playing field, the case was also a triumph for law and economics. In ruling for the defendant, the Court based its decision primarily on an economic argument that asserted that any false or misleading material statement, made openly by a representative of a company whose stock is traded publicly, has an effect on the market and price of that stock.91 Thus, investors who buy or sell after a materially misleading public statement is made do not have to prove that their decisions were affected by the communication; it is presumed that they were. Known as the fraud-on-the-market theory, the holding was the result of economic logic too compelling to be denied. 87 RESTATEMENT (SECOND) OF CONTRACTS § 352 (1981). 88 U.C.C. § 2-715(2)(a) (2003). 89 Id. § 2-715 cmt. 4. 90 485 U.S. 224 (1988). 91 Id. at 241–42. 2007] RECONSIDERING THE MEASURE OF RECOVERY 573 If the difficulty in assessing damages under a loss of chance theory is truly the prime hindrance to the remedy’s application, Basic is illustrative of how practitioners can promote change. The difficulty lies in demonstrating to a court’s satisfaction the soundness of economic arguments that purport to provide calculations designed to supply the market price of a contract for which there is no ready market. One could argue that the only reason Hilliard managed to recover against Schonfeld was because the market had already provided a convenient figure for the court to use as a guideline. Had Cox never made an offer to INN with a price tag, it would have been exceptionally difficult, but not impossible, for the court to affix a value to the contractual rights of INN. There are two primary means by which a court can value a lost chance. The first is to take the expected profit calculations provided by the plaintiff, average them, reduce the average for the time value of money (including inflation), and then reduce that value for the risk of the enterprise.92 The court would rely on the plaintiff for the initial anticipated profit calculation but would make the final determination of the amount to award on its own. This value reflects the value of the opportunity or chance to earn the profits.93 The second option is to treat the contract as an asset just as the court in Schonfeld did. But without the aid of an offered price or a reasonably thick market, the court would have to look to other means to establish the asset’s value. The best method a court could use is the Capital Asset Pricing Model (CAPM). Outlined by Professor Melvin Eisenberg in his article, Probability and Chance in Contract Law, the CAPM is the conventional tool used by financial analysts to determine the value of an income- producing asset.94 Eisenberg argues that a contract’s value can and should be determined using this model because the requirement of reasonable certainty to obtain lost profits does not accurately restore the injured party.95 The CAPM predicts the value of the contract at the time of the breach—in other words, it supplies a value where there is no current market. Professor Eisenberg calls this the “expected-value measure.”96 Using current financial data, the CAPM accounts for the time value of money, the risk of unanticipated events that affect the entire market, and the unanticipated events that affect only the type of asset being evaluated. It then discounts the expected cash flow of the 92 This is the approach advocated by Professor Schaefer. See Schaefer, supra note 4, at 741. 93 Id. 94 Eisenberg, supra note 4, at 1061–64. 95 Id. at 1063. 96 Id. (emphasis omitted).