Remedies for Damage to Property

International Review of Law and Economics 24 (2004) 525541

Remedies for damage to property: money damagesor restitution in natura?

Eleni Zervogianni

Law School of the University of Athens [Ph.D. candidate], 4 Kyprou Str., 15452 P. Psychiko, Athens, Greece

Abstract

This paper compares the tort remedies of money damages and restitution in natura from an efficiencyperspective. Although there is a parallel between these remedies and the remedies for breach ofcontract, i.e. money damages and specific performance, the analysis is fundamentally different intorts, because of the high transaction costs involved. The basis of the comparison is the relation ofeach of the remedies to the subjective loss for the victim. The conclusion drawn is that no rule isgenerally preferable, so it is crucial to sort the different types of cases and apply in each of them theremedy, which is better suited. On this premise, are evaluated the relevant rules of Germany, Englandand France, since each legal system tackles this issue differently. 2005 Elsevier Inc. All rights reserved.

JEL classication: K-13

Keywords: Tort remedies; Money damages; Restitution in natura; Subjective value

1. Introduction

An important aim of tort law from a law and economics perspective is efficient accidentdeterrence.1 This can be achieved if liability rules are designed in a way to provide both the

Tel.: +30 210 67 75 404; fax: +30 210 67 75 404.E-mail address: lena [email protected].

1 According to Calabresi, the aim of accident law is to minimize all accident costs, namely, the number andthe severity of accidents (primary costs), the social costs (secondary costs), and the administrative costs (tertiarycosts). See Calabresi (1970), pp. 2631. Since, the pursuit of each sub-goal is at least partially contradicting, the

0144-8188/$ see front matter 2005 Elsevier Inc. All rights reserved.doi:10.1016/j.irle.2005.01.008

526 E. Zervogianni / International Review of Law and Economics 24 (2004) 525541

tortfeasor and the victim with incentives to engage in their activity adopting optimal levelsof care and activity.2 One important variable of this problem is the accident loss. On thebasis of this value, courts determine the amount of compensation owed by the tortfeasor tothe victim, in case the former is held liable, thus influencing the incentives of the parties.This variable is more important under a strict liability rule than under a negligence rule,due to the character of the first rule as a price and of the second as a sanction.3 Even so, itmaintains a certain importance in all cases.

However, an implicit assumption in all the relevant models is that accident costs can beassessed in a perfect way. If this strong assumption is relaxed and the subjective valuationof the victim is brought into the picture, the situation becomes puzzling: the subjective lossof the victim of an accident, i.e. the diminution of his utility because of the accident, isnot observable by third parties.4 Moreover, the victim himself will never voluntarily revealhis true subjective costs; instead, he has incentives to overstate them, so that he can benefitfrom a higher compensation.5

Given these conditions, when courts award money damages they actually have to rely onobservable proxies, in order to evaluate the unobservable loss that has been sustained. Thesum to which the compensation amounts depends on the proxy used by the court. Usually,this refers either to the diminution of the market value of the damaged thing or to its costs ofrepair or replacement. Often the two amounts coincide, but not necessarily, since prices ofthings are derived from peoples marginal willingness to pay which may depend on factorsother than their objectively assessed quality.

An alternative remedy to money damages is restitution in natura, meaning the actualrestoration of the situation as it was before the damage, by repairing (or replacing) thedamaged thing. This restoration assures that the subjective loss of the victim is compensated,whereas the need to evaluate the accident loss is circumvented.6 This remedy presents twofurther particularities which are key elements for the subsequent analysis; first, it deprivesthe victim from the freedom of the disposition of the amount of the compensation, andsecond, the costs incurred by the tortfeasor in the event of restitution in natura do notnecessarily correspond to the benefits that the victim derives from it.7

pursuit of the others, in this paper, we focus mainly on the minimization of the primary accidents costs, which wehold as logically prior.

2 See among others, Brown (1973), Shavell (1987), Landes and Posner (1987).3 See Cooter (1984).4 See De Alessi and Staaf (1989), Schmidtchen (1993), p. 69.5 In the cases treated in this paper, the allocation of entitlements is given; it is derived from the need to align

the incentives of the parties and achieve efficient accident deterrence (see supra Note 1). Thus, in principle, thevictim has the right to be free from damage. For this reason, the mechanisms developed by Ayres and Talley (1995)and Ayres and Goldbart (2001) which aim at the unravel of subjective values in the context of the allocation ofrivalrous entitlements, mainly in cases of nuisance, are not of applicable to the cases examined here.

6 Restitution in natura is rather a property rule remedy in the sense of Calabresi and Melamed (1972). Thisis puzzling considering that in torts the transaction costs of ex ante bargaining are prohibitively high. The cor-responding problem in the context of contract law is phrased by Kronman (1979), pp. 352354, who examinesthe role of expectation damages (liability rule) as the default remedy for breach of contract, in spite of the lowtransactions costs between contracting parties.

7 These characteristics, on which the analysis focuses, are common in the repair and the replacement of thething. The comparison between these two forms of restitution in natura exceeds the scope of this paper.

E. Zervogianni / International Review of Law and Economics 24 (2004) 525541 527

The issue can be clearly illustrated with the help of an example: Consider the facts of thecase Darbishire v. Warran:8 The defendant damaged the old motorcycle of the plaintiff. Thediminution of its value was not more than 85. The costs of repair on the other hand amountedto 192. On this basis we can start speculating. Indisputably, if 192 are invested in the fullrepair of the motorcycle the victim would be as well off as before the accident.9 The victimmight however yield the same utility if he would receive instead a smaller amount of money(for instance 150), which he could dispose freely. The exact magnitude of this amountdepends on the preferences of the victim and reflects his subjective valuation of the loss.

The aim of this paper is to compare the tort remedies of restitution in natura and moneydamages from an efficiency perspective. The basis of the comparison is the relation of eachof the remedies to the ideal compensation, which, at least in principle, corresponds to thesubjective accident loss for the victim. Of course, such comparison can take place only to theextent that these two remedies can be viewed as alternatives. In other words, the cases treatedare cases where the repair or replacement of the damaged thing can be at least as satisfactoryas money damages. If, in spite of the restoration, the thing continues to be of reduced value,restitution in natura is no longer an alternative to monetary compensation. Therefore, thepaper does not deal with damages, which cannot be made good with restitution in natura.Finally, it is worth noting that, although the paper focuses on damage to chattels, the sameanalysis same analysis also applies in case of damage to land.

At this point, it is worth noting that there is a parallel between the two rules mentionedhere and the basic remedies for breach of contract, namely money damages and specificperformance.10 However, the problem is fundamentally different in contract law as com-pared to tort law.

More specifically, the terms of a contract are agreed upon by the parties and the contractis priced accordingly. Thus, if a party attaches subjective value to a certain outcome, he maywant to secure this outcome by agreeing on a remedy of specific performance.11 This remedy,however, would make the breach of contract more expensive for the other contractingparty. The latter, anticipating this, will demand a higher price.12 If this pricing mechanismworks correctly, a contracting party will not have any incentive to overstate his subjectivevaluation on performance. In addition, penalty default contract rules, like for example thedoctrine of foreseeability, may induce a party with a high subjective value on performance todivulge this and, consequently, limit his potential to behave opportunistically.13 Thus, theinformation asymmetry between the contracting parties is somehow mitigated. On these

8 (1963) 3 All England Law Reports 310, Court of Appeal. This case presents the particularity that the costs ofrepair exceed the pre-accident value of the motorcycle, which was 85. Nevertheless, this is not crucial for thecurrent analysis.

9 For reasons of simplicity, we assume that there does not persist any residual damage, which cannot be madegood with the repair.10 In contract law, there is extensive literature on this issue. See, among others, Kronman (1979), Schwartz (1979),

Ulen (1984), De Alessi and Staaf (1989).11 We are assuming, for the sake of the argument, that parties can stipulate to specific performance as a remedy.12 See among others, Kronman (1979), p. 366; Ulen (1998), p. 482; Craswell (1988), p. 631. This is also the

starting point of Mahoney (1995).13 See Muris (1983), p. 383; Bebchuk and Shavell (1991), pp. 289292; Ayres and Gertner (1989), pp. 102102.

It should be noted that there is some controversy on this matter. See among others, Johnston (1990), Ayres andGertner (1991). However, a further analysis of this issue exceeds the scope of this paper.


premises, specific performance as a default remedy may induce post-breach bargaining,which may be more efficient than a court judgement in protecting the innocent partyssubjective valuation on performance.14

Torts, on the other hand, are involuntary transactions. Pre-accident agreements cannottake place because of prohibitive transaction costs. Moreover, there is no way to mitigatethe information asymmetry between the parties. Under these conditions, post-accident bar-gaining does not always lead to efficient results. This changes drastically the analysis of tortremedies. Thus, the argumentation derived from the economic analysis of the contract lawremedies cannot be applied, at least not directly, to the tort cases examined in this paper.

We proceed to the analysis of the topic as follows: We show that the two rules can leadto different results (1); then we compare them and derive a normative proposition (2). Onthe basis of this proposition, we refer briefly to the relevant rules in Germany, England,and France and evaluate them. The choice of these legal systems is particularly interestingbecause each one of them tackles this issue differently (3). In the conclusion, we sum upthe results and mention possible extensions of the paper (4).

2. Evaluation of the remedies

In this section, we compare the effects of the rule of restitution in natura and the ruleof money damages along the lines of the following dimensions: first, we analyze the rulesfrom an efficiency perspective, focusing on the incentives of the victim (Section 2.1). Then,we comment on the effect of the rules on the incentives of the tortfeasor in particular(Section 2.2). This analysis is followed by some considerations about the implementationcosts related to each remedy (Section 2.3). Finally, based on the above results, we formulatea normative proposition (Section 2.4).

2.1. Efciency considerations focusing on the incentives of the victim

As already noted, the amount of compensation that the tortfeasor anticipates to pay inthe event of an accident influences his choice about his level of care and activity. Likewise,in bilateral cases, i.e. in cases where the behavior of the victim can influence the probabilityand the extent of the accident loss, the expected compensation also influences the decisionsof the victim, as far as precaution is concerned.

The way we proceed, is by distinguishing between cases where the costs of repair orreplacement of the thing and the diminution of its market value are equal (Section 2.1.1),and cases where the first costs exceed the latter (Section 2.1.2).15 In addition, the probabilitythat the parties will bargain and reach an agreement is a crucial parameter of this analysis,and thus, merits closer consideration (Section 2.1.3).

14 See De Alessi and Staaf (1989), p. 572 and Ulen (1998), p. 482.15 The cases where the diminution of the market value of the thing is greater than the repair costs, as for example

in case of serious car accidents (the repaired car is usually still less valuable than it was before the accident), are nottreated because, as already mentioned, in these cases the two rules are no longer alternatives; if the remedy appliedis restitution in natura, the extra loss will persist. Such losses can only be covered by monetary compensation.


2.1.1. Cases where the diminution of the price equals the costs of repairOn many occasions, the diminution of the market value of an item corresponds to the

costs of its repair (or replacement). This is mainly the case for serious damages, whichprevent the proper use of the thing.

At first glance, it seems that in such cases the choice of the legal rule is irrelevant.However, this is true only if the subjective costs of the victim equal the diminution of themarket value of the thing. In any different case, the choice of the legal rule matters. Thiscan be illustrated on the basis of the following graph (S stands for the subjective loss forthe victim16, Dv for the diminution of the market price, R for repair (or replacement)costs. Rn and Rm refer to the benefit of the victim in case the tortfeasor pays R; Rn is hisbenefit in the case of remedy of restitution in natura and Rm his benefit in the case of moneydamages).

S can be less than Dv and R if, for instance, the pre-accident subjective value of thedamaged thing for the victim was less that its market price. Although this case does notseem very plausible because the victim would have sold the thing in the first place, it couldoccur since markets for used things do not always function well.

Under the above-mentioned circumstances, S would be the ideal compensation. If thetortfeasor is compelled to cover the diminution of the market value of the damaged thingor its costs of repair he internalizes more than the harm he externalized. However, there isa fundamental difference as far as the benefits that the victim derives under each remedy.

Money damages, regardless of the proxy on the basis of which they are assessed, over-compensate the victim, in the sense that the latter, by disposing freely the amount of thecompensation, can be better off than he was before the accident. This suggests that in thecase of money damages the problem of the moral hazard of the victim arises.

Under the rule of restitution in natura, on the other hand, the exact pre-accident situationof the victim is restored (i.e. the thing is actually repaired), so he is as well off as before.This remedy, however, is also inefficient, since it leads to misallocation of resources. In thecases examined here, the same amount of money would yield more utility for the victim,had it been used for purposes other than the repair of the damaged thing.

Nevertheless, the choice of the remedy matters as far as bargaining is concerned. Morespecifically, restitution in natura can induce the parties to bargain, if transaction costs arelow enough. This is due to the asymmetry between the costs of the tortfeasor to repair thething and the benefits that the victims derives from it. The victim would settle for an amountof money which is less than the costs of repair but higher than S, and the tortfeasor would,

16 When S appears on the line of the graph referring to the Costs for the tortfeasor, it is into parenthesis. Theparentheses are used in order to indicate that the subjective value of the victims is unknown to the tortfeasor.


of course, be willing to pay less than R. Therefore, the scope of bargaining is between Sand R.

In theory, the efficient bargaining outcome would be yielded if the victim would notappropriate any bargaining surplus, in which case the compensation would correspond tohis subjective costs. However, such a result presupposes that the victim does not have anybargaining power. This can never be the case, given the information asymmetry betweenthe victim and the tortfeasor: the victim knows the threat point of the tortfeasor but the latterdoes not know the threat point of the former. Thus, the bargaining result will be a pointbetween S and R. Even so, the remedy of restitution in natura after bargaining distorts theincentives of the parties less than the initial result. Restitution in natura cannot do worsethan money damages.

In general, the decision as to which rule is preferable under these circumstances dependson the probability of bargaining and its costs. If the expected gain from bargaining, whichconsists in the decrease of the distortion of the incentives facing both parties, exceeds theexpected cost from the misallocation of resources, caused by the inefficient repair, thenrestitution in natura is preferable. In any other case, money damages are preferable.

2.1.2. Cases where the costs of repair exceed the diminution of the market valueIn order to evaluate the remedy of money damages and that of restitution in natura,

when the costs of repair of the thing exceed the diminution of its value, it is necessary tolook into their possible relation to the subjective damage of the victim. For this purpose,we distinguish between cases where subjective damages are less than the diminution ofthe market price and cases where subjective damages are more than the diminution of themarket price, but less than the repair costs.17

2.1.2.1. Case A: subjective loss is less than the diminution of the market value.This case can be depicted as follows:

Such a case may arise when the damage does not prevent the use of the thing in whichthe victim is interested. The damage will, of course, diminish the resale value of the thingbut this is of no great interest to the owner, since he does not intend to resell it. In any case,the repair of the damaged thing may cost more than the diminution of its market value.

As mentioned above, perfect compensation would be S. Under both remedies, the tortfea-sor internalizes more than the harm he externalized. This effect is greater when compensationis calculated on the basis of R. Correspondingly, monetary compensation overcompensates

17 Symmetrically, a third case seems to exist where the subjective damages exceed the repair costs. This impliesthat, even after repair, there will be some residual damage for the victim. These cases are out of the scope ofthis paper, because we only treat those where money damages and restitution in natura are alternatives. If it isrestitution in natura is not feasible money damages are the only possible remedy.


the victim. Restitution in natura on the other hand, does not overcompensate but may leadto misallocation of resources, if no bargaining follows.

Nonetheless, restitution in natura induces parties to bargain. The scope of bargainingis, as in the previous case, between S and R. Although S will never be an equilibrium,bargaining could mitigate to some extent the inefficiencies of the rule of restitution in natura.The victim, however, will pretend that his threat point is at least Dv. The bargaining resultwill be between Dv and R, and most likely, taking into account the increased bargainingpower of the victim, closer to R.

Hence, in the majority of such cases, monetary compensation calculated on the basis ofDv is less inefficient than restitution in natura. Monetary compensation calculated on thebasis of R on the other hand performs worse than all rules.

2.1.2.2. Case B: subjective loss exceed the diminution of the market value.In the cases examined here, S has a value greater than Dv. The following depiction refers

to a case where S is less than R. However, the same analysis applies basically when S equalsR.

Such cases seem to be the most usual ones. A typical example is that of a scratched car.The subjective value, which in this case is higher than the market price, may be due to thenon-perfect substitutability of the good, especially under conditions that favor markets forlemons. It may also be due to personal attachment of the victim to the thing. More con-cretely, according to the findings of experimental economic studies, a persons willingnessto pay for a good is systematically less than his willingness to accept for it.18 This impliesan attachment of individuals to their own goods; therefore, the subjective value of a thingis usually higher than its market price. This does not necessarily determine the result of thecomparison between the objective and the subjective diminution of the value. However,there seems to be a positive correlation between the two.

As regards the performance of the tort remedies in such a case, it can be seen from the linesin the above graph that money damages on the basis of Dv lead to the undercompensation ofthe victim. This means that the tortfeasor does not internalize all the harm he externalized.On the other hand, if S is less than R money damages amounting to R may drive to the exactlyopposite result by leading the tortfeasor to internalize more harm than he externalized andby overcompensating the victim.

As far as restitution in natura is concerned, it is efficient if S equals R. If S is at someother point between Dv and R, like in the case depicted above, bargaining may result. If so,the result will be a point between S and R, depending on the bargaining power of the parties,and most likely closer to R, since the tortfeasor does not know the threat point of the victim.

18 This is known as the endowment effect. On the experiments realized and their implications see among othersKorobkin and Ulen (2000), pp. 11071113 and Hoffman and Spitzer (1993).


If on the other hand bargaining does not ensue, restitution in natura leads to misallocationof resources; so it is more inefficient than monetary compensation, which consists in thecosts of repair.

Comparing money damages consisting in the diminution of the market value and resti-tution in natura the result depends on the exact position of S. In general, performing thesame analysis as in the previous cases, it seems that the rule under which the compensationcloser approximates the loss of the victim is preferable.

2.1.3. Some reections on bargaining and its outcomeAlthough a thorough discussion on the probability that the parties strike a deal under the

conditions described in this paper is not possible in this place, it is necessary to considerbriefly the main parameters which influence this result. In general, people bargain if theexpected benefits from bargaining exceed the expected costs. These costs refer to the effortrequired in order to look for an exchange partner to negotiate with and, if an agreementis reached, to enforce it.19 In the cases examined, the location of the partner is not costly,since the identity of the parties is not disputed. Moreover, the agreement that the partiesseek refers merely to a monetary payment from the tortfeasor to the victim; so it is rathereasy to enforce. The most problematic issue concerns the stricto sensu costs of negotiation.

Negotiations are facilitated when the rights of the parties are clear and information ispublic. In the cases examined, although the rights of the parties are not disputed, at leastafter the court decision, there is the abovementioned problem of asymmetric information.20Another factor, which may prevent parties from reaching an agreement is hostility. However,these problems may be overcome when the parties are advised by experienced lawyers.21Experimental evidence realized in similar frameworks indicates that private bargaining isactually more effective than is often supposed.22

On the basis of the above arguments, it is plausible to assume that bargaining will inprinciple take place and lead to the conclusion of a deal at rather law cost. This way theprobability of misallocation on resources when the remedy applied is restitution in naturais ruled out.

2.2. The incentives of the tortfeasor in particular

From the point of view of the tortfeasor, adopting the efficient level of care and activitypresupposes the anticipation of the amount of compensation he will have to pay if he is foundliable. However, in most accident cases the tortfeasor acts behind a veil of ignorance; hecannot know ex ante the victims valuation of the damage. Usually, he cannot even anticipateexactly which item he is going to damage.

As follows from the foregoing analysis, money damages calculated on the basis of thediminution of the market value of the damaged thing lead to the tortfeasors internalizing

19 Coase (1960), p. 15.20 On this issue, see Fudenberg and Tirole (1983).21 See, however, Farnsworth (1999), who examined 20 cases of injunctions, but found no bargaining after judg-

ment in any of them. Anyway, the cases examined there, are similar but not identical with those treated by thispaper.22 See De Meza (1998), pp. 278279, where he refers briefly to the most important relevant experimental studies.


sometimes more and sometimes less than the actually inflicted harm. Nevertheless, if thisdiminution of the market value were a good indicator of the mean value of damages sufferedby the victims, in spite of the possible deviations from case-to-case, the incentives of thetortfeasor concerning accident deterrence would be overall efficient. However, the caseswhere the subjective loss exceeds the diminution of the market price of the thing are by farthe most common ones.23

On the other hand, compelling the tortfeasor to take on the repair or its costs seems toperform better when there is a subjective value attached to the damaged thing higher than itsmarket value. However, these costs may exceed the externality, which the tortfeasor caused,and therefore, lead to overdeterrence. This result is to a certain extent mitigated under therule of restitution in natura, provided that bargaining succeeds.

If courts can decide which rule to apply on a case-to-case basis, it seems at first glancelogical to deny any ex ante effect of the rules on the incentives of the tortfeasor, sinceusually he cannot know ex ante under which case he will fall. However, this is not exact;even so, the tortfeasor can estimate the mean value of compensation that the victim wasawarded in past cases. This amount can be expressed as a percentage of the diminutionof the market value of a thing (e.g. the mean compensation a victim usually receives mayamount in general to 120% of the diminution of the market value.) Then, the tortfeasor cansolve his maximization problem by calculating accordingly the expected compensation hewill pay, once found liable.

This is efficient, provided that the compensation that the victims usually receive is thebest possible approximation of their subjective losses, without any systematic tendency ofover- or undercompensation.

2.3. Implementation costs

Apart from the bargaining costs between the parties in cases of a rule of restitution innatura, mentioned in Section 2.1.3, further considerations about the additional costs ofimplementation of each rule are merited. These costs may refer either to the procedurebefore the court or to the enforcement of each remedy.

As far as the costs of the procedure are concerned, money damages raise the cost ofthe procedure, since the court has to calculate them. If the compensation consists in thediminution of the market value of the thing, the costs rise the more individualized a thing isand reach their peak in the case of unique goods.24 If money damages consist in the costs ofrepair the calculation is less costly, if a competitive market for repair is assumed. Under therule of restitution in natura on the other hand, the court does not need to assess the damagein terms of money; it merely compels the tortfeasor to achieve a certain result (i.e. the actualrestoration of the damage).25 By saving in conversion costs, this last rule is associated withthe minimal costs of procedure. Nevertheless, it is worth noting that also under the rule ofrestitution in natura a rational tortfeasor will have to anticipate the cost of repair, in orderto adjust ex ante his level of care and activity. However, in this last case it is clear that the

23 See supra Section 2.1.2.2.24 See Kronman (1979), pp. 360361.25 For the same problem in the context of contract remedies, see Schwartz (1979), pp. 292293.


relevant costs are borne by the tortfeasor himself, whereas in case of procedural costs thisdepends on the relevant legal rule in place.

As regards the enforcement costs, it is often claimed that the application of the rule ofrestituton in natura is more costly, because it involves high monitoring costs and might leadto further disputes of the parties as to whether the repair was proper or not.26 This argument,however, is not decisive; in a competitive market for repairs, it is unlikely to arise. Even ifthis does not hold, it could be encountered if the victim and the tortfeasor were requiredto agree on the relevant issues before performing the repair27 or if the court would appointsomeone to supervise the repair.28 Moreover, taking into account that restitution in naturainduces the parties to bargain as described in Section 2.1, once an agreement is reachedthese costs are not relevant any more, since actual repair will not take place.

It is difficult to determine categorically which rule is associated with higher implementa-tion costs.29 This varies from case-to-case. However, if these cost were the decisive variableit would be reasonable to claim that, the more individualized a thing is the more preferablewould be restitution in natura to monetary compensation.

2.4. Synopsis of the results and formulation of a normative proposition

Since, neither restitution in natura nor money damages provide both the victim and thetortfeasor with the efficient incentives in all cases, there does not seem to exist an optimalsolution to the problem of compensating the real (subjective) accident losses. Looking for asecond best solution, it seems reasonable to classify the cases in different categories and treatthem separately. The more the mean amount of compensation of the victims approximatestheir subjective costs, the better the incentives of the parties are aligned.

Summarizing the results of the above analysis and under the assumption that bargainingsucceeds, if the diminution of the market value equals the costs of restitution in natura, thislast remedy performs better. In the rest of the cases, the magnitude of the subjective valu-ation involved is crucial:30 the higher the subjective valuation involved, the more suitablethe remedy of restitution in natura. At this point, it is worth noting that money damagesconsisting in the repair costs perform in all cases worse than any other, provided that resti-tution in natura is followed by bargaining. This rule is clearly sub-optimal, and thus, doesnot merit further consideration.

The normative proposition drawn is that a legal system should be flexible; both remediesof money damages (covering the diminution of the market value of the thing) and restitutionin natura should be available and the judge should be granted the discretion to decide on

26 See among others, Schwartz (1979), pp. 2923, who treat this problem in the context of the remedy of specificperformance in contract law.27 If the victim chooses the mode of repair alone and the tortfeasor has to pay the bill, there is the danger of

opportunistic behavior on the part of the victim, who might collude with the repairman, charge a higher price, andshare the extracted benefit.28 This is an analogy from the proposition of Schwartz (1979), p. 294, who in order to face the problems of

supervision in the case of specific performance suggests the appointment of special masters by the court.29 A similar statement is made by Kronman (1979), p. 374, concerning the costs of specific performance as

compared to the costs of expectation damages.30 This was proposed by Muris (1983), p. 382, in the context of contracts.


the basis of the particularity of each case which remedy applies. This can lead to rathersatisfactory results, provided, of course, that the courts follow a coherent practice, so thatlegal certainty is not at stake.

This proposition lies on the assumption that the judge can identify the different typesof cases. This is not unrealistic: the presumption that the subjective costs of the victimexceed by far the diminution of the market value of the thing, which is derived by findingsof experimental economics31 can serve as a starting point. Further criteria may refer eitherto the owner of the thing or to the thing itself. More specifically, in cases where a legalperson is the owner of the thing it is unlikely that any subjective value would be involved.The same is valid for things, which are owned by natural persons but are merely functional(e.g. instruments of work) or standardized commercial goods. Moreover, subjective valueseems to increase as the age of the thing increases. This is due to the fact that relativelynew things can be replaced rather easily, whereas things tend to get more individualizedthrough continuous use. A final criterion may refer to the intensity of the use of the thingby the owner. Of course, the distinction will not be perfect in all cases but as long as theerrors are stochastic and there is not a systematic tendency of over- or undercompensationof the victim, the incentive effects of the rules are not distorted.

3. Short overview of different legal systems

The principle of restitutio in integrum, which is common in most legal systems, doesnot suggest a concrete way to deal with the issue of the tort remedies. In comparative lawthree patterns of solution can be distinguished; the precedence of restitution in natura overmonetary compensation; the pre-eminence of monetary compensation; and the recognitionof restitution in natura as a discretionary form of compensation.32 Thus, in the light of theconclusions of Section 2, we examine the rules of Germany, England and France, which wehold as representative for each solution, respectively. The subsequent comparison is strictlyrestricted to the scope of this paper.

3.1. Germany

Article 249, sentence 1 of the German Civil Code, which was formulated under theinfluence of the natural law philosophy, gives restitution in natura priority over moneydamages. However, the second sentence of the same Article in the case of damage of a thinggrants to the victim the right to demand, instead of the actual restitution, the correspondingamount of money.33 From its formulation, it can be derived that the judge is bound by theclaim of the victim.

31 See supra Note 18.32 See Stoll (1972), p.63, no. 64.33 This form of compensation is generally considered to be restitution in natura in a broader sense. This provision

was introduced on the grounds that the victim cannot be expected to agree that the tortfeasor undertakes himselfthe repair of the thing (Lange & Schiemann, 2003, p. 226). This amount, however, may consist in the costs ofreplacement of the thing (Schiemann, 1998, 249, pp. 154155, no. 213). This provision does not apply in caseswhere the thing is destroyed (see among others Schiemann, 1998, 249, pp. 156157, no. 218).


In practice in the vast majority of cases, the victim exercises his right stemming fromArticle 249, sentence 2 and is routinely awarded the costs of repair or replacement,34 thusexcluding the possibility of bargaining. This behavior on the part of the victim is perfectlyrational; this is the maximum amount of compensation he can receive. In addition, sincethere are no restrictions as to its use, he can invest it into any activity he wishes. This way, incase his subjective valuation is lower than the repair costs, he is better off after the accidentthan before. This, however, results in systematic overcompensation of the victim and leadsto the distortion of the incentives of both parties.

The distortion of the incentives of the parties is strengthened by the fact that courtsaward repair costs even for things, which the victim cannot repair because he no longerowns them.35 The German legal term for this type of damages is fiktive Reparaturkostenand can be rendered in English as fictitious damages. This issue is being disputed for along time.36 According to the opinion, which finally prevailed in the court decisions, repaircosts should be awarded independently of the actual possibility of repair.37 It is claimed thatthe repair of the car is the only meaningful way to deal with the damage. Thus, the damagewhich occurred is objectivized and set equal to the repair costs. A further justification isbased on the argument that the owners of damaged things should be treated equally, nomatter whether they intend to repair the thing or sell it as is, since their intentions are of nointerest to the court.38 At this point, it is worth noting that a special provision was recentlyadded to Article 249, according to which the value added tax (VAT) is not included in thecompensation unless it is actually paid.39 The recovery of the VAT, in cases where no repairhad taken place, is a fictitious damage and preventing its recovery is reasonable. However,it is difficult to understand why the reform is restricted to this particular issue and does nottreat other similar matters along the same lines.40

A deviation from the principle of restitution in natura is introduced by Article 251 of theGerman Civil Code, when restitution in natura is impossible or disproportionally costly.In such cases, the victim is entitled to money damages consisting in the diminution of themarket value of the thing.41 This provision is logically necessary when restitution in naturais impossible. The notion of disproportion on the other hand is rather vague. Nevertheless,it has been interpreted by courts in a concrete way.42 The rule is particularly clear in case

34 See Medicus (2000), p. 275 and Magnus (1987), p. 29.35 See Magnus (1987), p. 58 and Magnus (2001), p. 105.36 See, among others, Lange and Schiemann (2003), pp. 230231.37 On the analysis of the tendencies of the courts on this matter, see Magnus (1987), pp. 5960, where it is

mentioned that in 1976 The Highest Court decided that repair costs are awarded only if it is possible for the victimto perform the repair; if not, article 251 BGB applies (BGH 23.3.1976, Entscheidungen des Bundesgerichthofs inZivilsachen 66, p. 239), but in 1985 the practice of the courts changed (BGH 5.3.1985, Versicherungsrecht 35, p.593).38 For a more detailed exposition of this argumentation and the criticism against it, see Magnus (1987), pp. 6065.39 See Zweite Gesetz zur Anderung schadensersatzlicher Vorschriften of 19.7.2002 (Bundesgesetzblatt I, p.

2674).40 Lange and Schiemann (2003), pp. 232233.41 Precisely, the compensation of the provision of Article 251 is calculated on the basis of the difference theory

in its objective version, which more or less coincides with the diminution of the value of the thing. See Magnus(2001), p. 96.42 See Medicus (2000), p. 278.


of car damages. In these cases, a repair is considered to be disproportional when it exceedsby 30% the value of the car before the damage.43,44 Nevertheless, such a rigid in abstractointerpretation is arbitrary and as such cannot be easily justified.3.2. England

In English Common Law, tort damages are always monetary.45 Restitution in natura ishardly an option in tort law. The judge can by means of a mandatory injunction compel thetortfeasor to perform an act, but this has no application in the case of accidents.46 Englishcourts are reluctant to order such measures, which they hold as interfering with the libertyof the defendant.47

Money damages are in principle meant to cover the diminution of the value of the thing.48Nevertheless, in the case of the destruction of a thing the courts may award the costs ofreplacement, if the plaintiff intends to replace the thing and this is reasonable.49 In the case,where the thing can be repaired, the costs of repair serve as a prima facie rule for the processof the diminution of the value of the thing,50 provided that they are also reasonable.51 Theextent to which this prima facie rule is reversed in practice is unclear.52 In the Glenfinlascase,53 the plaintiff received repair costs, even though he admitted before the court that hedoes not intend to repair his vessel. The main argument supporting this practice is that, insuch cases the diminution of their price of the thing cannot be assessed because there isno market for damaged things.54 In this context, fictitious damages have also been oftencompensated.55 This practice, however, has been heavily criticized56 and nowadays thereseems to be a tendency to abandon it.57

43 See Magnus (2001), p. 106 and Schiemman (1998), 251 BGB, p. 180, no. 2226.44 This issue also involves the comparison between the value of the thing and the replacement costs, which,

however, exceeds the scope of this paper.45 See Stoll (1972), p. 63, no. 6465.46 See Rogers (2001), p. 58 and Stoll (1972), p. 65, no. 65.47 For this problem in the context of contract law, see Schwartz (1979), p. 296298.48 See Mc Gregor (1997), p. 44, no. 68 and Rogers (2001), p. 62.49 See Tettenborn, Wilby, and Bennett (2003), p. 269 and Allen, Hartshorne, and Martin (2000), p. 156, no. 6-035,

who, however, do not refer to the intentions of the plaintiff.50 See Mc Gregor (1997), pp. 4445, no. 68.51 The criterion of reasonableness is examined in concreto. A usual case where it is considered that repair

costs are reasonable is when they exceed substantially the pre-accident value of the thing or they are obviouslydisproportionate to the diminution of the value of the thing but they should not be disproportionate. See Tettenbornet al. (2003), p. 281; Allen et al. (2000), p. 159, no. 6-043; Magnus (1987), p. 72.52 See Rogers (2001), p. 65.53 The (1918) Probate, Divorce and Admiralty (Law Reports,) p. 363.54 See Rogers (2001), p. 75.55 See Mc Gregor (1997), p. 870, no. 1326. This is evident in the London Corporation case (The (1935) Probate,

Divorce and Admiralty (Law Reports) p. 70) where the plaintiff received repair costs for his ship, although he hadsold it before the trial.56 See Tettenborn et al. (2003), p. 282, who cite the view expressed by the obiter in the Court of Appeal in the

case Apostolis (No 2), The (2000) 2 Lloyds Law Report, pp. 337, 348.57 See Tettenborn et al. (2003), p. 282, referring to the Argonaftis case (The (1989) 2 Lloyds Law Reports, p.

487). This reasoning is irreconcilable with that of the Glenfinlas case and as the first case is a more recent one itshould prevail.


Overall, in England there seems to be a concern that the tailoring of damages shouldtake into account the intentions of the plaintiff. Nevertheless, with the exception of thecases where the plaintiff has already restored the damage or the restoration is renderedimpossible before the trial, there is no way to ascertain the intentions of the victim andmake him commit himself to the way in which he will dispose the money damages. Thus,the plaintiff usually claims and receives repair or replacement costs, which is rather anindication of overdeterrence.

3.3. France

The French Civil Code does not contain any explicit provision about the form of compen-sation in case of torts. The judge is free to decide on the remedy, which he considers appropri-ate for each specific case, without being bound by the demand of the parties.58 The enforce-ment of restitution in natura seems to contradict to Article 1142 CC, according to whichin case of non-performance every obligation to act or refrain from an act results in moneydamages.59 Nevertheless, this provision has been interpreted so narrowly that it preventsexecution only when this would be directed expressly against the person of the defendant.60

In practice, although a number of court decisions where the defendant was compelled toactually repair or replace a damaged thing can be retrieved,61 courts usually award moneydamages.62 In the case of the destruction of a thing, according to the prevailing view, moneydamages are calculated on the basis of the replacements costs.63 Nevertheless, dependingon the circumstances the judge may decide in favor of the diminution of the (market) valueof the thing.64 When on the other hand, repair is possible, money damages cover its cost.65Moreover, although the compensation of fictitious damages is in theory denied,66 not allcourt decisions point to the same direction.67 The repair costs may outrun the pre-accidentvalue of the thing.68 However, they cannot exceed the costs of the replacement of the thing,if replacement is a possibility.69 The examination of the relation between the replacementand the repair of the thing exceeds the scope of this paper.70 Nevertheless, it is worth noting

58 See Starck, Roland, and Boyer (1996), p. 517; Le Tourneau and Cadiet (2002), p. 615, no. 2448; Viney andJourdain (2001), p. 87 no. 39; Terre, Simler, and Lequette (1999), p. 794, no. 858 who seem to restrict the libertyof the judge to decide for restitution in natura in the cases where at least one party has asked for it.59 See Stoll (1972), p. 68, no. 69.60 See Stoll (1972), p. 68, no. 69; Le Tourneau and Cadiet (2002), p. 615, no. 2449; Terre et al. (1999), p. 794,

no. 858.61 See Le Tourneau and Cadiet (2002), p. 615, no. 2450 and Viney and Jourdain (2001), p. 59, no. 28-1.62 See Viney and Jourdain (2001), p. 107, no. 56.63 See Le Tourneau and Cadiet (2002) p. 635, no. 2529.64 See Viney and Jourdain (2001), p. 184, no. 95 who refer to a case where the owner of the damages thing had

not used it for a long time and it was improbable that he would use it ever again.65 See Galand-Carval (2001), p. 82 and Le Tourneau and Cadiet (2002), p. 636, no. 2530.66 See Galand-Carval (2001), p. 87 and Viney and Jourdain (2001), p. 184, no. 95.67 See Magnus (1987), pp. 7071 with references to court decisions.68 See Galand-Carval (2001), p. 87.69 See Magnus (1987), p. 54; Le Tourneau and Cadiet (2002), p. 636, no. 2530; Viney and Jourdain (2001),

pp.186187, no. 96. Nevertheless, it is worth mentioning that the penal department (Chambre Criminelle) of theCourt of Cassation does not follow this restriction.70 See supra Note 7.


that the evaluation of such a rule depends on what is understood as a replaceable thing.If this only refers to standardized commercial goods, it is rather unproblematic since it islikely that the costs of replacement and the subjective loss of the victim coincide in whichcase repair would be rather superfluous. This is not so if the damaged good is an experiencegood (e.g. car).

In general, although the effect of overdeterence discussed above in the context of Germanlaw seems to be present in France too, the French rule on the tort remedies is flexible andas such is in accordance with the normative proposition. Thus, it could lead to satisfactoryresults if it were interpreted adequately.

4. Conclusion

To sum up, the choice of the tort remedy can influence the final amount of compensationowed and induce both parties to adjust their level of care and activity accordingly. Theefficient result would occur if compensation coincided with the subjective damages of thevictim. Since, in reality the victim will never reveal his true subjective valuation, this isnot feasible. Hence, the second best solution is to apply the tort remedy, which can lead tothe closest approximation of the ideal result. This remedy is not necessarily the same forall cases, but can vary according to the height of the subjective costs of the victim. To theextent that third parties (i.e. the judges) can roughly identify the different types of cases,flexibility of the legal system is really important.

In practice, despite the differences of the rules in place in the legal systems examined,in the vast majority of the cases, the victim receives monetary compensation amountingto the costs of repair or replacement of the damaged thing and has the freedom of itsdisposition, which leads in principle to systematic overcompensation of the victim, followedby overdeterrence of the tortfeasor. The possibility and the importance of ex post bargainingof the parties, to which the application of the rule of restitution in natura would result,received no recognition.

Understanding the effects of different institutions becomes increasingly more important,considering the contemplated drafting of a European Civil Code. It is worth mentioningthat according to Article 6:101 (2) of the Draft on Tort Law of the Study Group on aEuropean Civil Code,71 Reparation may be in money (compensation) or otherwise, as ismost appropriate, having regard to the kind and extent of damage suffered. This rule is inthe right direction. It conforms to the normative proposition of the paper, but the extent towhich it may lead to satisfactory results depends on its interpretation72.

Further research on this topic needs definitely to be carried out. A next step would be themodeling of the effects of the different tort remedies taking into account the probability ofsettlement. Another important extension of this paper would concern the impact of insuranceon the current analysis. Finally, the cases where the costs of repair or replacement exceedthe pre-accident value of the thing as well as those where the costs of repair exceed thecosts of replacement merit further examination.

71 Current version (June 2004) as retrieved from http://www.sgecc.net/media/download/04 06tort.pdf.72 cf., however, Article 6:201 of the Draft.


Acknowledgements

The support given by the Graduiertenkolleg Recht und Okonomik (University of Ham-burg) and the European Commissionin the framework of the Marie Curie FellowshipProgramis gratefully acknowledged. I would further like to thank Aristides Hatzis,Giuseppe Dari Mattiacci, Francesco Parisi, Thomas Ulen, Georg von Wangenheim, andtwo anonymous referees for helpful comments. I am also indebted to Youlika KotsovolouMasry for her valuable editorial comments.

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Paris: L.G.D.J.

Remedies for damage to property: money damages or restitution in natura?IntroductionEvaluation of the remediesEfficiency considerations focusing on the incentives of the victimCases where the diminution of the price equals the costs of repairCases where the costs of repair exceed the diminution of the market valueCase A: subjective loss is less than the diminution of the market valueCase B: subjective loss exceed the diminution of the market value

Some reflections on bargaining and its outcome

The incentives of the tortfeasor in particularImplementation costsSynopsis of the results and formulation of a normative proposition

Short overview of different legal systemsGermanyEnglandFrance

ConclusionAcknowledgementsReferences

Documents

Remedies for Damage to Property