The issue of who gets “custody” of the engagement ring when a relationship goes bad periodically gets widespread media attention. The latest interesting and entertaining take on this theme appeared on the CNNMoney website today (3/22/13). But couples have been calling off engagements throughout the history of mankind, although pundits only recently have had mass media to highlight this fact. In honor of the inauguration of the Chair Chats blog, I’m reproducing a column I co-wrote with John Sophocleus, published by the Philadelphia Inquirer, on December 22, 1999. As usual, economics offers compelling guidance about how to decide who gets the ring when one party calls off an engagement.
“Pennsylvania Court Rings It Up Wrong”
By David N. Laband and John P. Sophocleus
A recent Pennsylvania Supreme Court decision required a woman to return an engagement ring–even though her fiancé broke off the engagement.
It’s a striking example of why judges (juries, lawmakers and other public officials) would benefit from instruction in economic principles. This decision turns economic (i.e., common) sense on its head and is inconsistent with legal treatment of virtually identical circumstances under contract law.
Rodger Lindh broke off the engagement to Janis Surman and demanded that she return the $17,400 three-carat diamond engagement ring he had given her. When she refused, he sued.
We wonder whether the justices who required Surman to return the ring have ever sold a house.
The earnest money that prospective buyers offer to sellers when the contract is written constitutes the would-be buyer’s legally binding pledge to work to bring the proposed sale to a successful conclusion. If the putative buyer backs out of the contract for reasons not within the control of the seller, the seller can legally claim the earnest money. We all know why: Both parties understand that, unless the contract permits otherwise, the seller will stop trying to sell the house and work to conclude the proposed sale successfully.
Without this pledge, it would be much more difficult to buy and sell real estate. Would-be buyers would have no financial incentive to honor the contract, other than the fact that they haven’t found another property more to their liking.
In fact, earnest money protects both seller and buyer. Without it, buyers who contract for a certain house might just keep on looking. If they found a property they liked more than the one they’d contracted for, they could walk away from the contract without penalty. Sellers are protected from buyer opportunism by demanding sufficient earnest money in the event the buyers find something better.
Earnest money protects buyers, too. Without it, the seller would have every incentive to continue to show the property to other prospective buyers. Suppose another buyer offered more for the house than Buyer Number One. Without earnest money, there’s no reason not to break the contract and sell to Buyer Number Two. To forestall this possibility, Buyer Number One induces the seller to stop looking for other buyers by compensating him or her (via earnest money) for the implied costs that result from removing the house from the market.
Earnest money does not ensure that real estate contracts never get broken; it implies that such contracts are broken only on good cause–that is, when the value to the buyer of breaking the contract exceeds the lost earnest money.
Now think of engagement rings as earnest money. Engagement rings contribute to efficient formation of marriages. The giver of such a ring pledges to work toward achievement of marriage between the two individuals. By taking herself out of the “marriage market,” the recipient of the ring puts herself at risk. While she is off the “market,” after all, she might meet someone else with whom she might have enjoyed a happy and fulfilling relationship.
So, by accepting her fiance’s ring, she gives up valuable opportunity. If he dumps her, the value of the ring compensates her for the costs implied by those lost opportunities.
“Pennsylvania law treats the giving of an engagement ring as a conditional gift,” wrote Justice Sandra Newman in the 4-3 opinion. It must be returned to the groom-to-be if the marriage does not occur, “even if he broke the engagement.”
But isn’t the fiancé’s pledge of good faith identical to that of a prospective house buyer? Surely, Justice Newman would refuse to return earnest money put up by the prospective buyer of her home if he reneged. The legal right to earnest money is not conditional on house sales’ being consummated but, rather, on the good-faith behavior of the two parties.
Similarly, rights to the engagement ring should not be assigned on the basis of whether the marriage occurs but, rather, on the good-faith behavior of the prospective bride and groom. The courts’ decision is inconsistent with well-established contract law and raises the costs of contracting between young people interested in developing long-term relationships with one another.