Fault in Contract Law

September 26-27, 2008
Location: The University of Chicago Law School

Introduction | Speaker Biographies | Abstracts
Agenda

Abstracts

Oren Bar-Gill & Omri Ben-Shahar
An Information Theory of Willful Breach

Should willful breach be sanctioned more severely than inadvertent breach? Strikingly,there is sharp disagreement on this matter within American legal doctrine, in legal theory, and in comparative law. Within law-and-economics, the standard answer is no breach should be subject to strict liability. In this paper, we develop an alternative law-and-economics account, which justifies super-compensatory damages for willful breach. Willful breach, we argue, reveals information about the true nature of the breaching party -- that he is more likely than average to be a nasty type who readily chisels and acts in dishonest ways, and may have acted in other self-serving, counter-productive ways, which went undetected and unpunished. Willful breach triggers extra resentment for what underlies it -- for all the other bad things that the breaching party likely did, or, more basically, for the choice he made to engage in such pattern of behavior. Thus, when the party is caught in the act of willful breach, he is punished not merely for this act, but for the (probabilistically) inferred mesh of bad conduct. This account provides a concrete foundation for the notion that willful breach violates the “sanctity of contract.” We show that some remedial doctrines are consistent with the information-based account.

George M. Cohen
The Fault that Lies Within Our Contract Law

Scholars and courts typically describe and defend American contract law as a system of strict liability, or liability without fault.  Strict liability generally means that the reason for nonperformance does not matter in determining whether a contracting party breached.  Strict liability also permeates the doctrines of contract damages, under which the reason for the breach does not matter in determining the measure of damages, and the doctrines of contract formation, under which the reason for failing to contract does not matter.
In my Article, I take issue with the strict liability paradigm, as I have in my prior work on contract law.  In my view, the theoretical justifications for strict liability as a general paradigm for contract law oversimplify contractual intent, the relationship between intent and fault, and the nature of contractual fault.  Moreover, the strict liability label is descriptively misleading, once one dips even slightly below the surface of contract doctrine.  Fault shows up throughout contract law.  Efforts to make contract law conform more to the strict liability paradigm and exorcize fault are wrongheaded.  In any case, such efforts are doomed to fail.  Fault may not be the dominant feature of contract law, but it plays an inherent, invaluable, and ineluctable supporting part.  Like other contract rules, strict liability is merely a fault-based presumption.  Determining the limits of that presumption means considering why parties make contract and why they do not perform them, in other words, fault.  Courts and scholars would do better to acknowledge the role of fault and think about how to use fault more effectively within the framework of contract doctrine.

Richard Craswell
When is Willful Breach Willful? A Puzzle and Two Different Economic Solutions

Courts sometimes award higher damages for breach of contract if the breach is characterized by some term such as "willful." The puzzle with which the paper begins is that labels focusing solely on the breacher's mental states are conclusory or manipulable. Most breaches result from an entire series of events, and it will almost always be possible to find some events in that series that were deliberate and some that were random or accidental. The paper then considers (without endorsing) two economic approaches to selecting certain breaches for extra punishment. The first approach, similarly to a negligence rule in tort law, conditions higher penalties on a judicial finding that the breacher behaved inefficiently in some way. The second approach, corresponding more to strict liability in tort, adjusts the measure of damages without requiring any valuation of the efficiency of the breacher's behavior. While this second approach thus frees courts from having to evaluate the defendant's behavior, it makes additional demands by requiring courts to calibrate the measure of damages more precisely.

Stefan Grundmann
The Fault Principle as the Chameleon of Contract Law: A Market Function Approach

This article starts out from a comparative law survey which shows that all legal systems do not opt exclusively either for fault liability or for strict liability in contract law but adopt a nuanced approach, including intermediate solutions such as the reversal of burden of proof or market ('objective') standard of care, and including even other elements such as the 'second chance' given to a debtor in breach of contract. Taking this starting point seriously and arguing that it is highly unlikely that all legal systems err, this article asks the core question how and when which element should prevail and how and when they should be combined. It argues that there is no either or, but only the question of intelligent combination. When asking how to combine the elements, the simple answer is that market expectations are the core criterion. The article therefore argues that what is needed is a market function approach. A market function approach has to answer the question which element prevails in which situation. Some core criteria are developed in a last, more concrete section.

Roy Kreitner
Fault at the Contract-Tort Interface

The formative period in the history of contract and tort (in the second half of the nineteenth century) may be characterized by the cleavage of contract and tort around the concept of fault: tort modernized by moving from strict liability to a regime of “no liability without fault” while contract moved toward strict liability.  The opposing attitudes toward fault are puzzling at first glance.  Nineteenth century scholars of private law offered explanations of the opposition, in that alternative ideas about fault point to the different character of state involvement in enforcing private law rights: tort law governs liabilities imposed by law on non-consenting members of society (and thus, it should limit itself to fault based conduct), while contract law governs bargained for duties and liabilities of parties who exercise freedom of contract (and thus, liability voluntarily undertaken need not consider fault).  These theories are problematic, especially because they cannot offer a complete account of contract or tort.  Tort retains too much strict liability to be thought of as a regime of “no liability without fault,” and contract has too many fault-based rules to be conceived of through strict liability.  While these justifications for the distinction between contract and tort were questioned in ensuing generations, they still structure much of the debate over the current boundary between contract and tort.

Saul Levmore
Stipulated Damages, Super-Strict Liability, and Mitigation in Contract Law

The remedy of expectancy damages in contract law is conventionally described as strict liability for breach. Parties sometimes stipulate damages in advance, and may agree that the damages they stipulate shall be the exclusive remedy for breach. They may do so because of their conviction that they can, even in advance, assess damages with greater accuracy than courts, and they may be wary of litigation costs associated with the post-breach determination of expectancy damages. This paper advances two claims. First, that the familiar expectation remedy is correctly understood to involve elements of fault. There is litigation over the question of fault with respect to the mitigation of damages. Stipulation, on the other hand, makes contract liability more strict because it takes the mitigation question away from courts. It allows less room for courts to modulate the remedy on the basis of the parties' relative fault. Stipulation often encourages mitigation by one party, but then, to make up for the strict liability character, more detailed stipulation is possible in order to encourage bilateral mitigation. Mitigation considerations should change the way we think about many stipulated remedies. Second, while law is generally described as being suspicious of, or even hostile to, stipulation - in large part because courts refuse to enforce "penalty" clauses - in fact, law encourages stipulation. It does this by sometimes declining to award expectancy damages, often in the very situations where stipulation seems sensible, and also by awarding expectancy damages where stipulated damages are disregarded as penalties. These two claims illuminate cases on such diverse matters as residential leases, construction contracts, product warranties, service contracts with liability waivers, and no-show customers and their service providers.

Ariel Porat
A Comparative Fault Defense in Contract Law

This Article calls for the recognition of a comparative fault defense in contract law. Part I sets the framework for this defense and suggests the situations in which it should apply. These situations are sorted under two headings: cases of non-cooperation and over-reliance. Part II unfolds the main argument for recognizing the defense. It recommends applying the defense only in cases where cooperation or avoidance of over-reliance is low-cost.

Eric A. Posner
Fault in Contract Law

A promisor is strictly liable for breaching a contract, according to the standard account. However, a negligence-based system of contract law can be given an economic interpretation, and it is shown that such a system is in some respects more attractive than the strict-liability system. This may explain why negligence ideas continue to play a role in contract decisions, as a brief discussion of cases shows.

Seana Shiffrin
Why Breach of Contract May be Immoral

Some scholars defend the contract law's ban on punitive damage awards on the grounds that breach of contract, in itself, is not morally wrong.  In my Article, I offer two forms of response.  First, I refute one prevalent argument of Steve Shavell's for this justification.  Shavell argues that contractual breach is not immoral in those cases where the legal regime would offer expectation damages because the contracting parties would not have agreed to require performance had they explicitly deliberate about the circumstances occasioning the beach.  I criticize his argument for failing to justify this hypothetical contract approach and for failing to apply the approach properly in any case.  Second, I offer some positive considerations for the position that unless explicitly delineated otherwise a commitment to perform, morally, entails a commitment to perform rather than a commitment to 'perform or pay.'

Steve Thel & Peter Siegelman
Willfulness vs. Expectation: A Promisor-Based Defense of Wilful Breach Doctrine

Every Contracts student learns on the first day of class that the default remedy for breach is expectation damages, designed to put the injured promisee in the position she would have been in had the contract been performed. On the other hand, the cases often refer to “willful breach,” by which courts seem to mean deliberate and especially bad conduct by the promisor. Almost by definition, however, the willfulness of a breach can have little to do with the promisee=s expectation interest, which should only be measured with reference to the harm suffered by the injured victim, regardless of what the promisor did or failed to do to cause the harm. Commentators have typically sought to explain this tension by suggesting that expectation can often be measured or interpreted in many ways, and that what courts do when they deem a breach willful is to use the defendant=s bad behavior to pick the most generous definition of the plaintiff=s expectation. We offer an alternative understanding that is cleaner and, we think, more compelling. Willfulness matters not because it screens for a more generous expectation measure, but because it identifies those breaches that should be prevented or deterred.  When willfulness, so understood, is present, courts rightly award remedies that serve to deprive the promisor of any incentive to breach and to assure the promisee of getting her full expectation.