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First, the justifications for strict liability frame the issue as one of implementing contractual intent when the main problem of contract law is interpreting contractual intent. Fault helps us interpret contractual intent.1 Second, the strict liability paradigm focuses too much on a single fault variable – the superior ability of the promisor (which I use as a shorthand for the breaching or nonperforming party) to control his own performance – and downplays other relevant fault variables. In particular, the strict liability paradigm ignores the potential for opportunistic behavior by the promisee, which creates what I call the “negligence-opportunism trade-off ” in contract law.2 A broader conception of fault recognizes and emphasizes the potential for fault by both parties as well as the need to make relative fault assessments. Third, the strict liability paradigm overlooks doctrinal avenues in contract law that incorporate or accommodate fault. I will discuss one important set of such doctrines: the law of contract damages. Fault helps explain contract damages doctrine and fill doctrinal gaps.3

I. Fault and Uncertain Contractual Intent

Th e essence of the strict liability conception of contract law is that the reason a contracting party fails to perform does not matter. According to traditional contract doctrine, when one party promises to perform some service for another party or supply some good to another party in exchange for a price, and subsequently fails to perform, that party has breached the contract. The promisor’s fault or the lack of it is irrelevant.4 Th e only fault that matters is the promisor’s failure to perform. The primary justification for strict liability is that it best implements what many perceive to be the main goal of contract law, which is to facilitate voluntary transactions with minimal state interference. (For purposes of this chapter, I take this goal as given and leave third-party effects and interests for another day, though they are, in my view, more important than is usually supposed.) If one is committed to “freedom of contract” and sees “fault” as a social judgment independent of the parties’

1George M. Cohen, Implied Terms and Interpretation in Contract Law, in 3 Encyclopedia of Law and Economics 78 (Boudewijn Bouckaert & Gerrit De Geest, eds., 2000) [hereinafter Cohen, Interpretation].

2George M. Cohen, The Negligence-Opportunism Tradeoff in Contract Law, 20 Hofstra L. Rev. 941 (1992) [hereinafter Cohen, Negligence-Opportunism Tradeoff].

3George M. Cohen, The Fault Lines in Contract Damages, 80 Va. L. Rev. 1225 (1994) [hereinafter Cohen, Fault Lines]; George M. Cohen, Finding Fault with Wonnell’s “Two Contractual Wrongs,” 38 San Diego L. Rev. 137 (2001) [hereinafter Cohen, Finding Fault].

4Restatement (Second) of Contracts § 235 cmt. b (“[A]nything short of full performance is a breach, even if the party who does not fully perform was not at fault. …”) (1981).

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intentions, then naturally one sees fault as inconsistent with contract law. In this view, fault is a means to “regulate” contracting parties rather than to facilitate their transactions.

Th e problem with this justification is that it depends crucially on two assumptions: that the mutual intentions of contracting parties are known or easily determined, and that these mutual intentions do not themselves incorporate fault standards of performance. In many cases, however, these assumptions are contestable, if not false. Parties’ expressions of intent, whether written, oral, or conduct-based, are often unclear, contradictory, and incomplete. Questions of interpretation inevitably arise. Contractual intent is particularly likely to be uncertain in situations in which the parties cannot resolve contractual disputes amicably but resort to the courts; in fact, uncertain intent is often the cause of such disputes. In litigated contract disputes, out of which the bulk of contract law comes, parties typically offer competing meanings of contractual intent. Contract law aims to guide courts in resolving these disputed interpretations; thus, the very existence of contract law belies the assumption of easily determined contractual intent. One might usefully view contract law as a set of presumptions for resolving contested contractual intent.

Th e determination of contractual intent is so contested that courts and contracting parties often try to constrain the interpretive methodology courts use in ascertaining intent. Notable examples of this technique are the parol evidence rule and its contractual counterpart, the merger clause, both of which try to limit the source of contractual meaning to a writing. The debate over textualist versus contextualist methods of interpretation also falls into this category. Constraining interpretive methodology is an example of a common technique in law: Resolve (sidestep) difficult substantive questions via procedure. The technique is never fully successful, however, and again contract law is no exception. Interpretive methodologies themselves raise further interpretive questions. Instead of focusing on what the parties want to have happen under the contract (substantive or primary intent), the question shifts to how the court should go about determining what that intent is (procedural or secondary intent). Moreover, the potential exists for conflict between primary and secondary intent, adding new interpretive complexity.5

If contractual intent is often contested and the need for interpretation is common, the case for strict liability weakens. Strict liability no longer follows naturally or logically as a consequence of honoring the parties’ known intent.

5For example, the parties may prefer a textualist interpretive methodology, but may prefer more that the court get the substantive term right even if that goes against the textualist methodology. See Cohen, Interpretation, at 96–7.

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Rather, proponents of strict liability must defend it as the best proxy for interpreting uncertain intent. It may well be that contracting parties in many cases intend that the reason for nonperformance does not matter. The parties may intend that the promisor provide a kind of insurance or warranty of performance. On the other hand, in many cases, the parties may also intend that a court take fault into account in the event of an unsettled dispute. They may intend, for example, that “best efforts” or “reasonable care” suffice. If the parties intend fault standards to apply, then fault implements contractual intent. If the parties’ contractual intent is uncertain, fault can help interpret contractual intent. So long as fault represents a reasonable presumption of contractual intent, there is no inconsistency between the two.

II. An Expanded Law and Economics Approach to Fault

Law and economics theories of contract law try to answer the question of how to interpret uncertain contractual intent by hypothesizing “efficient” contract terms or rules, which potentially make both contracting parties better off (at least prospectively) by increasing the size of the contracting “pie.” From a law and economics perspective, then, strict liability makes sense in the face of uncertain contractual intent to the extent that the promisor is most often in a better position than the promisee to take cost-effective measures to ensure or enhance the promisor’s performance. If the promisor is generally the “superior risk bearer,” most contracting parties would agree to strict liability, and so courts should deem them to have intended strict liability even if they do not expressly say so (which they often do not do). Strict liability thus incorporates a fault-based presumption: The promisor’s nonperformance is presumptively his fault; therefore, it makes sense to impose liability on him.

Th e superior risk-bearer approach to contract law views contractual nonperformance as analogous to a tort accident.6 Although the analogy may seem odd at first blush, since contractual nonperformance is usually an intentional act, the analogy makes sense if one moves back one step to the event that motivates nonperformance. After the parties enter into the contract, some “regret contingency” may occur (or some previously existing and unknown risk may surface), which raises the cost of performance to the performing party or reduces the benefit of performance to the paying party to the extent that the adversely affected party would prefer not to perform.7 Viewing

6See, e.g., Robert Cooter, Unity in Tort, Contract, and Property: The Model of Precaution, 73 Cal. L. Rev. 1 (1985).

7See Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 Va. L. Rev. 967 (1983).

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contractual nonperformance as resulting from an accident, the superior riskbearer analysis naturally focuses on precaution taking, though it can encompass insurance and mitigation as well. Possible precautions include quality control, backup supplies, insurance, and the avoidance of promising in the first place.

Th e problem with the superior risk-bearer justification for strict liability is that it pushes the analogy between contract breaches and tort accidents too far, leading to an unduly cramped view of fault. Theorists agree that contract breaches differ from tort accidents (at least those involving strangers) because contract law must take account of the parties’ mutual intent – the contract. Law and economics theorists typically do this by arguing that most contract law rules are default rules, which apply only in the absence of an agreement by the parties that displaces the rule. Although the original Coasian analysis concludes that the default specification of legal rules is irrelevant when contracting around legal rules is costless, if “transaction costs” impede such contracting around, the theory holds that courts should set defaults so as to minimize transaction costs. One way to minimize transaction costs is to pick default rules that a majority of contracting parties would want.8 In this view, a contract is just another form of precaution. Since a promisor can often write a contract that protects him from liability in the event that various contingencies occur, using a force majeure clause, for example, the difference between contract and tort does not seem to affect the strict liability argument.

Th is view fails, however, to capture the key differences between contract breaches and tort accidents, differences that suggest a much larger role for promisee fault. First, promisees often have a greater ability to take cost-effective steps to mitigate losses caused by regret contingencies (both after and before their occurrence) than tort victims have to mitigate physical harm caused by accidents. Moreover, compared to promisors, promisees may be superior mitigators. Similarly, effective contractual performance often requires mutual cooperation rather than simply unilateral conduct; for example, investments by the promisee may affect the ability of the promisor to take precautions. Promisees may fail to engage in this cooperative conduct. The more that promisee fault matters, the weaker the case for strict liability becomes.

Second, the risk of opportunistic behavior looms much larger in contract breaches.9 Opportunistic behavior occurs when one party in a contractual relationship takes, or fails to take, some action contrary to the other party’s

8 See, e.g., Robert Cooter & Thomas Ulen, Law and Economics 200–02 (3d ed. 2000).

9See, e.g., Richard A. Posner, Economic Analysis of Law 93–4 (7th ed. 2007); Timothy J. Muris,

Opportunistic Behavior and the Law of Contracts, 65 Minn. L. Rev. 521 (1981).

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resolve uncertain intent by considering only the evidence of that intent that is easiest to determine. Second, identifying the superior risk bearer may also be difficult in certain cases. So long as courts are at least equally confident in the “most likely opportunist” judgment as they are in the superior riskbearer judgment, deterring opportunism should take priority. Third, in many cases, courts can just as easily gather information relevant to determining opportunism – such as the parties’ purposes in contracting, the commercial context of the deal, and the reasons for nonperformance – as they can collect information relevant to the superior risk-bearer determination – such as precaution costs, expected losses, and insurance capabilities. Courts can also develop rebuttable presumptions of opportunistic behavior by identifying situations in which opportunistic behavior is more likely to occur. These situations include those in which one or more of the following is present: The market price has moved against a contracting party who now seeks to escape the contract based on some contractual formality; one party has incurred significant sunk investments and the other appears to be trying to rewrite the deal; reputational effects are likely to be weak; the market for substitutes is “thin” rather than “thick”; or self-help protection is costly.

Perhaps the best example of the negligence-opportunism trade-off in contract law is the much-discussed case of Jacob & Youngs v. Kent.12 An owner who contracted to have a residence built withheld the final payment upon discovering that the builder had not used the Reading brand of pipe required by the contract but instead had used other wrought-iron pipe made by other manufacturers. The owner demanded that the non-Reading pipe be replaced even though much of the pipe was already encased within the walls of the house. Judge Cardozo and the New York Court of Appeals held that the owner had to make the final payment. Cardozo’s reasoning, albeit using different terminology, was essentially that the builder’s breach was merely negligent (“the result of oversight and inattention of the [builder’s] subcontractor”13), whereas the homeowner was likely acting opportunistically in insisting on the strict letter of the contract.

Cardozo devotes most of the opinion to identifying facts that would support a presumption of owner opportunism. The installed pipe was “the same in quality, in appearance, in market value, and in cost as the brand stated in the contract.”14 Th ere was no evidence of any idiosyncratic preference for Reading pipe and most people would view pipe as serving functional rather

12129 N.E. 889 (N.Y. 1921). I discuss my view of the case in more detail in Cohen, NegligenceOpportunism Tradeoff, at 990–1000.

13129 N.E. at 890.

14Id.