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than esthetic purposes. The contractor was in a vulnerable position, having incurred substantial sunk costs. Even though the contractor had protected itself to some degree against owner opportunism by insisting on progress payments, the amount owing was still a significant sum. The costs of “mitigating” the breach and replacing the pipe were high because the defective pipe was encased rather than “in shape to be returned.” One could add to Cardozo’s list the fact that owner was a one-shot contractor who might not be concerned about any reputation for opportunistic behavior among other builders, and so might be insufficiently deterred from “holding up” the builder for more money in the absence of court action.

My point is that contract disputes often present questions not only about which party is the best precaution taker, but also about which party is the best mitigator and the most likely opportunist. The case for strict liability is strongest when the promisor is all three. In my view, however, the likelihood that the promisee is more at fault on one or more of these criteria is high enough in litigated cases that courts should not presume that strict liability generally best represents contractual intent.

III. A Fault-Based Approach to Contract Damages

Having addressed the main arguments for strict liability in contract law, based on mutual intent and economic theory, I turn fi nally to the question of the role of fault in contract doctrine. In my view, the language and architecture of contract doctrine strongly reflect the pervasive influence of fault, though not always in obvious ways. In this fi nal section, I focus on a particular area of contract doctrine – contract damages – to show how a seemingly strict liability doctrine in fact leaves ample room for fault considerations.

Th e law of contract damages purports to follow the strict liability paradigm because it claims to focus on the goal of “compensation” for the promisee’s loss. If compensation is the goal, then the reason for the breach must be irrelevant. Contract law then claims expectation damages as the primary compensatory damage measure. The problem is that the apparent dominance of expectation damages as “the” unifying compensatory damages measure is an illusion. Contract law recognizes other compensatory interests, namely, reliance and restitution. Moreover, contract law recognizes a number of “limitations” on expectation damages, including mitigation, foreseeability, and certainty. Courts even have two different ways of measuring expectation damages: cost of completion and diminution in value. What explains the dizzying array of contract damage measures?

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In my view, the law of contract damages as courts actually apply it is best understood as a fault-based system.15 Courts apply different damage measures depending on the reason the contract fails and the relative fault of the parties. By adjusting the level of damages awarded, courts try to give optimal incentives to both parties. In general, higher damage measures, such as expectation damages and the disgorgement version of restitution, reflect a greater concern with promisor fault. Lower damages measures, such as reliance damages and the reimbursement version of restitution, reflect a greater concern with promisee fault. Contract damages are often undercompensatory relative to the expectation interest because they are as much about deterrence and incentives as about compensation.

More specifically, courts tend to use expectation damages when they believe that the promisor has acted opportunistically, the promisor is the superior mitigator, or the contract otherwise should be performed because it remains jointly profitable. The primary purpose of expectation damages is to deter opportunistic breaches. Expectation damages generally deter opportunistic breaches by depriving the promisor of gain that he has illegitimately expropriated in violation of the parties’ intentions or some broader social norm. This justification for expectation damages is broader than the traditional economic justification for expectation damages, based on the theory of efficient breach, which holds that expectation damages optimally deter inefficient breaches. Inefficient breaches are generally considered breaches involving situations in which circumstances unexpectedly change after the formation of the contract, making the contract sufficiently more costly or less desirable to the promisor that it is no longer profitable for him, although the contract remains jointly profitable. Opportunistic breaches, by contrast, include cases in which no such change occurs. The stated primacy of the expectation damage remedy, of course, makes these extreme cases of opportunism relatively rare; if reliance damages were the predominant contract damage remedy, however, these cases would be more common.

To make this point more concrete, consider four paradigmatic cases of pure opportunistic breach.16 In the first case, the half-completed exchange, one party provides a service to another for an agreed price, but the other party then simply refuses to pay. If the service provider (the promisee) were limited to reliance damages, and these damages are less than the contract

15For a more detailed discussion of the points in the next two paragraphs, see Cohen, NegligenceOpportunism Tradeoff, at 1245–316.

16I discuss these cases in more detail in Cohen, Finding Fault, at 140–54. The examples themselves come from Christopher T. Wonnell, Expectation, Reliance, and the Two Contractual Wrongs, 38 San Diego L. Rev. 53 (2001).

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price, the paying party (promisor) would always have an incentive to breach because he would, in effect, get the service for less than the contract price. In the second case, one party makes a relationship-specific investment and the other tries to exploit that vulnerability to extort a modification of contract terms. If the extortionist promisor expects that some percentage of vulnerable promisees will agree to the modification and not have the resources to sue later, the promisor will not be deterred from repeatedly attempting extortion if the promisees who do sue are limited to recovering reliance damages. Expectation damages are more likely to deter the repeated extortion attempts. In the third case, an insurer refuses to pay out on insurance after the insured contingency occurs. Reliance damages in this case, if they are defined as simply a refund of the premium, could lead to the collapse of the insurance market, because no insurers would have an incentive to pay out. They would simply keep the premiums of all who suffered no loss and refund the premiums for promisees who suffered losses. The same argument would apply to other contracts with a risk allocation component, such as those with warranty provisions. In the final case, a party with valuable private information contracts with another party. When the less-informed party discovers the information, that party may breach the contract but try to exploit the information in other transactions. Again, if the better-informed promisee is limited to recovering reliance damages, the promisor will not be deterred from the opportunistic expropriation. By contrast, to the extent it captures the value of the promisee’s information to the promisee, the expectation damage measure will deter such opportunistic breaches.

Th e idea that the main purpose of expectation damages is to deprive a promisor of illegitimate gain will strike some as more like the restitutionary goal of avoiding unjust enrichment than the goal of compensation. That depends on how restitution is defined. Sometimes, the restitution remedy is conceived of as a kind of reimbursement. In a half-completed exchange involving goods, rather than services, this version of restitution would simply involve returning the goods, or the money paid. The reimbursement restitution remedy is not sufficient to deter opportunistic breaches. In other cases, however, restitution is conceived of as a disgorgement remedy. That is analogous to the function I see expectation damages as playing. In fact, in some cases, courts will use the disgorgement version of restitution instead of expectation damages where they believe that expectation will not sufficiently deter opportunistic breach.

Courts tend to use reliance damages when breach is nonopportunistic; that is, the promisor breaches not to expropriate some illegitimate gain, but to avoid an unanticipated loss. There are two main examples of nonopportunistic

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Although the efficient breach theory of expectation damages does not describe the contract damage regime we have, it at least has a patina of plausibility to the extent that expectation damages are the predominant remedy. The continuing objection of law and economics scholars to the rule against enforcing penalty clauses19 more directly challenges existing law. T he critique, however, is similarly grounded in the strict liability paradigm and the argument that strict liability best comports with contractual intent. In many contracts, parties do not express their views on damages or other remedies. A seldom acknowledged corollary to this observation is that no court, to my knowledge, has ever held a contract unenforceable on the grounds of uncertainty for lack of a remedy term. In these cases, the contracting parties must expect courts to set reasonable damage default rules, and as I have already discussed, there is reason to think parties expect courts to use fault concepts to determine the appropriate measure of damages, as well as to interpret contracts generally.

But if the parties contract for a liquidated damage clause, then why does the law not always enforce these clauses? One concern is that parties may not have intended the clause to act as a penalty at all; the fact that it has become a penalty may be an “accident.” In addition, the parties may not have intended that a promisee be able to use a penalty clause opportunistically by looking for ways to assert breach, no matter how trivial.20 (A similar concern helps explain contract law’s avoidance of punitive damages, as well as the concern that such damages would too greatly deter promise making.) To critics of the penalty doctrine, however, the doctrine appears anomalous because it seems to single out a particular kind of contract term for special scrutiny and possible nonenforcement. From the perspective of a fault theory of contract, by contrast, strict enforcement of liquidated damage clauses would be the anomaly. Strict enforcement of liquidated damage clauses is a form of strict liability. If strict liability does not make sense generally in contract law, why should we impose it on this one term? Put another way, by not strictly enforcing liquidated damage clauses when they act as penalties, courts treat those clauses the same way that they treat other contract clauses, which are also not strictly enforced regardless of the circumstances and the fault of the parties.

Th e one pocket of contract damage doctrine where strict liability makes sense is market damages, which are based on the difference between the contract price and the market price of a substitute performance at the time of

19See, e.g., Posner, Economic Analysis of Law, at 127–30.

20See Kenneth W. Clarkson, Roger LeRoy Miller, & Timothy J. Muris, Liquidated Damages v. Penalties: Sense or Nonsense?, 1978 Wis. L. Rev. 351, 368–72.