- •CONTENTS
- •CONTRIBUTORS
- •PREFACE
- •Introduction
- •I. A Positive Account
- •II. Normative and Historical Accounts
- •III. Explaining Legal Doctrine
- •A. Willful Breach
- •B. Comparative Fault
- •Conclusion
- •ACKNOWLEDGMENT
- •Introduction
- •C. Summary
- •Conclusion
- •Introduction
- •B. Some Striking Nuances in Common Law Systems
- •II. A Market Function Approach
- •A. Ethics or Economics – The Wrong Question
- •B. Party and Market Expectation as Guidelines
- •D. Fault, Foreseeability, and Other “Softeners” of Strict Liability
- •Conclusion
- •I. Fault and Uncertain Contractual Intent
- •II. An Expanded Law and Economics Approach to Fault
- •III. A Fault-Based Approach to Contract Damages
- •Conclusion
- •Introduction
- •A. A Model
- •B. Fault
- •C. A Comparison: Strict Liability Versus Negligence
- •II. Doctrine
- •A. Impossibility/Impracticability
- •B. Reasonable or Substantial Performance
- •C. Good Faith and Best Efforts
- •D. Interpretation/Implied Terms
- •E. Conditions
- •F. Damages
- •Introduction
- •I. Unconscionability
- •A. Markets
- •B. Moral Fault
- •II. Unexpected Circumstances
- •III. Interpretation
- •IV. Mistake
- •C. Cases in Which the Nonmistaken Party Neither Knew nor Had Reason to Know of the Mechanical Error
- •V. Nonperformance
- •Conclusion
- •Introduction
- •I. Modernizing Tort and Contract Around Fault
- •II. Explaining the Fault Swap
- •Conclusion
- •Introduction: From Fault to Negligence – and Back
- •I. Tort Law
- •III. Gratuitous Transactions: Bailment and Agency
- •A. Coggs v. Bernard
- •C. Siegel v. Spear and Comfort v. McGorkle
- •D. Medical Malpractice, Occupier’s Liability, and Guest Statutes
- •IV. Frustration and Impossibility
- •Conclusion
- •Conclusion
- •A. Analogies in Criminal Law
- •B. Lay Assessments of Culpability
- •C. Two Ways of Defining “Willful”
- •B. “Willful” as a Test for Inefficiency?
- •B. Optimal Damages Under Strict Liability
- •Conclusion
- •II. Cost of Correction Versus Diminution in Value
- •B. Treatment by the Courts
- •Conclusion
- •Introduction
- •C. An Information-Based Explanation
- •B. Informal Lessons from the Example
- •D. From Moral Hazard to Adverse Selection
- •II. Willful Breach Doctrine
- •A. Overcompensatory Expectation Damages
- •B. Tort Damages for Bad-Faith Breach
- •C. Restitution
- •Conclusion
- •Introduction
- •I. Expectation Damages and Willful Breach
- •II. Willfulness, Material Breach, and Damages
- •Conclusion
- •Introduction
- •A. Noncooperation
- •B. Overreliance
- •A. Setting the Stage
- •B. Noncooperation
- •1. When Should Avoiding Overreliance be the Default Rule?
- •Conclusion
- •Introduction
- •I. Stipulation, Fault, and Mitigation
- •II. Encouraging Stipulation
- •A. How Courts Encourage Parties to Stipulate
- •B. Two Advantages of Stipulation: Knowledge and Mitigation
- •Conclusion
- •Introduction
- •II. Comparative Negligence
- •III. Mitigation
- •IV. Reasonable Reliance
- •V. Causation
- •VI. Foreseeability
- •Conclusion
- •I. Summary of the Argument that Breach May Not Be Immoral Given the Incompleteness of Contracts
- •F. When Is Breach Immoral and When Is It Moral in Practice?
- •II. Criticism and Discussion of the Foregoing Argument
- •Conclusion
- •Introduction
- •I. Promise De-moralized, Contract Moralized
- •II. Contract and Promise: More on the Relationship
- •IV. Harm, Fault, and Remedies for Breach
- •V. Fault and Institutional Harm
- •Conclusion: Toward a Moral Law of Contract
- •I. Breach as Moral Harm
- •III. Moral Norms as Default Rules
- •Conclusion
- •CASE INDEX
- •SUBJECT INDEX
188 • Oren Bar-Gill and Omri Ben-Shahar
“trickery and deceit.”17 Because this systematic conduct “ ‘would evade detection in many instances,’ ” it should be more heavily sanctioned “ ‘on those few occasions where it was discovered.’ ”18 Put differently, State Farm had to pay more than compensatory damages because it chose a low-value, low-integrity policy.
While the U.S. Supreme Court, in reviewing the Campbell decision, rejected the pattern-of-systematic-bad-behavior justification,19 the “pattern” theory pervades much of the insurance law damages doctrine and provides justification for increased damages. Moreover, there are a few other contexts in which courts invoke the “pattern” theory to justify exemplary damages.20
C. Restitution
In some circumstances, the law enables the aggrieved party to recover in restitution in lieu of expectation damages, even if this remedy is compensatory.21 High restitution awards are traditionally rationalized as necessary to prevent unjust enrichment from an intentional breach. In some cases, they can also be justified under our information theory.
For example, after signing a detailed contract the promisor deviates from the contractual specifications in a way that reduces the cost of performance without affecting the market value of the performance to the promisee. According to the proposed Third Restatement of Restitution, the promisee is entitled to recover the reduction in performance costs.22 Th is rule can be justified under the information theory if the detected deviation, which did not harm the promisee, was likely accompanied by additional undetected deviations that did harm the promisee.
Conclusion
Th ere are two striking aspects to the law of willful breach. The first is the pervasive sense that willful breach is worse, and deserving of greater sanction, than inadvertent breach. The second is the difficulty in defining willful
17Campbell v. State Farm Mut. Auto. Ins. Co., 65 P.3d 1134, 1147–57 (Utah 2001), rev’d, 538 U.S. 408 (2003).
18Id. at 1151 (quoting Crookston v. Fire Ins. Exch., 860 P.2d 937, 941 (Utah 1993)).
19State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 422–3 (2003) (emphasis added).
20For exemplary damages in banking and employment cases, see Joseph M. Perillo, 11 Corbin on Contracts: Damages 386–7 (rev. ed. 2005).
21Second Restatement of Contracts § 345 (1981); Third Restatement of Restitution and Unjust Enrichment § 39 (Tentative Draft No. 4, 2005).
22Th ird Restatement of Restitution and Unjust Enrichment § 39, illus. 7, 9.
An Information Theory of Willful Breach • 189
breach, given that most breaches are a result of some voluntary decision by the promisor, but not all are abusive. The thesis developed in this chapter tries to clarify both aspects. It suggests that the definition of willful breach lies not in some intrinsic characterization of the mental state of the promisor. Rather, willful breach is the tag attached to behaviors that reveal information about some underlying bad trait, distinct from the breach itself. What makes a trait bad is that it is associated with a pattern of undetected value-skimming conduct. Thus, willful breach in our theory is a device that encapsulates information. It is this information that justifies the harsher remedial consequence.
THIRTEEN
Contract Law and the
Willfulness Diversion
Barry E. Adler
As a general matter, American contract law imposes strict liability for breach. The willfulness doctrine, under which the damages awarded apparently depend on the reason for the promisor’s failure to perform, seems an exception to the strict liability approach. For an influential set of willfulness cases, however, the exception is merely apparent. In these cases, fault seems not to be truly part of the judges’ willfulness conception and punishment seems not to be part of their goal. Rather the judges use the esoteric legal term of willfulness in a mundane process: the calculation of expectation damages.
Introduction
Expectation damages for breach of contract are generally awarded on a strict liability basis. That is, in the typical case, the reason for the promisor’s breach is irrelevant. It is often stated that an exception to this general rule occurs in the event of “willful” breach, which is said to justify special damages. The supposed exception has led to a conundrum because every instance of anticipatory repudiation is in some sense willful as is every refusal to cure a deviation from promised performance, yet in only a subset of these cases is the “willful” label attached as a reason for a high damages award. Why then are some, but not all, intentional breaches singled out for condemnation?
Th is chapter answers this question by denying the premise, at least for an influential group of willfulness cases. In these cases, willful breaches are not disfavored, rather they are of a sort that tends to impose relatively high actual damages on the victim. That is, damages awarded in willful breach
Th e author thanks Oren Bar-Gill, Omri Ben-Shahar, Dick Craswell, Kevin Davis, and Ariel Porat for helpful comments.
190
Contract Law and the Willfulness Diversion • 191
cases – or at least those addressed here – can best be described as the ordinary benefit-of-the-bargain type, where strict liability remains the rule, and where there is no punishment for illicit motives.
Th e argument is spelled out in steps. Part I sets up the debate with a brief description of the connection between expectation damages and willful breach. Part II then describes three hoary cost-of-completion cases, each a staple of the first-year contracts curriculum. For each case, “willful” is described as a label a judge attaches to a breach that causes substantial injury; in each case, it is the perceived size of the victim’s injury, not the nature of the breach, that best explains the remedy the judge recommends. Finally, a conclusion is offered.
I. Expectation Damages and Willful Breach
Th e standard remedy for breach of contract is expectation damages, which are to provide the promisee the full benefit of his bargain. In terms of the Second Restatement of Contracts, §347, expectation damages owed the injured party are measured by “the loss in the value to him of the other party’s performance caused by its failure or deficiency” less any savings from the victim’s not having to perform.1 No mention is made of the reason for breach and there is no prescribed penalty, or augmentation of damages, for willful breach.
Th e Restatement’s description of the remedy for breach is not an accident or oversight; the omission of supplemental damages for an intentional failure to perform is deliberate. As stated in the introduction to the Restatement’s chapter on remedies:
Th e traditional goal of the law of contract remedies has not been compulsion of the promisor to perform his promise but compensation of the promisee for the loss resulting from breach. “Willful” breaches have not been distinguished from other breaches, punitive damages have not been awarded for breach of contract, and specific performance has not been granted where compensation in damages is an adequate substitute for the injured party. In general, therefore, a party may find it advantageous to refuse to perform a contract if he will still have a net gain after he has fully compensated the injured party for the resulting loss.2
Th is sentiment was famously summarized by Grant Gilmore, who noted that according to the traditional approach, “the wicked contract-breaker
1Second Restatement of Contracts §347 (1981). Under this provision, expectation damages are defined to include also compensation for incidental and consequential injury.
2 Second Restatement of Contracts ch. 16, introductory note (1981).
192 • Barry E. Adler
should pay no more in damages than the innocent and the pure in heart.”3
Defined in this way, the expectation remedy fits the basic economic theory of breach and damages, which, roughly speaking, favors an award for breach that reflects the harm caused the promisee so that the promisor will have the right incentive to take precaution against breach and the incentive to perform if, but only if, performance is efficient.4 A penalty for willful breach could encourage too much precaution against breach and discourage efficient termination of contracts at least in part because a promisor who wanted out of a contract would have to negotiate and pay for a release or face the penalty.5 Th e result could be a failure of the parties to maximize their joint wealth. Economic analysis, moreover, has fed back into doctrinal analysis, an observation confirmed by the Restatement, which in an introductory note to its chapter on contract remedies observes the agreement between the common law’s adoption of the expectation remedy and the economic theory of efficient breach.6
3Grant Gilmore, The Death of Contract 15 (1974). Even where fault does not play a role in the award of damages in the event of breach, it may be relevant to other contract doctrines such as those that relate to formation, interpretation, or excuse. See, e.g., George M. Cohen, The Fault that Lies Within Our Contract Law, 107 Mich. L. Rev. 1445 (2009); Melvin A. Eisenberg, The Role of Fault in Contract Law: Unconscionability, Unexpected Circumstances, Interpretation, Mistake, and Nonperformance, 107 Mich. L. Rev. 1413 (2009). Analysis of these doctrines is beyond the scope of this essay.
4See, e.g., Richard Craswell, Contract Remedies, Renegotiation, and the Theory of Efficient Breach, 61 S. Cal. L. Rev. 629 (1988); Steven Shavell, Damages Measures for Breach of Contract, 11 Bell J. Econ. 466 (1980); Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 77 Colum. L. Rev. 554 (1977); Richard A. Posner, The Economic Analysis of Law 56–7 (1972). Note, however, that the text is overly simplistic in its description of economic theory. In addition to the references just cited, see, e.g., Albert Choi & George Triantis, Completing Contracts in the Shadow of Costly Verification, 37 J. Legal Stud. 503 (2008) (modeling the role of litigation costs in optimal damages); Eric L. Talley, Contract Renegotiation, Mechanism Design, and the Liquidated Damages Rule 46 Stan. L. Rev. 1195 (1994) (modeling renegotiation into optimal remedy); Richard Craswell, Precontractual Investigation as an Optimal Precaution Problem, 17 J. Legal Stud. 401 (1988) (describing, e.g., the role of mitigation in optimal damages); Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 Va. L. Rev. 967 (1983) (same); Robert D. Cooter, Unity in Tort, Contract, and Property: The Model of Precaution, 73 Cal. L. Rev. 1 (1985) (describing, e.g., how expectation damages may induce too much precaution); A. Mitchell Polinsky, Risk Sharing through Breach of Contract Remedies, 12 J. Legal Stud. 427 (1983) (describing how risk aversion affects parties’ preferences for remedies). An extended discussion of the economic theory of contract damages is beyond the scope of this essay.
5See, e.g., Craswell, 61 S. Cal. L. Rev. 629, supra note 4. There are, at least in theory, occasions when a promisor’s anticipation of paying high damages for breach will optimize investment incentives. See, e.g., Lars A. Stole, The Economics of Liquidated Damage Clauses in Contractual Environments with Private Information, 8 J. L. Econ. & Org. 582 (1992), but a discussion of these circumstances, like the discussion of the circumstances under which compensatory damages are not optimal, see supra note 4, is beyond the scope of this essay.
6 See Second Restatement of Contracts ch. 16, introductory note (1981).
Contract Law and the Willfulness Diversion • 193
Th ere appears to be harmony, then, between practice and principle, almost. A growing number of commentators have observed that, despite the general pronouncements of the Restatement and the cases on which it relies, some courts use the willfulness of breach as a justification for an award of high damages.7 Not only is a willfulness supplement to damages seemingly inconsistent with economic theory, it also creates a doctrinal conundrum because not all intentional breaches provoke judicial disapproval. Consider, for example, a routine case of anticipatory repudiation, wherein a promisor announces in advance of the time for performance that she will not keep her promise. Unsurprisingly, such repudiation gives rise to a claim for damages, but the typical damages in this case are only for the “protection of [the promisee’s] expectation that the obligor will perform.”8 Th ere is no general enhancement of the damages even though an anticipatory repudiation seems quintessentially willful.
Various theories have arisen to explain and defend courts that only sometimes saddle intentional breaches with the willfulness label. For example, George Cohen has argued that courts appropriately award high damages, even supracompensatory damages, when a promisor behaves opportunistically,9 and the designation of willful breach, along with the associated high damages, properly corresponds with and may deter such behavior. In a more recent example, Oren Bar-Gill and Omri Ben-Shahar have proposed that “willful breach is a probabilistic indication that the breaching party is the type of transactor who readily chisels and acts in a dishonest way, and has likely exercised such bad faith in other occasions without being sanctioned.”10 A high, supracompensatory damages award for willful breach is justified under this approach because the prospect of such damages deters transgressions by promisors who know they will not be caught in every instance of breach. There is merit in these, and other, explanations or justifications of a special damages award under the willful breach doctrine.11 But there is also, in my view, a simpler way to explain at least some of the judicial precedent.
7See, e.g., Oren Bar-Gill & Omri Ben-Shahar, An Information Theory of Willful Breach, this volume; Richard Craswell, When Is a Willful Breach ‘Willful’?: The Link Between Definitions and Damages, this volume; George M. Cohen, The Fault Lines in Contract Damages, 80 Va. L. Rev. 1225 (1994); Patricia H. Marschall, Willfulness: A Crucial Factor in Choosing Remedies for Breach of Contract, 24 Ariz. L. Rev. 733 (1982).
8Second Restatement of Contracts §253, comment a (1981). See also, e.g., Harwood v. Avaya, Inc., 2007 WL 2407054 (S.D. Ohio); Walker v. Concrete Creations 2005 WL 2101191 (Del.Com.Pl.).
9See Cohen, supra note 7. For a broader view of the role fault does or should play in contract law, see the symposium contributions summarized in Omri Ben-Shahar & Ariel Porat, Foreword: Fault in American Contract Law, this volume. Some but not all of these contributions are discussed elsewhere in this chapter.
10Bar-Gill & Ben-Shahar, supra note 7 at 176.
11Additional approaches to willful breach are discussed in context below.