Stipulated Damages, Superstrict Liability, and Mitigation • 235

but only $30 if I give more than one-hour notice.” Similarly, we do find restaurants excusing the penalty with enough notice. But it is also possible that we do not often find more detailed stipulation because such stipulation might be thought to encourage breach, as it offers a price for breach and thus psychologically encourages the other party to “buy a breach.” Still, at the right price, breach ought to be welcome. Some restaurants and airlines do seem comfortable with no-shows, once fees have been included.

Conclusion

As a normative matter, there is something to be said for complete freedom of contract. From this position, it is easy to rail against cases that do not enforce the parties’ stipulations, and then to complain about cases that do not provide expectancy damages, or another remedy, where the parties appear to have planned on the supply of the given remedy. On the other hand, overand underliquidation can cause inefficiencies that parties may not have anticipated, and these may be avoided if courts judiciously intervene to prevent palpable waste. To this calculus we must now add the idea that just as parties might sometimes wish to avoid a court’s assessment of expectancy damages, so too they might sometimes choose to avoid a court’s assessment of their mitigation efforts. Stipulation in various currencies thus produces superstrict liability in contract law. It does so by adding strict liability regarding mitigation to the usual strict liability as to the fact of breach. Where mitigation is important, contract law is a comparative fault regime, and its strict liability component fades in the background. In an important subset of these cases, the parties will prefer strict liability and they will stipulate damages – sometimes partial and sometimes a good estimate of full expectancy damages – in order to achieve this result. In another subset, they will count on courts to police their efforts in comparative fault fashion. And in a surprisingly significant third group of cases, they will not stipulate, even knowing that courts will decline to impose liability.

Th e other reconception suggested here, that contract law effectively encourages the stipulation of damages, is a weaker though more startling claim. The doctrinal knowledge of most lawyers is, after all, limited in this regard to the fact that one must be careful not to overliquidate and enter the realm of penalty damages. But as we look at the variety of cases, it is apparent that expectancy damages are disrespected by courts at least as much as stipulated damages. And inasmuch as expectancy damages are still available when penalty damages are disregarded, there will be many circumstances in which parties will do well to stipulate damages. Certainly such stipulation

236 • Saul Levmore

does sometimes introduce the problem of an insufficient incentive to mitigate, especially when mitigation requires joint effort, but this problem can be reduced with yet more detailed stipulation. Courts may want to take these points into account when striking or enforcing stipulated damage clauses and when adjudicating mitigation disputes. As is often the case, a positive theory of the behavior of parties and courts is likely to bear on the normative questions associated with legal rules and private practices.

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different approaches to comparative negligence and mitigation, and then carry out a more general analysis of doctrines dealing with the creditor’s position in the contractual relationship and the role of cooperation.

In this area, legal systems display significant divergences – partly rooted in their historical antecedents, and partly related to different concepts of contracts and contractual relationships. Continental European systems (with significant differences between Germany and France) recognize a strong role for comparative negligence and the duty to cooperate, while common law jurisdictions (with important differences between England and the United States) limit the scope of comparative negligence and the duty to cooperate while attributing a wider role to the duty to mitigate.1

Th e divergence between the Continental European and common law regimes can largely be explained by their different forms of regulatory capitalism, as market structures and contractual interdependencies, especially in the context of business transactions, may influence the emergence and operation of a system’s comparative negligence rule.2 In particular, the different role of the judiciary in relation to private autonomy and contractual freedom can at least partly be explained by the different relationships between states and markets.3 The resulting comparative negligence and mitigation rules not only influence parties’ ex ante risk allocation, but also have an impact on adjustments made in light of unanticipated events – including the choice between remaining in the contractual relationship versus deploying market alternatives. Where markets are thin and likely to fail, the relevance of the creditor’s conduct will be heightened. As is common in many contractual relationships, new circumstances may require contract or market adaptations. Market prices of the traded commodity may increase or decrease to unexpected levels, new technologies may make the goods unsuitable for the buyer, or the seller may face an unexpected rise of production costs. But where markets are thin or substitute performance is difficult to obtain, due to high specific investments and/or interdependencies, the need for cooperation within the transaction will be amplified.

Th e duty to cooperate gains further importance in the case of collaborative contracts,4 wherein the exchange of performances is aimed at achieving

1For a comparative analysis, see A. Porat, Contributory Negligence in Contract Law: Toward a Principled Approach, 28 U. Brit. Colum. L. Rev. 141 (1994). In general comparative fault in contract law has been denied in the United States: see, e.g., Haysville U.S.D. No. 261 v. GAF Corp., 666 P.2d 192, 199 (Kan. 1983). I should clarify that, in relation to the United States, I will examine only the Second Restatement of Contract, leaving out the UCC.

2On the role of regulatory capitalism and its different models, J. Braithwaite, Regulatory Capitalism: How It Works, Ideas for Making It Work Better (Edward Elgar, 2008).

3 See C. Milhaupt & K. Pistor, Law and Capitalism (University of Chicago Press, 2008).

4See Fabrizio Cafaggi, Contractual Networks and the Small Business Act: Towards European Principles?, 4 Eur. Rev. of Contract Law 493 (2008).

Creditor’s Fault • 239

a common objective unlike conventional sales contracts.5 In the context of “business-to-business” transactions, where parties agree to codesign a product or jointly develop a research project, the role of the creditor in ensuring conforming performance by the debtor gains significance. The creditor’s failure to cooperate may affect both the likelihood of breach and the consequences flowing therefrom. In some contractual relationships, such as joint ventures, the distinction between creditor and debtor may be difficult to maintain, and a failure to achieve the agreed-upon outcome will often be the result of a lack of mutual cooperation.

As we shall see, the rules of comparative negligence and mitigation incentivize different types of behavior among contracting parties. While the comparative negligence rule is primarily aimed at fostering contractual cooperation, mitigation encourages parties to seek alternative performance in the market.6

Often, within the contractual relationship, performance is the outcome of a sequential game wherein the debtor and the creditor interact strategically. The creditor’s conduct may precede or succeed the debtor’s (promisor’s) performance, and the interaction may generate reliance on the promise and its execution by the debtor, which in turn may affect the decision-making process of the debtor concerning performance or breach. Reliance may occur before the contract is signed or after the promise becomes binding. In light of the fluid nature of the contractual relationship, the creditor’s conduct should be analyzed with regard to this sequential frame. Although the optimal level of a creditor’s reliance and his related levels of investment in precautions and performance are not directly controlled by the doctrines of comparative negligence and mitigation, these doctrines play a significant role in shaping rules concerning the creditor’s conduct.

I. Comparative Negligence and Mitigation

in Contract Law Compared

Th e core investigation concerns the relationship between comparative negligence and mitigation as regulatory principles of the creditor’s conduct and its effect on debtor’s decision-making process. The first issue is whether these divergent rules concerning the creditor’s conduct can still be traced back to a unitary principle of cooperation among contracting parties, or if they

5See R. J. Gilson, C.F. Sabel, & R.E. Scott, Contracting for Innovation: Vertical Disintegration and Interfirm Collaboration, 109 Colum. L.R. 431 (2009).

6See C. J. Goetz & R. E. Scott, The Mitigation Principle: Toward A General Theory of Contractual Obligation, 69 Va. L. Rev. 967 (1983) (hereinafter Goetz & Scott, The Mitigation Principle).

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instead perform different functions, varying in accordance with the nature of the contractual relationships and market structures. Legal systems currently provide three answers: (1) to combine comparative negligence and the duty to mitigate into a unitary principle; (2) to group them under a common principle of mitigation, but subdivide operational rules between the duty to mitigate and comparative negligence; and (3) to radically distinguish them by referring to different functions (i.e., deterrence and compensation).

In Continental Europe, legal systems such as those of Germany, Austria, and Italy adopt a unitary principle, differentiating between preand postbreach; while in other systems, comparative negligence and mitigation are distinguished. In France, comparative negligence (faute de la victime or du creancier) has been adopted by the Cour de Cassation, but the duty to mitigate has been rejected.7 In England, the duty to mitigate is widely recognized while contributory negligence with apportionment, which was introduced in tort with the 1945 act, is limited in contract common law.8 In the United States, mitigation is well recognized while comparative negligence is not.9 It should be underlined that even those jurisdictions that reject or limit comparative negligence in the context of a two-party contract often allow apportionment, based on fault, in multiparty contracts.10

Comparative negligence and the duty to mitigate share the common feature of being defenses pleaded by the debtor. They are not affirmative claims, unlike the duty to cooperate, whose breach by the creditor can give rise to an obligation of the debtor to pay damages. The two differ concerning the applicable standard: care in comparative negligence and reasonableness in mitigation. These differences may lead to different considerations concerning an individual party’s ability to act in order to prevent the breach or minimize its consequences. Reasonableness, in the context of mitigation, often allows subjective elements to be factored in, including, to a limited extent, impecuniosity. These elements are less frequently considered in comparative negligence. However, the key difference between comparative negligence and mitigation relates to creditor’s expectations. In the case of comparative negligence, precautions by the creditor are based on the expectation of performance, not

7 C. André, Le fait du créancier contractuel (LGDJ, Bibliothèque de droit privé, 2002), S. Reifergeste, Pour une obligation de minimiser le dommage (PUAM, 2002).

8See E. Peel, Treitel, The Law of Contract (12th ed., Thomson Sweet & Maxwell, London, 2007), 1064–6.

9See Second Restatement of Contracts § 350. For general rule that there is no apportionment of contractual damages based on comparative fault of parties, see III Farnsworth on Contracts (3d ed. 2004) §12.8, pp. 195–6.

10D. J. Bussel, Liability for Concurrent Breach of Contract 73 Wash. Univ. Law Q. 97, 124, 126 (1995).