An information theory of willful breach

Michigan Law Review

Volumn 107, Issue 8, 2009, Pages 1479-1500

  Bar Gill, Oren ^a   Ben Shahar, Omri ^b  

^a NEW YORK UNIVERSITY   (United States)

^b UNIVERSITY OF CHICAGO   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 66749109789     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (71)

1. RESTATEMENT (SECOND) OF CONTRACTS ch. 16, introductory n. (1981).
2. GRANT GILMORE, THE DEATH OF CONTRACT 14-15 (1974) (footnote omitted)
3. (quoting OLIVER WENDELL HOLMES, THE COMMON LAW 236 (Mark DeWolfe Howe ed., 1963) (1881)).
4. E.g., RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 118-26 (7th ed. 2007);
5. Steven Shavell, Is Breach of Contract Immoral?, 56 EMORY L.J. 439 (2006).
6. Lucian Arye Bebchuk & I.P.L. Png, Damage Measures for Inadvertant [sic] Breach of Contract, 19 INT'L REV. L. & ECON. 319, 329 (1999);
7. Robert Cooter, Unity in Tort, Contract, and Property: The Model of Precaution, 73 CAL. L. REV. 1, 32 (1985);
8. Richard Craswell, Precontractual Investigation as an Optimal Precaution Problem, 17 J. LEGAL STUD. 401, 425-28 (1988).
9. RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 39 cmt. a (Tentative Draft No. 4, 2005) ("[Section] 39 describes a disgorgement remedy: a claimant under this Section may recover the defendant's profits from, breach, even if they exceed the provable value to the claimant of the defendant's defaulted performance."). The Restatement (Second) of Contracts also recognizes the role of fault.
10. See Patricia H. Marschall, Willfulness: A Crucial Factor in Choosing Remedies for Breach of Contract, 24 ARIZ. L. REV. 733, 734-737 (1982) (collecting Restatement sections where fault and/or willful/intentional breach play a role).
11. See, e.g., George M. Cohen, The Fault Lines in Contract Damages, 80 VA. L. REV. 1225 (1994);
12. Richard Craswell, When is a Willful Breach 'Willful'?: The Link Between Definitions and Damages, 107 MICH. L. REV. 1501, 1502-04 (2009);
13. Marschall, supra note 5.
14. Jacob & Youngs, Inc. v. Kent, 129 N.E. 889, 891 (N.Y. 1921) (citations omitted).
15. JAMES GORDLEY, FOUNDATIONS OF PRIVATE LAW: PROPERTY, TORT, CONTRACT, UNJUST ENRICHMENT 408-11 (2006).
16. See generally Barry Nicholas, Fault and Breach of Contract, in GOOD FAITH AND FAULT IN CONTRACT LAW 337, 338-340 (Jack Beatson & Daniel Friedmann eds., 1995).
17. Brace Chapman & Michael Trebilcock, Punitive Damages: Divergence in Search of a Rationale, 40 ALA. L. REV. 741, 764-72 (1989);
18. Daniel Friedmann, The Efficient Breach Fallacy, 18 J. LEGAL STUD. 1, 13-23 (1989);
19. lan. R. Macneil, Efficient Breach of Contract: Circles in the Sky, 68 VA. L. REV. 947 (1982).
20. See Lisa Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and Institutions, 99 MICH. L. REV. 1724, 1733-1734 (2001).
21. See Cohen, supra note 6, at 1230;
22. Craswell, supra note 6 at 1505-07;
23. Friedmann, supra note 9, at 3-4;
24. Marschall, supra note 5, at 739-741
25. See FH 20/82 Adras Bldg. Material Ltd. v. Harlow & Jones Gmbh [1988] IsrSC 42(1) 221,
26. translated in 3 RESTITUTION L. REV. 235 (1995).
27. See Friedmann, supra note 9, at 3.
28. STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 308 (2004);
29. Shavell, supra note 3, at 441.
30. See, e.g., Micheline Maynard & Michelle Higgins, As Overbooked Flights Rise, So Do Payoffs for the Bumped, N. Y. TIMES, Aug. 23, 2008, at Al. A common sentiment reported is that "overbooking is a conscious fraud, in that the seller has sold a contract knowing that it might not honor that contract." Posting of Dan to http://community.nytimes.com/article/comments/ 2008/08/23/ business/23bump.html?permid=7 (Aug. 23, 2008, 07:23 EST). One passenger is quoted as saying, "If flights are being overbooked, then what does that say about how the airline runs their business?"
31. Maynard & Higgins, supra.
32. See Mkt. St. Assoes. Ltd. P'ship v. Frey, 941 F.2d 588, 593 (7th. Cir. 1991).
33. Robert D. Cooter, Economic Analysis of Punitive Damages, 56 S. CAL. L. REV. 79, 7980 (1982) (explaining that intentional wrongdoing reveals information about illicit gains derived by the wrongdoer, requiring higher sanction to deter);
34. A. Mitchell Polinsky & Steven Shavell, Punitive Damages: An Economic Analysis, 111 HARV. L. REV. 869 (1998) (providing an imperfect-detection rationale for punitive damages in tort law).
35. See, e.g., Craswell, supra note 6 (arguing that expected damages for breach are often too low, due to a below 100 percent probability of suit among other things, and that courts may be justified in characterizing a breach as willful in order to raise damages to the efficient level);
36. Linda Curtis, Note, Damage Measurements for Bad Faith Breach of Contract: An Economic Analysis, 39 STAN. L. REV. 161 (1986) (explaining that supercompensatory damages are an efficient response to imperfect enforcement, resulting from either imperfect detection or from high, litigation costs that reduce the probability of suit even when the breach is detected).
37. The "underlying pattern" theory also distinguishes our account from Cooter's information-based theory. See Cooter, supra note 17. Here, the information that is revealed is not the gain enjoyed by the wrongdoer, but the likelihood that this gain appears systematically in a variety of contexts.
38. The supracompensatory damages rule increases the contract price that the promisee pays. The promisee is happy to pay this higher price to the extent that she is paying for added incentives to avoid other, undetected breaches. She may be less happy to pay a higher price to bolster the promisor's incentives to pay taxes.
39. We later discuss the implications of relaxing this assumption. See infra note 24.
40. The total expected social value is a measure of all the pecuniary effects attributed to the promisor's investment. in this model, the total expected social value includes the cost of the investment and the net value of performance that is expected to arise.
41. Recall that q is the probability of the Good state of nature and thus by definition it cannot be greater than 1.
42. The argument becomes more nuanced when the cost of S quality exceeds the cost of M quality also with High effort. See supra note 18 and accompanying text. In this case, the undetectability of M quality reduces the expected cost of both Low effort and High effort (i.e., even with High effort the promisor will inefficiently choose M quality). Still, this undesirable effect will generally be larger for Low effort, since High effort can be expected to reduce the difference between the ex post costs of 5 quality and M quality.
43. If q • 086, then D > 75. In this scenario, the promisor will prefer to perform. M at a cost of 75 rather than T and pay damages. For such high q, the promisor will always have a lower expected cost for L-effort, and the distortion cannot be corrected. The reason, in the model, is that the promisor who invested L still has the option to incur the high cost of performance, in which case there will be no occasion for the court to impose punitive damages.
44. See Craswell, supra note 6, at 1502-1507
45. See, e.g., Russe! Dean Covey, Exorcizing Wechsler's Ghost: The Influence of the Model Penal Code on Death Penalty Sentencing Jurisprudence, 31 HASTINGS CONST. L.Q. 189, 235 (2004) (noting that under the character theory of punishment, "the purpose of retribution is not to proportion the punishment to the evil of the act, but rather to proportion the punishment to the evil of the character to whom, the act is attributed");
46. Samuel H. Pillsbury, The Meaning of Deserved Punishment: An Essay on Choice, Character, and Responsibility, 67 IND. L.J. 719, 733 (1992) ("[Character] theory rests on the idea that in punishing we judge not only the action but also the person revealed by the action.").
47. See POSNER, supra note 3, at 118-122
48. See Walgreen Co. v. Sara Creek Prop. Co., 966 F.2d 273 (7th Cir. 1992);
49. William P. Rogerson, Efficient Reliance and Damage Measures for Breach of Contract, 15 RAND. J. ECON. 39 (1984).
50. See, e.g., Peter Arenella, Character, Choice and Moral Agency: The Relevance of Character to our Moral Culpability Judgments, Soc. PHIL. & POL'Y, Spring 1990, at 59;
51. supra note 27 and accompanying text.
52. See Jacob & Youngs, Inc. v. Kent, 129 N.E. 889, 890 (N.Y. 1921).
53. See supra text accompanying note 7.
54. See Marschall, supra note 5.
55. See Jacob & Youngs, 129 N.E. at 892.
56. See, e.g., POSNER, supra note 3, at 121.
57. See, e.g., Richard Craswell, Contract Remedies, Renegotiation, and the Theory of Efficient Breach, 61 S. CAL. L. REV. 629 (1988).
58. See, e.g., Groves v. John Wunder Co., 286 N.W 235 (Minn. 1939);
59. Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 (Okla. 1962).
60. See, e.g., Anderson v. Cont'l Ins. Co., 271 N.W.2d 368 (Wis. 1978).
61. See JOSEPH M. PERILLO, 11 CORBIN ON CONTRACTS: DAMAGES § 592 (rev. ed. 2005) (explaining that the classification into tort law is meant to serve the purpose of increasing damages).
62. Campbell v. State Farm Mut. Auto. Ins. Co., 65 P.3d 1134, 1147-57 (Utah 2001), rev'd, 538 U.S. 408 (2003).
63. Id. at 1151 (quoting Crookston v. Fire Ins. Exch., 860 P.2d 937, 941 (Utah 1993)).
64. Id. at 1143.
65. Hangarter v. Provident Life and Ace. Ins. Co., 373 F.3d 998, 1011 (9th Cir. 2004).
66. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 422-423 (2003) (emphasis added).
67. For exemplary damages in banking and employment cases, see PERILLO, supra note 39, at 386-387
68. RESTATEMENT (SECOND) OF CONTRACTS § 345 (1981); RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 39 (Tentative Draft No. 4, 2005).
69. RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 39, illus. 7, 9.
70. The proposed rule would also apply to cases of unintentional breach. See id. at illus. 14. This can be justified if the breach, while unintentional ex post, is the product of intentionally low ex ante investments in quality control, which could generate multiple undetected breaches.
71. Id. at illus. 8, 10.