A comparative fault defense in contract law

Michigan Law Review

Volumn 107, Issue 8, 2009, Pages 1397-1412

  Porat, Ariel ^a,b  

^a TEL AVIV UNIVERSITY   (Israel)

^b UNIVERSITY OF CHICAGO LAW SCHOOL   (United States)

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[No Author keywords available]

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EID: 66749119890     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (48)

1. l DAN B. DOBBS, THE LAW OF TORTS § 201 (2001). Dobbs also notes that several states had adopted it earlier. Id.
2. W.V.H. ROGERS, WINFIELD & JOLOWICZ ON TORTS §§ 638-641 (16th ed. 2002).
3. See, e.g., LAW COMM'N, CONTRIBUTORY NEGLIGENCE AS A DEFENCE IN CONTRACT para. 1.4 (1993).
4. For refusal to apply the CFD to contracts, see Fortier v. Dona Anna Plaza Partners, 747 F.2d 1324 (10th Cir. 1984). For willingness to apply the defense to contracts, see
5. American Mortgage Inv. Co. v. Hardin-Stockton Corp., 671 S.W.2d 283 (Mo. Ct. App. 1984). There is an increasing willingness to apply the CFD to implied-warranty cases. See
6. l JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 11-8, at 758-60 (5th ed. 2006);
7. infra notes 19-21 and accompanying text.
8. For my earlier arguments calling for the adoption of the CFD by Commonwealth and European countries see Ariel Porat, Contributory Negligence in Contract Law: Toward a Principled Approach, 28 U. BRIT. COLUM. L. REV. 141 (1994) (focusing primarily on contract law in England, Canada, Australia, France and Germany). The efficiency argument that is the subject of Part II of the current paper was not made in the earlier paper.
9. This example is an adaptation of Lesmeister v. Dilly, 330 N.W.2d 95 (Minn. 1983), in which the court apportioned damages between the parties.
10. E.g., AMPAT/Midwest, Inc. v. Ill. Tool Works Inc., 896 F.2d 1035, 1041 (7th Cir. 1990) (Posner, J.) ("The parties to a contract are embarked on a cooperative venture, and a minimum of cooperativeness in the event unforeseen problems arise at the performance stage is required even if not an explicit duty of the contract."); RESTATEMENT (SECOND) OF CONTRACTS § 205 cmt. d (1981) (asserting that noncooperation could be considered a breach of the duty of good faith).
11. Lesmeister, 330 N.W.2d at 102.
12. Mkt. St. Assoes. Ltd. P'ship v. Frey, 941 F.2d 588, 594 (7th Cir. 1991). In this case, one party refused to fulfill her duties and the other party could have easily corrected the mistake. Id. at 596-97. In reversing summary judgment, Judge Posner ruled that the contracting parties bore a duty not to take deliberate advantage of each others' oversights concerning their rights and duties under the contract. Id. at 597-598
13. For an overview of the duty of disclosure generally, as well as a more specific discussion of the role of efficiency and morality in shaping this duty, see Melvin A. Eisenberg, Disclosure in Contract Law, 91 CAL. L. REV. 1645 (2003).
14. The inspiration for this example is, of course, Hadley v. Baxendale, (1854) 156 Eng. Rep. 145.
15. The following illustrates numerically the principles behind Example 4: assume at the time of contracting that the probability of losing $1000 was 0.1, yielding an expected loss of $100, but that a week after contracting, the probability of loss increased to 1, yielding an expected loss of $1000. Assume now that by investing $500 in precautions, A could prevent the breach. So long as A assumes the expected loss to be $100, he won't make this investment, whereas if he is aware that it has risen to $1000, he will. Since efficiency requires making the investment, efficiency also dictates that B should convey the information regarding his high potential loss to A.
16. Others have supported the use of this solution in analogous cases. See Melvin A. Eisenberg, The Duty to Rescue in Contract Law, 71 FORDHAM L. REV. 647, 670-72 (2002);
17. Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967, 1012-14 (1983).
18. Another situation in which the Hadley v. Baxendale principle would allow recovery, and where applying the CFD could be valuable, is one in which the high potential losses are foreseeable (objectively) but unforeseen (subjectively) by the promisor at both the time of contracting and later on. Here, too, if the promisee realizes during performance that the promisor is unaware of the high potential loss entailed by a breach, efficiency requires conveying the information to the promisor. The CFD would provide incentives to achieve this result.
19. This example is an adaptation of Carfield & Sons, Inc. v. Cowling, 616 P.2d 1008 (Colo. Ct. App. 1980).
20. There, the court stated that in order to avoid liability, "[A] was obligated to request adequate assurance of performance. If [B] then refused to provide that assurance, [A] could treat the contract as terminated." Id at 1010.
21. RESTATEMENT (SECOND) OF CONTRACTS § 251 (1981).
22. Id. § 350 cmt. f.
23. The High Court of Australia considered a similar situation. While refusing to apply the CFD to contracts, it maintained that "[a] plaintiff may be guilty of contributory negligence ... even if the 'very purpose' of the duty owed by the defendant is to protect the plaintiff's property." Astley v. Austrust Ltd. (1999) 197 C.L.R. 1, 14.
24. This example is an adaptation of Signal Oil & Gas Co. v. Universal Oil Prods., 572 S.W.2d 320 (Tex. 1978).
25. In that case, the plaintiff suffered losses due to a fire from a malfunctioning heater. Id. at 323. The defendants, who had manufactured, designed, and installed the heater, were found liable for breach of implied warranties of fitness and suitability. Id. at 329.
26. The court applied the CFD and reduced damages, finding that the plaintiff had been contributorily negligent in not shutting down, the heater despite warnings of the impending hazard. Id.
27. RESTATEMENT (SECOND) OF CONTRACTS § 350 cmt. f.
28. See, e.g., Karl v. Bryant Air Conditioning Co., 331 N.W.2d 456 (Mich. 1982) (applying a comparative fault defense); Signal Oil á Gas Co., 572 S.W.2d. 320 (same).
29. See LAW COMM'N, supra note 3, paras. 45-47; Ariel Porat, Note, The Contributory Negligence Defence and the Ability to Rely on the Contract, 111 LAW Q. REV. 228 (1995).
30. When noncooperation or overreliance is not observable or verifiable, other mechanisms can be employed to provide both parties with efficient incentives. See, e.g., Robert Cooter & Ariel Porat, Anti-insurance, 31 J. LEGAL STUD. 203 (2002) (proposing a mechanism for creating full liability for both, the promisor and promisee that would result in efficient incentives for both).
31. The parties will sometimes prefer to leave the question of cooperation open for future negotiation. However, that can only be done when, the costs of renegotiation are not prohibitively high.
32. Sometimes the parties may overcome this hurdle by imposing a duty (or burden) of cooperation on the promisee and a duty for the promisor to compensate the promisee for his costs. But since this solution could only work for some cases (for example, it would not work when, transaction costs involved in measuring the costs of cooperation and in transferring payments for cooperation are high), it cannot serve as a default rule.
33. In different terminology, under certain circumstances the promisee can be the cheapest cost avoider of the breach, while the promisor is the cheapest cost avoider of the circumstances giving rise to the need to avoid the breach.
34. For a general argument against cooperative default rules in contracts, see Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990).
35. But if most of the costs are fixed and their magnitudes are not dependent on the promisor's behavior, a different conclusion could be warranted. See supra Section II.B.l.b.
36. But sometimes the promisee may refrain from cooperating to induce a breach and find a way out of the contract; placing an expected burden on him, equivalent to the costs of cooperation, would not be sufficient to deter him efficiently.
37. Note that instead of leaving some unrecoverable losses on the promisee's shoulders (as the CFD mandates), the law could also make him liable for some of the promisor's losses (as though the promisor and promisee were both responsible for the breach, and its consequences). However, the latter solution would add the administrative costs of measuring the promisor's losses.
38. The distinction, between high-cost and low-cost overreliance is analogous to that applied to high-cost and low-cost cooperation. See supra Section II.B.1.
39. See Robert Cooter, Unity in Tort, Contract, and Property: The Model of Precaution, 73 CAL. L. REV. 1, 14-15 (1985). Note that this solution does not work for noncooperation cases. On handling overreliance, see
40. Richard Craswell, Performance, Reliance, and One-sided Information, 18 J. LEGAL STUD. 365, 367-68 (1989), which suggests a rule under which the promisor would state the probability of a breach, and on which the promisee would rely accordingly. For various doctrines in prevailing contract law that reduce overreliance,
41. see George M. Cohen, the Fault Lines in Contract Damages, 80 VA. L. REV. 1225 (1994).
42. See supra Section II.B.1.a.
43. For the argument that overreliance is not a severe or prevalent problem, in contract law, see Melvin A. Eisenberg & Brett H. McDonnell, Expectation Damages and the Theory of Overreliance, 54 HASTINGS L.J. 1335 (2003). But note that Eisenberg and McDonnell consider the cases represented by Example 6 to be
44. "out of the realm of overreliance." Id. at 1346.
45. See supra Section II.B.1.d.
46. Knowing the chance of performance increases if he overrelies, the promisee may increase his reliance even more when the promisor is aware of his overreliance. This possibility notwithstanding, when avoidance of overreliance is low cost and the risk of breach is significant in spite of his overreliance, the promisee will prefer to restrain his reliance.
47. This argument seems to be more persuasive in the context of Example 6 than in Examples 7 and 8, since asymmetric information and control are more prevalent in the former.
48. This is the outcome when cooperation or avoiding overreliance is low cost and the probability of a breach, without cooperation, or avoidance of overreliance is high. See supra Section II.B.2 (providing a numerical example).