Why breach of contract may not be immoral given the incompleteness of contracts

Michigan Law Review

Volumn 107, Issue 8, 2009, Pages 1569-1582

  Shavell, Steven ^a  

^a HARVARD LAW SCHOOL   (United States)

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EID: 66749144033     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (60)

1. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS ch. 16, introductory note at 100 (1981);
2. CHARLES FRIED, CONTRACT AS PROMISE: A THEORY OF CONTRACTUAL OBLIGATION 17 (1981);
3. Tess Wilkinson-Ryan & Jonathan Baron, Moral Judgment and Moral Heuristics in Breach of Contract, 6 J. EMPIRICAL LEGAL STUD. (forthcoming 2009) (an empirical study).
4. RESTATEMENT (SECOND) OF CONTRACTS ch. 16, inttoductory note at 100 (1981) ("The 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.");
5. see also JOHN D. CALAMARI & JOSEPH M. PERILLO, THE LAW OF CONTRACTS § 16.1 (4th ed. 1998) ("The primary relief that the Anglo-American legal systems offer is substitutionary relief, normally damages .... Specific performance is an extraordinary remedy ....").
6. E.g., O.W. Holmes, The Path of the Law, 10 HARV. L. REV. 457, 462 (1897) ("The duty to keep a contract... means ... that you must pay damages if you do not keep it.... But such a mode of looking at the matter stinks in the nostrils of those who think, it advantageous to get as much ethics into the law as they can.").
7. Steven Shavell, Is Breach of Contract Immoral?, 56 EMORY L.J. 439 (2006) [hereinafter Shavell, Is Breach of Contract Immoral?].
8. Many of the points of that article are first made in Steven Shavell, Damage measures for breach of contract, 11 BELL J. ECON. 466, 466-69 (1980) [hereinafter Shavell, Damage measures],
9. and are amplified in LOUIS KAPLOW & STEVEN SHAVELL, FAIRNESS VERSUS WELFARE 155-223 (2002).
10. See also STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 304-12, 338-55, 638-40 (2004).
11. Seana Shiffrin, Could Breach of Contract Be Immoral?, 107 Mich. L. Rev. 1551 (2009)
12. [hereinafter Shiffrin, Breach of Contract];
13. see also Seana Valentine Shiffrin, The Divergence of Contract and Promise, 120 HARV. L. REV. 708 (2007).
14. I here sketch the argument of Shavell, Is Breach of Contract Immoral?, supra note 4.
15. This section, is reprinted with permission of the Emory Law Journal, and appeared in part in Shavell, Is Breach of Contract Immoral?, supra note 4.
16. In reality, what a contract would have said about a particular contingency might not be known with confidence by the parties, implying that they might not know their moral duties with confidence.
17. In this example, taken from Shavell, Is Breach of Contract Immoral?, supra note 4, at 443, and below, I will refer to the party who would provide performance as the seller (rather than the promisor) and to the party who would receive performance as the buyer (rather than the promisee).
18. See, e.g., DAVID HUME, A TREATISE OF HUMAN NATURE § 3.2.5 (David Fate Norton & Mary J. Norton eds., Oxford Univ. Press 2007) (1739);
19. IMMANUEL KANT, GROUNDWORK OF THE METAPHYSICS OF MORALS 15, 32, 38 (Mary Gregor ed. & trans., Cambridge Univ. Press 1997) (1785);
20. W.D. Ross, THE RIGHT AND THE GOOD 16-47 (Philip Stratton-Lake ed., 2002) (1930);
21. John Rawls, Two Concepts of Rules, 64 PHIL. REV. 3 (1955).
22. This example is taken, from Shavell, Is Breach of Contract Immoral?, supra note 4, at 446-447
23. Id. at 448.
24. Id. at 444-445
25. Although this paragraph demonstrates that the conditions under which performance is specified must be as claimed, it does not show what the contract price or possible payments made in the event of nonperformance would be. These elements of the contract would depend on characteristics of the parties and cannot be predicted on a priori grounds.
26. This section is reprinted with permission of the Emory Law Journal,
27. and appeared in part in Shavell, Is Breach of Contract Immoral?, supra note 4.
28. To amplify, suppose that the contract price is paid in advance. Then expectation, damages would equal $200, for that amount must be received by the buyer to make her whole. Consequently, the seller would not commit breach unless the cost exceeded $200. Alternatively, suppose that the contract price, say $125, is to be paid upon performance. Then expectation damages would equal $75, for now it is this amount that must be received to make the buyer whole. Hence, if the seller commits breach, he forgoes collecting the $125 and pays $75, and so suffers a total cost of $200; again, therefore, he would not commit breach, unless the cost exceeded $200.
29. Shavell, Is Breach of Contract Immoral?, supra note 4, at 449.
30. Id. at 450.
31. This section is reprinted with permission of the Emory Law Journal,
32. and appeared in part in Shavell, Is Breach of Contract Immoral?, supra note 4.
33. RESTATEMENT (SECOND) OF CONTRACTS § 346-47 (1981);
34. CALAMARI & PERILLO, supra note 2, § 14.4.
35. A good account of why damages are undercompensatory is given in Melvin A. Eisenberg, Actual and Virtual Specific Performance, the Theory of Efficient Breach, and the Indifference Principle in Contract Law, 93 CAL. L. REV. 975, 989-996 (2005).
36. If, for example, a lawyer's hourly fee is $250, and only twenty hours of his or her time are required to litigate, the legal costs of litigation would be $5000, implying that the expected gain from suit would have to exceed this amount for a threat to litigate to be credible.
37. I considered hypothetical completely detailed contracts in Shavell, Is Breach of Contract Immoral?, supra note 4, at 444-446 The discussion and calculations there are premised on the assumption that performance occurs when a contract states that it is to occur. Breach and payment of damages are never mentioned and play no role in the hypothetical complete contract.
38. Shiffrin, Breach of Contract, supra note 5, at 1557-59, speculates on what the hypothetical complete contract means. She conjectures that the parties would have elected terms that "provided the promisor with a disjunctive option to perform, or pay expectation damages. I suspect that... this is the correct interpretation of [Shavell's] position."
39. Id. at 1558-1559 As I just stated in the text and in the preceding note, that was not my assumption. Also, I observe that had I made a different definition of the hypothetical contract, under which nonperformance would be accompanied by the payment of money by the seller, my conclusion about the agreed upon conditions of performance would be the same. Indeed, the argument given in Section LD demonstrates this.
40. See, e.g., Benjamin E. Hermalin et al., Contract Law, in 1 HANDBOOK OF LAW AND ECONOMICS 3, 24-25 (A. Mitchell Polinsky & Steven Shavell eds., 2007);
41. Shavell, Damage measures, supra note 4, at 475-476
42. Shiffrin, Breach of Contract, supra note 5, at 1559 ("Shavell fails to contemplate the entire contract and its contents. He focuses on how the contingency would have been settled in isolation.").
43. Id. at 1560.
44. Shiffrin states her position as follows: [O]ne may be tempted by the thought that... one party should bear the burden for not raising the contingency and ushering the parties to a concrete explicit bargain. In the case of the contract for snow removal, for example, the risks and costs of equipment failure are more salient to the promisor than to the promisee .... One might presume ... that he bears default responsibility for performance in this contingency; or at the very least... for drawing attention to the issue.
45. Id. at 1560-1561
46. To understand the morality of breach, it is clarifying to focus on a contractual context uncluttered by, not only issues of unequal information, but a whole host of others (duress, mitigation, and so on). Any of these issues could, in general, lead to different conclusions about the moral duty to perform.
47. If the moral obligation to disclose information mirrors the functional obligation to perform, there would often, but not always, be a moral duty to reveal information at the time of contracting. For a discussion on economic analysis of contractual disclosure obligations, see Anthony T. Kronman, Mistake, Disclosure, Information, and the Law of Contracts, 1 J. LEGAL STUD. 1 (1978),
48. and Steven Shavell, Acquisition and disclosure of information prior to sale, 25 RAND J. ECON. 20 (1994).
49. Shiffrin, Breach of Contract, supra note 5, at 1562.
50. Id. at 1564.
51. Id. at 1565-1566
52. Id. at 1566.
53. These criteria may overlap and are not exhaustive.
54. Shavell, Is Breach of Contract Immoral?, supra note 4, at 452-55. In particular, I found that "the individuals participating in the survey found the simple, unqualified fact of breach to be unethical on average."
55. Id. at 455.
56. However, when individuals were prompted by being asked to consider the terms of hypothetical complete conttacts, they changed their opinions somewhat. Id.
57. Wilkinson-Ryan & Baron, supra note 1.
58. By the welfare of a party, I refer to the party's expected utility. In strict logic, the utility of a party could depend not only on conventional components of well-being (material goods and services, friendship, and the like) but also on. satisfaction of moral notions, but I overlook this latter point for present purposes.
59. Shiffrin, Breach of Contract, supra note 5, at 1565.
60. See Shavell, Damage measures, supra note 4, at 478.