Could breach of contract be immoral?

Michigan Law Review

Volumn 107, Issue 8, 2009, Pages 1551-1568

  Shiffrin, Seana ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

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EID: 66749153655     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (73)

1. Seana Valentine Shiffrin, The Divergence of Contract and Promise, 120 HARV. L. REV. 708 (2007).
2. By morality, I mean, those nonlegal, objectively grounded normative principles that regulate our motives, reasons, and conduct (and perhaps our attitudes). I am not using the term "morality" as a sociological term. That is, I do not use the term "morality" to refer to the set of principles that are socially understood or accepted as articulating what is morally acceptable or morally impermissible. Although (individual and) social understandings are, of course, relevant to what one should do and are often epistemically helpful in discerning what one should do, our beliefs may be incorrect about the correct content of these principles. My own approach to identifying their content is nonconsequentialist and deontological in character. This description is, of course, overly brief, but this is not the venue to describe or defend that general methodology more fully or to defend my assumption that there are such principles.
3. Shiffrin, supra note 1, at 721-22;
4. see also RESTATEMENT (SECOND) OF CONTRACTS § 1 (1981) ("A contract is a promise or set of promises for the breach, of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.").
5. Shiffrin, supra note 1, at 722-29;
6. see also RESTATEMENT (SECOND) OF CONTRACTS § 355.
7. Shiffrin, supra note 1, at 731-32, 740-749
8. Id. at 710.
9. Steven Shavell, Is Breach of Contract Immoral?, 56 EMORY L.J. 439, 439 (2006) [hereinafter Shavell, Is Breach of Contract Immoral?].
10. He has also articulated this position, in Steven Shavell, Specific Performance Versus Damages for Breach of Contract: An Economic Analysis, 84 TEX. L. REV. 831, 867 (2006) [hereinafter Shavell, Specific Performance Versus Damages for Breach of Contract],
11. and Steven Shavell, Contracts, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 436, 439 (Peter Newman ed., 1998).
12. Shavell, Is Breach of Contract Immoral?, supra note 7, at 449-450
13. In his reply, Shavell states that the parties' duties consist in what they would have agreed to "assuming that the parties know what this hypothetical contract would have stated." Steven Shavell, Why Breach of Contract May Not Be Immoral Given the Incompleteness of Contracts, 107 MICH. L. REV. 1569, 1570 (2009). It is unclear whether this knowledge is ex ante or ex post, but I think this matters substantially. It is one thing to say that, in light of implicit knowledge at the time of agreement of the other party's will, about an unspoken matter, that one is bound to respect the agreement that would have been made had implicit understandings between the parties been made explicit. It may be reasonable to expect the party who objects to what she knows (or what both know) is the implicit understanding of the other party to make that objection clear before the agreement is solidified; if she fails to voice her objection (or different understanding) at the time the agreement is made, but then later objects to the implicit term, of which she was aware at the time of agreement, she would be attempting to take advantage of a misunderstanding, mistake, or known ambiguity. It is a different thing to say that parties are bound to what they would have agreed to when they in fact had no implicit understandings about the contingency at the time of contract; objecting to an agreement that one acknowledges, ex post, would have been made does not involve the same taking advantage as objecting to terms that one knew at the time of agreement were implicit. As I argue infra, the ex post principle is overbroad and fails to render agents responsible for securing (or for failing to secure) actual agreements.
14. See infra Part I.
15. See Shavell, Is Breach of Contract Immoral?, supra note 7, at 458.
16. Richard Posner's characterization of my position in this volume is thus much stronger than the position I actually take. Compare Richard A. Posner, Let Us Never Blame a Contract Breaker, 107 MICH. L. REV. 1349, 1363 (2009),
17. with Shiffrin, supra note I1 at 733 (arguing that appeal to the economic values of breach cannot justify the rule against punitive damages, but that a distinctively legal reason, for the rule may justify the bar). Nor do I intimate that all contract and tort liability should be fault-based.
18. Shavell, Is Breach of Contract Immoral?, supra note 7, at 451. Shavell is sensitive to the difficulties of collecting awards and to the lacunas in compensation for items such as attorneys' fees in the American method of calculating expectation damages.
19. See id.; Shavell, supra note 9, at 1575 n.22. Having noted these difficulties, I will abstract from them as he does, and assume (as against reality) either that breaching promisors readily and voluntarily pay whatever damages would be legally awarded or that legal awards would include attorneys' fees and other transaction costs of collection.
20. Shavell, Is Breach of Contract Immoral?, supra note 7, at 449.
21. 14. Id. at 443.
22. Id. at 449.
23. Id. at 449-450
24. Id. at 443.
25. Id.
26. Id.
27. Id.
28. Id. at 444-446
29. W. at 449. Here, Shavell assumes A's motives are not malicious, an assumption that might make a difference to whether one judged A's breach, to be immoral.
30. See infra Part II;
31. see also infra notes 33, 38.
32. Shavell, Is Breach of Contract Immoral?, supra note 7, at 450.
33. Id. at 441 ("In sum, we can deduce from the fact that the party in breach was willing to pay the expectation measure of damages that the breach was probably not immoral ...."). Shavell often appears merely to be arguing that specific performance is not morally required.
34. See Shavell, Specific Performance Versus Damages for Breach of Contract, supra note 7, at 835. In his reply, Shavell clarifies that he meant only that if the hypothetical contract would not specify performance, then neither performance nor damages should be due to the promisee.
35. See Shavell, supra note 9, at 1576. But this position raises further questions. First, why should we conclude from the mere fact that the promisor favored a payment of the amount of expectation damages over performance that the hypothetical contract would require neither performance nor payment from the promisor rather than its requiring some payment from, the promisor? Second, this position now renders the moral status of the contract law that deems nonperformance as breach (as Shavell's title assumes) rather suspect. Either the contract law unjustifiably classifies nonperformance as breach in these situations in light of the fact that the parties would not have agreed to performance (or to payment in its absence), or it justifiably classifies nonperformance as breach in these circumstances. If the former, then the claim, that breach as such is not immoral really stems from, the implicit claim that some acts are treated as breach that really should not be. If it is the latter, then, the argument for the morality of breach seems incomplete. If there are good normative reasons to hold promisors legally accountable for nonperformance in situations in which, had they considered the matter, the parties would not have required performance, then this casts some doubt on Shavell's suggestion that morality requires only what the parties would have agreed to. These good normative reasons (unspecified by Shavell) may be relevant to the moral valence of nonperformance, as may the fact that the law itself in some sense requires performance. They may also bear on the contents of the hypothetical agreement: the agents themselves may be responsive to these reasons and not merely to the financial costs associated with performance and nonperformance.
36. The specific language of "excuse" appears in Shavell, Specific Performance Versus Damages for Breach of Contract, supra note 7, at 866,
37. and Shavell, Is Breach of Contract Immoral?, supra note 7, at 445.
38. Shavell's reply clarifies that the third interpretation is not, in fact, what he has in mind. I leave the main text unaltered, despite this clarification, to preserve the coherence of his reaction. In addition, I take the third interpretation to be the most plausible version of his view and I remain unconvinced that the difficulties associated with, the other interpretations may be surmounted. Shavell, supra note 9, at 1576.
39. Note that one cannot make the more straightforward claim that the contract already intentionally incorporates a price break to the promisee for the promisor's possible failed performance, because it is presupposed by Shavell that the contingency in question has not been considered by the parties. So they cannot have negotiated or incorporated any precise price calibration ex ante. Might market pressures have already forced a price calibration whether or not the parties themselves intentionally sought to calibrate? In part, this depends on what their starting points are, whether any promisees have alternative contracts they could select, and if the transaction costs for negotiating for strict performance were low enough that they wouldn't preclude negotiations. The more salient point is that whether the ex ante price sufficiently compensates for the potential of deliberate breach depends in part on whether a mere implicit price break could morally compensate for a nonconsensual deliberate breach. That is, in part, what is at issue.
40. See Shavell, Is Breach of Contract Immoral?, supra note 7, at 450.
41. RESTATEMENT (SECOND) OF CONTRACTS § 261 cmt. b, illus. 2-4 (1981).
42. Of course, Shavell might well respond that the meaning of this requirement is fully fleshed out by the available remedy, namely, expectation damages, for failure to fulfill it. But I take it that the larger issue here is whether all duties associated with a contract are fully discharged merely by voluntary compliance with the background remedies in place. If the remedy is a remedy for breach, then there is an independent duty. If remedies are to be interpreted as alternative responses to nonperformance, then the remedy may be "read into" the right. Because this is largely what is at issue, it is unsatisfying that Shavell implicitly presupposes that the right reduces to the remedy given, that this is exactly what is at stake.
43. RESTATEMENT (SECOND) OF CONTRACTS § 261 cmt. b.
44. But see supra note 26.
45. Actual agents with a variety of concerns - including concerns about the nature of their relations to one another - may negotiate differently than rational agents concerned only with maximizing wealth. That makes a difference, I submit, both to whether one concurs that, in all circumstances, agents will agree only to performances that cost the seller less than their value to the buyer, and to whether one concurs that this is "an objective claim that follows from straightforward logic."
46. Shavell, supra note 9, at 1576. Because we are analyzing the question of whether breach can. ever be immoral, I also assume the motivations of actual agents with imperfect information are at least as relevant to the issue as those of hypothetical agents with narrow motivational sets and perfect information.
47. See id. at 1577-1578
48. See, e.g., RONALD DWORKIN, Justice and Rights, in TAKING RIGHTS SERIOUSLY 150, 177-183 (1978).
49. Notice also that the failure to raise the prospect of equipment failure and to negotiate an excuse in such situations may do some work to secure the deal. It may distract the promisee's attention from concerns she might otherwise have about the deal or the promisor's relative reliability - concerns that might affect the contents of her offer or her willingness to make it.
50. Shavell, Is Breach of Contract Immoral?, supra note 7, at 448-449
51. See id. at 458-459
52. This issue connects to another broader point of controversy. Shavell's approach reduces the moral permissibility of any breach to whether a breach in such circumstances would ever be morally permissible. That is, he asks whether the parties would agree to the omission of an act, but he does not discuss the motives under which they would act. See supra notes 22, 33. I, as promisee, may be sympathetic to the straits of the promisor with the faulty equipment. I might waive the promisor's obligation were the promisor to ask. I might even agree that it may be permissible morally for him. to decline to perform, even absent my waiver, in cases where equipment failure was entirely unpredictable and the cost of rental is punishingly high. But it would be an entirely different moral matter if he declined to appear, in the same circumstances, not because he was unwilling or unable to pay the rental fee, but because he relished the safe harbor of such an excuse to inconvenience me for his personal pleasure. Failure to perform for bad motives even in circumstances that might warrant failure to perform for other reasons may be immoral. Shavell's approach is, on this score, objectionably indifferent morally to the performer's motive. He is, though, in some good company on this score.
53. See, e.g., DEREK PARFIT, ON WHAT MATTERS (forthcoming 2009);
54. T.M. SCANLON, MORAL DIMENSIONS: PERMISSIBILITY, MEANING, BLAME 1-88 (2008);
55. JUDITH JARVIS THOMSON, THE REALM OF RIGHTS (1990).
56. But see Barbara Herman, A Mismatch of Methods, commentary in PARFIT, supra.
57. Shavell, Is Breach of Contract Immoral?, supra note 7, at 458 ("[W]hen efficient breach does occur, it coincides with the terms of completely detailed contractual promises and thus should not be seen as immoral....").
58. Id. at 452 ("If, though, expectation damages are near the value of performance, breach is quite likely to be moral, and the reason for breach does not need to be examined to infer that that is so.").
59. There are two ways to understand the issue here: on the one hand, as a question about the content of the moral default rule where there is a gap; in the alternative, as a question about whether moral considerations infuse the context under which interpretation is to take place in which case there may not be gaps where Shavell perceives them. That is, we might agree with Shavell that where the language of a promise is not explicit about a requirement of performance as such in specified circumstances, that the promise is therefore incomplete. But we may disagree about whether the moral default rale favors "perform or pay" or whether, for moral reasons, it disfavors deliberate nonperformance. Second, in the alternative, if there are moral reasons why deliberate nonperformance is morally disfavored unless the parties explicitly agree otherwise, one might take the view that all promises (themselves moral instruments) implicitly incorporate the significance of performance as such. On this view, the failure to articulate explicitly a requirement of performance as such in a range of circumstances does not necessarily signal a gap at all. I am not convinced it matters to the ethical analysis of the situation which of these ways of running the argument one selects, and the argument that follows would serve either one. I suspect the correct analysis both resists that gaps in promises are as common as Shavell conceives of them (because of the implicit incorporation of the background moral context) and that what gaps do exist in promises may be filled in by a moral default rule that disfavors deliberate nonperformance unless the parties have otherwise agreed.
60. See Shiffrin, supra note 1, at 740-741, 749.
61. Shavell conducted a small survey of the moral reactions of respondents to breach in a case in which a contractor breaches on a kitchen renovation after discovering the prices for materials had risen substantially and the contractor would lose money. The average answer rated the breaching behavior as falling in between unethical and ethically neutral, but the respondents brightened if they were told that the contractor would pay compensatory damages. In the latter case, the respondents' average "score" for the breaching behavior rose to a point in between ethically neutral and somewhat ethical. Shavell, Is Breach of Contract Immoral?, supra note 7, at 453-55. On the one hand, it should strike Shavell as worrisome that the payment of the compensatory damages did not render the breaching behavior fully ethical in the respondents' estimation. On the other hand, I am not confident about the significance of what rehabilitation did seem to be accomplished through the payment. Two factors cloud Shavell's results. First, in his second hypothetical, parties are told that the conttactor pays compensatory damages "as conttact law says is required."
62. Id. at 454. That the contractor is doing that which the law requires may influence the respondents' judgment about the ethical nature of the conduct. The respondents may think the law plays a role in establishing the parties' legitimate expectations and that the law has balanced the appropriate ethical concerns. Some of what may be going on in the respondents' reactions may be an implicit reliance on the imagined expertise and authority of the law's moral assessment of the conduct. Second, although Shavell's question does ask directly about the breach, I have some worry that the respondents are not focusing on the morality of breach per se but the overall moral assessment of the contractor's conduct. They may just be registering their greater moral comfort with a party who provides some remedy (damages) for his wrongdoing as opposed to a party who merely engages in wrongdoing. But although we do and should feel better morally about the character who attempts to provide a remedy, it does not show the initial action was not wrong in the first place.
63. The number of promises might decline were performance the universalized response to a promise to perform, because in those cases in which conscientious agents had doubts, they would care to perform, and in those in which the potential promisee was unwilling to agree to an explicit "perform or pay" promise, conscientious agents would forbear from making the promise. This, however, is not any embarrassment. It is an embarrassment if a universalized practice, properly construed, would eliminate the practice, because this shows that the practice's flourishing depends on free riding off others behaving differently or depends on its salient features being obscured or disbelieved by the participants. If making the practice's features fully salient undermines the practice, this reveals a fundamental problem with, its structure because it shows the motivations for the practice cannot be squared with its execution. By contrast, if making the practice's features salient merely reduces interest in the practice or encourages more cautious behavior, that does not show the practice itself is fundamentally misconceived. The argument I make in the text about universalization is not intended to be, contrary to Shavell's assumption, a welfarist argument of any kind.
64. See Shavell, supra note 9, at 1580.
65. Shavell does not contest this assumption but embraces it. Shavell, Is Breach of Contract Immoral?, supra note 7, at 444 ("[C]ontract is a species of a promise for which there are wellknown grounds for finding moral obligations.").
66. Importantly, though, in public accommodations, some reasons to refuse to contract are both morally and legally impermissible. Civil Rights Act of 1964 § 201, 42 U.S.C. § 2000a (2006).
67. There are, of course, exceptions to this rule-but unsurprisingly, they involve exceptional circumstances. See, e.g., RESTATEMENT (SECOND) OF TORTS §§ 197, 263 (1965) (observing that trespass to land or on chattels is permissible in cases of private necessity to prevent serious harm, but compensatory damages will be payable). And, although one cannot force a contract with an unwilling party by offering that party the market (or greater) price of her performance, once a contract is formed, contract law adopts a more permissive standard for the delegation of duties and assignment of rights to third parties without an assignment clause and without the promisee's consent.
68. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS §§ 317, 318 (1981) (permitting assignment and delegation except where it would substantially burden the other party). The ability to delegate without the other party's consent has been thought to be quite limited, however, in personal-service conttacts and other contracts in which the identity of the specific obligee is thought to matter, categories some courts construe broadly.
69. See Larry A. DiMatteo, Depersonalization of Personal Service Contracts: The Search for a Modern Approach to Assignability, 27 AKRON L. REV. 407, 413-29 (1994);
70. see also E. ALLEN FARNSWORTH, 3 FARNSWORTH ON CONTRACTS § 11.10 (1990).
71. Stees v. Leonard, 20 Minn. 494, 504 (1874), may be a good example of what I have in mind.
72. See Shiffrin, supra note 1, at 722. But see Barbara Fried's suspicion that I harbor or am otherwise committed to such a position.
73. Barbara H. Fried, What's Morality Got to Do With It?, 120 HARV. L. REV. F. 53 (2007), http://www.harvardlawreview.org/forum/issues/120/jan07/bfried.pdf.