The fault that lies within our contract law

Michigan Law Review

Volumn 107, Issue 8, 2009, Pages 1445-1460

  Cohen, George M ^a  

^a UNIVERSITY OF VIRGINIA   (United States)

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EID: 66749164976     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (140)

1. E.g., RESTATEMENT (SECOND) OF CONTRACTS, ch. 11, introductory note (1981) ("Contract liability is strict liability.... The obligor is therefore liable in damages for breach of contract even if he is without fault....").
2. This essay thus continues a recurrent theme in my writing on contract law. George M. Cohen, Implied Terms and Interpretation in Contract Law, in 3 ENCYCLOPEDIA OF LAW AND ECONOMICS 78 (Boudewijn Bouckaert & Gerrit De Geest eds., 2000)
3. [hereinafter Cohen, Interpretation];
4. George M. Cohen, The Fault Lines in Contract Damages, 80 VA. L. REV. 1225 (1994)
5. [hereinafter Cohen, Fault Lines];
6. George M. Cohen, Finding Fault with Wonnell's "Two Contractual Wrongs," 38 SAN DIEGO L. REV. 137 (2001)
7. [hereinafter Cohen, Finding Fault];
8. George M. Cohen, The Negligence-Opportunism Tradeoff in Contract Law, 20 HOFSTRA L. REV. 941 (1992)
9. [hereinafter Cohen, Negligence-Opportunism Tradeoff].
10. RESTATEMENT (SECOND) OF CONTRACTS § 235 cmt. b ("[A]nything short of full performance is a breach, even if the party who does not fully perform was not at fault....").
11. U.C.C. § 2-601 (2005).
12. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 266 cmt. b, illus. 7 (contracting party who warrants merchantability of a machine is liable for uncurable defect not due to fault of seller and which seller did not know about).
13. Globe Ref. Co. v. Landa Cotton Oil Co., 190 U.S. 540, 544 (1903). For a critique of this view,
14. see Cohen, Fault Lines, supra note 2.
15. RESTATEMENT (SECOND) OF CONTRACTS §§ 344 cmt. a, 347 & cmt. a.
16. Technically the doctrine is one of strict nonliability rather than, strict liability, but the idea is essentially the same.
17. E.g., RESTATEMENT (SECOND) OF CONTRACTS § 17(1);
18. E. Allen Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 COLUM. L. REV. 217, 221-222 (1987).
19. See, e.g., Curtis Bridgeman, Reconciling Strict Liability with Corrective Justice in Contract Law, 75 FoRDHAM L. REV. 3013, 3034-3035 (2007) (justifying strict liability under a theory of corrective justice focusing on the wrongful loss of entitlements determined primarily by mutual consent).
20. See, e.g., CHARLES FRIED, CONTRACT AS PROMISE: A THEORY OF CONTRACTUAL OBLIGATION 4 (1981) (contrasting contract law, which focuses on the will of the parties, with tort law, which focuses on "fairness").
21. For a more sophisticated philosophical approach to strict liability, see STEPHEN A. SMITH, CONTRACT THEORY 376-386 (2004).
22. Alan Schwartz & Robert E. Scott, Contract Theory and the Limits of Contract Law, 113 YALE L.J. 541, 544 (2003).
23. See, e.g., RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 99 (7th ed. 2007).
24. RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 99, Id. at 97 (2007).
25. RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 99, Id. at 182 (2007).
26. E.g., Robert Cooter, Unity in Tort, Contract, and Property: The Model of Precaution, 73 CAL. L. REV. 1, 31-32 (1985).
27. E.g., Robert E. Scott, In (Partial) Defense of Strict Liability in Contract, 107 MICH. L. REV. 1381, 1392-1394 (2009).
28. See generally Robert M. Cover, The Supreme Court, 1982 Term-Foreword: Nomos and Narrative, 97 HARV. L. REV. 4 (1983).
29. See Cohen, Interpretation, supra note 2, at 96-97. Schwartz and Scott argue for the priority of secondary over primary intent on theoretical (and to me unconvincing) grounds.
30. Schwartz & Scott, supra note 13, at 568-94. Similar questions arise in recent theories arguing that parties often intend to rely on "fairness norms" (primary) but they intend these norms to be enforced privately rather than by courts (secondary).
31. See, e.g., Robert E. Scott, A Theory of Self-Enforcing Indefinite Agreements, 103 COLUM. L. REV. 1641 (2003). Suppose that parties do have that intention (which is contestable in many cases). If one party violates a fairness norm, the other party may, in violation of another norm, take the dispute to court. The theorists argue that courts should invariably enforce the procedural norm rather than the substantive norm. Why?
32. See, e.g., RESTATEMENT (THIRD) OF AGENCY § 203 (2005).
33. See, e.g., id. § 503 cmt. d(l). U.C.C. § 1-202(f) (2005) adopts a version of imputed knowledge for organizations. Also, § 1-103 incorporates agency law.
34. See, e.g., Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1981) (discussing a dispute that arose when new management failed to continue prior unwritten price protection policy);
35. Int'l Telemeter Corp. v. Teleprompter Corp., 592 F.2d 49 (2d Cir. 1979) (discussing a dispute that arose when new management refused to proceed with negotiated settlement agreement).
36. See generally KENNETH A. ADAMS, A MANUAL OF STYLE FOR CONTRACT DRAFTING 8894 (2004).
37. See, e.g., Channel Home Ctrs. v. Grossman, 795 F.2d 291 (3d Cir. 1986) (holding enforceable a contractual duty to bargain in good faith contained in a letter of intent).
38. The classic case is Wood v. Lucy, Lady Duff-Gordon, 118 N.E. 214 (N.Y. 1917) (Cardozo, J.).
39. See, e.g., RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 52 cmt. b (1998) (stating that a lawyer is not a guarantor of successful outcome).
40. See, e.g., RESTATEMENT (THIRD) OF AGENCY §§ 801, 808 (2005).
41. For example, in Milau Associates, Inc. v. North Avenue Development Corp., 368 N.E.2d 1247 (N. Y. 1977), the court rejected the application of the implied warranty of fitness to a contract for the installation of a sprinkler system, finding instead that "unless the parties have contractually bound themselves to a higher standard of performance, reasonable care and competence owed generally by practitioners in the particular ttade or profession defines the limits of an injured party's justifiable demands."
42. Id. at 1250. The court added that "[g]iven the predominantly service-oriented character of the transaction, neither the code nor the common law of this State can be read to imply an undertaking to guard against economic loss stemming from the nonnegligent performance by a construction firm, which has not contractually bound itself to provide perfect results."
43. Id. at 1251.
44. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 228 (1981);
45. Morin Bldg. Prods. Co. v. Baystone Constr., Inc., 717 F.2d 413 (7th Cir. 1983) (Posner, J.).
46. See, e.g., RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 40.
47. Cf. Robert S. Summers, "Good Faith" in General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 VA. L. REV. 195 (1968) (arguing that good faith should be defined with reference to specific acts done in bad faith).
48. See U.C.C. §§ 2-313, 2-314, 2-315 (2005);
49. RESTATEMENT (SECOND) OF CONTRACTS § 266 cmt. b, illus. 7.
50. See, e.g., E. ALLAN FARNSWORTH. CONTRACTS § 323. at 176 (4th ed. 2004). Economic scholars have become enamored with analogizing many contract terms and doctrines to options.
51. See, e.g., Avery Wiener Katz, The Option Element in Contracting, 90 VA. L. REV. 2187 (2004). While the analogies can be enlightening, one danger of them is that they too casually smuggle the strict liability connotation of options to other areas where plausible arguments can be made for faultbased approaches. That is, option analogies put the strict liability rabbit in the hat.
52. See, e.g., FARNSWORTH, supra note 34, § 717, at 499-500.
53. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 178 (stating when conttact terms are unenforceable on grounds of public policy).
54. Compare, e.g., Cohen, Interpretation, supra note 2, at 84-85 (discussing whether good faith is better viewed as a mandatory or default rule),
55. with VICTOR GOLDBERG, FRAMING CONTRACT LAW (2006) (criticizing court interpretations of good faith as inconsistent with mutual intent).
56. The classic statement remains Cardozo's: "From, the conclusion that promises may not be treated as dependent to the extent of their uttermost minutiae without a sacrifice of justice, the progress is a short one to the conclusion that they may not be so treated without a perversion of intention." Jacob & Youngs, Inc. v. Kent, 129 N.E. 889, 891 (N. Y. 1921).
57. In a recent case explicitly referencing the strict liability principle, a court found that a commercial landlord breached a contractual obligation to secure tenant consent in connection with selling the property, in part because the parties used "best efforts" clauses elsewhere in the contract but not in connection with the tenant approval obligation. West Willow-Bay Court, LLC v. RobinoBay Court Plaza, LLC, No. 2742-VCN, 2007 Del. Ch. LEXIS 154, at *14 (Ch. Nov. 2, 2007). An alternative interpretation would be that the "best efforts" clauses reflected the parties' view of the landlord's obligations generally rather than exceptions to strict liability.
58. Thus, insurance contracts are usually considered strict liability obligations, yet the contra proferentem doctrine deems the insurer at fault for drafting ambiguous contracts, see, e.g., JOHN EDWARD MURRAY, JR., MURRAY ON CONTRACTS § 88G, at 483-84 (4th ed. 2001), and the bad faith breach doctrine punishes insurers who unreasonably try to avoid their contractual obligations,
59. see, e.g., FARNSWORTH, supra note 34, § 128, at 762.
60. See Cohen, Negligence-Opportunism Tradeoff, supra note 2, at 944-61.
61. See, e.g., Ariel Porat, A Comparative Fault Defense in Contract Law, 107 MICH. L. REV. 1397, 1398-1403 (2009).
62. See, e.g., U.C.C. § l-201(b)(17) (2005) (defining "fault" broadly as "a default, breach, or wrongful act or omission"); id. § 2-613 cmt. 1 (fault includes both negligence and willful wrong).
63. See generally Cohen, Negligence-Opportunism Tradeoff, supra note 2.
64. See Cohen, Fault Lines, supra note 2, at 1245-52 (discussing accidental contracts);
65. id. at 1258-1265 (discussing accidental contingencies).
66. See Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967, 972-973 (1983).
67. See RESTATEMENT (SECOND) OF CONTRACTS § 350 (1981). The Restatement recognizes the "willful failure to mitigate" as a form of bad faith.
68. Id. § 205 cmt. e.
69. See, e.g., POSNER, supra note 14, at 93-94;
70. Timothy J. Muris, Opportunistic Behavior and the Law of Contracts, 65 MINN. L. REV. 521 (1981).
71. Cohen, Negligence-Opportunism Tradeoff, supra note 2, at 957.
72. See, e.g., Schwartz & Scott, supra note 13, at 559-562
73. See, e.g., Cohen, Negligence-Opportunism Tradeoff, supra note 2, at 960-961
74. POSNER, supra note 14, at 93-94.
75. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 19 cmt. a. illus. l (1981);
76. id. § 90 cmt. d, illus. 10.
77. See, e.g., Cohen, Finding Fault, supra note 2, at 150.
78. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 49 (stating that an offeree cannot accept beyond deadline if offeror negligently delayed in communicating the offer but offeree knows or has reason to know of the delay);
79. id. § 153 (allowing relief for unilateral mistake if the other party had reason, to know of the mistake or his fault caused it).
80. I disagree with the argument that formalist approaches to contract law create less possibility for opportunistic behavior than alternative approaches. See Schwartz & Scott, supra note 13, at 585-89, 601-605
81. In my earlier work, I argued that deterring opportunism should take priority over deterring negligence in contract law when one party is the least-cost avoider and the other is the most likely opportunist. See Cohen, Negligence-Opportunism Tradeoff, supra note 2.
82. See, e.g., U.C.C. § 2-306 (2005).
83. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS §§ 54(2)(a), 56, 67.
84. See infra note 90 and accompanying text.
85. See, e.g., U.C.C. § 2-702(2).
86. See, e.g.,id. § 2-103(j).
87. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 90.
88. See, e.g., id. § 164.
89. See infra text accompanying notes 71-74.
90. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 350 cmt. b.
91. See, e.g., id. § 19 cmt. c.
92. See, e.g., id. § 66.
93. See, e.g., id. § 228.
94. See, e.g., U.C.C. § 2-302 (2005).
95. See RESTATEMENT (SECOND) OF CONTRACTS § 261. cmt. d.
96. Id. §§ 201.
97. Id. §§ 20(1) & cmt. d, 201(3).
98. See, e.g., Hub Recycling, Inc. v. Louis Usdin Co., 106 B.R. 372 (D.N.J. 1989) (applying § 201 to interpret Pollution Exclusion Clause against insurance company on ground that it knew insured's intended meaning). The Restatement rules on trade and other usages also incorporate a "knows or has reason to know" standard.
99. RESTATEMENT (SECOND) OF CONTRACTS §§ 220, 221, 222;
100. see also U.C.C. § 1-303(d) (stating that trade usage of which the parties "are or should be aware" can be used to interpret the agreement);
101. RESTATEMENT (SECOND) OF CONTRACTS § 211(3) (excluding term of standardized agreement if party who drafts it "has reason to believe" that other party would not have agreed to a particular term if he knew about it).
102. RESTATEMENT (SECOND) OF CONTRACTS § 2 cmt. b.
103. Cohen, Negligence-Opportunism Tradeoff, supra note 2, at 979-980
104. RESTATEMENT (SECOND) OF CONTRACTS § 19(2). The objective theory also uses the term "justify" to incorporate fault considerations.
105. See id. § 2 ("A promise is a manifestation of intention ... so made as to justify a promisee in understanding that a commitment has been made.");
106. id. § 24 (similar definition of offer).
107. For a recent critique of the objective theory sounding some similar themes, see Lawrence M. Solan, Contract as Agreement, 83 NOTRE DAME L. REV. 353 (2007).
108. See, e.g., FARNSWORTH, supra note 34, § 61, at 356.
109. See, e.g., Eric A. Posner, The Parol Evidence Rule, the Plain Meaning Rule, and the Principles of Contractual Interpretation, 146 U. PA. L. REV. 533 (1998).
110. See, e.g., POSNER, supra note 14, at 100.
111. Cohen, Fault Lines, supra note 2, at 1319-1320
112. A more apt example is the substantial performance doctrine and Jacob & Youngs, Inc. v. Kent, 129 N.E. 889 (N.Y. 1921),
113. discussed in Cohen, Negligence-Opportunism Tradeoff, supra note 2, at 990-1000, as well as in a number of papers in this Symposium.
114. RESTATEMENT (SECOND) OF CONTRACTS § 261 (1981).
115. See SMITH, supra note 12, at 383.
116. See GOLDBERG, supra note 37, at 334-339 (arguing that excuse is justified to encourage promisee to economize on getting nonfungible substitute).
117. See POSNER, supra note 14, at 105-08. For a critique of the superior insurer theory,
118. see MICHAEL J. TREBILCOCK, THE LIMITS OF FREEDOM OF CONTRACT 130-136 (1993).
119. See, e.g., U.C.C. § 2-614(1) (2005).
120. RESTATEMENT (SECOND) OF CONTRACTS § 262.
121. Id. § 263.
122. See U.C.C. § 2-613 ("Where ... goods suffer casualty without fault of either party ... the conteact is avoided ....");
123. RESTATEMENT (SECOND) OF CONTRACTS § 261 ("Where ... a party's performance is made impracticable without his fault... his duty to render that performance is discharged ....");
124. id. § 265 ("Where ... a party's principal purpose is substantially frustrated without his fault ... his remaining duties to render performance are discharged ...."). Somewhat surprisingly, the term "fault" appears in the Restatement and UCC almost exclusively in connection with excuse doctrines.
125. See Cohen, Fault Lines, supra note 2.
126. See RESTATEMENT (SECOND) OF CONTRACTS §§ 26, 54, 69. The "reason to know" standard also appears in other contexts. For example, a party with reason to know of another party's special needs may have an obligation to take special precautions to protect the other party.
127. See U.C.C. § 2-315 (stating that reason to know creates implied warranty of fitness); id. § 2-715(2)(a) (stating that seller's reason, to know of buyer's general or particular requirements and needs makes seller potentially liable for consequential damages);
128. cf. RESTATEMENT (SECOND) OF CONTRACTS § 351(1) ("reason to foresee" standard).
129. See, e.g., McGum v. Bell Microproducts, Inc., 284 F.3d 86(1st Cir. 2002) (remanding for factual findings on whether employer accepted employee's counteroffer by silence under § 69 because it knew or had reason to know that employee had written counteroffer on employer's original offer and returned it to employer).
130. See RESTATEMENT (SECOND) OF CONTRACTS § 26.
131. See U.C.C. § 1-203; RESTATEMENT (SECOND) OF CONTRACTS § 205 cmt. c.
132. See, e.g., Markov v. ABC Transfer & Storage Co., 457 P.2d 535 (Wash. 1969) (involving a tort action of misrepresentation based on promise of lease renewal made while promisor was looking to sell the premises).
133. See, e.g., Reeves v. Alyeska Pipeline Serv. Co., 56 P.3d 660 (Alaska 2002) (finding implied contract where promoter disclosed idea for visitor center in return for confidentiality or participation, in project).
134. See RESTATEMENT (SECOND) OF CONTRACTS §§ 84(2)(b), 87 cmt. e, 89, 90, 129, 139(1). In performance doctrine, the rules regarding conditions and material breach speak of "forfeiture" rather than reliance, but the idea is similar.
135. Id. §§ 227, 229, 241. In remedy doctrine, the foreseeability limitation on expectation damages also contains a "justice" limitation,
136. id. § 351(3), as do the remedial provisions for mistake, id. § 158(2), and impracticability,
137. id. § 272(2).
138. See generally Charles L. Knapp, Reliance in the Revised Restatement: The Proliferation of Promissory Estoppel, 81 COLUM. L. REV. 52 (1981).
139. See R.H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1 (1960).
140. See generally Eric A. Posner, Economic Analysis of Contract Law After Three Decades: Success or Failure?, 112 YALE L.J. 829 (2003) (summarizing game theoretic models of contract).