Willfulness versus expectation: A promisor-based defense of willful breach doctrine

Michigan Law Review

Volumn 107, Issue 8, 2009, Pages 1517-1532

  Thel, Steve ^a   Siegelman, Peter ^b  

^a Fordham Law School ^*

^b UNIVERSITY OF CONNECTICUT   (United States)

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EID: 66749169948     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (70)

1. See, e.g., 3 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 12.17a (2d ed. 1998) (listing various circumstances in which courts take willfulness into account). Robert Hillman suggests that "in construction contracts, the degree of willfulness of a contractor's breach helps courts determine whether to grant expectancy damages measured by the cost of repair or the diminution in value caused by the breach, the latter often a smaller measure."
2. Robert A. Hillman, Contract Lore, 27 J. CORP. L. 505, 509 (2002).
3. See, e.g., William S. Dodge, The Case for Punitive Damages in Contracts, 48 DUKE L.J. 629 (1999);
4. Nicholas J. Johnson, The Boundaries of Extracompensatory Relief for Abusive Breach of Contract, 33 CONN. L. REV. 181 (2000).
5. Alan Schwartz, The Myth that Promisees Prefer Supracompensatory Remedies: An Analysis of Contracting for Damage Measures, 100 YALE L.J. 369 (1990).
6. See Daniel A. Farber, Reassessing the Economic Efficiency of Compensatory Damages for Breach of Contract, 66 VA. L. REV. 1443, 1444-45 (1980);
7. Alan Schwartz, The Case for Specific Performance, 89 YALE L.J. 271, 275 (1979). Among the factors frequently leading to undercompensatory expectation awards are doctrines limiting recovery for damages not proven with certainty, consequential damages, and attorneys' fees.
8. See Steven Shavell, Damage measures for breach of contract, 11 BELL J. ECON. 466, 467-469 (1980).
9. See Robert Cooter & Ariel Porat, Anti-insurance, 31 J. LEGAL STUD. 203 (2002).
10. See, e.g., Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87, 101-104 (1989).
11. 209 Cal. Rptr. 60 (Ct. App. 1984).
12. 42 Cal. Rptr. 2d 286 (Ct. App. 1995).
13. 382 P.2d 109 (Okla. 1962).
14. 286 N.W. 235 (Minn. 1939).
15. 129 N.E. 889 (N.Y. 1921).
16. See, e.g., E. ALLAN FARNSWORTH, CONTRACTS § 12.12, at 813-814 (3d ed. 1999).
17. See VICTOR GOLDBERG, FRAMING CONTRACT LAW: AN ECONOMIC PERSPECTIVE 225-32 (2006);
18. David Simon & Gerald A. Novack, Limiting the Buyer's Market Damages to Lost Profits: A Challenge to the Enforceability of Market Contracts, 92 HARV. L. REV. 1395, 1436-38 (1979).
19. See JOHN EDWARD MURRAY, JR., MURRAY ON CONTRACTS § 128, at 854-56 (4th ed. 2001)
20. ; Roy Ryden Anderson, Of Hidden Agendas, Naked Emperors, and a Few Good Soldiers: The Conference's Breach of Promise ... Regarding Article 2 Damage Remedies, 54 SMU L. REV. 795, 833 n.206 (2001).
21. See, e.g., TexPar Energy, Inc. v. Murphy Oil USA, Inc., 45 F.3d 1111, 1113-14 (7th Cir. 1995); KGM Harvesting Co. v. Fresh Network, 42 Cal. Rptr. 2d 286, 289-93 (Ct. App. 1995);
22. Tongish v. Thomas, 840 P.2d 471, 475-476 (Kan. 1992).
23. The market-contract price remedy has been criticized in other contexts as excessive. See, e.g., GOLDBERG, supra note 14, at 233 (lost-volume retail seller);
24. JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE § 6-4, at 412-14 (5th. ed. 2006);
25. David W. Carroll, A Little Essay in Partial Defense of the Contract-Market Differential, as a Remedy for Buyers, 57 S. CAL. L. REV. 667, 667 (1984) ('Theoretical discussions are in unanimous support of [the] criticism" that "contract-market differential measure of damages in sale-of-goods cases is inaccurate and inconsistent with the compensation principle of contract damages." (footnotes omitted));
26. Robert Childres, Buyer's Remedies: The Danger of Section 2-713, 72 Nw. U. L. REV. 837, 837 (1978) ("Section 2-713 of the Uniform Commercial Code [the market damage rale] should not have been enacted and should be repealed. Given the small chance of repeal, the observer should be made aware that the Code's scheme for buyer's remedies is sensible only if section 2-713 is ignored. This is so, for section 2-713 fails because it is a hypothetical remedy; it lacks any relevant relation to damages actually suffered.").
27. This insight leads Victor Goldberg to the conclusion that the contract-market price remedy should be available in all such cases. See GOLDBERG, supra note 14, at 225-32. Several commentators suggested to us that a breach by the seller does create a net gain, for the seller/middleman, since the middleman could pass on the higher market price to the ultimate buyer. But that seems to us to ignore the reality that the downstream, contract between the middleman and the buyer would likely incorporate some form of liability for the middleman if he failed to deliver and forced the downstream buyer to cover, or if he simply bought at the same price at which the buyer could have purchased.
28. See TexPar Energy, 45 F.3d at 1113.
29. RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW § 4.10, at 119 (7th ed. 2007).
30. Cf. id. (suggesting that the sanction for opportunistic breach should be calculated to deter and not to punish breach).
31. See, e.g., H-W-H Cattle Co. v. Schroeder, 767 F.2d 437, 438 (8th Cir. 1985) (seller unable to deliver);
32. Allied Canners & Packers, Inc. v. Victor Packing Co., 209 Cal. Rptr. 60, 61-62 (Ct. App. 1984) (seller unable to deliver).
33. But see Sun Maid Raisin Growers v. Victor Packing Co., 194 Cal. Rptr. 612, 613 (Ct. App. 1983), which involved the same seller and a similar claim, that " 'disastrous' rains" made it impossible for the seller to perform. In this case, however, the seller opportunistically breached his obligation to supply the raisins remaining on an old contract, apparently believing that he could cover from the new year's raisin crop, which would be cheaper. Id. at 615-16. After the seller breached, rain destroyed the bulk of the crop, almost doubling the price of raisins. The published opinion is incomplete and does not describe the trial court's reasoning in detail. Id. at 616. However, it appears that in using the higher December (post-rain) price, the trial court was motivated by an effort to deprive the breaching seller of its gains from, breach.
34. The breach might be inefficient if the seller breached because her cost of producing a replacement was more than the contract price but less than market price at time of breach. However, there is no evidence that this is the case, inasmuch as the seller did not produce substitute goods and sell them to someone else at the new, higher market price.
35. The seller will of course have her own reasons to protect her property, but to the extent this is so the middleman has no incentive to pay extra for the contract-market price remedy.
36. Indeed, the effect of a perfect willful breach rule is to prevent such breaches, so that no such damages are ever actually paid. By contrast, a rule entitling the middleman to the contract-market price remedy in the event of nonwillful breach will not prevent this type of breach, and will in fact result in windfall awards.
37. Shavell proves that the optimal complete contract will entail performance only when, the cost of performance is lower than, the buyer's valuation. Shavell, supra note 5, at 467-469
38. E. Allan Farnsworth, Your Loss or My Gain? The Dilemma of the Disgorgement Principle in Breach of Contract, 94 YALE L.J. 1339, 1382 (1985).
39. Although, the $60,000 cost of correction can be thought of as protecting the buyer's expectation, interest, it often overcompensates that interest. The diminution in market value will not fully compensate a promisee who places idiosyncratic value on the completed project. However, the award of the cost of correction will overcompensate that idiosyncratic value if the promisee values performance more than, the market does but not as much as the cost of correction. A promisee who receives the cost of completion will have enough to get exactly what she bargained for, but need not choose to spend the money on completion.
40. Compare Kangas v. Trust, 441 N.E.2d 1271, 1275-76 (Ill. Ct. App. 1982) (emphasizing deliberateness),
41. and City School Dist. v. McLane Constr. Co., 445 N.Y.S.2d 258 (App. Div. 1981) (same),
42. with H.P. Droher & Sons v. Toushin, 85 N.W.2d 273 (Minn. 1957) (emphasizing good faith).
43. See also George M. Cohen, The Fault Lines in Contract Damages, 80 VA. L. REV. 1225 (1994);
44. Hillman, supra note 1, at 509 ("[I]n construction contracts, the degree of willfulness of a contractor's breach helps courts determine whether to grant expectancy damages measured by the cost of repair or the diminution in value caused by the breach, the latter often a smaller measure.");
45. Patricia H. Marschall, Willfulness: A Crucial Factor in Choosing Remedies for Breach of Contract, 24 ARIZ. L. REV. 733 (1982).
46. 129 N.E. 889 (N.Y. 1921).
47. See id. at 890.
48. The breach was only discovered after the pipe had been installed, which made the cost of correction vastly greater than would have been the case if the correct pipe had been used in the first place. See id.
49. Richard Craswell effectively deconstructs the distinction between "deliberate" and "accidental" breaches in his contribution to this Symposium, and after reading his paper, we acknowledge that the distinction is much more difficult to sustain, than has previously been recognized. Richard Craswell, When is a Willful Breach "Willful"? The Link Between Definitions and Damages, 107 MICH. L. REV. 1501 (2009).
50. Analogously, having a bargee on duty could have prevented the unmooring of the ship in United States v. Carroll Towing. 159 F.2d 169, 172 (2d Cir. 1947). While the text below offers an example of willful breach, one that could be avoided without cost, the analysis suggests that breaches should be treated as willful even if they are costly to prevent, so long as the cost of prevention is less than the benefit of performance to the promisee. Defining a willful breach as one that can be avoided at no net cost to the parties suggests a negligence limitation to willful breach doctrine.
51. "There is no general license," Cardozo wrote in Jacob & Youngs, "to install whatever, in the builder's judgment, may be regarded as 'just as good.'" 129 N.E. at 891 (quoting Easthampton Lumber & Coal Co. v. Worthington, 79 N.E. 323, 325 (N. Y. 1906));
52. see also id. ("The willful transgressor must accept the penalty of his transgression. For him there is no occasion to mitigate the rigor of implied conditions. The transgressor whose default is unintentional and trivial may hope for mercy if he will offer atonement for his wrong." (citations omitted));
53. O.W. Grun Roofing & Constr. Co. v. Cope, 529 S.W.2d 258, 261 (Tex. Civ. App. 1975) ("The [substantial performance] doctrine does not bestow on a contractor a license to install whatever is, in his judgment, 'just as good.' ").
54. This case also shows that promisor-centric willfulness rules do not create perverse promisee incentives. Suppose that you are a member of the Reading family and so value living with Reading pipe that you will indeed correct the situation. Notwithstanding your real injury, however, under the consequential damage rules, you will not be able to recover your special loss if you did not inform us of your unique concern at the time we entered the contract. The fact that you might nonetheless recover the cost of correction if we breach does not undermine the information-forcing effect of the consequential damage rules, however, since you can neither predict nor cause our willful breach.
55. This was the conclusion of Richard Danzig, who noted the building contract provided that " '[w]here any particular brand of manufactured article is specified, it is to be considered as a standard.' " RICHARD DANZIG, THE CAPABILITY PROBLEM IN CONTRACT LAW: FURTHER READINGS ON WELL-KNOWN CASES 111 (1978) (quoting specification twenty-two of the contract).
56. We are aware that joke breaches are rarely, if ever, seen. This is not, we suspect, because breaches can never be funny. Rather, it likely reflects the fact that since joke breaches are willful, the Jacob & Juveniles of the world know that they would be on the hook for cost-of-completion damages if they did breach. Only a very funny joke indeed would be worth the substantial sum it would cost to rip down, the walls and replace Cohoes with Reading pipe. The cost-of-completion measure does its job when it deters joke breaches, as indeed it usually does. For a recent example of an actual joke breach, however, consider the case of the consteuction worker who buried a Red Sox jersey in the foundation of the new Yankee Stadium as it was being built in order to bring bad luck on the Pinstripers.
57. See Yankees will donate once-buried Red Sox jersey to Boston-area charity, ESPN.COM, Apr. 14, 2008, http://sports.espn.go.com/mlb/news/story?id= 3344825 (providing details on and photographs of the burial and exhumation). The remedy in this case - though not legally ordered - turned out to be the cost-of-performance measure (removal of the jersey), rather than the diminution in value of Yankee Stadium from having a shirt buried in its foundation, which would presumably have been zero. As Seana Shiffrin nicely pointed out to us, the cost of preventing this breach would not be zero if the contractor had to incur expenses to supervise the construction workers on the project. But if we suppose that the shirt was inserted by the CEO of the construction company (rather than a day laborer), our zero-cost characterization remains apposite.
58. 382 P.2d 109 (Okla. 1962); see also Eastern S.S. Lines, Inc. v. United States, 112 F. Supp. 167 (Ct. Cl. 1953) (restoration of ship);
59. City of Anderson v. Sailing Concrete Corp., 411 N.E.2d 728 (Ind. Ct. App. 1980) (landfill not brought to level specified in lease).
60. 286 N.W. 235 (Minn. 1939);
61. see also Am. Standard, Inc. v. Schectman, 439 N.Y.S.2d 529 (App. Div. 1981); Joyner v. Weeks, (1891) 2 Q.B. 31 (U.K.).
62. See Timothy J. Muris, Cost of Completion or Diminution in Market Value: The Relevance of Subjective Value, 12 J. LEGAL STUD. 379 (1983).
63. Groves, 286 N.W. at 236. Of course, the term, "wilful" could just be a makeweight or place maker that a court uses to justify the remedy it prefers for other reasons.
64. The dissent noted: Defendant admits that it failed to perform its obligations that it agreed and contracted to perform, under the lease contract and there is nothing in the record which indicates that defendant could not perform, its obligations. Therefore, in my opinion defendant's breach of the contract was wilful and not in good faith. Peevyhouse, 382 P.2d at 115 (Irwin, J., dissenting). There is evidence of a conflict of interest (or possibly even outright corruption) on the part of several justices involved in the Peevyhouse majority.
65. See Judith L. Maute, Peevyhouse v. Garland Coal & Mining Co. Revisted: The Ballad of Willie and Lucille, 89 Nw. U. L. REV. 1341 (1995). That fact makes it especially difficult to interpret the majority's lack of reference to the willfulness of the breach.
66. Indeed, they negotiated for nonstandard contractual language, waiving the right to the usual payment of $3000 for surface damage in exchange for a promise to return the land to its original condition.
67. That said, an award of the cost of correction may overcompensate even a promisee who places idiosyncratic value on completion, if she values correction more than the market does but less than the cost of correction. Nonetheless, courts typically restrict themselves to either diminution in value or cost of correction, perhaps because determining idiosyncratic value is difficult. For an unusual case in which the court estimates the buyer's loss of subjective value and compensates that directly, rather than awarding either diminution in value or cost of correction,
68. see Ruxley Electronics & Construction Ltd. v. Forsyth, [1996] 1 A.C. 344 (H.L.) (appeal taken from Eng.) (U.K.) (approving award of £2500 for "loss of amenity" for a swimming pool built to a maximum depth of 6 feet instead of contractually specified 7 feet 6 inches, rather than either the £21,560 cost to rebuild or the £0 diminution in market value).
69. Moreover, the prospect of this remedy assures the promisee that she will get her expectation if she wants it, since she is free to go ahead with correction.
70. As Andrew Kull nicely observed, "Skimped performance [indicates] opportunism, because we can see that the performance being withheld ... is one that was specifically bargained for. To the extent that the defendant can cheat on a promised performance and get away with it, the bargain has been undermined." Andrew Kull, Disgorgement for Breach, the "Restitution Interest," and the Restatement of Contracts, 79 TEX. L. REV. 2021, 2050 (2001).