Fault in contract law

Michigan Law Review

Volumn 107, Issue 8, 2009, Pages 1431-1444

  Posner, Eric A ^a  

^a UNIVERSITY OF CHICAGO   (United States)

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EID: 66749182684     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (53)

1. George Cohen's article is the most comprehensive discussion; however, he focuses on damages rules, which I will for the most part ignore. George M. Cohen, The Fault Lines in Contract Damages, 80 VA. L. REV. 1225, 1237-1239 (1994).
2. On this, see George M. Cohen, The Fault Lines in Contract Damages, 80 VA. L. REV. 1225, (1994), id. at 1245-1256
3. I use a simplified version of the model that has been developed in the literature. See Lucian Arye Bebchuk & I.P.L. Png, Damage Measures for Inadvertent Breach of Contract, 19 INT'L REV. L. & ECON. 319 (1999);
4. Robert Cooter, Unity in Tort, Contract, and Property: The Model of Precaution, 73 CAL. L. REV. 1 (1985);
5. Richard Craswell, Performance, Reliance, and One-sided Information, 18 J. LEGAL STUD. 365 (1989);
6. Richard Craswell, Precontractual Investigation as an Optimal Precaution Problem, 17 J. LEGAL STUD. 401 (1988);
7. Lewis A. Kornhauser, Reliance, Reputation and Breach of Contract, 26 J.L. & ECON. 691 (1983). These articles focus on the extent to which different damage measures provide the promisor with proper incentives to take precautions. With a few exceptions to be noted, they do not discuss whether the law should use a fault-based liability rule.
8. L), and d would need to be greater than this level of investment, instead of greater than V, as in the text.
9. See, e.g., Cooter, supra note 3, at 31.
10. See Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 11 COLUM. L. REV. 554 (1977). This point has also been made about supracompensatory damage measures, such as punitive damages.
11. See, e.g., Richard Craswell, Contract Remedies, Renegotiation, and the Theory of Efficient Breach, 61 S. CAL. L. REV. 629, 643-44 (1988);
12. Richard Craswell, Deterrence and Damages: The Multiplier Principle and Its Alternatives, 97 MICH. L. REV. 2185, 2229 (1999).
13. Except in the context of products liability, where the normal justification for strict liability is that buyers are unlikely to discover information about the riskiness of the product except (implicitly) through the price system. See Steven. Shavell, Strict Liability versus Negligence, 9 J. LEGAL STUD. 1, 20-22 (1980).
14. See Cooter, supra note 3, at 11.
15. A further advantage of the negligence regime is that it would permit courts to award specific performance without deterring efficient breach. Under the negligence regime, specific performance would be awarded only if the breach was inefficient (or efficient but resulting from inefficient investment).
16. RESTATEMENT (SECOND) OF CONTRACTS ch. 11, introductory n. (1981).
17. See Cohen, supra note 1;
18. see also G.H. Treitel, Fault in the Common Law of Contract, in LIBER AMICORUM FOR THE RT. HON. LORD WILBERFORCE 185 (Maarten Bos & Ian. Brownlie eds., 1987).
19. Posner and Rosenfield state as follows: The foregoing discussion indicates the factors that courts and legislatures might consider in devising efficient rules for the discharge of contracts. An easy case for discharge would be one where ( 1) the promisor asking to be discharged could not reasonably have prevented the event rendering his performance uneconomical, and (2) the promisee could have insured against the occurrence of the event at lower cost than the promisor because the promisee (a) was in a better position to estimate both (i) the probability of the event's occurrence and (ii) the magnitude of the loss if it did occur, and (b) could have self-insured, whereas the promisor would have had to buy more costly market insurance. Richard A. Posner & Andrew M. Rosenfield, Impossibility and Related Doctrines in Contract Law: An Economic Analysis, 6 J. LEGAL STUD. 83, 92 (1977). As will become clear, my argument is that (1) should be sufficient for discharge and (2) is irrelevant.
20. Victor P. Goldberg, Impossibility and Related Excuses, 144 J. INSTITUTIONAL & THEORETICAL ECON. 100 (1988);
21. Alan O. Sykes, The Doctrine of Commercial Impracticability in a Second-best World, 19 J. LEGAL STUD. 43, 66-67 (1990).
22. See, e.g., Am. Trading & Prod. Coip. v. Shell Int'l Marine Ltd., 453 F.2d 939 (2d Cir. 1972).
23. RESTATEMENT (SECOND) OF CONTRACTS § 261 (emphasis added).
24. Karno v. Bourbon Burlesque Club, Inc., 05-0241, p. 5 (La. App. 4 Cir. 5/10/06); 931 So. 2d 1111, 1115 (quoting Karno v. Joseph Fein Caterer, Inc., 02-1269, pp. 9-10 (La.App. 4 Cir. 4/16/03); 846 So. 2d 105, 110) (emphasis omitted).
25. RESTATEMENT (SECOND) OF CONTRACTS § 241(e).
26. Bourbon Burlesque Club, 05-0241, at 9-10;
27. 931 So. 3d at 1117. 19. 335 N.E.2d 320 (N.Y. 1975).
28. Id. at 322-323
29. Id. at 321.
30. However, the court expressed doubt about whether such a test would be feasible. Id. at 323 ("In any event, 'economic feasibility', an expression subject to many interpretations, would not be a precise or reliable test.").
31. Cf. Charles J. Goetz & Robert E. Scott, Principles of Relational Contracts, 67 VA. L. REV. 1089 (1981). Goetz & Scott similarly argue that in such "relational contracts," courts cite the doctrines of good faith and best efforts when they are really just teying to determine whether continued performance would be value maximizing. For a recent case that can be given this interpretation,
32. see Market Street Assoes, v. Frey, 941 F.2d 588 (7th Cir. 1991) (holding that failure to inform other party of its contractual rights violated duty of good faith).
33. RESTATEMENT (SECOND) OF CONTRACTS § 227 cmt. b, illus. 2 (1981).
34. Id.
35. To be sure, if the contract explicitly provides for a negligence standard of liability-that is, it says that the promisor must take cost-justified actions-then "strict" enforcement of such a contract would produce the same outcome as fault-based enforcement.
36. 129 N.E. 889 (N.Y. 1921).
37. Id. at 890.
38. Id.
39. Id. The brand was printed on the outside of the pipe in intervals but the pipe was otherwise indistinguishable from other pipes.
40. Id.
41. 585 N.E.2d 315 (Mass. 1992).
42. Id. at 316-318
43. Cohen, supra note 1.
44. RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 39 (Tentative Draft No. 4, 2005). For similar principles, see RESTATEMENT (SECOND) OF CONTRACTS § 357 (1981).
45. Special cases include the use of damage multipliers when breach is difficult to detect. See Craswell, supra note 6, at 2230.
46. See Alan Schwartz, The Myth that Promisees Prefer Supracompensatory Remedies: An Analysis of Contracting for Damage Measures, 100 YALE L.J. 369 (1990).
47. Again, a similar result can be found in the literature on tort law. See, e.g., Shavell, supra note 7.
48. In some cases, however, the burden is on the victim. For example, in interpretation cases, the burden is effectively on the victim to prove the relevant interpretation.
49. Chris William Sanchirico, A Primary Activity Approach to Proof Burdens (Univ. of Pa. Inst, for Law & Econ, Research Paper No. 06-03, 2006), available at http://papers.ssrn.com/sol3/ papers.cfm?abstract-id=878551.
50. See Shavell, supra note 7. The two rules do not always lead to identical results, of course; but even when they do not, each rule is superior under equally plausible (but different) conditions.
51. German contract law is a fault-based system but fault is presumed, and in many settings there are strict-liability exceptions to the general rule of fault. For a very helpful discussion, see Karl Riesenhuber, Damages for Non-Performance and the Fault Principle, 4 EUR. REV. CONT. L. 119 (2008). So American and German law have different starting points but may well end up at the same midpoint. Riesenhuber identifies a similar mixing of fault and strict-liability principles in many other bodies of law, including French and Japanese.
52. Karl Riesenhuber, Damages for Non-Performance and the Fault Principle, 4 EUR. REV. CONT. L. 119 (2008), Id.;
53. see also G.H. TREITEL, REMEDIES FOR BREACH OF CONTRACT: A COMPARATIVE ACCOUNT 7-43 (1988).