University of Virginia Law School The John M. Olin Program in Law and Economics Working Paper Series Year 2008 Paper 46 The Fault that Lies within Our Contract Law George M. Cohen∗ ∗University of Virginia School of Law, [email protected] This working paper is hosted by The Berkeley Electronic Press (bepress) and may not be commer- cially reproduced without the permission of the copyright holder. http://law.bepress.com/uvalwps/olin/art46 Copyright c 2008 by the author. The Fault that Lies within Our Contract Law George M. Cohen Abstract Scholars and courts typically describe and defend American contract law as a system of strict liability, or liability without fault. Strict liability generally means that the reason for nonperformance does not matter in determining whether a con- tracting party breached. Strict liability also permeates the doctrines of contract damages, under which the reason for the breach does not matter in determining the measure of damages, and the doctrines of contract formation, under which the reason for failing to contract does not matter. In this essay, prepared for a symposium on Fault and Contract Law sponsored by the University of Michigan School of Law and to be published in the Univer- sity of Michigan Law Review, I take issue with the strict liability paradigm, as I have in my prior work on contract law. In my view, the theoretical justifications for strict liability as a general paradigm for contract law oversimplify contractual intent, the relationship between intent and fault, and the nature of contractual fault. Moreover, the strict liability label is descriptively misleading, once one dips even slightly below the surface of contract doctrine. Fault shows up throughout contract law. Efforts to make contract law conform more to the strict liability paradigm and exorcise fault are wrongheaded. In any case, such efforts are doomed to fail. Fault may not be the dominant feature of contract law, but it plays an inherent, invalu- able, and ineluctable supporting part. The strict liability impulse occurs when contract intent, contract terms, and contract doctrine coincide with a persuasive story of promisor fault, and when the consequences of strict liability are blunted because the promisor can easily mitigate them. But strict liability, like other con- tract rules, is merely a fault-based presumption. Determining the limits of that presumption means considering why parties make contract and why they do not perform them, in other words, fault. Courts and scholars should would do better to acknowledge the role of fault and think about how to use fault more effectively within the framework of contract doctrine. DRAFT 5/28/08 The Fault that Lies within Our Contract Law George M. Cohen * Scholars and courts typically describe and defend American contract law as a system of strict liability, or liability without fault. 1 I disagree with that position. 2 In my view, the theoretical justifications for strict liability as a general paradigm for contract law oversimplify contractual intent, the relationship between intent and fault, and the nature of contractual fault. Moreover, the strict liability label is descriptively misleading, once one dips even slightly below the surface of contract doctrine. Efforts to make contract law conform more to the strict liability paradigm and exorcize fault are wrongheaded. In any case, such efforts are doomed to fail. Fault may not be the dominant feature of contract law, but it plays an inherent, invaluable, and ineluctable supporting part. Courts and scholars would do better to acknowledge this role and think about how to use fault more effectively within the framework of contract doctrine. The Meaning of Strict Liability in Contract Law Usually when courts or scholars label contract law a strict liability system, they are referring to a specific doctrinal area: performance and breach. Under the strict liability view, a court imposes liability on a contracting party when that party fails to honor his agreement, regardless of whether the court can attribute that failure to any Afault @ by the breaching party. 3 In the paradigmatic case, if a contracting party promises to provide a good or service and fails to deliver, or delivers a defective good or service, that party breaches the contract even if there were no reasonable precautions that party could have taken to prevent the nondelivery or defect. Strict liability means that the contract provides a Awarranty @ of results; it protects against all risk Hosted by The Berkeley Electronic Press of nonperformance or imperfect performance. In short, the reason for nonperformance does not matter. Although the strict liability paradigm appears most prominently in performance and breach doctrine, the paradigm permeates most other doctrinal areas of contract law as well. Broadly speaking, the main doctrinal areas other than performance are formation and remedy. In the contract law of damages, Holmes long ago articulated the strict liability view, which holds that just as the reason for nonperformance does not matter in determining breach, the reason for the breach does not matter in determining contract damages. 4 An aggrieved party who can prove breach is entitled to a remedy that compensates him for his loss, generally defined doctrinally as protecting the expectation interest. Fault seems irrelevant to determining compensation. The strict liability label does not usually appear in connection with the law of contract formation, but formation doctrine also seems to comport with the strict liability view. In this case, however, it is the reason for failing to contract, rather than for failing to perform, that does not matter. Technically, the doctrine is one of strict nonliability rather than strict liability. The idea is the same, though the story is different. Contracts are voluntary agreements; no one is obliged to agree. So contract law generally imposes no liability unless and until the parties agree. However a court might determine whether and when parties agree, Afault @ again seems irrelevant. Justifications for Strict Liability Pronouncing contract law to be a strict liability system is, it turns out, easier than justifying such a system. Two broad types of justifications are a traditionalist or philosophical http://law.bepress.com/uvalwps/olin/art46 approach, which focuses on faithfulness to contractual intent, and an economic or functionalist approach, which focuses on the facilitation of better contracting behavior. From a traditionalist perspective, strict liability seems to follow naturally from two simple premises. First, contract law grounds liability in the mutual intentions of the contracting parties. Second, fault is a social judgment distinct from the intentions of the parties. The tort law of accidents between strangers naturally bases liability on fault because strangers have no mutual intentions. Courts in tort cases must therefore resort to some social judgment such as fault. In contract law, by contrast, the parties themselves define the basis and scope of liability, so in theory no social judgment is necessary (other than the social judgment to enforce agreements according to the intentions of the parties). The parties themselves define the standard of conduct applicable to them by the terms of their agreement. 5 The only relevant fault is breach of any agreement the parties intended to make. Fault thus merges with mutual intent and cannot serve as an independent criterion of liability. This justification is incomplete, however. If the parties intend that courts should determine contract liability based on why nonperformance occurred, few people would call that a strict liability system. Strict liability connotes not merely court deference to rules of conduct established by contracting parties, but also a standard of conduct that is not itself fault-based. A traditionalist justification of strict liability, then, must defend the proposition that the parties intend that the reason for nonperformance does not matter. 6 That proposition is, however, often contestable. Law and economics scholars have tried to explain and justify strict liability in contract law on consequentialist grounds. Like traditional scholars and courts, economic scholars start Hosted by The Berkeley Electronic Press from the premise that courts should enforce agreements according to the parties = mutual intention, but proceed differently from that premise. As the well-known theory goes, contracting parties generally have the incentive to form and write efficient contracts, but not necessarily to perform them, so courts facilitate efficient contracting by enforcing the bargain according to the intentions of the parties. If courts try instead to Aregulate @ the parties = behavior, for example, by injecting courts = Aown notions @ of Afault @ that conflict with the parties = preferences, parties will contract around those restrictions if they can and lose out on mutually beneficial trades if they cannot. That still leaves the question of whether the parties intend strict liability. Most contracting parties, economists argue, prefer a strict liability contract regime even if they do not expressly say so. The reasons supporting that conclusion usually fall into one of three categories: superior risk bearing, comparative institutional competence, and litigation costs. First, the promisor is usually in a better position than the promisee to bear a risk that would make performance of that promise more costly or less valuable. Institutionally,