09 May 2014

The Price of Breach

Over a century ago Oliver Wendell Holmes, Jr. famously remarked that "the duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it--and nothing else." That this "de-moralized" notion corresponds neither to what judges believe they are doing when hearing contract cases or what parties assume they've done when they've entered into a contract was beside Holmes's point. His was, or so he said, a perspective of pure description.

Yet many find it peculiar that a description of contractual duty that fails to correspond to the internal perspective of parties and judges could be accurate. And I count myself among the skeptics of the venerable Holmes. (For more read my Principled Pluralism and Contract Remedies.)

Building on Holmes's dictum, Law and Economics 1.0 concluded that it was appropriate for a legal system not to discourage breach of contract so long as the breacher made whole the disappointed party. After all, the reasoning went, there was nothing "wrong" about breaching a contract so paying damages of no more than the aggrieved party's lost expectation was adequate if the breacher would still come out ahead. Going further, the political justification offered for such an approach was that this is what contract parties expected, or is what they would have agreed to in advance if they'd thought about it.

For empirical evidence that Holmes was at best incomplete read Tess Wilkinson-Ryan's Demand for Breach. Using some nifty empirical research, Wilkinson-Ryan shows that there a demand curve for breach of contract. In other words, some folks will breach if it puts little more than a penny in their pocket while others won't breach for any amount of money. (Or at least not for the greatest amount of money that the designers of the experiment were willing to pay.) In other words--and here's the point--imposing the law's minimalistic measure of recovery for breach of contract does not correspond to what most people do most of the time.

If Wilkinson-Ryan is correct, and I suspect she is, then what does account for the law's parsimonious approach to damages for breach of contract? Or, to my initial quote from Holmes, what was he up to when he delivered his pithy remark? You can read my piece for some thoughts about an answer but in a word or so it has do with the law's attitude toward justice. Justice--a thoroughly moral concept--either justifies limited contract damages or nothing does. While not so much wrong on its face, Holmes's aphorism betrays his inability to see beyond the material world, a truncation we need not follow.

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