A comparative fault defense in contract law.

• Author: Porat, Ariel

This Article calls for the recognition of a comparative fault defense in contract law. Part I sets the framework for this defense and suggests the situations in which it should apply. These situations are sorted under two headings: cases of noncooperation and cases of overreliance. Part II unfolds the main argument for recognizing the defense and recommends applying the defense only in cases where cooperation or avoidance of overreliance is low cost.

INTRODUCTION

In the 1970s, the comparative fault defense ("CFD") in tort law began to spread across the United States, (1) about thirty years after it became prevalent in the United Kingdom. (2) Both legislatures and courts throughout the United States adopted this defense, with the latter applying it in tort cases on a daily basis. Today, few will call for the restoration of the doctrine that preceded it: the contributory negligence defense. That defense enabled courts to either impose full liability on the injurer (when there was no contributory negligence) or leave the burden of harm completely on the victim's shoulders (when there was contributory negligence). The CFD rejects this binary approach to fault, instead allowing apportionment of damages between the injurer and the contributorily negligent victim.

Over the years, the CFD has spread into the contract law of many countries (such as Canada, the United Kingdom, and Israel), albeit primarily in cases where a party breached a contractual duty of reasonable care or in cases of concurrent tort and contract liability. (3) Yet the same shift has been slow to occur in American contract law. (4)

This Article calls for a reversal of this state of affairs and for the recognition of a CFD in American contract law. (5) Part I begins by presenting the nature and scope of the advocated CFD. It also illustrates the categories of cases to which it should apply: cases where (1) efficiency requires that the promisee take steps during performance to reduce the probability of a breach (to cooperate) or to reduce his potential losses (to avoid overreliance), and (2) the cooperation or avoidance of overreliance is low cost. Part II unfolds the main argument for applying the defense in American contract law. It argues that the CFD is warranted because it would provide the promisee with incentives to cooperate and rely efficiently, while at the same time maintaining incentives for the promisor to perform the contract even if the promisee failed to fulfill his part. The CFD would also encourage the promisor to efficiently reduce the need for the promisee's cooperation and avoid overreliance, thereby decreasing the losses from failure to cooperate or avoid overreliance.

1. THE NATURE AND SCOPE OF THE COMPARATIVE FAULT DEFENSE

   The CFD should be available to a breaching party ("promisor") against an aggrieved party ("promisee") when the latter's fault has contributed to his own losses. The promisee should be considered "at fault," and should shoulder part of the loss, when he fails to meet a legal burden to reduce his potential losses by cooperating with the promisor or avoiding overreliance. Below, I present eight categories of cases in which the promisee should be considered at fault and a CFD applied. These are sorted under two headings: cases of noncooperation and cases of overreliance. In all eight categories, efficiency requires the promisee to take steps either to reduce the probability of breach or otherwise reduce his potential losses, and prevailing contract law mostly fails to provide him with adequate incentives to do so.

   1. Noncooperation

      In the cases that can be classified as instances of noncooperation, the promisee fails to take steps to prevent or reduce the likelihood of breach during performance. Example 1 presents the case where a promisee fails to assist in performance by act or omission. Example 2 presents the case where a promisee could have reasonably prevented the breach by clarifying the promisor's legal rights and duties under the contract for her. In Example 3, the promisee fails to provide the promisor with information necessary for performance, while in Example 4 he fails to inform the promisor of the high potential losses he would incur in the event of breach. In both cases, the failure to provide information contributes to the breach of the contract. In the fifth and final example, the promisee is responsible for creating apprehensions that he will not perform, thereby inducing the promisor to breach.

      Example 1. Failing to assist in performance. A undertakes to construct a building for B. During the last stage of performance, B gives A's employees confusing instructions on the construction work required. In the end, there is a delay in the completion of performance; moreover, some of the construction work is found to be defective. Had B refrained from instructing A's employees, the contract would have been adequately performed. (6)

      Prevailing contract law would take a binary approach to such situations: either A or B would shoulder any losses due to nonperformance in their entirety. The choice between the two alternatives would hinge on the interpretation of the contract. (7) Courts rarely opt for an intermediate solution that apportions damages between the parties. (8)

      Example 2. Failure to clarify misunderstandings. A is a subcontractor and B is a primary contractor. They enter a contract for A to perform construction work and for B to pay installments at different stages of the work. At a certain point in time, A argues that she has reached one of these payment stages and is therefore entitled to an installment. In fact, A is not entitled to any payment, because she failed to meet an additional condition stipulated by the contract. A is not aware of this additional condition because of an oversight on her part. B refuses to pay, stating that he is not obliged to do so under the contract, but B provides no other explanation. A then stops her work, causing loss to B. Only after a month, during which B stubbornly refuses to meet with A, does B explain to A why she was not entitled to payment.

      Traditional contract law would impose liability on A since she breached the contract. The fact that B could have easily clarified the misunderstanding and prevented the breach is seen as irrelevant: after all, B is not A's legal advisor, and it is A's responsibility to fulfill her obligations under the contract. Under a different approach, which finds some support in the case law, when one party is aware of the other party's ignorance of his legal rights and duties and can easily clarify them, he is under obligation to do so. B would not be allowed to take deliberate advantage of A's oversight, and he could not recover for A's breach. (9) The CFD is a third option: in this type of case, it would make both A and B responsible for the losses.

      Example 3. Failure to provide information necessary for performance. A, a contractor, and B, the owner of a certain piece of land, enter a contract for the performance of construction work. Due to geological difficulties, there is a delay in performance that causes B substantial losses. It becomes evident, however, that B knew about these obstacles at an early stage (although not prior to entering into the contract with A). Had he revealed this to A in due time, the delay could have been prevented.

      Contract law imposes a limited duty of disclosure at the contract formation stage. (10) In shaping this duty, courts balance the interest the party possessing information has in using it for his own benefit against the interest the other party has in not being misled.

      Traditional American contract law does not impose any duty to disclose information at the performance stage. However, one might expect an even broader disclosure duty at this stage: disclosing the information necessary for performance, especially when it is costless (or nearly so), increases the surplus of the contract without distributional effects. As I argue in Part II, under certain conditions, applying the CFD is a better solution than imposing a duty of disclosure.

      Example 4. Failure to warn of a high potential loss. A, a carrier, undertakes to ship a crank shaft from B's mill for repair and to bring it back in one week's time. A instead brings the shaft back after two weeks, which results in high consequential losses to B, who could not find a substitute shaft. At the time of contracting, the parties were aware of a small risk that a substitute shaft would not be available. A week later it had become clear to B, but not to A, that this risk had materialized. Had B conveyed this information to A on time, A would have taken costly precautions to ensure that he would return the shaft on time, thus preventing the breach. (11)

      Under the Hadley v. Baxendale principle, A would be liable for B's losses, since the unavailability of a substitute shaft was foreseeable at the time of contracting. Yet, had B informed A of his potentially high losses when he realized that a substitute shaft was not available, the inefficient breach would have been avoided. (12) One way to provide promisees with incentives to convey such information would be to deprive B of his entitlement to damages. (13) A less extreme approach would be to make the CFD available to A and reduce his liability accordingly. (14)

      Example 5. Creating apprehensions. B constructs a building for A. At a certain point in time, B brings heavy equipment to the construction site and places it on a concrete floor that was poured only a few days earlier. At A's request, the equipment is removed to avoid damaging the floor. A suspects that it is already damaged, however, and demands its replacement. B refuses. A forbids B from continuing the construction work, and both suffer losses. It later becomes evident that the concrete floor was not damaged and that B's placement of the heavy equipment on the floor was no more than a minor breach that did not warrant...