Could breach of contract be immoral?

• Author: Shiffrin, Seana

Some scholars defend the contract law's ban on punitive damage awards on the grounds that breach of contract, in itself, is not morally wrong. In this Article, I offer two responses. First, I refute one prevalent argument of Steven Shavell's in support of this view. Shavell argues that contractual breach is not immoral in those cases in which the legal regime would offer expectation damages because the contracting parties would not have agreed to require performance had they explicitly deliberated about the circumstances occasioning the breach. I criticize his argument for failing to justify this hypothetical-contract approach and, in any case, for failing to apply the approach properly. Second, I provide some arguments for the general default interpretation that, unless explicitly delineated otherwise, a commitment to perform, morally, entails a commitment to perform rather than a commitment to perform or pay.

INTRODUCTION

In a recent article, (1) I argued that we should reconsider an oft-cited rationale for the contract law's strong traditional bar on punitive damages for intentional, gratuitous breach of contract. Further, this reconsideration should, perhaps, lead us to reevaluate the merits of maintaining the strong traditional bar. Morality, I claimed, correctly regards some breaches of promise as morally wrong and as warranting not only compensation but the administration of morality's punitive remedies, including blame, criticism, recrimination, and avoidance. (2) The contract law invokes promise as the fundamental component of a contract (3) but, puzzlingly, does not subject gratuitous breaches of contract (and hence breaches of promise) to the distinctive punitive measures endorsed and administered by law, save when those breaches are also torts. (4)

If the law's rationale for the bar on punitive damages is that the prospect of punitive damages might discourage efficient breach of contract--I label this the efficient-breach rationale--then the divergence between morality's response to breach and the law's response to breach is problematic in ways that morally decent citizens cannot accept. The efficient-breach rationale forwards a justification for a legal doctrine that consists in the claim that barring punitive damages would encourage and facilitate certain breaching behavior. But this behavior is condemned by morality. To the extent the law adopts and embodies this rationale, it thereby embraces and tries to encourage and facilitate immoral behavior. Although the law need not enforce morality as such, it is problematic when the law, either directly, or by way of the justifications underlying the law, embraces and encourages immoral action. Citizens, who in a democratic polity must be thought of as partial authors of the law, cannot, in all consistency, accept such laws and their justifications while simultaneously acting and reasoning as moral agents. (5) The law ought not to be structured or justified in ways that place citizens in such an untenable position: it must accommodate the needs of moral agency even if it need not or should not enforce morality directly. (6)

My argument against the efficient-breach rationale presupposes that there are occasions on which breach of contract is immoral because the contractual breach is a relevant instance of an immoral form of breach of promise. This presupposition has most recently been criticized, at least with respect to incomplete contracts, by Steven Shavell. (7) Shavell argues that breach of contract is not immoral under certain conditions. His strategy is to argue that when breach of contract occurs--at least with respect to an incomplete contract and in an appropriate legal context--the very occurrence of the contractual breach paradoxically demonstrates that there is no breach of promise--much less an immoral breach of promise. (8) The contracts that Shavell imagines are incomplete in the respect that they do not explicitly address the conduct at issue; there is a contractual breach not because explicit language has been defied but because the background, gap-filling law supplies a missing term that is not fulfilled. Because the promise contained in the contract did not explicitly address the conduct, to assess whether contractual breaches of this sort also represent promissory breaches, we must interpret the underlying promise.

Briefly put, Shavell's argument is that because the parties had not made specific, explicit promissory arrangements to address the contractual-breaching conduct (for the contract is incomplete in this respect), the appropriate way to interpret the underlying promise is to ask what the parties would have agreed to had they considered the matter. (9) In the relevant circumstances, he argues, the contractual breach itself reveals that the parties would have agreed to permit the breaching behavior had they considered the matter. Therefore, the underlying promise does not forbid the conduct in question and the contractual breach is not immoral, at least not because it is any sort of promissory breach.

Shavell's argument holds special interest in some part because it does not, at least on its surface, flow from a direct consequentialist analysis of the social welfare value of permitting or facilitating breach in relevant contexts. Rather, Shavell seems to be arguing that breach may be morally innocuous even if we assign moral pride of place to the significance of agreement as such. (10) In relevant legal contexts, Shavell concludes, the values associated with promissory fidelity are not impugned by contractual breach.

In this Article, I begin by answering Shavell. I then use the issues that arise from this dispute as a springboard to examine the significance of performance as such to the morality of promising more generally. In Part I, I describe Shavell's position, explore some questions of interpretation of his position, and then register some direct criticisms of the strongest interpretation of his view. In Part II, I proceed to the larger underlying issue: what, if anything, is morally special about performance?

My conclusion is neither that all deliberate breaches of promise are immoral, nor that all immoral breaches of promise should be punished by contract law. (11) In this short Article, I mean only to defuse one source of resistance to the claim that some deliberate breaches of contract are immoral and to motivate one moral source of some promisees' claims to performance as such. A key theme in my argument is that it is a mistake to regard the available remedy for breach of contract as fully exhausting the content of the duty that one assumes when one promises (or when one contracts).

1. SHAVELL'S ARGUMENT THAT BREACH OF CONTRACT CANNOT BE IMMORAL

   Shavell contends that where expectation damages are readily available, (12) breach of contract is not immoral. Instead, breach reflects the behavior that the parties would have agreed to had they directly faced the circumstances that gave rise to the breach. (13) It seems as though Shavell believes there is no real breach of promise in these circumstances. The promise and the contract it gave rise to were both silent about what to do in such cases, he supposes. And had the parties filled in the gap, the term they would have supplied would not require performance.

   According to Shavell, a failure to perform is immoral only if it contravenes what the parties did agree to or would have agreed to had they explicitly contracted about the circumstances that gave rise to the breach. (14) At least with respect to cases involving the actions of rational agents, Shavell thinks, the circumstances that give rise to breach are ones that the parties would have agreed excused nonperformance had they explicitly faced the question. (15 Nonperformance in these situations, therefore, is not immoral. (16)

   If a contract explicitly provides for performance in the event of a particular contingency, then Shavell would allow that there is a moral duty to perform should that contingency occur. (17) If it explicitly excuses performance in that contingency, then Shavell would say there is no moral duty to perform. (18) If the contingency is not explicitly addressed, then in Shavell's view, "the moral duty of a party ... is determined by what the contract would have said had it provided explicitly for the contingency." (19) In his illustrative example, A contracts to shovel B's snow for a fee, say $150. If A's snowshovel is stolen but the contract did not address A's duty in the case of theft, then A has a moral duty to locate a replacement and to shovel only if A and B would have explicitly specified that A must perform in cases of the theft of A's standard equipment. (20)

   Where the background law would award payment of expectation damages to B for A's failure to perform in this contingency, Shavell argues that if A and B did not explicitly require performance and A breaches, then the parties would not have specified that A must perform. (21) For, according to Shavell, if A breaches, then A's cost of performance must exceed the cost of expectation damages. (22) Suppose that the expected value to B was $200. If the cost of renting equipment in a snowstorm would be $500, then A may be expected to breach. Further, A, rationally, would not have agreed to perform in such a contingency, for it would be cheaper for A to pay expectation damages than to perform. Presumably, since the value to B is only $200, B would not have offered to pay more for A's shoveling to cover the cost of the rental. Had they addressed the contingency, they would have agreed to excuse A from performance where A's equipment fails. Therefore, A's failure to perform is not immoral. (23)

   Shavell's argument is unconvincing. It is unclear, for instance, why he assumes only certain aspects of the background law will infuse parties' hypothetical agreements and mutual understandings, but not others. A more consistent position on...