In (partial) defense of strict liability in contract.

• Author: Scott, Robert E.

Many scholars believe that notions of fault should and do pervade contract doctrine. Notwithstanding the normative and positive arguments in favor of a fault-based analysis of particular contract doctrines, I argue that contract liability is strict liability at its core. This core regime is based on two key prongs: (1) the promisor is liable to the promisee for breach, and that liability is unaffected by the promisor' s exercise of due care or failure to take efficient precautions; and (2) the promisor's liability is unaffected by the fact that the promisee, prior to the breach, has failed to take cost-effective precautions to reduce the consequences of nonperformance. I offer two complementary normative justifications for contract law's stubborn resistance to consider fault in either of these instances. First, I argue that there are unappreciated ways in which courts' adherence to strict liability doctrine at the core of contract reduces contracting costs. In addition, I argue that a strict liability core best supports parties' efforts to access informal or relational modes of contracting, especially where key information is unverifiable.

"Contract liability is strict liability."

--Second Restatement of Contracts

INTRODUCTION

The Restatement's off-quoted assertion about the nature of contract liability is one of the most imprecise generalizations ever made about the common law of contract. Numerous scholars have pointed out that, in fact, there are many notions of fault that infuse contract law, ranging from prescriptions against intentional "bad behavior," to assessments of the reasonableness of an actor's behavior in assessing both liability and damages. But while there are indeed many "fault lines" in contract, (1) speaking at that level of generality has little analytic purchase. (2) In short, from a distance the fault lines in contract appear broken and indistinct.

In this Article, I propose to defend the notion of strict liability that lies at the core of the Restatement's claim. By its terms, the Restatement does not rule out fault-based considerations for claims based on promissory estoppel, fraud, bad faith, mistake, excuse or a host of other issues. But the availability of these principles only in select circumstances justifies a core no-fault regime. (3) This core regime is based on two key prongs: (1) the promisor is liable to the promisee for breach, and that liability is unaffected by the promisor's exercise of due care or failure to take efficient precautions; and (2) the promisor's liability is unaffected by the fact that the promisee, prior to the breach, has failed to take cost-effective precautions to reduce the consequences of nonperformance. (4) In terms of the Restatement conception, then, contract law is strict liability without a contributory negligence defense.

Notwithstanding the many illustrations of fault lines in contract, the Restatement's assertion, as limited above, is descriptively accurate. The core of contract law as applied in the courts is a no-fault regime. This is so even though theorists mount powerful arguments on efficiency grounds for a cost-benefit analysis of promisor and promisee behavior in particular cases, and even though contract doctrine appears to invite just such an analysis. For example, if the promisor carelessly fails to take efficient precautions ex ante that result in breach ex post, the "willful breach doctrine" invites courts to increase damages to deter such inefficient behavior. Similarly, if the promisee fails to take efficient precautions prior to the breach that would reduce or eliminate losses, the mitigation principle invites courts to apply a "contributory negligence" bar to recovery. However, a large sample of cases shows that courts decline to employ the willful breach doctrine to deter an inefficient breach. And despite evidence that the promisee has failed to take precautions prior to breach that would have reduced losses, courts adhere strictly to the rule that the promisee's mitigation responsibility is not triggered until the promisor breaches.

The courts' reluctance to adopt a comparative fault standard in assessing the core question of liability for breach is all the more surprising given that comparative fault principles are found elsewhere in contract law, most notably in the doctrines of unjust enrichment and unilateral mistake. (5) Viewed in this light, the question is not why contract law fails to acknowledge explicitly the many different fault principles that it embraces implicitly. Rather, the puzzle is why courts adhere to a no-fault regime at the core of contract liability even though contract doctrine invites them to consider fault in other instances.

In Part I of this Article, I set out the case that courts are committed to a strict liability regime at what I call the "core" of contract law. This Part focuses on the evidence of strict liability as demonstrated by (a) courts' reluctance to use the willful breach doctrine to deter inefficient breach by promisors, and (b) courts' reluctance to use the mitigation principle to deter inefficient overreliance by promisees. In Part II, I offer two complementary normative justifications for contract law's stubborn resistance to fault principles at its core. I argue that there are unappreciated ways in which courts' adherence to strict liability doctrine reduces contracting costs. In addition, I argue that a strict liability core best supports parties' efforts to access informal or relational modes of contracting, especially where key information is unverifiable. I conclude, therefore, that both autonomy and efficiency values support the claim that commercial parties will prefer strict liability rules to fault-based rules for assessing performance and the response to nonperformance.

1. THE STRICT LIABILITY CORE OF CONTRACT LAW

   1. The Promisor's Behavior: The Willful Breach Doctrine

      Among the many debates about fault in contract law, one principle remains unchallenged: a promisor is strictly liable for defective performance or nonperformance despite her exercise of due care. Even the most fervent adherents of fault in contract law concede that the law always applies this rule strictly. (6) Thus, the promisee does not have to prove that the promisor failed to take cost-effective precautions against breach. (7) Nor, for that matter, can the promisor escape liability by showing that the breach was caused by exogenous factors beyond her control. (8)

      But there is a doctrine in contract law that invites courts to adjust liability or damages if the promisor's breach was "willful." Courts have attached this doctrine primarily to the choice of damage measures in cases involving breach of a contract for services. In such cases, promisees commonly sue for the "cost of completion"--of purchasing a substitute performance in the market. However, the cost of completion sometimes exceeds the gain that the seller's performance would have produced. This problem usually occurs in construction contexts. In Jacob & Youngs v. Kent, for example, the contractor deviated from the agreed-upon performance in an apparently minor way, but the costs of remedying that defect were much greater than the reduction in property value that the deviation had caused. (9) Similarly, in Peevyhouse v. Garland Coal & Mining Co., a lessee agreed to restore the lessor's property after the lessee had used it, but the costs of restoration turned out to be much higher than the resultant increase in property value. (10) In cases like these, where repair involves unreasonable destruction of the contractor's work, or the cost of completion is grossly disproportionate to the benefit obtained, the owner can recover only the diminished market value on the ground that the standard remedy would produce "economic waste." (11)

      There is substantial uncertainty, however, as to the appropriate circumstances for applying the "economic waste" doctrine. A key doctrinal prerequisite is the finding that the contractor has substantially performed the contract in good faith and that the breach was not "willful." (12) In both of the celebrated cases noted above, the court declined to find fault with the promisor's breach. In Jacob & Youngs, Justice Cardozo invoked the economic waste doctrine to limit the owners' damage award to the diminution in value caused by the breach. He found (at least implicitly) that the contractor's breach was accidental and not willful. In Peevyhouse, the majority did not address the willful breach doctrine directly, but Justice Irwin dissented on the ground that the breach "was willful and not in good faith." (13) Thus, the majority at least implicitly rejected application of the willful breach doctrine to the facts in the record.

      To be sure, the precise behavior intended to be captured by the willful breach doctrine is unclear. (14) However, the concept should be sufficiently capacious to embrace "inefficient behavior" by the promisor. By this standard, a breach is willful when the promisor fails to take cost-effective precautions in performing a contract that is ex ante efficient and then breaches the contract to avoid incurring substantial losses. In using this standard to evaluate the actions of promisors in cases such as Jacob & Youngs and Peevyhouse, it is important to recognize that the promisees in such cases will have prepaid for the service in a master contract. Prepayment is often ignored by courts and commentators because, in such a contract, the services are bundled together and are not separately priced. For example, the royalty on the mineral lease in a case such as Peevyhouse is smaller if the mining company agrees to restore the land at the end of the lease term, but rarely, if ever, is there an explicit "subprice" for the agreement to restore. Likewise, the cost of constructing a building is seldom disaggregated into separate prices for the promise to install the plumbing and the promise to...