Morality, Compensation, and the Contractual Obligation

• Published date: 01 March 2019
• Author: Sergio Mittlaender
• Date: 01 March 2019
• DOI: http://doi.org/10.1111/jels.12211

Journal of Empirical Legal Studies

Volume 16, Issue 1, 119–142, March 2019

Morality, Compensation, and the

Contractual Obligation

Sergio Mittlaender*

This article presents empirical estimates suggesting that most people do not perceive

breach of contract followed by compensation for the promisee as immoral. In the absence

of compensation, the article reveals that individuals commonly perceive the moral value of

breach depending on the consequences thereof, with the unfairness of the outcome—and

not the inefficiency—as the preponderant factor. Contract law reflects observed interper-

sonal morality and allows courts to rescind the contract on grounds of impossibility,

impracticability, or frustration if the breach is fair and the promisor avoids exceptionally

high losses, but not if the breach is unfair and the promisor breaches to profit from a sub-

stitutive transaction. The law, moreover, does not punish breach, nor inevitably require

performance by the promisor, but instead aims at compensating the victim, thereby

reflecting how most individuals perceive breach followed by compensation, from a norma-

tive standpoint: as not morally wrong.

I. Introduction

While most people understand that a promise is a morally binding commitment, and that

its breach is a moral wrong, no one would say that a promisor might never morally fail to

perform a promise (Rawls 1955:17; Raz 1977:222; Scanlon 1990:214; Eisenberg 2006:580).

Despite this observation, few scholars have analyzed the circumstances in which breach

might be morally justifiable (Atiyah 1981:142; Craswell 1989:493–95), with scarce evidence

on how individuals understand the contractual obligation from a normative standpoint.

Most importantly, there is no evidence on whether payment of compensatory damages can

turn an act that is perceived as immoral into one that is not perceived as such.

This article reports results from an experiment that elicits how laymen perceive the

moral value of breach of promise and of contract, in the absence and in the presence of pay-

ment of compensatory damages. Participants were asked whether breach was immoral or

not immoral in different types of contingencies that disentangle the efficiency or ineffi-

ciency, and the fairness or unfairness, of the breach.

1

With that, the experiment reveals

*Senior Research Fellow, Max Planck Institute for Social Law and Social Policy, Amalienstraße 33, Munich 80799,

Germany; Professor of Law, Fundac¸a

˜o Getulio Vargas Law School in Sa

˜o Paulo (FGV Direito SP); email:

mittlaender@mpisoc.mpg.de.

1

See Section II.B for the notion of fairness adopted herein. In brief, it concerns inequality in the distribution of

gains and losses in contingencies that were not part of the deal, and hence excludes, by definition, unfairness of

the price.

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when individuals perceive breach to be immoral, possibly depending on its conse-

quences, as well as on payment of compensation.

Results reveal, first, that breach of promise is not always perceived to be morally wrong

even in the absence of compensation. In fact, whenever breach is fair in avoiding an unequal

outcome in a contingency that the parties had not considered, then only a minority of subjects

think it is immoral. It is when breach is unfair in creating an unequal distribution in a contrac-

tual gap that the majority of subjects perceive it to be immoral. Most individuals do not under-

stand the contractual obligation in a deontological fashion, as per Fried (1981, 2007) and

Shiffrin (2007, 2009), nor in a consequentialist manner that considers only welfare as the

“good” to be maximized, as per Shavell (2006, 2009). Rather, they think that breach is immoral

when it is unfair and the promisor profits fromthebreach,whilethepromiseedoesnot.

Second, when breach is followed by payment of fully compensatory damages, it is

not perceived as immoralby most of the subjects. This did not depend on the realized con-

tingency, on the consequences of the breach, or on the motives that led the promisor to

breach. The majority of subjects consistently selected “not immoral” in all different types of

contingencies in which the promisor decided to breach but compensated the promisee for

loss of expectancy. This result serves as evidence that most people perceive the moral value

of breach of contract in a manner that is compatible with the Holmesian theory of the con-

tractual obligation (Holmes 1881:299, 1897:462; Posner 2009; Markovits & Schwarz 2011).

This does not imply that individuals understand that the contractual obligation cre-

ates no moral duty, and that breach is, for them, an amoral act. Quite the contrary, results

reveal that individuals perceive breach to be a wrong in need of redress. With no loss for the

victim, and in the absence of other harms (such as loss of benefit or loss of reliance) and

wrongs (such as a violation of fiduciary duty or of proprietary interest), breach is not per-

ceived as wrong, for the majority of subjects, if the promisee is fully compensated.

Results suggest different implications for the law. First, observed interpersonal

morality does not require promisors to keep bargained-for promises independent of the

consequences. It allows them to breach and walk away from the deal in certain circum-

stances, such as when the promisor would incur high losses by performing, and the prom-

isee would lose no more than promised gains from trade because of breach.

Second, legal enforcement and the recognized grounds for rightful discharge

closely resemble observed moral beliefs. While defenses including impossibility, impracti-

cability, and frustration of purpose are all allowed in case of breach for the purpose of

avoiding exceptional losses or difficulty, there is virtually no excuse that can release the

promisor from the secondary duty to pay damages in case of breach for the purpose of

profiting from a substitutive transaction. While courts might rescind the contract in the

first case, and put parties back in the position that they were before the making of

the contract, they will almost inevitably enforce the contract in the second case, and put

the disappointed promisee in the position he would have been in had the promisor per-

formed “by giving him something he never had” (Fuller & Perdue 1936:53).

Third, substitutive relief, and the measurement of damages according to the expecta-

tion interest, seem adequate to enforce the promisor’s moral obligation. They allow promisors

to breach at their own discretion, and without the need to obtain the consent of the promisee

but, at the same time, they require the promisor to compensate the latter, thereby turning an

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