The fault principle as the chameleon of contract law: a market function approach.

• Author: Grundmann, Stefan

This Article begins with a comparative law survey showing that all legal systems do not opt exclusively for fault liability or strict liability in contract law, but often adopt a more nuanced approach. This approach includes intermediate solutions such as reversing the burden of proof using a market ("objective") standard of care, distinguishing between different types of contracts, and providing a "second chance" to breaching parties. Taking this starting point seriously and arguing that it is highly unlikely that all legal systems err, this Article argues that the core question is how and when each liability regime should prevail or how and when the regimes should be combined. It then argues that there is no either-or, but only the question of intelligent combination. When asking how best to combine the regimes, the simple answer is that market expectation, and specifically the ability to compare offers, should be the core criterion. This Article therefore argues that a market function approach is needed. Such an approach answers the question of which factors are most important in which situations and thus helps to shape the combination. Some core criteria are developed in a last, more concrete section.

INTRODUCTION

Some seventy-five years ago, Ernst Rabel came from Berlin to the United States as director of the famous "Schloss Institutes" for comparative and international law, the forerunner of the Max Planck Institutes. Since Michigan became what was likely his strongest link to the United States, it seems fitting to begin with his contributions. Rabel brought with him his conception of comparative law as a discovery device for all countries, (1) and sought to develop this international discussion into more concrete results, namely, into a unification of sales law as the core area of contract law. (2) Moreover, when Rabel later wrote his treatises on international private law and (comparative) sales law (3)--which became highly influential for the Hague Uniform Sales Law of 1964 (4) and subsequently the Vienna Convention on the International Sale of Goods of 1980 ("CISG") (5)--one of the core questions where his new surroundings heavily influenced him (6) was fault. In fact, he strongly advocated a strict liability regime, a trademark of Anglo-American contract law, which was ultimately introduced into article 79 of the CISG. And because of the eminence of the CISG, this regime has remained on the international agenda; it is evident in more general sets of contract law principles developed over the last decades at the Unidroit level (7) and in Europe. (8) The Principles of European Contract Law opt for a strict liability regime in which the only permissible excuse is force majeure, (9) and the breaching party bears the burden of proof. (10) The Unidroit Principles share, in principle, this singular focus on force majeure, (11) but they do so in a more refined manner: article 5.1.4 distinguishes "obligations de resultat" (promises of result) from "obligations de moyen" (promises of best efforts). The addition of this distinction is important. But it should be kept in mind that these terms could be bargained for in a contract under any regime. (12)

The importance of another development for which Rabel strongly advocated, the introduction of the so-called German "Nachfrist" into the CISG regime, is less obvious. But in fact, this was no less influential on the current European regime than the incorporation of the strict liability approach. Nachfrist limits, in principle, the most onerous sanctions for breach of contract to those cases where the party not only breached but also did not cure when given a "second chance" (after an additional period of time), both in the CISG and in the current European system. (13)

Several questions arise from this cross-Atlantic trip into history. The first is whether the example of Rabel and the contract law developments he spawned speak in favor of the superiority of a strict liability regime. (14) The second question is whether the core argument advanced by Rabel, i.e., that only strict liability can mirror the promise initially given, is one that works particularly well in sales law (and in an industrial society), but less well in services (and in a service society). A third question is whether, instead of following Rabel's regime, all legal systems really follow a nuanced approach with a mixture of strict liability and fault liability elements, and utilize other governance devices such as the "second chance" principle. Finally, a fourth question is what guidelines can be given for a satisfactory combination of the two liability regimes.

This Article suggests that the answer to this final question is that market expectations should be the core criterion for combining strict and fault liability and that, therefore, legal scholarship and legal regimes should take a market function approach. Part I takes a comparative law approach to show the range of possibilities in choosing between liability regimes, and examines their relative advantages. Part II proposes a market function approach based on these systems to balance elements of strict liability and fault liability.

1. NUANCE AS THE COMMON DENOMINATOR IN A COMPARATIVE LAW PERSPECTIVE

   The traditional view among contract scholars is that civil law systems opt for fault liability in contract law while common law systems opt for strict liability. Yet this impression is the result of too much abstraction on both sides. Upon closer inspection, the common denominator between civil and common law systems is that all systems opt for a nuanced combination of the two. (15) Contract law development in Europe now often occurs at the European Community ("EC") level. EC contract law is an amalgam of the civil law and common law systems of its member states and thus provides a valuable additional perspective.

   1. The Most Important Nuances in Civil Law Systems

      The nuanced approach is evident in several civil law systems. The core breach-of-contract rule in the German Civil Code (section 276), after the fundamental reform in 2002, reads as follows: (16)

      (1) The obligor is responsible for intention and negligence, if a higher or lower degree of liability is neither laid down nor to be inferred from the other subject matter of the obligation, including but not limited to the giving of a guarantee or the assumption of a procurement risk.... (2) A person acts negligently if he fails to exercise reasonable care. (3) The obligor may not be released in advance from liability for intention. (17)

      The practical impact of this rule is heavily influenced by the second phrase of section 280(1), which says that, in contracts, the burden of proof for negligence is the reverse of the burden in tort law. (18) Therefore, absent a provision to the contrary, the breaching party is responsible for any non-conformity with the contract unless he can prove that no negligence can be imputed to him.

      The German Law is interesting in three respects here. First, it is a law that has been reformed very recently and therefore reflects current policy, not outdated views. For instance, C.W. Canaris, the scholar who was most influential in the legislative process, has very strong feelings about the ethical superiority of the fault principle over strict liability. (19) Second, notwithstanding Canaris's apparent preference for fault liability, section 276 is very clear in that liability is neither entirely based on fault nor entirely based on strict liability, but a nuanced combination of both approaches. As section 276(1) states, German law tolerates regimes more favorable to the breaching party--such as assigning responsibility only where there is gross negligence or even willful conduct, or alternatively simple negligence with the burden of proof on the nonbreaching party--but it also tolerates a regime more favorable to the nonbreaching party--namely strict liability, the so-called liability by warranty, or "Garantiehaftung" (20) Rules that are more favorable to the breaching party are not commonly part of the German legal scheme (the Code itself), but rather appear in the terms of individual contracts. Conversely, rules favoring the nonbreaching party, namely those introducing strict liability, can be found both in the Code--namely, in case law interpreting the Code--and, most important in the context of our discussion here, in an agreement between the parties either implicitly or explicitly.

      Third, German law is in fact rather close to a strict liability regime even where it formally provides exclusively for fault liability. The reversal of the burden of proof, mentioned above, is a first factor in this regard. A second factor is that, in fault liability, the standard of care applied is a market, or "objective," standard. Therefore, behavior is negligent if it does not meet the standards that the market would expect of good contract partners--and if the partners are professionals, by good professional partners in a particular business sector. (21) A third factor is that fault is irrelevant for the duty to perform in the first place as well as for the availability of rescission as a remedy. (22) This has repercussions for damages because restitution awards that accompany rescission are often an equivalent to damages for breach and because, at least when the breaching party is given a second chance after performance has fallen short of the terms of the contract, any noncompliance outside cases of force majeure gives rise to damages (at least if the contract is about the supply of goods in mass transactions). (23) There is also a lesser-known fourth factor that makes German contract law converge with a strict liability regime. Despite Canaris's opposition to strict liability, a rule slipped into the Code of 2002 that is highly sensible but converges considerably with the common law approach. Under this rule, a breaching party is at fault not only if he could...