The fault that lies within our contract law.

• Author: Cohen, George M.

Scholars and courts typically describe and defend American contract law as a system of strict liability, or liability without fault. Strict liability generally means that the reason for nonperformance does not matter in determining whether a contracting party breached. Strict liability also permeates the doctrines of contract damages, under which the reason for the breach does not matter in determining the measure of damages, and the doctrines of contract formation, under which the reason for failing to contract does not matter.

In my Article, I take issue with the strict liability paradigm, as I have in my prior work on contract law. In my view, the theoretical justifications for strict liability as a general paradigm for contract law oversimplify contractual intent, the relationship between intent and fault, and the nature of contractual fault. Moreover, the strict liability label is descriptively misleading, once one dips even slightly below the surface of contract doctrine. Fault shows up throughout contract law. Efforts to make contract law conform more to the strict liability paradigm and exorcize fault are wrongheaded. In any case, such efforts are doomed to fail. Fault may not be the dominant feature of contract law, but it plays an inherent, invaluable, and ineluctable supporting part. Like other contract rules, strict liability is merely a fault-based presumption. Determining the limits of that presumption means considering why parties make contracts and why they do not perform them, in other words, fault. Courts and scholars should acknowledge the role of fault and think about how to use fault more effectively within the framework of contract doctrine.

INTRODUCTION

The myth that contract law is a system of strict liability stubbornly persists. (1) I seek to debunk this myth. (2) In my view, the theoretical justifications for strict liability oversimplify contractual intent, the relationship between intent and fault, and the nature of contractual fault. Moreover, the strict liability label is descriptively misleading once one dips even slightly below the surface of contract doctrine. Efforts to make contract law conform more to the strict liability paradigm and exorcize fault are misguided. In any case, such efforts are doomed to fail. Fault plays an inherent, invaluable, and ineluctable role in contract law.

1. STRICT LIABILITY IN CONTRACT LAW

   The strict liability paradigm permeates classical contract law. Usually, however, the explicit label "strict liability" appears only in connection with the doctrines of performance and breach. Under these doctrines, failure in any way to perform a contract breaches the contract, and subjects the breaching party to liability, regardless of "fault." (3) The paradigmatic case is a seller who delivers goods that fail "in any respect to conform to the contract." (4) Strict liability means that the contract provides a "warranty" of results. (5) In short, the reason for nonperformance does not matter.

   If the doctrinal irrelevance of fault is the touchstone of strict liability, then the other main areas of contract law--formation and damages--seem to fit that paradigm as well. With respect to damages, Holmes long ago articulated the strict liability view: just as the reason for nonperformance does not matter in determining breach, the reason for the breach does not matter in determining damages. (6) An aggrieved party who can prove breach is entitled to "compensation," which contract law generally defines as protecting the expectation interest. (7) Fault seems irrelevant to determining compensation.

   Finally, although contract formation doctrine does not explicitly endorse strict liability, it nevertheless also seems to comport with the strict liability view. In this case, however, it is the reason for failing to contract, rather than for failing to perform, that does not matter. (8) Basic formation doctrine holds that no contractual liability exists unless and until the parties agree. (9) Just as fault seems irrelevant to performance and compensation, so it seems irrelevant to "agreement."

   The narrow explicit association of strict liability with contract performance and breach is puzzling. What sense would it make to call contract law a strict liability regime if strict liability merely occupies the narrow doctrinal space of performance while the reason for nonperformance matters for formation and remedy? In fact, the justifications usually offered for strict liability apply across contract law. These justifications are weak.

2. JUSTIFICATIONS FOR STRICT LIABILITY

   One can posit two broad types of justifications for strict liability: traditionalist and economic. A "traditionalist" justification derives strict liability from two simple premises. First, contract law grounds liability in the mutual consent of the contracting parties. (10) Second, fault is a social judgment distinct from consent. (11) Unlike the tort law of accidents between strangers, contract law allows the parties themselves to define the scope of liability, removing, in theory, the need for social judgment (other than the social judgment to enforce agreements according to the parties' intentions). The only relevant fault is breach of any agreement the parties intended to make. Fault thus merges with mutual intent; it is not an independent criterion of liability. (12)

   Enforcing agreements according to mutual consent does not quite imply strict liability, however. Suppose the parties intend that the reason for nonperformance matters in determining liability under their contract. A regime that strictly enforces fault-based intent is not what we usually think of as strict liability. Thus, a traditionalist justification of strict liability must defend the proposition that the parties generally intend that the reason for nonperformance does not matter. That proposition is, however, contestable, as discussed below.

   The economic justification starts from the same premise as the traditionalist justification--that courts should enforce agreements according to the parties' mutual intentions--but grounds that premise differently. The economic justification focuses on "facilitat[ing] the efforts of contracting parties to maximize the joint gains ... from transactions." (13) If courts do not enforce contracts according to mutual intent, but instead try to "regulate" the parties' behavior, for example, by injecting courts' "own notions" of "fault" that conflict with the parties' preferences, joint gains will not be maximized; thus, parties will contract around those restrictions if they can and incur losses if they cannot. (14)

   Even if contracting parties do not expressly state a preference for strict liability, economists would infer such a preference if it comports with efficiency, on the assumption that most parties would prefer strict liability. (15) Economists generally offer three reasons why strict liability in contract is efficient: superior risk bearing, litigation costs, and comparative institutional competence. First, if promisors are usually in a better position than promisees to bear risks that would make performance of their promises more costly or less valuable, then strict liability is efficient because it generally puts those risks on the superior risk bearer. (16) Second, fault-based liability imposes higher litigation costs on the parties than strict liability, because fault is more costly for courts to assess, and these costs outweigh the benefits of a fault-based system. (17) Finally, contracting parties are better equipped than the courts to make whatever fault determinations are desirable, and so prefer informal enforcement to court enforcement unless they say otherwise. (18)

   These reasons are not persuasive. As discussed below, the superior-risk-bearer analysis actually supports a fault-based approach to contract law as a whole, because the promisor is not always the better risk bearer. Further, distinguishing cases in which the promisee is the better risk bearer is not always unduly burdensome. Moreover, the litigation-cost advantage of strict liability is far from clear. For example, courts under a fault-based approach can easily limit the kinds of fault evidence that parties could introduce; fault need not mean free-for-all. And the comparative institutional advantage argument that parties prefer that they, rather than courts, should make fault judgments merely returns us to the problem of determining mutual intent.

3. THE UNCERTAINTY OF MUTUAL INTENT

   Under both the traditionalist and economic justifications, the argument for strict liability is stronger if mutual intent is easily determined and clearly distinguishable from fault. Adopting a fault-based system of contract law in those circumstances would lead to illegitimate social judgments by courts on the traditionalist view, and result in inefficient contracting around or failures to contract on the economic view.

   Determining disputed mutual intent is inherently uncertain, however. Mutual intent is an ideal. Contracting parties attempt to express mutual intent, often in writing, but do so imperfectly. Contracts are largely a set of private rules, and all rules require interpretation, stories that explain their meaning in a particular situation. (19) As unanticipated situations arise, disputes requiring interpretation inevitably occur. Parties generally resolve these disputes on their own, often driven by reputational concerns. When these efforts fail, they bring their disputes to court. In litigated cases, the parties typically contest the requirements of mutual intent. Contract law is another set of rules, designed predominantly to help courts choose between competing versions of mutual intent. The very existence of contract law, therefore, belies an easily determined mutual intent in disputed contracts. This is especially true for doctrines of formation and remedy, matters about which contracting parties often say...