Willfulness versus expectation: a promisor-based defense of willful breach doctrine.

• Author: Thel, Steve

Willful breach doctrine should be a major embarrassment to contract law. If the default remedy for breach is expectation damages designed to put the injured promisee in the position she would have been in if the contract had been performed, then the promisor's behavior--the reason for the breach--looks to be irrelevant in assessing damages. And yet the cases are full of references to "willful" breaches, which seem often to be treated more harshly than ordinary ones based on the promisor's bad/willful conduct. Our explanation is that willful breaches are best understood as those that should be prevented or deterred because the parties have implicitly agreed that the promisor would not breach in those circumstances. When willfulness, so understood, is present, courts rightly award remedies that serve to deprive the promisor of any incentive to breach and to assure the promisee of getting her full expectation.

INTRODUCTION

Almost every contracts student learns on the first day of class that the default remedy for breach is expectation damages, which are designed to put the injured promisee in the position she would have been in had the contract been performed. At the same time, the cases often refer to "willful breach," by which courts seem to mean especially bad, deliberate conduct by the promisor. Almost by definition, however, the willfulness of a breach can have little to do with the promisee's expectation interest; that interest should only be measured with reference to the harm suffered by the injured victim. Whatever the promisor did or failed to do to cause the harm would seem to be of no relevance in calculating the promisee's expectation. Commentators have typically sought to explain this tension by suggesting that while the promisee's expectation is not affected by the willfulness of the breach, expectation can often be measured or interpreted in many ways, and when a breach is found to be willful, the defendant's bad behavior grants license to pick the most generous definition of the plaintiff's expectation. (1)

We offer an alternative understanding that is cleaner and, we think, more compelling. Willfulness matters not because it screens for a more generous expectation measure, but because it identifies those breaches that should be prevented or deterred--that is, all breaches that could have been avoided at little or no cost to the promisor. When willfulness, so understood, is present, courts rightly award remedies that serve to deprive the promisor of any incentive to breach and to assure the promisee of getting full expectation.

The special treatment of willful breach has been difficult to square with contract doctrine, and not just because it is sometimes unclear what courts mean when they say a breach is willful. According to conventional wisdom, courts do and should award the victims of breach of contract their expectation--the amount necessary to put them in the position they would have been in had their promisors kept their promises--with the breaching promisor free to keep anything left over. However, in reality, courts frequently award promisees more than their expectation when they find that a breach is willful, and thus act to deprive willful breachers of any gains from breach.

Although some commentators are quite upset by willful breaches, (2) contract law generally does not concern itself with the morality of breach in any direct way. In the context of bargains, this approach has much to recommend it. People enter into contracts in hopes that the promises made to them will be kept, and when a promise is broken, the promisee's injury is typically the same whatever the reason for the breach. A disappointed promisee ought to be satisfied with full expectation, regardless of what motivated the breach. Moreover, the ex ante price of a promise is in part a function of the remedies that will be available upon breach, and promisees who bargain for nothing more than the benefit of their bargains will not want to pay a premium for the right to receive more than expectation in case of any breach, willful or otherwise.

Nonetheless, courts often talk about the willfulness of breach, and a number of doctrines seem to turn on willfulness. In this article we examine and defend these doctrines. The special treatment of willful breach can be justified without any recourse to particular concern for fairness or the morality of promise keeping. Indeed, our rationale for willful breach doctrines is not promisee centered at all. Instead, we argue, the willful breach rules provide a mechanism by which promisors can bind themselves in a manner that promising parties would and do adopt ex ante. We show that courts appropriately give special treatment to breaches that contracting parties, at the time they enter into their contract, expect the promisor to be able to avoid at little or no cost to the parties as a whole--that is, willful breaches. We also show that the remedies awarded on a finding of willful breach effectively and appropriately bind the promisor not to commit such a breach, even if those remedies sometimes overcompensate the promisee's expectation.

We accept--and indeed, embrace--the proposition that promisees want nothing more than to have the promises made to them kept, and thus will not bargain for anything more than a fight to expectation, regardless of the reason why breach has occurred) The problem, however, is that promisees (and promisors) know that courts seldom award a disappointed promisee full expectation. (4) In this situation, promisors cannot credibly commit to efficient performance, because the ex post damages courts actually award will likely leave promisees undercompensated. That, in turn, leaves promisors with too much incentive to breach. As a result, promisors will get more for their promises at the time when contracts are negotiated if they can credibly commit not to breach. The level of commitment and the price paid depend on the cost to the promisor of avoiding breach: the more costly it is to avoid breach, the more a promisor will charge to accept liability for such breach.

While contracting parties will agree upon different levels of commitment in different situations, they will almost always agree that some breaches are out of bounds. When the parties know at the time of contract that a breach will damage the promisee and can be avoided by the promisor at no net cost to the two parties taken together, they will not want to permit it. (5) Since a commitment not to breach in these circumstances will be of value to the promisee, the promisor will receive more for her promise when she makes that commitment. Moreover, the promisor will get that premium at little or no cost, since she can, by definition, get that premium (and avoid enhanced liability) simply by not breaching willfully.

The various willful breach doctrines screen for those opportunistic breaches that produce no net benefit for the parties--this is the best definition of willful breach, and often turns out to be what concerns courts. The doctrines enable promisors to commit credibly to perform their promises without requiring the parties to negotiate a premium to reflect the added cost to the promisor of not breaching willfully. Moreover, if a promisor for some reason wants to preserve the right to commit a cost-free breach, she is free to do so by opting out of the rules, but only at the cost of revealing that she is willing to commit such a breach and foregoing what the promisee would pay for the commitment.

The efficiency of the willful breach rules is enhanced by the sanction for their violation--a sort of promisor-centered expectation, in which the breaching promisor is put in the position she would have been in if she had kept her promise. At the same time, the remedy also effectively assures the promisee of getting at least her expectation as well, because the promisor's cost will always be greater than the promisee's expectation, inasmuch as the promisee can use that cost to perform. Granted, when this remedy is actually awarded, the promisee will sometimes receive more than her expectation. The point, however, is not to compensate the promisee for some special harm imposed by willful breach, but instead to destroy the promisor's incentive to breach willfully. Indeed the remedy would work just as well if it were paid to a third party, and the beauty of the doctrines is that if they work, there are no breaches. (6)

Moreover, by defining the remedy in terms of the promisor's expectation, the willful breach doctrines avoid untoward incentives. The promisor is not punished for a willful breach, but simply denied any benefit there-from. The disgorgement remedy does not lead the promisor to take inefficient precautions, since it only applies to willful breaches, which can be avoided with no precautions at all. The remedy does not distort the promisee's incentives either. Inasmuch as the promisee's compensation is not dependent on his actions, the prospect of an enhanced remedy for willful breach will not lead the promisee to rely excessively on the promise. Similarly, the willful breach rules do not undercut the effectiveness of rules that depend on permitting undercompensation in some cases. For example, since a promisee cannot expect a willful breach at the time he enters a contract, the prospect of receiving a supercompensatory remedy in case of willful breach does not at all undermine his incentive to disclose his circumstances to avoid the rule limiting consequential damages. (7)

We use two sets of cases to show that willful breach doctrines require those who commit breaches that could be avoided without cost to the parties as a whole to surrender the profits they gain from breach. One group is the cases, such as Allied Canners & Packers, Inc. v. Victor Packing Co. (8) and KGM Harvesting Co. v. Fresh Network, (9) in which the question is whether to award the difference between contract and...