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Valparaiso Univ. Law School

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Tuesday, March 16, 2010

Fault Lines in Contracts Theory II: Steven W. Feldman

This is the second in a series of posts on recent scholarship relating to the relationship between contract and fault or between contract and promissory obligation.   Yesterday, we posted about Martha Ertman’s book chapter, “The Productive Tension between Official and Unofficial Stories of Fault in Contract Law.”  Today, we discuss Steven W. Feldman’s article, “Autonomy and Accountability in the Law of Contracts: A Response to Professor Shiffrin,” which can be found at 58 Drake Law Review 177 (2009).   Unfortunately, no electronic version is currently available on the Internet. 

Us-army-corps-of-engineers
 As its title suggests, Mr. Feldman’s article is a response to Seana Shiffrin’s “The Divergence of Contract and Promise.”  Mr. Feldman is not a contracts prof; he is an attorney with the U.S. Army Corps of Engineers, and he faults Professor Shiffrin and other contracts law scholars for their failure to give adequate attention to statutes and case law.  Based on his review of the case law, Mr. Feldman concludes that contract and promise do not diverge as Professor Shiffrin has suggested. 

After an introductory Part I, Part II of the article contends that judges have often expressed not only legal but also moral disapproval of willful breach.  He concludes that now more than ever a moral standard undergirds our expectation that people will abide by their contractual obligations.  (189-90).  The Part also discusses promissory estoppel and the relatively few U.S. jurisdictions that expressly deny the moral basis of contract.   Part III of the article then takes up the implied covenant of good faith and fair dealing, which Mr. Feldman characterizes as a “wide-ranging code of moral conduct that spans the full spectrum of formation, performance and enforcement.”  (196)

Part IV focuses on the Holmesian dictum that a contract is nothing more than a promise to perform or to pay damages.  Mr. Feldman finds that only a few jurisdictions embrace this doctrine (197-98) and even Holmes himself viewed breach of contract as a legal wrong that resulted in liability to the breaching party.  (199)   Part V discusses the doctrine of efficient breach.  Mr. Feldman contends that very few courts accept the doctrine or use it to decide cases.  (201)

Part VI addresses the availability of specific performance as a remedy and criticizes Professor Shiffrin for overlooking cases in which courts have awarded the remedy in the face of anticipatory repudiation.  (205)  More generally, Mr. Feldman notes a trend in favor of increased awards of specific performance, claiming that some jurisdictions even identify specific performance as the preferred remedy for breach of contract. (207)  In short, Mr. Feldman disputes Professor Shiffrin’s claim that specific performance is not commonly invoked and thus finds no divergence between promise and contract because “courts hold the promisor accountable to the promisee for breach.”  (209) 

The final three Parts address damages issues.  Part VII begins by acknowledging courts’ “traditional reluctance to award punitive damages for a breach of contract.”  (210)  Mr. Feldman cites to numerous opinions in which courts do indeed award punitive damages for breach of contract and cites to 12 jurisdictions in which there is no requirement that the plaintiff also allege an independent tort.  (213)  He thus believes to have demonstrated a considerable erosion of the barriers separating contracts law and morality.  Part VIII asserts a moral basis justifying Hadley’s foreseeability requirement with respect to consequential damages.  Finally, Part IX defends the morality of the damages rule that puts the responsibility on the non-breaching party to mitigate the damages arising from the breach.   I have had occasion to remark elsewhere on my skepticism regarding that claim.

I should disclose that I provided some pre-publication comments on a draft of the article, and I am always happy to read the work of a practitioner who is not only well-informed regarding current academic debates but also has on eye on the practical ramifications of contracts scholarship.  The article has a wealth of information.  The footnote apparatus is especially useful because Mr. Feldman has hunted down every case and every statute that supports his thesis.  Law professors would do well to mine these footnotes and read or re-read the cases so as to deepen their own and their students’ understanding of the relationship of contracts remedies to the question of moral wrongdoing.

Nonetheless, I remain unpersuaded by Mr. Feldman’s arguments, except to the extent that they illustrate Professor Ertman’s “unofficial” counternarrative to mainstream contracts doctrine.  Yes, there are cases in which the general rule that contracts law is a strict liability regime yields to equitable considerations.  There are contracts doctrines such as “good faith and fair dealing” and “unconscionability” that clearly invoke moral sentiments.   But then there is vast majority of cases, including every case I ever litigated, in which the only issue is whether or not there has been a breach and in which no consideration is given, at least in the litigation, to whether or not the breach was willful.

I find the claims of Parts IV and V especially troublesome.   Courts may wax moralistic before finding a party liable for breach of contract, but what practical consequences derive from identifying a breaching party as a wrongdoer?  If there is no liability beyond the obligation to pay expectation damages, I do not see how the notion of fault matters.   Similarly, with respect to efficient breach, the question is not whether or not courts embrace the doctrine expressly but whether they can do anything to dissuade parties from engaging in the practice.  Standard contractual remedies for breach of contract suggest that courts are powerless to do anything other than encourage efficient breach.

I learned a great deal from Mr. Feldman’s Part VII on punitive damages.  He opened my eyes to the surprising willingness of courts to award such damages for breach of contract, and I have subsequently discovered additional evidence of their willingness to do so.  Nonetheless, I still believe it to be the case that in the vast majority of breach of contract cases, claims for punitive damages will not and should not arise.  Mr. Feldman’s remaining sections on damages suffer, in my view, from a confusion of moral and economic justifications for existing rules.  Mr. Feldman is aware of the overlap of moral and economic justifications  (190, n. 49), and seems to regard the fact that the justifications overlap as sufficient to make his point that moral considerations underlie contracts doctrine.  But Professor Shiffrin and others have not argued that there is no overlap between contractual and moral obligations; they merely explore what they regard as the troublesome areas in which contract law and moral sentiment diverge.  

Remedies is actually an area where practitioners’ insights would be especially welcome.  Certainly one does want to impress a judge with the extent to which one’s client has been wronged, but it seems to me that the real value of moral suasion lies outside of the litigation context.  There are extra-legal consequences for bad behavior, and those consequences likely have a far more profound impact on parties’ inclinations to breach agreements than does the remote chance that a court might award a remedy other than expectation damages.

That said, I applaud Mr. Feldman for his significant contribution to our body of knowledge on this important subject, and I am happy to report that more scholarship is on the way from Mr. Feldman.

[Jeremy Telman]

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Comments

[As our website was giving Steve a hard time about posting, I post the following on his behalf]
Jeremy--

Thank you very much for your thoughtful commentary on my article in the
Drake Law Review.

I wish to briefly address your point that "Similarly, with respect to
efficient breach, the question is not whether or not courts embrace the
doctrine expressly, but whether they can do anything to dissuade parties from
engaging in the practice."

My main focus on efficient breach is that courts embracing the doctrine
not only do nothing to dissuade parties from engaging in the practice, but
they actively and wrongly encourage parties to break their contracts. Thus,
we have cases such as Patton v. Mid-Continent Sys., Inc., 841 F.2d 742, 750
(7th Cir. 1988), which says that the law does not want to deter an efficient
breach.

It is very odd to me that this so-called basic truth did not occur until
the 1980's when Judge Posner and his relatively few judicial adherents
decided to inject their economics agenda into case law and got away with it
in those jurisdictions. In this regard, I agree with Professor Shiffrin's
moral criticisms of efficient breach, especially as noted in her Michigan Law
Review follow up, 107 Mich. L. Rev. 1551 (2009).

It is highly anomalous for a court as influential as the Seventh Circuit
to encourage parties to violate their pacts when courts are constituted to
police breaches and to provide the appropriate remedy as the protector of the
integrity of the contracting system. I think it would be unethical for a
lawyer to advise a client, "The law encourages you to breach your contract
because I believe you would qualify for efficient breach--therefore, go ahead
and exit the agreement."

When courts actively encourage efficient breach, as does the Seventh
Circuit, this message can be abused and misinterpreted--intentionally or
otherwise. In such instances, parties will always act self-servingly and
often slide over into inefficient breaches and thereby destabilize the
contracting system.

I agree that courts are powerless to prevent efficient breaches, but
they are not powerless to reject the efficient breach doctrine. In their
opinions, they should condemn the breach on principle, and in sending this
message, serve as teachers to lawyers and their clients. That is really what
I am saying in the Drake piece.

Steve Feldman

Posted by: Jeremy Telman | Mar 16, 2010 7:16:01 AM

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