I am delighted to receive a copy of a recent Michigan Law Review article, Willfullness Versus Expectation: A Promisor-Based Defense of Willful Breach Doctrine, a co-authored by Peter Siegelman and Fordham Professor Steve Thel. (107 Mich. L. Rev. 1517-31 (2009).
The authors take as their starting point the default rule that the proper remedy for breach of contract is a judicial award of damages that will put the injured party in the position she would have been in had the contract been performed. Every contracts student, however, is aware that there are different ways to calculate such expectation damages. Two examples are prominent in our authors’ account. Suppose Acme Corp. agrees to sell 1000 widgets at $10 per widget to Beta Corp knowing that Beta Corp. plans then to sell the same widgets to Charlie Corp. for $12 per widget. Suppose Acme Corp. then breaches the contract because market prices shoot up to $15 per widget. Should Acme be forced to pay Beta $5,000 (the market price – contract price differential) or merely the $2,000 that Beta lost by being unable to complete the transaction? (The authors assume here that Charlie Corp. proves unable to accept the widgets so Beta has no liability.)
The second example is more familiar. Suppose a builder promises to install a certain brand of fiber optic cable into my home during construction. After I move in, I discover the builder used a slightly lower quality cable. The inferior cable lowers my home’s value by $10,000 but tearing up the house to replace the cable would cost $50,000. Which amount should a court award me?
Our authors are concerned with what they present as a recurring judicial approach to such questions. Lacking a way to conclude which level of award most closely represents true “expectations,” courts are often allow the result to turn on the motivations of the breaching promisor. If the breach was accidental or inadvertent, then the promisee receives the lower amount, but where the breach is “willful” then the higher award is provided. At first glance, this approach appears to mix apples and oranges. The promisor’s motivations tell us little about the extent of the promisee’s loss. To the extent courts are acting out of some kind of moral spite, we might have reason to question these outcomes. But our authors rush to rescue the courts’ conclusions by presenting an alternate rationale. The thrust of their article is that courts are right to award higher damages in cases of willful breach because this permits deterrence of breach in just those cases where breach can be avoided at little or no cost to the promisor. Indeed, our authors offer this as a definition of willful breach.
The case is very convincing. Of course, the reader can’t tell from the article what courts have actually been thinking in these cases. The phrase “willful” suggests they have something in mind that may track our authors’ position. I’m still not clear on why this phrase is chosen rather than “intentional” breach unless courts have some notion of breaches to be avoided. If we want to encourage “efficient” breaches but ban some other kind, willful seems a good name. Nor is it clear to me why courts shouldn’t make promisors pay higher amounts in some cases of negligent breach. If I can’t perform my contract because I failed to install smoke detectors and my factory burned down, shouldn’t I pay the highest measure of expectation possible so as to deter future negligence? These mere quibbles are merely the beginning of the many wonderfully fun discussions articles such as this one will inevitably produce. It’s a joy to read scholars re-mining basic questions of contract law and still finding more gold. Congratulations Peter.