While legal scholars have investigated if, and to what extent, fundamental norms and doctrines of contract law converge with theoretical moral and ethical principles, little is known about people’s moral preferences for remedies for breach of contract. Is there a convergence or a divergence between what people think the law of remedies for breach should be and what it is? To what extent do people’s perceptions of the social appropriateness of different remedies for breach change between fundamentally different legal systems of common law and civil law?
This project aims at providing empirical estimates of people’s choices in the USA and Germany of the (i) amount of monetary damages that should be owed to the victim and of people’s choice of the (ii) type of remedy that should be adopted by the law (specific performance and monetary compensation). People’s preferences are elicited through scenario studies that involve different types of contingencies and contracts. Thereby, the project further investigates to what extent people’s normative preferences for remedies for breach depend on whether the contingency in which breach occurs was (iii) foreseen or not, and whether the breach was (iv) intentional or not, thereby examining to what extent commonsense morality converges with these two key doctrines in remedies for breach. At the same time, insights shall be gained into how people’s moral perceptions of different remedies for breach differ between these two countries that adopt different types of remedies for breach. Contract law allocates the risks inherent to changed circumstances to the promisor, independent of whether the risk was foreseen or not, and whether the risk involves a higher outside price offer (a breach to profit) or an increase in costs of performance (a breach to avoid losses). Moreover, and especially in the USA, contract law does not consider whether the breach was intentional or inadvertent. The promisor is equally liable in both cases, i.e., liability for breach of contract is strict liability. In Germany, contract law requires fault by the promisor, and liability for breach is based on fault.
The remedy for breach is an award of expectation damages in the USA, and of specific performance in Germany. This implies that, in the USA, the promisee is not entitled to any share of the gains from breach achieved by the promisor. In contrast, in Germany, the promisee might be entitled to all the gains from breach achieved by the promisor through the Anspruch auf das Commodum.
Individual assessments of the appropriateness of legal remedies might diverge from the approach adopted by the law for different reasons. People’s assessment might consider not only the goal of providing compensation for the victim, or the principle that pacta sunt servanda, but also of implementing a fair outcome. While the goal of legal remedies is to compensate the victim, or to induce performance of the contract, people might well consider the trade-off that emerges between these goals and a fair distribution of gains and losses. Often, by providing full compensation to the promisee through an award of expectation damages, or by requiring that the promisor keeps the contractual obligation through specific performance, the law of remedies for breach imposes high costs on the promisor, such as when the promisor faces difficulties and high costs to perform. The outcome will be very unequal, with the promisor losing and the promisee earning. As a result, people’s preferences might be more flexible and contingent than the law.
Data collected from the USA reveal some convergence between commonsense morality and legal remedies. With respect to the question how high damages should be, most people prefer an amount equivalent to expectation damages for breaches to profit, and this did not depend on the foreseeability of the contingency and on the intention to breach. In this case, there is a striking convergence between morality and the law of remedies for breach. For loss-avoiding breaches, however, most people prefer compensatory damages when the contingency was foreseen and undercompensatory damages when the contingency was unforeseen. These preferences did not depend on the intention to breach. In this case, there is some convergence between commonsense morality and the law of remedies for breach, as most people believe that compensatory damages are the most adequate, at least for foreseen contingencies.
Furthermore, in the USA, and with respect to the question which type of remedy the law should adopt, most people clearly prefer specific performance over damages for breaches to profit, and this persists for unforeseen and foreseen contingencies, and for intentional and inadvertent breaches. There is a striking divergence here, as existing American law only very exceptionally adopts specific performance. For loss-avoiding breaches, however, most people prefer damages for breach, although around a third of the people prefer specific performance. There is a convergence between the type of remedy adopted by the law and people’s preferences in this type of contingency.
The analysis of these questions in Germany is the next step of the project. However, some conclusions can already be drawn with respect to the USA.
While it is hard to ascertain, in general, that observed interpersonal morality diverges from the law of remedies for breach of contract, the obtained results point in this direction, especially given that people prefer specific performance when the promisor breaches to profit from a higher outside price offer. However, not all existing contract law presents a divergence with people’s moral preferences. Most people clearly prefer expectation damages when the promisor breaches to avoid losses, which is the remedy provided by law. Moreover, the law does not consider whether the breach was intentional or inadvertent, as does commonsense morality. This is a striking finding, as people are not more lenient with promisors who inadvertently breached a contract than with those who did it on purpose.
Should the law change to better reflect observed interpersonal morality? Should it adopt specific performance for breaches to profit, and should it adopt undercompensatory damages for breaches to avoid losses? While this project does not attempt to answer this question, it does point out the consequences of doing so.
If the law adopted specific performance for breaches to profit, then we would expect more bargaining and renegotiation after the contingency materialises, with the promisor having to offer a share of the extra profits to the promisee to buy the right to breach. The outcome would be more equitable. If the law adopted undercompensatory damages for loss-avoiding breaches, then we would expect too many breaches of contract, and this would bring a loss of social welfare. This result, however, will only occur when parties cannot renegotiate the contract. If they can, and if there are still gains to be made from the deal after the increase in costs, then the promisee would likely offer some extra payment to the promisor, and the latter would accept the deal and perform the contract. That is, whenever parties can renegotiate, then no loss of welfare would occur if the law were to change to better reflect people’s moral perceptions.
