首页 | 农村土地改革 | 法经济学茶座 | 法经济学论坛
     网站首页≯ 合同法≯
合同救济:可预见性、谨慎、因果关系和减损规则
文/Eric A. Posner

CONTRACT REMEDIES: FORESEEABILITY,

PRECAUTION, CAUSATION AND MITIGATION

 

Abstract

This section discusses undercompensatory damages rules in contract law. These

are rules that reduce the award to the promisee to an amount below that to

which he would be entitled under the expectations rule. The reason for reducing

compensation is to encourage the promisee to behave in a value-maximizing

manner. The Hadley rule, which denies recovery for losses that the promisor

could not ordinarily foresee, is thought to provide promisees with incentives to

reveal how much they value performance, in order to give the promisor optimal

with incentives to take care. The mitigation rule, which denies recovery for

losses that the promisee could have avoided by mitigating damages after the

breach, is thought to provide promisees with the proper incentives to reduce

losses caused by the promisor’s breach. Several theoretical and empirical

ambiguities, however, weaken these arguments. Two other undercompensatory

damages rules - the reasonable certainty doctrine and the emotional distress

doctrine - are also discussed.

The section also deals with precautionary behavior by both the promisor and

the promisee. The expectations rule encourages the promisor to take optimal

precautions, but it also discourages the promisee from taking precautions. To

encourage the promisee also to take optimal precautions, damages must be

invariant with respect to the amount of reliance and, ideally, should be set at

the efficient level of reliance. Causation is not an important concept in contract

law and scholarship.

JEL classification: K12

Keywords: Contract Remedies: Foreseeability, Precaution, Causation, and

Mitigation

 

1. Introduction

 

The expectation measure of contract damages, which requires the breaching

promisor to pay the promisee an amount of money sufficient to put the

promisee in the position it would have been in if the promisor had performed,

is the standard measure of damages in Anglo-American law, but it is subject to

several exceptions. First, the award is reduced when a portion of the promisee’s

loss is attributable to circumstances that the promisor could not ordinarily

foresee. This result is due to the rule of consequential damages, also known as

the Hadley rule, after Hadley v. Baxendale (1854). Second, the award is

reduced when a portion of the promisee’s loss is attributable to the promisee’s

failure to take actions that would have minimized its losses subsequent to the

promisor’s breach. This result is due to the mitigation rule. Two less important

doctrines hold that the award is reduced when the promisee cannot show that

the loss was reasonably certain, and when the loss consists of emotional

distress. Because these four rules on average produce an award lower than that

produced by the expectation rule if applied unconditionally, they can be thought

of as composing a larger category of undercompensatory contract damages

rules.

 

The value of the Hadley, mitigation, reasonable certainty and emotional

distress rules, like that of all other rules of contract law, depends on their

effects on the various forms of contract-related behavior. This behavior includes

the selection of contracting partners, the choice of contracting rather than using

other forms of commitment, the care in drafting the contract, the disclosure by

each party of private information, investment in anticipation of performance,

the taking of precautions to minimize the expected loss from breach, the

allocation of risk, performance rather than breach, and the readiness to

renegotiate contractual obligations in light of changed circumstances. We

concentrate on the promisee’s incentives to disclose information, to take

precautions and to mitigate damages. The Hadley rule and the mitigation rule

have their greatest impact on these forms of behavior, and they will be

discussed in the first and second sections of this chapter. The third section

discusses the effect of damages rules on the parties’ incentives to take

precautions. The fourth section discusses causation, which, however, is not an

important concept in contract law. The fifth section briefly discusses the

reasonable certainty and emotional distress rules; however, these rules either

have not received much attention in the literature or are discussed in other

chapters of this encyclopedia.

 

2. The Hadley Rule

 

The Hadley rule states that promisors are not liable for losses that are not

‘foreseeable’. This term has attracted a great deal of criticism. Some

commentators charge that courts simply call a loss ‘unforeseeable’ whenever

they believe, for an unarticulated reason of policy, that the loss should not fall

on the promisor (see Fuller and Perdue, 1936). Whether or not this skepticism

is justified, the term does not provide much guidance, because sophisticated

parties can foresee and often do foresee the range of losses considered

unforeseeable by courts. For example, if a carrier fails to deliver goods or

delivers them late, and this breach causes large losses for the shipper, perhaps

because the goods were to perform a crucial role in the production process, the

carrier will usually be liable for a limited amount, such as the purchase price,

rather than the amount necessary to satisfy the shipper’s expectation. In the

traditional doctrine, the shipper receives full expectation damages only if the

losses are predictable or if the shipper informs the carrier of the size of the

anticipated loss prior to agreement. But surely the uninformed carrier can

‘foresee’ that some shippers place a greater value on performance than other

shippers. When courts say that a loss is unforeseeable, the best interpretation

of this conclusion is that the loss is considerably greater than the average of the

losses that result from the kind of breach in question.

 

The Hadley rule is a default rule: parties are free to bargain around it and

frequently do. Carriers, for example, often limit their liability and separately

sell insurance against losses from misdelivery of expensive goods. The question

asked by the Hadley literature is why the default rule limits liability to

foreseeable damages, rather than imposing full liability on the promisor. It is

thus typical to compare the Hadley (or ‘limited liability’ rule) to a full

expectation rule (or ‘unlimited liability’).

 

Default rules have well-recognized functions: by providing background

terms they spare the parties the costs of negotiating ‘complete’ contracts and

they provide a focus to their negotiations. Assuming for the moment that the

only purpose of default rules is to minimize transaction costs, the optimal

default rule is the one that on average minimizes the necessity of bargaining,

or, what is the same thing, that maximizes the ex ante value of the contract.

 

The relative advantages of the Hadley rule and expectation damages depend

on which of the forms of behavior mentioned above has the greatest impact on

the ex ante value of the contract. Inefficient breach, for example, is not fully

deterred by the Hadley rule. To see why, consider a promisor (for concreteness,

the ‘seller’) who would gain more from breaching than keeping its promise to

the promisee (the ‘buyer’). Suppose that when deciding whether to breach, the

seller accurately anticipates the buyer’s loss from breach. If the seller expects

to be required to pay only average damages, it will breach even when the loss

to the buyer from breach exceeds the seller’s gains from breach. In contrast, the

expectations measure deters inefficient breach. The reason for the different

outcomes is that the Hadley rule does not permit compensation for the loss of

the buyer’s private, idiosyncratic value if not disclosed to the seller; but this loss

is real, and if the seller is permitted to ignore it, then it will breach even when

the buyer’s loss exceeds the seller’s gain. The effects of the rules on precaution

- to take another example - are more complex. By forcing the buyer to incur

part of the loss caused by the breach, any undercompensatory damages rule,

including the Hadley rule, gives the buyer an incentive to take precautions

against the loss. There is, however, no necessary relation between the Hadley

rule and the optimal level of buyer precaution. (More on this later.)

 

Unifying the analysis of the different effects of the Hadley and expectation

rules is difficult. It is possible that for some broad class of transactions the ex

ante value of contracts depends mostly on deterring inefficient breach, whereas

for another class of transactions the ex ante value of contracts depends mostly

on deterring insufficient precaution-taking by the promisee. If so, the Hadley

rule should be enforced more vigorously in the second class than in the first.

This approach has not, however, been taken in the literature, and it is not clear

whether it would be fruitful.

 

The literature has focused instead on the problem of asymmetric

information. Suppose that the carrier deals with two kinds of customers: highvalue

shippers, who suffer a large loss in case of misdelivery, and low-value

shippers, who suffer a small loss in case of misdelivery. The carrier does not

know whether a particular customer is high-value or low-value, but does know

the proportion of each type in the population. Shippers know their own type.

All parties are neutral with respect to risk. Because the loss avoided by

investing in precautionary measures increases from the low type to the high

type, the optimal contract with the high-value shipper would require the carrier

to take costly precautions, whereas the optimal contract with the low-value

shipper would require the carrier to take few precautions. Suppose that the

expectation rule prevails. With full information the carrier would simply charge

a higher fee for the high-precaution shipments than for the low-precaution

shipments, and take the optimal level of precaution in each case. Without full

information, the carrier would take an intermediate level of precaution and

charge an intermediate price, producing two sorts of inefficiency. First, the

carrier would take a suboptimal level of care when making high-value

shipments. Second, too few contracts with low types will occur, because the

intermediate price charged for unnecessary care will drive some of the low

types from the market; and too many contracts with high types will occur,

because their price is subsidized by the low types who remain in the market.

 

The Hadley literature originated with an influential argument that the

Hadley rule cures these two inefficiencies. The argument asserts that under the

expectation rule the high-value shipper has no incentive to reveal information.

Whether or not the high-value shipper reveals its type, the expectation rule

awards it damages sufficient to cover its loss. Because the shipper therefore

expects full compensation whether the carrier breaches or not, it is indifferent

as to whether the carrier breaches or not; and so it does not care whether the

carrier minimizes the chance of breach by taking the optimal (high) level of

precaution. The carrier can take the optimal level of precaution only if it knows

the shipper’s valuation; but because the shipper does not care about whether the

carrier takes precautions, the shipper does not disclose its high valuation.

Under the Hadley rule, in contrast, the high-value shipper is undercompensated

if it does not disclose its type, because the average level of damages is

intermediate between high and low. To ensure adequate compensation in case

of breach, the high-value shipper discloses its type. Now ‘foreseeing’ the large

loss should it breach, the carrier will be liable under the Hadley rule for high

damages if it breaches. To limit its expected liability the carrier invests in

precautions until their marginal cost equals the marginal gain from avoided

loss. Thus does the carrier invest in optimal precaution. Meanwhile, the carrier

can distinguish the low-value shippers as those who do not state that they

belong to the high type. The carrier can therefore charge the low-value shippers

a lower fee, also taking the fewer precautions that are optimal for low-value

shippers. Thus are the optimal number of low-value contracts entered. The

Hadley rule cures both forms of inefficiency (see Barton, 1972; more recent

treatments include Perloff, 1981; Bishop, 1983; Quillen, 1988; Cooter and

Ulen, 1988; Ayres and Gertner, 1989; Bebchuk and Shavell, 1991; Eisenberg,

1992; and Posner, 1992).

 

A problem with some of the earlier discussions in the literature results from

their focus on the behavior of the high-value shippers to the exclusion of the

behavior of the low-value shippers. The argument tacitly assumes that although

high-value shippers can and do contract out of the Hadley rule, low-value

shippers would not contract out of the expectation rule. If the low-value

shippers cannot contract around the expectation rule, then, of course,

inefficiencies result. If the low-value shippers can contract around the rule,

however, they will. The reason is that the low-value shippers prefer a package

offering a low price, few precautions and low damages, to the package offering

intermediate price, intermediate precautions and intermediate damages.

Therefore, the low-value shippers will identify themselves as low-value

shippers and offer to agree to limited liquidated damages in case of breach.

Because their liability in case of breach of contract with low-value shippers is

thus limited, the carriers take fewer precautions. The carriers also charge the

low-value shippers a reduced fee, which attracts back into the market all lowvalue

shippers who value shipment more than its marginal cost to the carrier.

This cures the problem of too few contracts with low-value shippers. Since the

carriers know that only high-value shippers would decline to identify

themselves as low-value shippers, the carriers know to charge a high fee to any

shipper that fails to identify itself as a low-value shipper. Because the carriers

remain subject to full expectation damages with respect to the high-value

shippers, and because they can accurately predict the extent of their liability

(now that the high-value shippers are no longer pooled with the low-value

shippers), they will increase their level of precaution to the optimal level with

respect to the high types. This cures the problem of inefficient precaution (see

Perloff, 1981; Ayres and Gertner, 1989; Bebchuk and Shavell, 1991).

 

Barring further analysis or empirical work, the arguments are in equipoise.

To see more clearly why, observe that to compare default rules, one sums (1)

the expected costs of contracting around the rules (also sometimes called the

‘communication costs’), and (2) the losses resulting from the failure to contract

around when doing so is not individually cost-justified. Consider one element

of the expected costs of contracting around each rule: the proportion of high

and low types in the population. If low types form a majority, then more

contracts require disclosure of information under the expectation rule, where

low types bargain around, than under the Hadley rule, where high types bargain

around. If it is costly to bargain around contracts by disclosing information,

then, everything else being equal, the Hadley rule generates fewer costs. The

problem with the argument, however, is that there is no reason for believing

that low types outnumber high types. More likely, the valuations are

approximately normally distributed, and if a model requires bifurcation of the

distribution then it should assume that half the types are high and half are low,

an assumption which, unfortunately, renders the analysis indeterminate. These

considerations appear to account for the skepticism toward the Hadley rule in

Perloff (1981). Ayres and Gertner (1989) and Bebchuk and Shavell (1991)

argue informally that the Hadley rule is superior when communication is

socially optimal, but it is clear from their models, as the authors appear to

recognize, that this conclusion depends on the assumption that high types form

a minority.

 

Consider now the costs of bargaining around a default rule - the costs of

communicating one’s type and of negotiating and drafting the contracts.

Suppose that the low types and the high types are equal in number. The Hadley

rule is favored if the cost to low types is systematically higher than the cost to

high types. There is no reason, however, to assume that the different types

would typically incur different bargaining costs. As an aside, note that if the

bargaining costs are trivial, never preventing parties from bargaining around,

then the entire default analysis becomes irrelevant, since the parties can always

choose the optimal terms.

 

Finally, when the cost of communication exceeds the gains produced when

the carrier takes the optimal level of precaution rather than the intermediate

level of precaution, it is socially suboptimal for communication to occur, but

under certain conditions the Hadley rule, but not the expectation rule, will

cause the high types to communicate (see Bebchuk and Shavell, 1991). To see

why, imagine that the equilibrium obtains in which only the high types

communicate. If a high type were to deviate, then it would save the costs of

communication, but it would incur an expected loss as a result of the carrier’s

move from high to low precautions. The high type would stop communicating

its type only if the former exceeded the latter. But from the perspective of social

welfare, the relevant comparison is between the savings in communication

costs, on the one hand, and the loss resulting from the move from the high level

of precaution to the intermediate level of precaution. The reason is that if no

high types communicated, then the carrier would offer the intermediate

package of precaution, price and damages, not the low package. It is thus

possible that communication costs for high types are high enough that no

communication is socially optimal, but also low enough that no high type

would decline to communicate, given that all other high types are

communicating. To be sure, the low types are injured by a move from a

communication to a no-communication equilibrium, since they communicate

in neither case and prefer the package of price, precaution and damages in the

first case. But under the right conditions their injury is smaller than the gain

to the high types.

 

In sum, although a cursory reading of the literature may suggest otherwise,

the information revelation arguments do not clearly favor the Hadley rule or the

expectation rule. The Hadley rule dominates the expectation rule only under

special conditions, and there is no reason to believe that these conditions

generally prevail or that, when they do prevail, courts can reliably identify them

for the purpose of applying the rules. The indeterminacy is not surprising,

given that the Hadley articles so far discussed rely on signaling models, and the

difficulty of ranking equilibria produced in signaling models is well-known.

Another branch of the Hadley literature also assumes asymmetric

information but assumes further that the party without the private information

has market power. Suppose the carrier has market power and the shippers do

not. The existence of market power changes the high-value shippers’

calculations under the Hadley rule. If they reveal their type, they will expect the

carrier to respond by charging them a supracompetitive price. If they do not

reveal their type, however, they will not gain the benefit of full compensation

in case of breach. In weighing these costs, shippers will sometimes choose not

to reveal information, resulting in the precaution and number-of-transactions

inefficiencies discussed above (Wolcher, 1989; Johnston, 1991). In contrast,

under the expectation rule, the low-value shippers lose nothing from revealing

their type. Indeed, they gain. Because the carrier can price-discriminate against

the high types only if it can identify them, and it can identify them only if the

low-value shippers disclose their type, the carrier will offer the low types a

lower price in order to encourage such disclosure. The parties thus

distinguished, the carrier will offer each type a different package of price,

compensation and care. On these grounds Johnston (1990) prefers the

expectation rule to the Hadley rule.

 

The argument does not, however, show that the expectation rule dominates

the Hadley rule under general conditions. To see why, observe that the carrier

can force the parties to reveal their types only by offering alternative contracts,

one of which (the ‘high’ contract) the high types prefer to the other (the ‘low’

contract), but the other of which the low types prefer to no contract at all. At

the same time, the carrier will maximize profits by exploiting its monopoly

power, and this means charging prices that are as close to the types’ valuations

as possible. To encourage the low types to accept the low contract, the carrier

must give them a price below their valuation; but if this price is too low, the

high types will choose the low contract over the high contract, frustrating the

carrier’s attempt to maximize profits. To make the low contract sufficiently

unattractive to the high types, the carrier will set the damages level at a low

level. Obviously, the carrier would not set the damages level above the low

type’s valuation; but it can also be shown mathematically (see Ayres and

Gertner, 1992, pp. 768-769) that the damages level in the low contract will be

lower than the low type’s valuation. (The intuition for this result is that a high

damages level for the low contract would drive the price for the low contract

down, leading to a greater difference in prices for the high and low contracts,

which would attract the high types to the low contract, but this would prevent

the carrier from price discriminating against them.) But if the damages level

in the low contract is less than the low type’s valuation, then the carrier will

take an inefficiently low level of precautions. This efficiency loss occurs under

both the expectations and the Hadley rule. The relative size of the efficiency

loss depends on a variety of factors, such as the parties’ relative valuations, the

proportions of types in the population, and so on, so that one cannot describe

abstract conditions under which each rule produces better outcomes.

 

The analysis of Hadley thus plummets into theoretical indeterminacy, but

a few routes may lead out of this impasse. First, greater attention to historical

and current commercial practices may reveal that some common assumptions

are implausible and can safely be ignored in analysis. Legal and commercial

constraints, for example, may inhibit the exercise of market power by carriers

and other promisors. The empirical efforts of Danzig (1975), Landa (1987),

Epstein (1989) and Johnston (1990) provide a foundation for such work.

Second, greater attention to institutional issues may put helpful constraints on

the analysis. If courts have general knowledge about valuations in an industry,

if they can reliably distinguish between cases in which transaction costs are

high and cases in which they are low, and if they can detect market power, then

they should apply a rule that makes the extent of liability turn on all these

factors; but if they cannot, then perhaps a bright-line rule should be used, such

as unlimited liability, on the grounds that it would put the least demands on

their abilities.

 

3. The Mitigation Rule

 

The mitigation doctrine requires the promisee to take steps to reduce the loss

from breach after it learns of the breach or acquires reason to know of it. If the

promisee fails to take such steps, it will not recover full expectation damages.

Instead, it will receive damages sufficient to compensate it for the loss that it

would have incurred if it had taken the proper steps to mitigate. In this way, the

mitigation doctrine, like the Hadley rule, is an undercompensatory damages

remedy. Also like the Hadley rule, the mitigation doctrine is a default rule.

 

The buyer (that is, the promisee) often has a chance to minimize the loss

resulting from breach. For example, upon learning that the seller will not make

a timely delivery of components that the buyer plans to use in producing goods,

the buyer can consider buying replacements on the market and using them

instead, or it can suffer a delay in production. If it does not purchase

replacements, then it will lose profits from the delay in production. If it does

purchase replacements and their price exceeds the contract price of the

promised goods, then it will incur a loss equal to the difference in price.

Mitigation refers to the buyer’s choice of the response that minimizes the loss

resulting from breach.

 

The most thorough analysis of the mitigation doctrine is that of Goetz and

Scott (1983). See also Wittman (1981), and the comments in Bebchuk and

Shavell (1991). Suppose that renegotiation is prohibitively expensive and that

no mitigation rule exists, and that after the seller breaches, the buyer has the

opportunity to reduce its expected loss from $100 to $50 by taking some action,

like purchasing a substitute on the spot market. (For simplicity, the cost of

mitigation is built into the loss; this could also be understood as the buyer

incurring a $10 expense to reduce the expected loss from breach to $40.) We

also assume throughout that the buyer can more cheaply reduce the expected

loss than the seller can; otherwise, there is no problem, since the seller has

every incentive to reduce its own liability. Under the rule of expectation

damages, the buyer expects to be fully compensated for its loss regardless of

whether it mitigates. If it mitigates properly, then it will incur only a $50 loss,

but it will receive only the $50 damages necessary to compensate it. If it fails

to mitigate and so loses profits, then it will incur a $100 loss, but it will receive

the $100 in damages necessary to compensate it. Thus, the buyer has no

incentive to engage in mitigation in the absence of the mitigation rule. But

clearly mitigation is efficient: it reduces net losses by $50. The reason the buyer

does not mitigate is that the seller enjoys the gains while the buyer incurs the

costs. To give the buyer the incentive to mitigate, it must be penalized when it

fails to do so. The mitigation rule produces this penalty by imposing on the

buyer the loss that the seller would otherwise incur from the buyer’s failure to

mitigate. If the buyer fails to mitigate, it would incur a loss of $100 but receive

damages of only $50; if it mitigates, the $50 damages would fully compensate

it for the $50 loss. Therefore, the buyer would mitigate.

 

Notice that the buyer has an incentive to mitigate as long as it does not

recover actual damages and that the amount it does receive is unrelated to

actual loss. While the mitigation doctrine performs this function, so would any

damages rule that provides an amount that is invariant with respect to the

actual loss - for example, a rule of zero damages.

 

The argument is less straightforward if renegotiation costs are low. In the

absence of the mitigation rule, the seller could, at the time of breach or in

anticipation of breach, offer to pay the buyer to mitigate. Since the seller bears

the full costs of the failure to mitigate, it will pay the buyer to the extent that

the gains from mitigation exceed its costs; and as long as this is the case, the

buyer would be willing to accept the payment and to engage in mitigation. In

the example, the seller would offer to pay the buyer up to $50 to mitigate, since

mitigation would reduce the seller’s liability by $50. The efficient outcome is

obtained. The only difference between this result and the result under the

mitigation rule is that the cost of mitigation is fully borne by the buyer under

the mitigation rule, whereas in the absence of the rule the cost of mitigation is

fully or partly borne by the seller, depending on its bargaining power.

 

This argument, at first glance, suggests that the value of the mitigation rule

depends on its effect on incentives to engage in ex post renegotiation. One

might argue that the no-mitigation rule creates worse incentives to renegotiate.

Under the no-mitigation rule the buyer has strong incentives to hold out for a

large payment from the seller and the seller has strong incentives to pay as little

as possible, so that the gains from mitigation would be dissipated as the parties

haggle. This problem, however, is offset by an advantage of the no-mitigation

rule, namely, that it forces the seller to disclose an anticipated breach at the

earliest possible moment. In contrast, under the mitigation rule the buyer must

guess the likelihood and time of breach, and take steps to mitigate in light of

its incomplete information. For discussions of the complex problems of the

timing of breach, and of repudiation and cure, see Jackson (1978), Goetz and

Scott (1983) and Craswell (1990).

 

Even supposing low renegotiation costs, the mitigation and the nomitigation

rules have different effects on behavior. Consider, for example, the

parties’ incentives to take precautions against loss. The seller has higher

expected costs under the no-mitigation rule than under the mitigation rule,

because under the former it must pay the buyer to mitigate in case of breach.

These costs will encourage the seller to take precautions against the loss from

breach; but at the same time the expected gain to the buyer in mitigation

payments in case of breach will deter the buyer from taking precautions. Under

the mitigation rule, the buyer no longer has this disincentive to take

precautions, but now the seller, because it no longer expects to have to pay the

buyer to mitigate, has less reason to take precautions. Another example of the

different effects the rules have on the parties’ behavior concerns the allocation

of risk. Under the no-mitigation rule, the seller charges the buyer a premium

to make up for the expected cost of paying the buyer to mitigate. The premium

can be thought of as the cost of a lottery ticket that gives the buyer the chance,

equal to the probability of breach, to gain the value of the premium. There is

no reason to think that a buyer would be willing to purchase this lottery ticket.

Risk-averse buyers do not want to take on risk, and risk-preferring buyers can

gamble more profitably by visiting a casino (compare Craswell, 1990). The nomitigation

rule creates an added cost to contracting, and this cost will deter

people from entering otherwise value-maximizing contracts.

 

If a mitigation rule seems superior to a no-mitigation rule, some authors

doubt that courts apply the mitigation rule in a proper way. For example, some

courts award the buyer the difference between the contract price and the market

price of the substitutes without taking into account the possibility that the buyer

should mitigate also by purchasing fewer substitutes or substitutes of lower

quality. But when prices of goods rise, users of them generally should reduce

consumption (see Fenn, 1981). Another example is the practice of refusing to

compensate buyers who engage in high-risk mitigation strategies that result in

no actual loss reduction, or allowing full compensation of buyers who decline

to engage in mitigation strategies that require high capital outlays. As

MacIntosh and Frydenlund (1987) point out, the net present value of a

mitigation strategy, not its riskiness or costliness, determines its suitability.

These criticisms, however, do not undermine the mitigation rule so much as

raise the issue of whether it should be enforced as a series of strict liability

rules, as reflected in the doctrines criticized, or as a negligence-like standard

as the authors implicitly argue. A standard taxes judicial competence, but

whether this cost outweighs the systematic distortions caused by rules is not

known.

 

To return to more general issues, one might ask why the mitigation analysis

and the Hadley analysis follow such different paths. The disclosure of

information, which is the focus of the Hadley analysis, and the mitigation of

losses, which is the focus of the mitigation analysis, are but aspects of promisee

behavior that minimizes the expected loss from breach. Indeed, the Hadley rule

encourages the promisee to mitigate post-breach whenever the

‘unforeseeability’ of the magnitude of its prospective loss threatens it with an

undercompensatory remedy. And the mitigation rule encourages the promisee

to disclose information prior to contracting whenever the disclosure of

information would enable the promisor to take precautionary steps that are

more cost-effective than post-breach mitigation by the promisee. Both the

Hadley rule and the mitigation rule threaten the promisee with

undercompensatory damages in order to encourage it to engage in lossminimizing

behavior: in this way, they address the same problem in a similar

manner. The convenient but artificial distinction in the doctrine has created an

unjustified divergence in scholarly analysis.

 

4. The Precaution Decision

 

A ‘precaution’ can be defined as any act by a person that reduces the expected

loss from breach of contract. A person can take precautions by using care in

selecting a contracting partner, by disclosing information to that partner, by

drafting the contract in clear and simple language, by purchasing insurance

against loss from breach, by modifying its capital investments to minimize the

loss from breach, by mitigating, by renegotiating, and so on - in short, by

taking any of the value-maximizing steps that were discussed in prior sections.

One should take care in reading the literature, because commentators use the

word ‘precaution’ in different ways. Goetz and Scott (1980) limit their

discussion of precaution to the promisor’s use of clear contracting language that

encompasses an adequate quantity of contingencies. Cooter (1985) limits his

discussion of precaution to efforts made by the promisor and the promisee to

minimize the expected loss from breach of contract between the signing of the

contract, on the one hand, and performance or breach, on the other. Because we

have already discussed disclosure of information and mitigation, and because

discussion of the other aspects of precaution can be found in Chapter 4600, we

follow Cooter.

 

The only sustained discussion of precautionary behavior as an aspect of contract

law (it appears routinely, however, in commentary on the law of products

liability and, of course, on the law of torts generally) is that of Cooter (1985)

(see also Cooter and Ulen, 1988). In Cooter’s model, a promisor agrees to

deliver goods at a certain time. The promisor and the promisee choose whether

to take precautions, and the jointly maximizing behavior of each party is to take

precautions. For example, if the promisor agrees to rent warehouse space to the

promisee at a future date, the promisee can take a precaution against breach by

reserving storage space at another site or by letting its inventory run down. The

precaution is costly to the promisee, but we suppose that it reduces the expected

loss from breach by more than it costs the promisee. It is therefore efficient for

the promisee to take the precaution, in the sense that the gains from the

precaution exceed the cost. Indeed, a complete contract would require the

promisee to take the precautions. When transaction costs prevent the parties

from describing the promisee’s duty to take a particular precaution, however,

the promisee would not take the precaution in the absence of a legal rule

compelling it to do so. The reason is that it incurs the costs of the precaution

but the promisor enjoys the gains. A legal rule that forced the promisee to take

the precaution might therefore seem desirable.

 

Similarly, the promisor can incur costs to lower the expected loss from

breach. For example, the promisor can take a precaution against breach by

hiring a guard to protect the premises, so that the warehouse will not be

destroyed by fire. If the cost of hiring the guard is less than the expected loss,

the promisor would maximize the value of the contract by hiring the guard. A

legal rule should force the promisor to take such a precaution.

 

What kind of rules would serve these purposes? For the promisor,

expectation damages would ensure the optimal level of precaution. Since

expectation damages force the promisor to bear the promisee’s loss, the

promisor would take precautions to the point where their marginal cost equals

the marginal expected reduction in the promisee’s loss. The problem with

expectation damages, however, is that they would discourage the promisee from

taking precautions. The reason is that if the promisee is fully compensated

whether or not it takes precautions, it has no incentive to take them. Another

rule is necessary for encouraging the promisee to take precautions.

 

One possibility is a rule that awards zero damages. To see why, imagine

that the breach would result in an expected loss of $100 if the promisee fails to

take a precaution, and in an expected loss of $50 if the promisee takes a

precaution that costs it $10. Under the zero damages rule, the promisee expects

to bear the full loss, and so would take the $10 precaution in order to reduce the

loss from $100 to $50. The problem with zero damages, however, is that it

gives the promisor no incentive to take precautions. Thus, there is a tension

between creating incentives for the promisor to behave properly and creating

incentives for the promisee to behave properly.

 

One possible resolution is a rule, analogous to the mitigation rule, that

would require the promisee to take precautions whenever they produce gains

greater than their costs. Such a rule might hold that the promisee must take

‘reasonable’ precautions against breach, meaning that the promisee suffers a

reduction in damages equal to the amount of loss it could have avoided by

taking precautions minus the cost of those precautions. Under this rule the

promisee will take cost-justified precautions in order to avoid the reduction in

damages. Then the promisor would bear any residual losses caused by its (the

promisor’s) failure to take cost-justified precautions, and to avoid these costs

the promisor would take precautions as well.

 

Another possibility is a rule that limits the promisee’s damages to an

amount that is invariant with respect to its level of reliance. We already saw

that a rule that gave the promisee zero damages would cause it to use the

precaution, because by doing so it incurs a $10 cost in order to reduce its losses

by $50. Similarly, a rule that gave the promisee $50 of damages would cause

it to use the precaution, because the $10 cost of the precaution is less than the

reduction in the uncompensated loss from $50 (that is, $100 loss minus $50

damages) to $0 (that is, $50 loss minus $50 damages). Even a rule that gave the

promisee $200 in damages would cause it to use the precaution. The promisee

expects to gain more from taking the precaution (-$50 - $10 + $200 = $140)

than by failing to take the precaution (-$100 + $200 = $100). The crucial

distinction between this rule and expectation damages is that under the former

the promisee benefits from taking precautions, whereas under the latter the

promisor benefits when the promisee takes precautions. The promisee can be

forced to internalize the cost of failing to take precautions only by a rule that

makes its damages award invariant with respect to the amount which it invests

in precautions. To be sure, the $200 rule, like the $0 rule, would create

improper incentives for the promisor. It would cause the promisor to take too

many precautions and to perform when it should breach. The optimal damages

rule with respect to both promisor and promisee incentives would require an

amount equal to what would be necessary to put the promisee in the position it

would have been in if the promisor had performed and the promisee had taken

efficient precautions.

 

The reader might recall from Chapter 4600 that a similar conclusion was

reached with respect to the question of promisee ‘reliance’. The connection

between precaution and reliance is indeed very close. Scholars often talk of the

promisee engaging in too much reliance or engaging in too little reliance on

promises, by which they mean that the promisee invests more or less than the

jointly value-maximizing amount between the signing of the contract and the

completion of performance. The notions of promisee reliance and promisee

precaution capture similar phenomena but from opposite directions: a promisee

who takes too few precautions relies too much; a promisee who takes too many

precautions relies too little. Commentary on reliance has focused on the

behavior of the promisee in relation to the promisor’s incentive to breach,

whereas analysis of precaution has dealt with the precautionary behavior of

both the promisor and the promisee. But the conclusions of the two analyses are

the same: the remedy of expectation damages is suboptimal because it allows

the promisee to externalize costs on the promisor. The optimal damages rule

would give the promisee the value of the expectation it would have had if it had

engaged in the optimal level of reliance or - what is the same thing - the

optimal level of precaution.

 

This rule, however, does not exist. No rule straightforwardly encourages

promisees to take efficient precautions. To be sure, promisees may fear that the

Hadley rule and the mitigation rule will result in undercompensatory damages,

and thus take precautions in order to limit their expected losses (compare

Cooter, 1985). But neither the Hadley rule nor the mitigation rule directs courts

to take account of a promisee’s precautions other than those of disclosing

information pre-contract and mitigating damages post-breach. Cooter (1985)

notes that parties can contractually limit damages to encourage the promisee

to rely, but parties are free (usually) to contract around any damages rule. The

question is why there is no default rule that, on an analogy to the Hadley rule

and the mitigation rule, encourages precautionary behavior when transaction

costs prevent the parties from stipulating damages in advance. There is not an

obvious answer, but one possible direction of research would inquire into

whether courts are more competent at making some kinds of evaluations, such

as the reasonableness of mitigation, than others, such as the propriety of

precautionary behavior.

 

5. Causation

 

Causation is not an important concept in Anglo-American contract law. This

is partly because the concept of causation is captured by other contract

doctrines. If the promisee fails to mitigate, one might say that the promisor did

not cause the entire loss, and therefore should not be fully liable; but this result

is produced through application of the mitigation doctrine, and a separate

‘causation doctrine’ is not necessary, as it is in tort law. In only a handful of

contract cases do courts discuss causation as a distinct issue. These cases

involve a promisee who has separate contracts with two different breaching

promisors, both of which breaches are sufficient to cause some or all of the loss.

These cases have not attracted the attention of scholars, probably because of

their rarity. The tort doctrine of proximate causation has an analogy in the

Hadley doctrine and the doctrine of ‘reasonable certainty’. All of these

doctrines release the wrongdoer from some or all liability when the victim’s

loss is not entirely attributable to the promisor’s wrongdoing.

 

6. Related Doctrines

 

Two other doctrines are related to the themes that have been discussed. The

first limits expectation damages to an amount sufficient to compensate the

promisee for a loss that is ‘reasonably certain’. The second denies promisees

compensation for emotional distress arising from a breach of contract. Both

doctrines, like the Hadley rule and the mitigation rule, are undercompensatory.

The reasonable certainty doctrine requires the promisee to prove its loss with

a greater degree of certainty than that required by the preponderance of

evidence test that governs the other elements of civil actions. Some

commentators argue that, in practice, the courts use the doctrine in a highly

flexible way to prevent recovery of damages whenever they seem to

overcompensate the promisee. Possibly, courts use the doctrine to punish

promisees who engage in too much reliance, take too few precautions, or

misbehave in other ways. This would support the analysis of Cooter (1985),

described above.

 

Another possibility is that the reasonable certainty doctrine actually does

have analytic bite, and serves the purpose of preventing parties from

externalizing the cost of resolving disputes on the courts. Unlike the injurers

and victims under tort law, which has no analogous doctrine, the parties to a

contract can anticipate a legal dispute and take steps in advance of performance

to facilitate adjudication. For example, if they anticipate that a loss, such as the

loss of good will or the loss of personal enjoyment of the goods or services, will

be hard for a court to measure, they can arrange for a liquidated damages

provision to specify that loss in advance. To deter parties from externalizing the

cost of determining loss onto the courts, and to encourage them instead to

supply a liquidated damages provision, a doctrine denying compensation for

uncertain loss might be justified. See Chapter 4600 for discussion of the closely

related issue of subjective loss.

 

The ‘emotional distress’ doctrine raises issues similar to those raised by the

reasonable certainty doctrine, but it raises one additional issue. The tort

literature suggests that the case for compensation for emotional distress is

uneasy. On the one hand, it is not clear that people would purchase insurance

against nonpecuniary loss, because the marginal utility of money in the

accident state of the world, once pecuniary losses are compensated, is not

necessarily higher than the marginal utility of money in the non-accident state

of the world. On the other hand, if the promisor is not forced to pay damages

for emotional distress, it will have an incentive to take too few precautions

against breach. For discussion of these issues, see Chapter 5140.

 


中国法律经济学网登载此文出于学术研究之目的,绝不意味着中国法律经济学网赞同其观点或证实其描述。以上内容仅供研究者学习与交流,无意侵犯版权。如有侵犯您的利益,请告知。我们将尽快删除。

加入日期:2007/1/11 8:52:54浏览次数:2389
发表评论
名号:
内容:
验证: 7015
法律经济学网
联系站长: 柯华庆 lawgame@263.net 京ICP备09028584号
北京市昌平区中国政法大学法学院(102249)
本网站由卡卡鱼网提供技术支持 网站总访问量:1996356