by Tom Stilp JD, MBA/MM, LLM, MSC, DBA, February 14th, 2025
As covered in our last In the Loop article, the law does not make moral judgments about a breach of contract (Holmes, 1897). Under the law, damages for breach of contract do not depend on the reason for breaking the contract. Not only does the law appear indifferent, but there is an entire school of thought under the Efficient Breach Theory that a contract should be broken when in some instances it is more profitable to break a contract (Posner, 1976).
The law’s attitude goes against the common belief of many people who think a breach of contract is immoral (Khorui, 2002). Two legal scholars tested attitudes about breach of contract using surveys of 251 people in three separate studies (Wilkinson-Ryan and Baron, 2009). The following is a summary of their findings.
The first study looked at the motivation for the breach by a contractor, whether it was to make more money taking another more profitable job (gain event), or whether it was to avoid a loss because prices increased making the job unprofitable (loss event). Participants believed the contractor in the gain event was more morally culpable and were likely to award larger damages. These findings would seem to go against the Efficient Breach Theory which espouses the view that a breach may be acceptable.
The second study focused on whether the parties agreed in advance to damages in the contract (known as a “liquidated damages clause”) or whether the parties left damages out of the contract and for a later decision. The study found participants would award higher damages ex-post contract than if damages were negotiated before any breach occurred.
In the third study, participants read two scenarios that led to the same exact loss. In the first, the breach was intentional. In the second, the breach was unintentional, that is, the breach was the result of something outside the control of the parties (e.g., weather). Although the losses were identical, an intentional breach was considered more blameworthy justifying higher damages than the unintentional breach based on an outside event which made performance of the contract impossible by one of the parties.
The findings are important for trial attorneys and their clients, especially when juries apply notions that overtake the law’s technical perspective that a breach of contract is not immoral. Experienced counsel will know how to develop facts to provide a compelling narrative why the breach of contract occurred to maximize damage awards.
References
Holmes, O.W. (1897). The Path of the Law. Harv L Rev, 10, 457 at 462.
Khorui, N. (2002). Efficient Breach Theory in the Law of Contract: An Analysis. Auckland
Univ. L Rev, 9(3), 739-763.
Posner, R. (1976). Antitrust law: An economic perspective (Univ. of Chi).
Wilkinson-Ryan, T. and Baron, J. (2009). Moral judgment and moral heuristics in breach of
contract. Journal of Empirical Legal Studies, 6(2), 405-423.
