The moral obligations entailed by a contractual promise implicate unusually robust moral intuitions, which may deter parties from breaching even when there is an economic incentive to do so. However, those intuitions are not immutable. Decision researchers have found experimental evidence that, when social norms are in conflict with efficiency incentives, a more explicit incentive structure leads to more self-interested behavior. Liquidated damages are a means of making the sanction for breach explicit within a contract. The hypothesis of this research is that parties will be less resistant to breaching a contract that includes a liquidated damages clause. In a series of web-based questionnaires, subjects read contracts scenarios involving efficient breach opportunities. Subjects were asked to imagine themselves in the position of the promisor, and to indicate in each case the lowest offer that they would accept (from a hypothetical third-party offeror) to breach each contract. Subjects were randomly assigned to read either that their contract had a liquidated damages clause specifying damages for breach, or they were assigned to read an identical scenario in which the same damages were said to be "required by the law of contracts." Subjects in the liquidated damages condition gave much lower willingness-to-accept responses; they were willing to breach for less money. This was true even when the liquidated damages clause included a slight penalty on top of the promisee's expected loss. I argue that a liquidated damages clause clarifies the respective normative expectations of the parties, permitting efficient breach without repudiation of the mutual understanding.
This made total sense to me, at least in the context of interpersonal contracts (as opposed to commercial contracts between mega-corporations). In an earlier paper, she relatedly wrote that:
Most people think that breaking a promise is immoral, and that a breach of contract is a kind of broken promise. However, the law does not explicitly recognize the moral context of breach of contract. Using a series of web-based questionnaires, we asked subjects to read breach of contract cases and answer questions about the legal, financial, and moral implications of each case. Our results suggest that people are quite sensitive to the moral dimensions of a breach of contract, especially the perceived intentions of the breacher.
As I listened to the paper, I was reminded of the old joke whose punchline is:
... we've already established that. Now we are haggling about the price
My guess is that most people have moral qualms about breaching a contract, but that there's a price you can pay most people to help them get over it. I think Wilkinson-Ryan's work is consistent with that hypothesis.
All of which was called to mind by Peter King's criticism of Lane Kiffin's decision to jump from Tennessee to USC:
I think there are a lot of people who would not break a contract for three times the salary. I am among them. It's called honesty. I signed a contract with SI for four years, and no matter who offered me what, I would not break it.
Let's assume the conditions of efficient breach. Richard Posner's example from Economic Analysis of Law
Suppose I sign a contract to deliver 100,000 custom-ground widgets at $.10 apiece to A, for use in his boiler factory. After I have delivered 10,000, B comes to me, explains that he desperately needs 25,000 custom-ground widgets at once since otherwise he will be forced to close his pianola factory at great cost, and offers me $.15 apiece for 25,000 widgets. I sell him the widgets and as a result do not complete timely delivery to A, who sustains $1000 in damages from my breach. Having obtained an additional profit of $1250 on the sale to B, I am better off even after reimbursing A for his loss. Society is also better off. Since B was willing to pay me $.15 per widget, it must mean that each widget was worth at least $.15 to him. But it was worth only $.14 to A – $.10, what he paid, plus $.04 ($1000 divided by 25,000), his expected profit. Thus the breach resulted in a transfer of the 25,000 widgets from a lower valued to a higher valued use.
Would King criticize the widget maker? If not, what's different about his contract? Assume King's newly tripled salary would permit him to fully compensate SI.com for any damages his breach of contract causes, while still leaving him better off. Would breaching the SI.com contract still be dishonest?
As Wikipedia notes, Charles Fried argued in Contract as Promise
A is obligated to honor a contract made with B because A has made a promise. Fried wrote, "The moralist of duty thus posits a general obligation to keep promises, of which the obligation of contract will only be a special case – that special case in which certain promises have attained legal as well as moral force."
Personally, I think there are moral aspects to promise making. When I was awarded the William D Warren at UCLA, I made a moral commitment to then Dean Michael Schill that I would stay at UCLA at least 5 years. At the very least, I would have had qualms about breaking that promise, even though it was not a legal contract.
But context matters. Morality is often contextual, as are social norms. Assume Mike Schill had a 5-year contract to serve as UCLA law school's dean, which he breached to go to Chicago (I actually don't know what the state of Mike's contract was when he left us). I would have no objection to his doing so. I think it's an accepted norm that deans can step down (I had one who quit after less than a year) to move up at will.
Likewise football coaches. Colleges don't show much loyalty to coaches these days and vice-versa. One and one may be at the margin, but lots of coaches get fired these days after one year. I suspect the social norm is that coaches get to change jobs without moral opprobrium.
Although I might be wrong about coaches. Outside of fayetteville, for example, I suspect most people think Bobby Petrino's a schmuck. And the riot that followed Kiffin's announcement tells us what the folks in Knoxville think about one and done coaches. So maybe the social norm in college football still requires a decent interval before hopping jobs.
Anyway, my bottom line is that King was far too categorical. Context matters. The professional norms of one's occupation matter a lot. The expectations of the parties matter. The presence of liquidated damages apparently matters.
Sometimes it's okay to breach efficiently. And sometimes it isn't. They key thing is to be able to tell the differemce.
Social Media