Sunday, December 05, 2004

Help! Help! Help Yourself Avoid Paying Unforeseeable Contract Damages!

Suppose that your mechanic forgets to replace the oil that he's drained from your car. The next morning, as a consequence of his breach of contract, your engine block cracks during your morning commute. You have your car towed and take a taxi to the office. Arriving late, you discover that you missed a surprise visit by George Soros, who on a lark handed a million dollar bill to each person in the building. You also missed a surprise meeting with your boss, who consequently fires you. Crushed by this double blow, you fall into depression, find yourself unable to work, and end up homeless, delusional, and flea-ridden.

What damages will contract law allow you to recover from the breaching mechanic? You will at a minimum get a refund for what you paid but failed to receive: the fresh oil and neglected labor. You will almost certainly also get damages to cover the direct consequences of the mechanic's breach of contract: the damage to your car, the cost of a tow, and the taxi fare. Beyond that, however, contract damages will not go.

Why? Because the mechanic could not reasonably have foreseen that you would have missed a surprise windfall courtesy of George Soros, that your boss would have fired you, or that you would thereafter fall apart psychologically. As Restatement of Contracts (2d) § 351(1) explains, "Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made." See also U.C.C. §§ 2-714(1) (limiting buyer's damages for breach with regard to accepted goods to "loss resulting in the ordinary course of events from the seller's breach"), 2-715(2)(a) (defining consequential damages to include those that "the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise . . . .").

I earlier posted on how contract law's "duty" to mitigate demonstrates a preference for self-help remedies, as opposed to judicially mandated ones, and offered an example of that doctrine's application. As I mentioned, though, the doctrine of foreseeability sends a somewhat more equivocal message about self-help.

How does the doctrine of foreseeability show at least some regard for self-help? It ensures that a party in breach has a reasonable opportunity to avoid liability by contracting around it. The doctrine thus gives the breaching party a fair chance to avoid paying for consequential damages. But if that party had no reason to foresee the damages that subsequently followed from his breach, he would have had no chance to protect himself. The foreseeability test requires that those damages, being beyond the self-help cure of restructuring the bargain, not be afforded in court by contract law.

I'd argue, however, that the doctrine of foreseeability does not go far enough in respecting self-help alternatives to contract law remedies. Why? Because it focuses on the possibility of avoiding such a lawsuit by way of redefining contractual duties. A more comprehensive doctrine should, however also include the possibility of avoiding suit by way of performance.

Suppose, for instance, that a roofer did not foresee at the time he contracted with you, a resident of Southern California, that an August hurricane would strike the area. He knows that no hurricane has done so in recorded history. The roofer falls behind schedule, and so falls into breach of contract. That would not ordinarily pose a huge problem in SoCal, as the rainy season occurs predictably between late October and March or so. This time, though, wind tears away the unfinished roof and rain pours into your house. Large losses result from the roofer's breach. Yet the roofer can plead lack of foreseeability and thus probably escape paying for your extraordinary damages.

Suppose further, though, that it would have been relatively cheap for the roofer (but not you, the homeowner) to mitigate those damages by putting down weighted tarps on the roof. It looks as if the roofer has no such duty to do so. (Recall that we apply the mitigation test not to the party in breach but rather the party suffering breach.) So it looks like we have in this hypothetical both a lack of due regard for self-help and, as an unsurprising consequence, an inefficient assignment of liability.

I foresee a counterargument, one that relies on the good ol' Coase theorem. As before, however, I feel compelled to pull back from the brink of profound geekiness. I fear that you, dear reader, would rightly regard that chasm as "yawning."


David said...

I think the counterargument you're thinking of is the idea that a person can't foresee EVERYTHING--we are only human. That's why the doctrine of forseeability exists. But we can remedy the problem with the Coase Theorem.

The contract provides that compensation can be awarded if the courts determine the infractured party has a right to the things denied him as a result of the others' actions. In other words, he should have thought it and we can negioate payment based on how likely we think he should of thought of it.

I may be wrong about what you thought would be the counteragrument but that's only because you really ARE a bigger geek than any of us.


Anonymous said...

Very good, Tom! Whenever you point out where "the law is an ass" as Dickens once said, you are doing everybody a favor even the non-geeks out there. But you do more than that, you propose solutions! Please continue on with the Coase theorem part when you get a chance then go play some more in the tide polls with your daughter for inspiration. (And don't worry so much about being a geek or putting us to sleep!)

-Sleepless in Seattle