Thursday, February 03, 2005

Self-Help Self-Criticism

I think I screwed up. Nobody else has said anything, granted. Maybe they didn't notice or care. But I did and I do. Allow me, then, to engage in some self-criticism about self-help.

I earlier wrote a couple of posts about how contract law encourages self-help. In the first post, I briefly described how contract law's rules for damages encourage self-help alternatives to judicial remedies for breach. (As I observed then, a draft paper by Doug Lichtman had inspired my ruminations. I could not point you to an online copy of his paper, then. Happily, though, I can now offer you a link: How the Law Responds to Self-Help, Journal of Law, Economics, and Public Policy (forthcoming 2005).) So much, so good. The goof-up came in the second, related post.

I there focused on the foreseeability limitation to contract damages. I began by arguing, plausibly enough, that it encourages self-help alternatives to judicial remedies because it "ensures that a party in breach has a reasonable opportunity to avoid liability by contracting around it." Then I started going astray. I ventured that the doctrine of foreseeability, because it allows parties merely to contract around liability, does not go far enough. I should, I argued, "also include the possibility of avoiding suit by way of performance."

What is wrong with that? Expecting a promisor to cure damages proximately caused by his breach, but unforeseen at the time he contracted, would not encourage him to pursue any self-help alternative to judicial remedies. To the contrary, because that rule would increase the scope of the promisor's liability, it would encourage the promisee to seek judicial relief. It may be efficient to impose liability for (deep breath) reasonably avoidable unforeseeable proximate damages of breach (whew!), but that doesn't mean it promotes self-help.

Consider the illustration I used earlier. Your roofer falls behind schedule. Freakishly severe weather strikes, causing large damages due to his unfinished repairs. Though the roofer may owe you something for his breach, the foreseeability limitation on damages immunizes him paying for your extraordinary losses. I argued that respect for self-help suggests we should amend that rule. If he can throw a protective tarp over your roof much more cheaply than you can, I argued, contract law ought to hold him liable for not doing so.

But I surely erred. Imposing that new liability on the roofer doesn't encourage him to seek any self-help alternative to a judicial remedy. To the contrary, it creates a new judicial remedy, one that you can wield against him. The roofer may thereafter try engage in self-help efforts to avoid that new source of liability, granted, but that hardly means that my proposed rule would encourage self-help on net. Better, I now think, that we should stick with the present regime and leave you to reach a new agreement with the roofer. You would start the negotiations like this: "Although you won't be liable for all the damage this freak storm is causing, you can prevent it more cheaply than I can. I'd break my neck if I tried to fix it! So let me pay you to go up there and throw some tarps over my roof."

As I said, it might (or might not) prove more efficient to hold the roofer liable for the reasonably avoidable unforeseeable proximate damages of his breach. Making him liable would, after all, save you the transaction costs of reaching an emergency repair deal with him. Coase's theorem, because it assumes away those costs, suggests that the assignment of liability makes no difference to the efficiency of the outcome. But here in the real world, we have to keep that question of fact in mind. I thus don't know if the rule that I proposed would in fact maximize efficiency. I'm pretty sure, however, that it would not promote self-help.

2 comments:

Mr. Bugman said...

But are the damages truly related to a breach? Even if the roofer falls behind, then it may not necessarily be a breach if he intends to continue performance. Perhaps there could be some sort of negligence tort claim based on a reasonable professional/expert standard and rainfall doesn't seem to fit into an act of God defense even with record setting rainfall. However, there doesn't seem to be a clear breach of K claim. Of course I'm just a rookie here.

As for...wait let me go copy/paste this...reasonably avoidable unforeseeable proximate damages of breach, it seems odd that you could reasonably avoid something that is unforseeable. I wish I had those superpowers! By nature, something that is unforseeable would not be foreseen and therefore avoided. The issue here is not foreseeability, but reasonable actions to mitigate the damage. Perhaps the threat of a tort claim and the cost of pursuing that claim encourage self-help for both parties rather than relying on clauses and caveats in a contract which as you explain would be further contracted around. In the ideal world the roofer and the homeowner sing Kumbaya together as they lay the tarp together. By the way, didn't Sarbane-Oxley make it illegal to mention Coase's Theorem in any context?

Tom W. Bell said...

How nice of you to drop by, Mr. Bugman!

You ask if the extraordinary damages I describe would be "truly related to a breach." I think so. Recall that the damages arose only because he was late in finishing the project. One might quibble about the materiality of only modestly breaching the contract's finish date, I suppose, but we can deal with that objection simply by stipulating that the roofer has fallen far, far behind.

I cannot speak to the tort angle; you've got Prof. Hall for those questions. But I don't think an Act of Nature defense will work on the contract side. As we will see later in Contracts II, that defense works (when it does) to counteract a claim of *breach.* But we've already settled that the roofer breached. He's trying to use the excuse for something different: to reduce his *damages.* I thus doubt it will work.

You add that, "[I]it seems odd that you could reasonably avoid something that is unforseeable. I wish I had those superpowers! By nature, something that is unforseeable would not be foreseen and therefore avoided." Ah, but recall the curious facts of the hypo at issue: Although the roofer could not have foreseen the damages *at the time of the contract's formation,* he later finds that he is in a position to mitigate the damages that have, long after the contract's formation, in fact arisen. The forseeability doctrine excuses him from liability. I was wondering if we should not expect him to cure the harm just the same.

You also speculate about the role of tort law in encouraging the singing of Kumbaya and such. Again, I must leave you in the able hands (and lovely tenor) of Prof. Hall.

You ask, in closing, "By the way, didn't Sarbane-Oxley make it illegal to mention Coase's Theorem in any context?" I believe that only publicly traded professor's face that liability. I'm privately held, thankfully.