A Breach Born Every Minute
posted by Dave Hoffman
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In the Spring, I asked you folks for some help thinking of examples of true Holmesian agreements, “contracts which, when breached, have a similar psychological profile to a speeding ticket.” It turned out to be pretty hard to identify such agreements, since most people believe breach to be a morally wrongful activity – not simply an option to pay damages at will. As Jonathan Baron and Tess Wilkinson-Ryan previously have found, the degree to which individuals find breach to be “bad” is quite manipulable: breaches to gain are worse than breaches to avoid loss, liquidated damages ameliorate feelings of reprehensibility, etc. Missing from this research has been a psychological theory of what makes breach so aversive.
Tess and I came up with a working hypothesis: breach is seen as a form of interpersonal exploitation that makes the breachee a sucker. We’ve put together a paper that reports on a series of experiments supporting this hypothesis, titled (naturally) “Breach Is For Suckers.“ Check out the abstract, after the jump.
This paper presents evidence from three experiments offering evidence that parties see breach of contract as a form of exploitation, making disappointed promisees into “suckers.” In psychology, being a sucker turns on a three-part definition: betrayal, inequity, and intention. We used web-based questionnaires to test the effect of each of the three factors separately. Our results support the hypothesis that when breach of contract cues an exploitation schema, people become angry, offended, and inclined to retaliate even when retaliation is costly. This theory offers a useful advance insofar it explains why victims of breach demand more than similarly situated tort victims and why breaches to engorge gain are perceived to be more immoral than breaches to avoid loss. In general, the sucker theory provides an explanatory framework for recent experimental work showing that individuals view breach as a moral harm. We describe the implications of this theory for doctrinal problems like liquidated damages, willful breach, and promissory estoppel, and we suggest an agenda for further research.
The paper is a further extension of tons of work on reciprocity in the law, as well as Tess’s own work on the “sucker norm.” I think it adds a unique contribution to the contracts literature in part because it suggests that studying parties’ behavior in one-shot contracts is worth the investment, and thus challenges the views of relational contract theorists, who hold that such discrete contracts aren’t worth the paper they are printed on.
The paper will be out to the law reviews in the next week. We welcome any reader comments!
August 15, 2009 at 9:41 am
Posted in: Behavioral Law and Economics, Contract Law & Beyond, Law and Psychology
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Responses (6)
Jeff Gamso - August 16, 2009 at 3:44 pm
I’m a criminal defense lawyer. I don’t pretend to understand contract law. But when I was in law school (a couple of decades ago), most if not all of the students in the contracts class were deeply upset at the thought that a breach of contract was considered just fine and by the notion that the victim of the breach could be obligated to mitigate damages.
It seemed to me (us?) then and to me now (I have virtually no contact with any of my law school classmates) that the basic claim – promises can be broken at will – is fundamentally at odds with one of the key lessons we were taught as children.
“A man’s word is his bond.”
“Let’s shake on that.”
“I give you my word.”
None of that jibes with, “If I decide to welch on the deal, you’re obligated to make sure it doesn’t cost me much.”
There was never a chance I would have gone into any sort of law routinely involving contracts, but if there had been, that principle would have turned me off on it.
Brett Bellmore - August 16, 2009 at 5:39 pm
Yeah, that’s my hypothesis, too: Most people view contracts as promises, and people as having a moral obligation to honor their promises. And it’s as simple as that.
Dave Hoffman - August 16, 2009 at 8:48 pm
Brett & Jeff,
Yes, I agree that most people view contracts as promises attended by a moral obligation. But the puzzle is that you can manipulate the degree of obligation by, for instance, having the breachor seek to avoid loss, or by inserting a liquidated damages clause in the contract. The point of the paper is to show why such manipulations work — i.e., what are the psychological roots (and constraints) on the “don’t breach” norm.
ohwilleke - August 17, 2009 at 2:08 pm
There are many “no harm” breaches of contracts — for example — a due on sale clause when the proposed buyer is more creditworthy than the proposed seller, or a non-monetary default on a promissory note that is current on payments and the debtor is still able to pay as agreed.
Christine Hurt - August 19, 2009 at 8:40 am
I apologize for commenting before reading the paper, which I certainly plan on doing. This is a fascinating inquiry. Dave, what about deposits? Do people think that putting down a deposit and then abandoning it is as immoral as breaching a contract with no deposit? My first example would be the law school applicant who puts down multiple deposits — admissions office figure in to their calculus that a certain number of admittees who make deposits won’t show. Or deposits for apartments by apartment seekers? Or earnest money in hot markets where homebuyers put contracts on houses before they can see them? Do we think of these more like options even though they are actually contracts? Isn’t every contract an option under the efficient breach theory? Some random thoughts before I read your article and am limited by actual knowledge!
Dave Hoffman - August 19, 2009 at 10:03 am
Christy,
It’s a great question and a good area for investigation. I think that deposits are thought of (in lay terms) like liquidated damages clauses. People see the “contract” as pay or play – that’s the beauty of the LD clause, as it turns the moral obligation to perform into a Holmesian deal. But it’s just an intuition. We could test it!
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