Contracting for Cooperation in Recovery

Abstract

There is a longstanding debate about whether courts should enforce contract terms purporting to limit the parties’ liability for fraud. It is less-often noticed that many contracts are designed to incorporate fraud liability by requiring one party to make representations about her performance that, if false, can satisfy the elements of deceit. Such contractual representations are best understood as members of a broader, hitherto underappreciated category of contract terms: duties designed to increase the other party’s chances of recovering for breach. Examples include the duty to keep records, to share information about performance, to permit audits, and not to hide breach. This Article shows that the logic of proving proximate harm from the breach of such terms entails that legal liability for such breach often makes a practical difference only when it includes penalties, punitive damages, or other extracompensatory measures. The Article also demonstrates that most of the costs of extracompensatory remedies (such as deterring efficient breach) do not apply when those remedies are attached to duties to cooperate in recovery, and that, in many cases, adopting such duties is a better solution to underenforcement than damages multipliers. Parties now contract for liability in fraud, where punitive damages are available, because they cannot get these remedies in contract. The practical upshot is a new argument against rulings, most recently via a broad reading of the economic loss doctrine, that there can be no liability in fraud for lies that are also breaches. Rather than serving the oft-stated goal of protecting the parties’ contractually chosen allocation of risk, these rules defeat party choice. Even better, however, would be exceptions to the rules against penalties and punitive damages when those remedies are attached to the breach of a duty to cooperate in recovery. author. Associate Professor, Georgetown University Law Center. I want to thank Jennifer Arlen, Guido Calabresi, Richard Craswell, Kevin Davis, Chris Elmendorf, John Mikhail, Jed Purdy, Chris Sanchirico, Christian Turner, Bill Vukowich, Ethan Yale, and Kathy Zeiler, each of whom added to the ideas in this Article through discussion or comment. I owe special thanks to Ian Ayres, who suggested that I write down these thoughts during a walk in the Arizona desert. The Article also benefited from faculty workshops at the University of Virginia Law School and Georgetown University Law Center, and from discussion at the Stanford/Yale Junior Faculty Forum. Jason Daniels provided excellent research assistance. Finally, I thank Sanjukta Misra, who not only provided input along the way, but is the work’s sine qua non. 0002.KLASS 10/25/2007 11:02 AM contracting for cooperation in recovery