Morality, Compensation, and the Contractual Obligation

Abstract

This article presents empirical estimates suggesting that most people do not perceive breach of contract followed by compensation for the promisee as immoral. In the absence of compensation, the article reveals that individuals commonly perceive the moral value of breach depending on the consequences thereof, with the unfairness of the outcome—and not the inefficiency—as the preponderant factor. Contract law reflects observed interpersonal morality and allows courts to rescind the contract on grounds of impossibility, impracticability, or frustration if the breach is fair and the promisor avoids exceptionally high losses, but not if the breach is unfair and the promisor breaches to profit from a substitutive transaction. The law, moreover, does not punish breach, nor inevitably require performance by the promisor, but instead aims at compensating the victim, thereby reflecting how most individuals perceive breach followed by compensation, from a normative standpoint: as not morally wrong.

Retaliation, Remedies, and Contracts

“…There is substantial evidence that individuals punish those who violate social and moral norms (Henrich et al, 2006;Guala, 2012), either when they personally suffer from the violation or when they are in a neutral third-party position (Fehr and Fischbacher, 2004;Nelissen and Zeelenberg, 2009). But the norm of promises does not explicitly identify the "excusing conditions" that release the promisor from the moral obligation to perform, and there is evidence that different individuals hold different perceptions of the moral value of breach, often depending on the consequences thereof (Mittlaender, 2019).…”

“…Moreover, the payment of those damages can change individuals'perception of the immorality of breach, with a substantial share of them believing that while breach without compensation is immoral, breach followed by full compensation is not (Mittlaender, 2019). Buyers are therefore expected to retaliate against the seller in breach less often in the contract treatment, where they can recover expectation damages, than in the promises treatment, where this possibility is absent.…”