Plate vi in print

The Breach

Holmes; efficient breach, and the contract as an option to perform or to pay, the duty to keep it only a duty to compensate.

If you would know the law, look at it as a bad man would, one who cares nothing for the morality of the thing and asks only what the courts will do to him. To such a man the obligation of a contract is no solemn bond, but a plain forecast: break it, and you will be made to pay — and that is the whole of it. He feels no pull in the promise he gave; he sees a price upon its breaking, and weighs that price against his gain like any other cost of doing business.

— the provocation of this plate, after Oliver Wendell Holmes, 1897

This volume asks what binds a promise, and answers: enforcement, some power that makes the keeping of it cheaper than the breaking. But Oliver Wendell Holmes, the great American jurist, pressed a sharper question — what, exactly, does that enforcement compel? The common and moral answer is plain: a promise binds one to perform, and to break it is a wrong. Holmes denied this for the law. A contract, he held, does not bind one to perform; it binds one only to perform or else to pay — and the law, asked to enforce a broken contract, does not as a rule drag the breaker to his task, but merely makes him compensate the other for the breach. The duty to keep a contract is, in the law's cold eye, no more than a duty to pay damages if one does not keep it; and so a breach is not a wrong to be forbidden but a choice to be priced. From this Holmes drew a startling moral: that a man may break his contract whenever the breaking profits him more than the paying costs, and do the world no injury in the breaking. The question the plate inherits is whether the law is right to see it so — if breaking a promise and paying for it leaves everyone better off, is the breach a wrong at all?

Holmes reached this view by a method as bracing as the conclusion: he looked at the law through the eyes of the bad man. The good man, he observed, obeys the law because he feels its moral force; but to see what the law actually is, stripped of the moralizing that clouds it, one should look from the vantage of the man who cares nothing for right and wrong and asks only one question — what will the courts do to me? From that vantage the law dissolves into a set of forecasts: if I do this, the courts will do that. And a contractual duty, seen so, is simply a forecast — that if I do not perform, I shall be made to pay. The bad man does not feel the tug of his word; he sees a figure attached to its breach, and reckons it like any other expense. Holmes did not commend the bad man's morals; he commended his clarity, for the bad man sees the law as it is, a machinery of consequences, where the good man sees it through a haze of obligation that hides its true workings. To know the law, Holmes taught, is to know what it will do, and nothing grander than that.1

1. Holmes reached his view through the eyes of what he called the bad man: to see the law as it is, stripped of moralizing, look from the vantage of one who cares nothing for right and wrong and asks only what the courts will do to him. The law then dissolves into forecasts; a contractual duty becomes a forecast that if one does not perform, one will be made to pay. Holmes commended not the bad man's morals but his clarity.

The economic logic latent in this view was drawn out by a later age, and it goes by the name of efficient breach. Suppose I have promised you a thing for a hundred, and before I deliver, another buyer appears who values it at a hundred and fifty and offers me as much. If I am held rigidly to my word, the thing goes to you, who valued it least of the three; if instead I am free to break, to pay you the profit my breach denied you, and to sell to the newcomer, the thing goes to the one who values it most — and you, made whole by the payment, are left no worse, while he and I are better. The breach has not destroyed value but moved it to a higher use, and left the world the richer for the move.2 The condition, of course, is that the damages truly make you whole — that they hand you all you expected from performance, so that you stand indifferent between the contract kept and the contract broken-and-paid. Where damages do that work, the breach wrongs no one, and to forbid it would only chain the world's goods to a lower use than they might have found.

2. The economic logic is efficient breach. If I promise you a thing for a hundred and another values it at a hundred and fifty, then breaking, paying you the profit you lost, and selling to him moves the thing to its highest use and leaves you no worse, him and me better. The condition is that damages truly make you whole — hand you all you expected from performance — so that you stand indifferent between the contract kept and broken-and-paid.
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The view explains a fact about the law that has long puzzled the moralist: that its ordinary remedy for a broken contract is not to compel performance but to award money. One who breaks a promise is, as a rule, not forced to do the thing he promised; he is made to pay what the failure cost the other, and there the law's demand ends. This is no oversight but the very engine of efficient breach: a law that compelled performance would block every gainful breach, chaining each good to its first destination however much some later use might be worth; a law that lets the breaker pay sets the goods free to move. The order to perform the thing itself — specific performance, the lawyers call it — the law keeps in reserve for the rare case where money cannot make the promisee whole, as when the thing promised is unique and has no market price. For the great run of contracts the law chooses damages; and in choosing damages it chooses, whether it means to or not, the regime of the priced breach — perform where performance is worth more than its cost, break and pay where it is not. The remedy is the doctrine wearing plain clothes.3

3. The view explains why the ordinary remedy is money, not compelled performance. A law that forced performance would block every gainful breach; a law that lets the breaker pay sets goods free to move to a higher use. Specific performance, the order to do the thing itself, the law keeps for the rare case where money cannot make the promisee whole, as when the thing is unique. For the run of contracts the damages remedy is the priced breach in plain clothes.

Yet the doctrine has its accusers, and their case is not weak. A promise, they urge, is a moral act, the giving of one's word, and to treat it as a mere option to perform-or-pay is to dissolve the morality of promising into a calculus of damages — to teach that one's word binds only so far as it is cheaper to keep than to break. And the keystone of the economic case, that the damages make the promisee whole, is shakier than it looks: the law's measure of loss is a crude instrument, and rarely captures all that a broken promise costs — the disruption, the scramble for a substitute, the plans laid waste, the trust withdrawn — so that the promisee, pronounced whole by the court, is very often left short, and the breach the theory calls costless has in truth shifted a hidden loss onto his shoulders. Nor do men of business, as this volume has already seen, deal as the bad man would: they keep their promises well past the point where breach would pay, because to break is to be marked as one who breaks, and the standing and the dealing they would forfeit are worth more to them than the gain. The breach is efficient on the page; in the world, the trust it quietly spends may cost more than the goods it moves.4

4. The doctrine has accusers. A promise is a moral act, and treating it as an option to perform-or-pay dissolves it into a calculus of damages. And the claim that damages make the promisee whole is shaky: the law's measure of loss is crude and rarely captures all a broken promise costs — the disruption, the substitute, the trust withdrawn — so the promisee pronounced whole is often left short. Men of business keep their word past the point where breach would pay, because the standing they would lose is worth more.

So Holmes's bad man sees the law with a cold and useful clarity, and misses, in the very seeing, the thing that makes the law mostly unneeded. He is right that the law, asked what it will do to one who breaks a contract, answers only: make him pay. He is right that this licenses the breach that profits, and that such breaches can leave the world richer. But he mistakes the law for the whole of what holds a promise, when it is in truth the last and least of the things that hold it. Most promises are kept by men who are not bad men — who feel the word they gave, who fear the name they would earn, who prize the dealing they would lose — and the law's cold remedy is the floor beneath them, not the force that moves them. This is the volume's lesson seen from the side of breach: the contract, the explicit and enforceable thing, rests at last on the unwritten morality of promising, which the bad man cannot see and the good man does not need reminding of. The law treats the promise as an option; the world, for the most part, keeps it as a vow. And the whole apparatus works because the bad men are few — because most who could break and pay choose, instead, to keep their word.5

5. Holmes's bad man sees the law clearly and misses what makes it mostly unneeded. He is right that the law makes the breaker pay, and that this licenses the breach that profits. But the law is the least of the things that hold a promise: most are kept by men who feel the word they gave, fear the name they would earn, prize the dealing they would lose. The contract, the explicit thing, rests on the unwritten morality of promising.