Contracting for Cooperation in Recovery
67 Pages Posted: 29 Sep 2006 Last revised: 28 Feb 2012
There is a longstanding debate about whether courts should enforce contract terms purporting to limit the parties' liability for fraud. Less often noticed is 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, or not to hide breach. This Article shows that difficulties in proving proximate harm entail that legal liability for the breach of such terms makes a practical difference only when it includes penalties, punitive damages or other extra-compensatory measures. Parties now contract for liability in fraud, where punitive damages are available, because they cannot get these remedies in contract. The Article also argues that most of the costs of extra-compensatory remedies (such as deterring efficient breach) don't apply when they are attached to duties to cooperate in recovery, and that, in many cases, adopting such duties is a better solution to under-enforcement than adopting a damages multiplier.
The practical upshot is a strong 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 a duty to cooperate in recovery.
Keywords: contract, fraud, remedies, punitive damages, penalties, penalty clauses, economic loss rule
JEL Classification: K12
Suggested Citation: Suggested Citation
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By Thomas Colby