Enforcing contracts and resolving disputes is an important matter in Contract Law as it helps in functioning of the agreements smoothly. These procedures help in making relationships better as well as in reduction of any kinds of uncertainty. By adding certain clauses in the agreement itself gives protection to the parties and aware them of their liabilities.
Liability means in its basic sense as being responsible legally for something. Contractual Liability is often more than not about agreeing to pay for any breach, damages of losses that could be caused to the other contracting party. In case of Limited Liability, the parties can specify in the terms of the contract that they shall be held liable for paying damages for breach only in certain circumstances or that there will a cap on the damages. In case of Unlimited Liability, the liability of the parties in case of default in the contract or when anything goes wrong shall not be capped. Which means that the parties will have to do every possible thing to pay the compensation for breach of contract or pay the damages in case of defaults.
“The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it,-- and nothing else.”[1]
This in itself defines the need of keeping liability of contracting parties limited to actual loss incurred only. Breach shouldn’t make the non-breaching party in a better condition than it was in before making the contract but to make the non-breaching party in the same condition it was in if the contract was not made.
Theory of Fuller and Perdue’s- The Reliance Interest in Contract Law
This Article by Lon Fuller and his research assistant William Purdue defends and explains how contract law should only provide for reliance damages and not expectation damages. Reliance damages are basically calculated by seeking what would restore the injured/non-breaching party to the position that it was in before coming into the contract. On the other hand, expectation damages are calculated by seeking what would restore the injured/non-breaching party to the position it would have been if there was no breach, hence in a better position.
They further rely on normative ethical theory of Harm Principle by John Miller which prevents expectation damages and holds that damages should only compensate non-breaching parties for the reliance losses imposed on them due to the breach.
Fuller and Perdue discuss how uncertain contracts having no specific liability mentioned should focus on not to broaden the liability of the defaulter by making remote injuries compensable; not to impose on the defendant a liability felt to be disproportionate to the gains which he stood from the contract; a desire to further restrict the liability imposed on an innocent breaching party to that of a wilful breaching party.
Theory of Professor Richard Craswell
Even though Prof. Craswell disagrees with Fuller and Purdue, he tends to focus on how courts should determine damages in case of breaching of contracts. He contends that if the court awards more than expectation damages to the defaulter, it would have certainly looked and taken into consideration the mala fide intents of the breaching party. Further, courts may also award damages expectation damages or specific performance to the breaching party while taking into consideration the facts of the case. Similarly, while taking care of the facts and circumstances courts may award reliance or restitution damages.
Prof. Craswell also disagrees with Hadley v. Baxendale as according to him the case did not decide the question as to how to measure the reasonable foresight of the parties. In Hadley v. Baxendale court held that no damages shall be paid by the Defendant as he did not foresee his late in delivery would cause loss to the Plaintiff. The problem here is how and where to determine foresightedness and awareness of consequences that can occur in case of breach and negligence.
Theory of Professor Richard Epstein and Barry Adler
Prof. Epstein focuses on effect of bargain in contracts[2]. According to him if the parties have agreed to a term, they ought to follow it and enforce it. However, if they haven’t agreed to a term and did not foresee the events, then look into the resolution the parties would have bargained for. Epstein explains that limited liability helps in maximising joint benefits and minimize the costs of administration and mitigation that arise in case of breach. Prof. Adler says that damages are decided based on patterns and circumstances and hence not certain.
Theory of Efficient Breach
The cause of not having unlimited liability is also supported by the concept of efficient breach. The concept determines that the parties should be allowed to breach a contract and then to pay the damages to the non-breaching party is that is more beneficial than actually being in a contract and performing. If there is unlimited liability, efficient breach would not be an option, leaving that parties frustrated.
Conclusion
Limited liability terms when mentioned in the contracts helps both the parties to be aware of their consequences as well as that of the other party. It also helps in finding which party has acted negligently and what damages or compensation shall be received. At the end dispute resolution becomes easy. Even in limited liability parties bargain on the penalties and liabilities mentioned. However, when there are no terms mentioned in the contracts, it shouldn’t be presumed as unlimited liability. The courts in such cases look at the facts and the circumstances to determine what losses have actually occurred and how much of that should be compensated. By the theories that are discussed above, it gives us an insight of how damages and liability of a breaching are determined. It should further be understood that unlimited liability is against natural rights and often more than not acts as a barrier to enter to contracts because of the perception that the breaching party might have to pay from their own pockets or personal assets.
[1] Oliver Wendell Holmes, Path of the Law, 10 HARV. L. REV. 457, 462 (1897)
[2] Richard A. Epstein, Beyond Foreseeability: Consequential Damages in the Law of Contract, 18 J LEGAL STUD. 105 (1989)
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