Although the role of fault in contract law has traditionally received little theoretical or doctrinal attention, it is central to commonsense moral theories of contract. Most people believe that breaking a promise is wrong, and that breach of contract is a form of promise breaking. Parties' moral intuitions may affect their willingness to breach when it is otherwise efficient to do so, their ability to reach settlement once a contract has been breached, their predictions about legal rules of contract, and their post hoc assessments of appropriate damages. This chapter reviews experimental research on the effects of moral norms on contracting. Behavioral studies show that many people believe that breach of contract is a moral harm irrespective of actual losses suffered by the promisee. It is argued in the chapter that moral norms often act as default rules in legal decision making about contracts when a contingency is unspecified in the contract.

The remedy of expectancy damages in contract law is conventionally described as strict liability for breach. Parties sometimes stipulate damages in advance, and may agree that the damages they stipulate shall be the exclusive remedy for breach. This chapter advances two claims. First, that the familiar expectation remedy is correctly understood to involve elements of fault. There is litigation over the question of fault with respect to the mitigation of damages. Stipulation, on the other hand, makes contract liability stricter because it takes the mitigation question away from courts. Second, while law is generally described as being suspicious of, or even hostile to, stipulation, in fact, law encourages stipulation. It does this by sometimes declining to award expectancy damages, often in the very situations where stipulation seems sensible, and also by providing expectancy damages where the award of stipulated damages is regarded as a penalty. These two claims illuminate cases on such diverse matters as residential leases, construction contracts, product warranties, service contracts with liability waivers, and no-show customers and their service providers.

It is often asserted that contract law is based on strict liability, not fault. This assertion is incorrect. As this chapter demonstrates, fault is a basic building block of contract law, and pervades the field. Contract law discriminates between two types of fault: the violation of strong moral norms, such as the prohibition of deception, and the violation of somewhat weaker norms, such as the requirement of due care. Where both types of fault are relevant, one party's violation of a strong moral norm will normally override the other party's violation of a weaker moral norm. Fault is pervasive in contract law because it should be. If moral obligation and fault were removed from contract law, the contracting system would be much less efficient. The efficiency of the contracting system rests on a tripod whose legs are legal remedies, reputational effects, and the internalization of social norms – in particular, the moral norm of promise keeping. All three legs are necessary to ensure the reliability, and therefore the efficiency, of the contracting system.

Willful breach doctrine should be a major embarrassment to contract law. If the default remedy for breach is expectation damages designed to put the injured promisee in the position in which she would have been had the contract been performed, then the promisor's behavior – the reason for the breach – looks to be irrelevant in assessing damages. And yet the cases are full of references to “willful” breaches, which seem often to be treated more harshly than ordinary ones based on the promisor's bad/willful conduct. This chapter's explanation is that willful breaches are best understood as those that should be prevented or deterred because the parties have implicitly agreed that the promisor would not breach in those circumstances. When willfulness, so understood, is present, courts rightly award remedies that serve to deprive the promisor of any incentive to breach and to assure the promisee of getting her full expectation.

The formative period in the history of contract and tort may be characterized by the cleavage of contract and tort around the concept of fault: tort modernized by moving from strict liability to a regime of “no liability without fault,” while contract moved toward strict liability. Nineteenth-century scholars of private law offered explanations for the opposition, reasoning that alternative ideas about fault account for the different character of state involvement in enforcing private law rights: Tort law governs liabilities imposed by law on nonconsenting members of society (and thus, it should limit itself to fault-based conduct), while contract law governs bargained-for duties and liabilities of parties who exercise freedom of contract (and thus, liability voluntarily undertaken need not consider fault). It is argued in this chapter, that these theories are problematic, especially because they cannot offer a complete account of contract or tort. Tort retains too much strict liability to be thought of as a regime of no liability without fault, and contract has too many fault-based rules to be conceived of through strict liability. While these justifications for the distinction between contract and tort were questioned in ensuing generations, they still structure much of the debate over the current boundary between contract and tort.

This chapter begins with a comparative law survey showing that not all legal systems opt exclusively for fault liability or strict liability in contract law, but often adopt a more nuanced approach. This approach includes intermediate solutions such as reversing the burden of proof, using a market (“objective”) standard of care, distinguishing between different types of contracts, and providing a “second chance” for breaching parties. Taking this starting point seriously and arguing that it is highly unlikely that all legal systems err, this chapter argues that the core question is how and when each liability regime should prevail or how and when the regimes should be combined. When asking how best to combine the regimes, the simple answer is that market expectation, and specifically the ability to compare offers, should be the core criterion.

Holmes famously proposed a “no-fault” theory of contract law: A contract is an option to perform or pay, and a “breach” is therefore not a wrongful act but merely triggers the duty to pay liquidated or other damages. This chapter elaborates the Holmesian theory, arguing that fault terminology in contract law, such as “good faith,” should be given pragmatic economic interpretations, rather than be conceived of in moral terms. It further argues that contract doctrines should normally be alterable only on the basis of empirical investigations.