Good Faith in Law and Moral Obligation

by Michael C. Dorf

A former colleague of mine used to say that popular misconceptions about the law could sometimes be useful. The example he gave most frequently was the widespread but false belief that for a contract to be binding it must be written. That is not true, except in particular circumstances. Traditionally, the so-called statute of frauds made unenforceable oral contracts that could not be performed in a year or less, contracts for the sale of real estate, and various other oral contracts. Modern statutory schemes expand the categories for which a written contract is necessary. For example, the widely adopted Uniform Commercial Code requires a writing for a contract for the sale of goods for the price of $500 or more. However, as a general matter, oral contracts are binding.

Nonetheless, the popular belief that all contracts must be written to be binding has a salutary effect. It induces those who hold the belief to put their contracts in writing, which in turn greatly simplifies proving the existence and terms of a contract should a dispute arise. One might think that the resulting certainty has such great value that it justifies an actual legal rule requiring all contracts to be written to be binding, but there are countervailing reasons to think that most oral contracts ought to be enforceable. I am not now interested in resolving the policy question whether to extend the requirement of a writing to all contracts. Instead, I'm interested in exploring the potentially salutary effect of what might be thought to be a related misperception of contractual obligation--that contracts impose moral as well as legal obligations.

In my latest Verdict column, I discuss recent criticism by Golden State Warriors head coach Steve Kerr of NBA players demanding trades while they have considerable time remaining on their contracts. Kerr pretty clearly had in mind Anthony Davis's successful demand that the New Orleans Pelicans trade him to the Los Angeles Lakers and Paul George's successful demand that the Oklahoma City Thunder trade him to the Los Angeles Clippers. Kerr said that NBA players have every right to sign wherever they want when they are free agents, but that while they remain under contract, they owe their effort and loyalty to the teams the are on. He appeared to use the language of moral obligation, not just legal obligation.

My column observes that Kerr could be understood to be saying that when one signs a contract, one obligates oneself to perform. I point to the tension between that view and the contract doctrine of efficient breach--which conceptualizes the obligation imposed by a contract as a choice to either perform or breach and pay damages. I go on to acknowledge that contracts for unique goods or services are different but that given the Thirteenth Amendment and the influence of Lumley v. Wagner, employers like the Pelicans and Thunder have no effective remedy against unhappy employees like Davis and George. Those employees have a duty of good faith and fair dealing to carry out their contracts, but as a practical matter it will be impossible for the employers to enforce that duty. Employers of employees with leverage must ultimately rely on the employees' own consciences.

I urge readers who find the foregoing paragraph confusing or dense to read the column, which spells these points out in greater detail and does not assume that readers are familiar with contract law basics. For now, I'll simply assume the conclusion for which I argue in the column: that some contractual obligations are essentially unenforceable or grossly under-enforceable. The question is what follows.

Oliver Wendell Holmes, Jr., famously wrote in The Path of the Law:
If you want to know the law and nothing else, you must look at it as a bad man, who cares only for the material consequences which such knowledge enables him to predict, not as a good one, who finds his reasons for conduct, whether inside the law or outside of it, in the vaguer sanctions of conscience.
For a Holmesian, the contractual obligation to perform a contract in good faith could be said not merely to be unenforceable or under-enforceable. A Holmesian could say that the obligation doesn't exist at all (if unenforceable) or only has partial force (if under-enforceable). After all, a bad man concerned only about "material consequences" will not draw a distinction between limits on the law's normative content and practical limits on legal remedies. As I note at the end of the column, Donald Trump is a good illustration of how an (at-best) amoral businessperson can thus take advantage of others' good faith while not displaying any good faith of his own.

These observations suggest two possible understandings of contract law. One understanding, which the doctrine of efficient breach highlights, is that contract law is distinct from morality. On this view, contracts do not impose moral obligations. The very concept that one can always breach and pay damages is fundamentally Holmesian. It defines the underlying obligation of the contract purely in terms of what Holmes called "material consequences."

If one takes this view, one might think it points to another place where public misunderstandings of law can do good. The law itself imposes no moral obligation to fulfill contractual duties, but a great many people think it does, and that misconception has salutary effects. To be sure, bad women and men (like the president) do whatever they think they can get away with doing, but decent people abide by their contractual obligations even when those obligations are, as a practical matter, unenforceable. To be sure, their misunderstanding has some limited cost. Efficient breaches don't occur. However, as an example I use in the column illustrates, "efficient breach" is something of a misnomer, because even in its absence well-functioning markets will place goods and services in the hands of those who most value them.

Alternatively, the other understanding of contract law says that contractual obligations are (at least sometimes) moral obligations. Charles Fried's book Contract as Promise was rooted in this understanding of contract law as (more or less) giving legal effect to the moral obligations that arise out of promising. The correspondence is not perfect, of course. For example, in ordinary morality, promises are binding even without consideration, whereas promises do not impose legal obligations absent some reciprocal obligation (or at least detrimental reliance). Nonetheless, Fried's view makes sense out of the seemingly moral language of the implicit contractual obligation of "good faith and fair dealing."

Whichever view one takes of contract law, this discussion underscores a limit of the bad-man theory. A market economy cannot function in a society composed entirely of Holmesian bad men. Legal sanctions are expensive and thus often unavailable. Reputational sanctions are likewise incomplete, given the large number of one-time transactions and information asymmetries even among repeat players. Ultimately, markets depend on trust, and you cannot trust bad men. Don't believe me? Talk to one of the numerous people who were cheated by the untrustworthy bad man in the White House.