To Breach or Not to Breach

Robert FelgarThis is an issue faced by every company. But in my experience, as a former general counsel, there is no consensus approach. I have done business with, and worked with, people who believe that breaching a contract is acceptable business conduct; it is just business. I have also encountered people who take a more moralistic view of the issue.

 

Before you take sides, consider that both approaches have significant support in the legal community. Associate Supreme Court Justice Oliver Wendell Holmes, Jr., one of the most cited Supreme Court justices in history, stated that "[n]owhere is the confusion between legal and moral ideas more manifest than in the law of contract. . . . 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." (Holmes, The Path of the Law (1897) 10 Harv. L. Rev. 457, 462). Under this amoral approach, contracts are commercial documents that can be breached without ethical judgment. This approach is supported by the economic insight that an intentional breach can benefit society if the economic gain to the breaching party is greater than the loss to the party suffering the breach.

 

The alternative view is simple: contract is rooted in the morality of promising. And if a contract is a type of promise, there is, as we all know, an ethical obligation to keep one’s promises.

 

Which view does your company espouse? If it takes the moralistic approach to contracts, has this been clearly communicated to employees? If it follows the view espoused by Justice Holmes, has your company set up processes and procedures to make certain that contracts are breached only when doing so is in the best interest of the company? Have you considered the impact of the Justice Holmes approach on corporate ethics generally? For example, would employees get the message that ethics are not important? After all, if breaching a company’s contractual commitments are a matter of economics, rather than morality, what about verbal commitments to vendors, customers and fellow employees?

 

Returning to the original hypothetical, how would your company respond to the employee who recommends breach of the commercial lease?

Posted August 27, 2010 in CR Blog