In the 1983 hit single “Promises, Promises” the British Group Naked Eyes tells us, “You made promises, promises you knew you’d never keep.”  Despite these lyrics the vast majority of contracts are performed to the benefit of all involved.  The beauty of most contracts is that they begin with optimism.  The parties to the contract anticipate a mutually beneficial relationship.  However, on occasion unexpected events make it difficult or impossible for one of the parties to keep the promises made.  The question then becomes what are the ethical and legal obligations if someone breaches the terms of a contract?

While the legal obligations under a specific contract can be complicated, the general principle is simple.  If you breach a contract you are legally required to put the other party in the same position they would have been had the breach not occurred.  In other words, the party in breach is required to pay only those damages suffered by the non-breaching party.  The Courts do not impose punishment.  In fact, Utah Courts have held that a party may not recover punitive damages for a breach of contract.

The more difficult question is whether a breach of contract is ethical.  Legal scholars often referred to the “sanctity of contract and the resulting moral obligation to honor one’s promises.”  Despite the reference to a moral obligation, we know that not all contracts are performed.  A breach is often the result of a significant change in the circumstances that created the contract.  By way of example, suppose I agreed to mow your lawn for $50.00.  Before I can mow your lawn, my lawnmower is stolen, and it will cost me $200.00 to purchase a new lawnmower.  My circumstances have changed due to events largely beyond my control.  Although it will cost me $200.00 to mow the lawn it will only cost $75.00 to have the lawn mowed by someone else.  The law will generally not require me to purchase a new lawnmower, but only to pay the $75.00 necessary to ensure that your lawn is mowed.  The law allows breach, so long as I pay for the lawn to be mowed.  The law refers to this as an efficient breach.

The efficient breach doctrine arises from an understanding that parties to a contract cannot negotiate express provisions of a contract which account for every possibility.  My ethical obligation is to ensure your lawn is mowed, therefore, if it costs me more to mow your lawn than your cost to have it mowed by another, my ethical obligation is fulfilled if I pay the cost to have the lawn mowed by another.  Therefore, the breach should not be considered unethical in the circumstances described above.

The ethical obligations created in a contract run not to the terms of the contract itself, but to the individuals or businesses who are parties to the contract.  You are ethically obligated to ensure the other party or parties to the contract are not injured.  When unforeseen circumstances make it difficult or impossible to perform as agreed, the first question should be, what is required of me to make the person to whom I promised performance whole?  If the cost of making that person whole is less than the cost to complete the contractual obligation, both the law and ethics allow a breach of contract if the cost of making the other party whole is paid.   As business owners we have many ethical obligations.  We have duties to our families, our employees, our clients, and our businesses.  The law recognizes that there is a give and take between these competing interests, and sometimes the most ethical course of action is to make the difficult decision to make the other party whole and breach the contract.

JensenBayles, LLP provides a broad spectrum of legal services.  Please visit our web site www.JensenBayles.com or call 435-674-9718 and ask for James Spendlove. The information in this article is for educational purposes only and is not intended to be construed as legal advice. Please contact an attorney for legal advice specific to your situation.

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