01/10/2012 12:18 pm ET Updated Mar 10, 2012

Morality Is Part of Contract Law

Morality has been a part of contract law for ages in the history of western civilization. At one time it was believed that contracts were made in the presence of God and consequently certain moral standards were implicit in creating and executing the agreement. While this view has faded, there are still overtones of this concept in a variety of secular U.S. legal doctrines. This comment briefly mentions several of these.

A December 9 unreleased decision by the Delaware Court of Chancery, Clean Harbors, Inc. v. Safety-Kleen, Inc., discusses the implied covenant of good faith and fair dealing in the context of interpreting a contract. The Court noted that this implied covenant cannot conflict with (express) specific contract terms governing conduct. However, the Court noted approvingly that this covenant is a "backstop" that "requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain." (quoting Alliance Data Systems Corp. v. Blackstone Capital).

The implied covenant of good faith and fair dealing has been a notable fixture of U.S. law since the 1880s. It is frequently criticized as injecting subjectivity into an otherwise objective agreement. On the other hand the continuing references to this doctrine demonstrates a deep social morality that underlies all contracts (agreements) and their enforcement. The Mayflower Compact of 1620 contains references to God and residual echos of this religious heritage are still present in the U.S. legal system.

Comments concerning morality are suspect in an increasingly pluralist society. Additionally, references to morality are conflated with religious extremism. Our legal system contains numerous standards with moral overtones. Consider the following few examples: "Unconscionable" - harshly and shockingly unfair; "fiduciary standards" -utmost honesty and loyalty; "good faith" -honesty in fact and the observance of reasonable commercial standards; "mitigation of damages" -reasonable steps must be taken to reduce one's loss.

Those writing contracts will attempt to remove the injection of subjective moral standards by stating very precise obligations. At the same time it is commonplace to insert in a contract "however," "unless," "notwithstanding," and "conditioned upon" language to create the proverbial loophole for which attorneys are frequently despised. The very use of this limiting language is frequently criticized as being morally offensive.

Occupy Wall Street is the most recent in a long line of historic movements that demands "fairness" in social, political, and business interactions. Consider the Farmers Movement and Labor Movement in the 1800s. While one may debate what is "fair," there is no denying that the concept of fairness is a core value in our society.

Corporations have engaged in a variety of legal methods of reducing debt obligations for a number of years. In 2009 Brent T. White published "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis" in which he discussed "norm asymmetry" between lenders and borrowers. This seeming distinction between corporate moral behavioral and individual moral behavioral continues to generate controversy. Does legal recognition of corporate personhood imply moral obligations?

One who argues "the letter of the law" or contract may anticipate a response concerning the "spirit of the law" or contract. Consequently, when actions under a contract are perceived as being unfair, there is still an opportunity to argue "good faith and fair dealing," and a variety of other morally based standards. Since commonly understood concepts of "trust" underlie all social interactions, it is unlikely that morality or moral based constructs will soon be expelled from contract law.