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Managing Moral Risk -...

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ESSAY MANAGING MORAL RISK: THE CASE OF CONTRACT Aditi Bagchi* The concept of moral luck describes how the moral character of our ac- tions seems to depend on factors outside our control. Implications of moral luck have been extensively explored in criminal law and tort law, but there is no literature on moral luck in contract law. This Essay shows that contract law is an especially illuminating domain for the study of moral luck because it highlights that moral luck is not just a conundrum to solve, deny, or ignore. We anticipate moral luck, that is, manage our moral risk, when we take into account the possibility that our actions might result in serious harm to others for which we would be morally responsible and adjust our conduct accordingly. Moral risk is present in contract both at the stage of contract formation and, later, when a party must decide whether to breach or whether to accommodate a request for modification. Parties negotiate these risks both through collective background institutions that limit the harms they can in- flict on others and through the rules of contract law itself, which align mate- rial and moral interests. I NTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1879 I. M ANAGING M ORAL L UCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1883 A. The Challenge of Moral Luck . . . . . . . . . . . . . . . . . . . . . . . . 1883 B. Taking Moral Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1886 C. The Possibility of Managing Moral Luck . . . . . . . . . . . . . . 1888 II. C ONSENT AND M ORAL L UCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1891 A. The Case Against Moral Luck in Contract . . . . . . . . . . . . 1894 B. Brute Luck in Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1897 C. The Possibility of Culpability for the Losses of a Consenting Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1899 D. Shared Responsibility for Losses in the Course of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1903 III. M ORAL R ISK T AKING IN C ONTRACT . . . . . . . . . . . . . . . . . . . . . . . . 1906 A. Moral Luck in Contract Formation . . . . . . . . . . . . . . . . . . . 1906 1. Background Distributive Claims in Contract . . . . . . 1907 2. Equivalence of Exchange . . . . . . . . . . . . . . . . . . . . . . . . . 1911 3. Choice of Terms as Exercise in Agency . . . . . . . . . . . 1913 4. Involuntary Relational Duties Toward Contractual Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1915 * Assistant Professor of Law, University of Pennsylvania. Many thanks to participants at the Georgetown Law School workshop on Contract and Promise, AALS Workshop on Women Rethinking Equality, Fordham Law School, DePaul Law School, and University of Pennsylvania faculty workshops. Special thanks to Anita Allen, Tom Baker, Susan Block- Lieb, Jeanne Fromer, Andrew Gold, Youngjae Lee, Ethan Lieb, Mark Patterson, Steve Thel, Robin West, and Benjamin Zipursky. 1878
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2011] MANAGING MORAL RISK 1879 B. Moral Luck in Contract Performance . . . . . . . . . . . . . . . . . 1917 1. Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1917 2. Requests for Modification . . . . . . . . . . . . . . . . . . . . . . . . 1924 IV. L AW AS A T OOL FOR M ANAGING M ORAL R ISK IN C ONTRACT . 1925 A. Safety Nets as Collective Tools of Moral Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1926 B. Contract Law as a Tool for Managing Ex Post Moral Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1928 C ONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1930 I NTRODUCTION Moral luck describes the effect that events outside our control have on the normative upshot of our actions, or at least how others credit and blame us for those actions.
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