NELLCO

NELLCO Legal Scholarship Repository New York University Public Law and Legal Theory Working Papers

New York University School of Law

4-2014

The Practice of Promise and Contract Liam B. Murphy NYU School of Law, [email protected]

Follow this and additional works at: http://lsr.nellco.org/nyu_plltwp Part of the Contracts Commons, and the Jurisprudence Commons Recommended Citation Murphy, Liam B., "The Practice of Promise and Contract" (2014). New York University Public Law and Legal Theory Working Papers. Paper 458. http://lsr.nellco.org/nyu_plltwp/458

This Article is brought to you for free and open access by the New York University School of Law at NELLCO Legal Scholarship Repository. It has been accepted for inclusion in New York University Public Law and Legal Theory Working Papers by an authorized administrator of NELLCO Legal Scholarship Repository. For more information, please contact [email protected].

ThePracticeofPromiseandContract LiamMurphy1

1.ContractTheory Aphilosophicaltheoryofpromisingattemptstojustifysomeaccountofpromissoryobligation. Itdoesnot,attheoutset,attempttojustifyanyparticularsocialpracticeorsetofprevailing ethicalcommitments.Thisiswhythedependenceofpromissoryobligationonanactualsocial practiceisadiscoveryworthremarkingupon.2 Ofcourse,one’sbeliefsaboutpromissoryrights andobligations—beliefsembeddedinasocialpractice—aretheinitialdatafromwhichany theoryofpromiseisconstructed.Thereisnowhereelsetostart.Butinmostphilosophical reflectionaboutsubstantivemoralissuestheprospectofrevisionaryconclusionsispartofthe pointofengagingintheinquiry.Fewphilosophersbelieve thatpretheoreticalmoral commitmentor“intuition”shouldbetreatedassacrosanct. Whatevertherightmethodologyinmoraltheorymaybe,itisclearenoughthat normativelegaltheoryshouldnottreatexistinglawaspresumptivelygoodandseekonlyto showwhythisisso.Lawisobviouslyasocial,indeedapolitical,artifact.Wedon’tneedcritical theorytotellusthatlawhasacertaingenesisandservescertainfunctionsandthatitwouldbe

1

HerbertPeterfreundProfessorofLawandProfessorofPhilosophy,NewYorkUniversity.ThankstoOrenBarͲGill, KevinDavis,MartijnHesselink,LewisKornhauser,GeorgeLetsas,SeanaShiffrin,andaudiencemembersattheUCL conferenceandaseminarattheCenterfortheStudyofEuropeanContractLawattheUniversityofAmsterdam forcommentsandcriticism.ThesupportoftheFilomenD’AgostinoandMaxE.GreenbergResearchFundofNew YorkUniversitySchoolofLawisgratefullyacknowledged. 2 SeeDAVIDHUME,ATREATISEOFHUMANNATURE(P.H.Nidditch,ed.1978[1740]);LiamMurphy,PracticeandPromise (unpublishedms.,2013).

1

perversesimplyto assumethatitdeservesourapproval.3 Ofcourse,itisanessentialprojecttouncovertheinternalnormativestructure(ifthere isone)ofaparticularbranchoflawinaparticularplace.Suchanunderstandingisobviously crucialforthemakingofargumentswithinthatlegalpractice.Butit’salsotherightstarting pointfornormativelegaltheory.4Thoughthemainpointofnormativelegaltheoryasmostsee itisevaluative,aimingatleasttoproducecriteriabywhichparticularlegaldoctrinesand practicescanbejudged,itwouldobviouslybeawasteoftimetotrytodesignanidealsystem ofcontractlaw(oreventotrytocomeupwithasetofgoalscontractlawshouldserve,leaving theproblemofconcreteinstitutionalizationtosomeoneelse)inignoranceofhowsocieties havebeenthinkingaboutthetopicoverthecenturies.Thoughitispossiblethatallactual contractlawisallwrong,itisveryunlikelytobeso,andanytheoryclaimingthishastheburden ofexplaininghowweallwentastray.(IthinkitquitelikelythatNewZealandwasrightto abandonthewholeofaccidentlaw,butwedoneedanaccountofwhytherestoftheworldis unmovedbythisrevolution.)Inanyevent,aswiththemoralcase,whereelsecanwestartthan withexistingideasaboutwhyandhowlawshouldenforceagreements? Inpractice,theconnectionbetweennormativelegaltheoryandactuallawisoften

3

The formalist approach to legal theory of ERNEST WEINRIB, THE IDEA OF PRIVATE LAW (1995), and Peter Benson’s work oncontracttheorymayseemtoreflectadifferentview.ButintheendIdonotbelievethisisthebestwayto understandtheirwork.OnBenson,seenote4infra. 4 Forsome,forexampleJulesColemanintorttheoryandPeterBensonincontracttheory,it’salsotheendpoint, atleastoftheirinquiry.Havingpresentedananalysisofthenormativestructureoftortlaw,Colemanleavesitto otherstodeterminewhethersuchaninstitutionisworthhaving;see,e.g.,JULESCOLEMAN,RISKSANDWRONGS(2002). AndBenson,whilearguingthatuncoveringtheimplicitnormativestructureofcontractdoctrineprovidesa“public justificationofcontract,”leavesitopenwhetherthisjustificationcanbegivenadeeperphilosophicalormoral foundation;seeTheUnityofContractLawinPETERBENSON,THETHEORYOFCONTRACTLAW(2001),118,124.

2

strongerthanthis.5Itistypicalforwriterstoattempttofitatheoryof,say,contract,asclosely aspossibletosomeparticularactuallegalsystem,eveniftheirultimatemotivationiscritical.6 Thisisinawaysurprising,sinceifoneseesexistinglawasjustinitialdatafortheory construction,acomparativeapproach—drawingonaswideavarietyoflegalsystemsas possible—wouldclearlybepreferable.ButexistingEnglishͲspeakinglegaltheory,atanyrate,is notablyparochial.Thisisprobablypartlyattributabletotheprevailingmonolingualismof contemporaryscholarsintheEnglishͲspeakingworld—instarkcontrastwithwhatseemsto havebeenthenormahundredyearsago.Butitisalsosurelypartlybecauselegaltheorists typicallyhavemixedaims.Theymostlydowishtoadvanceanormativeandnotjusta descriptiveorexplanatorylegaltheory.Butbytrainingandprofessiontheyalsotendtobe expertsonaparticularlegalsystemandsohaveanaturalinterestinmakingreformist proposalsthathaveachanceofsuccessintheirownlegalworld;theclosertheevaluative theorymatchesexistinglawinaparticularplace,themorelikelyargumentsfororagainst reformmadeinitsnamewillbeheeded. TheapproachofStephenSmithdeservesspecialmention.7Smith’sdiscussionof contracttheoryisofferedasaninterpretationofexistinglaw,alongthelinesofDworkin’s theoryofhowtofigureoutthecontentofthelawinforce.Suchaninterpretation,simplifying greatly,aimsbothtofittheexistinglegalmaterialsandshowthemintheirmorallybestlight.

5

SeealsoJodyKraus,ThePhilosophyofContractLawinTHEOXFORDHANDBOOKOFJURISPRUDENCEANDPHILOSOPHYOF LAW(JulesColemanandScottShapiro,eds,2004),687. 6 AgoodexampleisCharlesFried,whosetheoryinCONTRACTASPROMISE(1981)leaveshimwithnochoicebutto repudiatethedoctrineofconsiderationbutwhostrivestojustifyasmuchaspossibleoftherestofU.S.lawonthe contractaspromisemodel. 7 STEPHENSMITH,CONTRACTTHEORY(2004).

3

Smiththereforeaimstogobeyonduncoveringthenormativestructureofcontractlaw;heaims toprovidethebestavailablejustificationforthewaythatitis.NowDworkin’stheoryofhowto determinethecontentofthelawmaybecorrect.8Butifitisevaluativecontracttheoryweare doing,ratherthantryingtomakethebestsenseofthelawwehave,themethodofshowing existinglegalmaterialsintheirbestlightisinappropriate.Evaluativeorcriticallegaltheoryis notconstrainedtofitexistingmaterials.Thoughexistingmaterialsarethestartingpointofthe discussion,thereisnoloss,sofarasthetheoryisconcerned,ifitexplainswhysomewellͲ establishedfeatureofthelawshouldsimplybedropped;lessfitisnotinitselfacountagainst thetheory.TouseSmith’shelpfultaxonomy,Iaminterestedin“prescriptive”ratherthan “interpretive”contracttheory.9  2.LegalEnforcementofAgreements Thebasicquestiontoaskaboutcontractlawiswhy(some)agreementsorpromisesshouldbe enforcedbythestate.Ananswertothisquestionwillprovidecriteriafordeterminingwhich agreementsandpromisesshouldbeenforced,andwhichshouldnot.Itwillalsocarrywithitan accountofwhatenforcementamountsto:anaccountoftheappropriateremedyforbreach. Itmightseemthatinstatingtheprobleminthisway,Ihavealreadyrestrictedmyselfto thecommonͲlawworld,whereitisentirelynaturaltolawyersandtheoriststothinkofcontract lawintermsoftheenforcementofagreementsandpromises,andleftbehindthecivilͲlaw tradition,inwhichthequestionistypicallyposedasoneabouttheconditionsunderwhicha 8 9

Fordiscussion,seeMurphy,WhatMakesLaw(forthcoming,2013) SMITH,supranote7,at4.

4

personhastakenonalegal(contractual)obligation.Butthedifferenceisactuallysuperficial, sinceevenifwedon’tthinkofcontractlawintermsoftheenforcementofindependently existingpromisesoragreementsthatmighthavemoralforce,contractualobligations everywherearelegalobligationstoperformone’ssideofanagreementorstandͲalone commitment.Whetherornotwethinkofcontractlawasarrivingonthesceneofamoral practiceofmakingpromisesandagreementsandchoosingtoaddlegalforcetosomeofthem, wecanagreethatcontracttheoryaimstoprovidenormativefoundationsforthetypeoflegal institutionthatenforces(some)agreementsandunilateralundertakings. Forabodyoflawascomparativelysettledascontracts,itisperhapssurprisingthatso manyverydifferentanswerstothebasicquestionshavebeenproposed.Butthenperhapsitis notsurprising:likeproperty,contractisafundamentallegalcategoryandalotisatstakehere forasociety’smoralandpoliticalselfͲunderstanding. Wecanorganizethemostimportantoptionsincontracttheoryintothreebroadcamps. First,therearemoralisticaccounts—thosethatseecontractlawasaimedateitherenforcing moralobligationorpromotingavirtuouscharacter.Second,therearecorrectivejustice accounts,accordingtowhichtheaimofcontractlawistoallowthevictimsofacertainkindof wrongdoingtoextractcompensation(rectification)fromthewrongdoers.Last,thereare instrumentalaccounts,whichfindthepointofcontractlawinthemorallysignificantsocial effectsthatflowfromit.Onemightofcoursesubscribetosomepluralisticmixofsomeorallof thesebasictypes,butIwillfirstintroduceeachtypeinitspureform. Thelabelscouldmislead.ThoughIlabelonlythefirstview(andthissomewhat

5

tendentiously)moralistic,allthecontracttheoriesIconsideraregroundedinconsiderationsof politicalmorality.Eventheeconomictheoryofcontract,despitetheideologicaldisavowalsof someofitspractitioners,10dependsontheassumptionthateconomicefficiencyisavaluelegal institutionsshouldpromote.Andofcourseallcorrectivejusticeviewsaremoralviews.What makesthefirstgroupofviewsworthyofthelabel“moralistic”isthattheyunderstandthepoint ofcontractlawtobetheenforcementofmoralobligation,orthepromotionofvirtue,fortheir ownsake.Thedistinctionisfamiliarfromcriminallawtheory.Allaccountsofcriminallaw attempttoprovidemoraljustificationforthismostcoercivebranchofthelaw.Andallagree thatmostdefensiblecriminalprohibitionsdovetailwithwhatmostpeoplewouldacknowledge astheirmoralobligations.ButonlythekindofviewH.L.A.Hartcalledlegalmoralismwillhold thatthepointofthecriminalprohibitionistoenforcetheassociatedmoralobligation.11On instrumentalaccounts,totakeonecontrastingcase,thecontentofthelawisjustifiedbecause andtotheextentthatenforcementofthesecriminaldutiesdoessomegood. Ifallcontracttheoriesareatthebroadestlevelgrounded(inpart)inmoraltheory,itis alsotruethatthereisasenseinwhichtheyareallinstrumental:Theyholdnotthatthelegal regulationofagreementshasintrinsicvaluebutratherthatitisvaluableasameanstocertain goodeffects—including,perhaps,theenforcementofmoralobligation.12ThosetheoriesIlabel instrumentalaresoinamoreparticular,narrowersense:theyrejecttheideathatthepointof 10

See,e.g.,RICHARDPOSNER,PROBLEMATICSOFMORALANDLEGALREASONING(2002). SeeHART,LAW,LIBERTY,ANDMORALITY(1963).Fordefenseoflegalmoralisminthecriminallaw,seeMICHAEL MOORE,PLACINGBLAME(1997). 12 EvenRonaldDworkin’stheoryoflaw,whichperhapshasmoretosayaboutthevalueoflawthananyother,is instrumentalinthissense:theorderingofsociallifethroughlawisnotintrinsicallyvaluable,rather,itsvalueliesin itsroleincreatingacertainkindofpoliticalcommunity.SeeRONALDDWORKIN,LAW’SEMPIRE(1986);RonaldDworkin, InPraiseofTheory29Ariz.St.L.J.353(1997). 11

6

contractlawistodojusticetothemoraldimensionsoftherelationshipbetweentheparties. Thustheydenythatthepointofcontractlawlieswiththemoralstandingofthepromisor(the moralisticview)orwiththerightsandlegitimateinterestsofthepromisee(thecorrective justiceview).Rather,theyfindthepointofcontractlawinsocietyͲwidemorallysignificant consequences.Itisappropriatetocallsuchtheoriesinstrumental,becausetheytreatasmere instrumentsinserviceofanentirelydistinctgoallegalrightsanddutiesthatmostpeople,on firstthought,wouldtreatastrackingrealandsignificantmoralrightsanddutiesheldbythe partiestotheagreementagainsteachother. Ifavoraninstrumentalistcontracttheory,thoughnotofthenarrowlyeconomicvariety. Ibeginwithareviewofthemostimportantalternativesontheirownterms.Muchofthe argumentthatfollowsdoesnotdependuponanyparticularaccountofpromise.  3.MoralisticContractTheory



CharlesFried’smainaiminContactasPromiseistoestablishthecentralityofpromiseto contracttheory.Hissetshimselfagainstthosewhodownplaytheimportanceofpromiseto contracteitherbytakingapurelyinstrumentalviewinwhichthemoralityofpromisedoesnot figure,orbyexplainingcontractincorrectivejusticetermsbutwithreferencetothepromisee’s relianceratherthanexpectationinterest. InFried’saccountofpromise,thevalueofthepracticeliesinitscontributiontohuman autonomy:Inprovidingamechanismwherebypeoplecansecureothers’trustandtherefore cooperation,thepracticeexpandsfreedom.ButFrieddoesnotexplaintheobligationtokeep

7

promisesinstrumentally,intermsofthepromotionofautonomy.13Ratherhegivesa deontologicalaccountofwhyitiswrongtoviolatetherulesofthepractice.Todosoisto intentionallyinvokeanother’strustandthenabuseit,andtodothatistouseaperson,inthe Kantiansense—tofailtoshowthemappropriaterespect.14Nowthisaccountofpromissory obligationissubjecttoessentiallythesamecircularityproblemfacedbynonͲpractice accounts.15Wemightthinkthattrustcanbeinvokedoutofthinairifapromisorcangivemoral groundsforthepromiseetoexpectperformance.16Friedclaimsthatthishappens automatically.“Anindividualismorallyboundtokeephispromisesbecausehehas intentionallyinvokedaconventionwhosefunctionitistogivegrounds—moralgrounds—for anothertoexpectthepromisedperformance.”17Thetrouble,thecircle,isthatthereareno moralgroundstoexpectperformanceunlesstheindividualisalreadyboundtokeephis promise.18 Bethatasitmay,itisplainthatFriedtakestheconclusionofhisaccountofpromiseto bethatpromisorshaveadeontologicalobligationtoperformandthatpromiseeshavethe correlativerighttoperformance.Fried’sdiscussionofcontractlawstartsdownstreamofthis moralconclusion.Andisnotunderminedbyhisunpersuasiveargumentforthatconclusion,

13

ThusRichardCraswell’scharacterizationofFried’stheoryofpromise(andcontract)asan“autonomy”theory, inContractLaw,DefaultRules,andthePhilosophyofPromising88Mich.L.Rev.,489(1989)ismisleading. Unfortunately,thisterminologyhasbeenwidelyadoptedbycontracttheorists. 14 FRIED,supranote6,16Ͳ17.Forsympatheticdiscussion,seeDORIKIMEL,FROMPROMISETOCONTRACT,chap.1(2003). 15 SeeNikoKolodnyandR.JayWallace,PromiseandPracticeRevisited,31Phil.&Pub.Aff.119(2003);Murphy, supranote2. 16 ThougheveninthatcaseIdonotthinkthattrustwillautomaticallygenerated. 17 FRIED,supranote6,16. 18 StephenSmithmakesessentiallythesameobjectiontoFried’saccountofpromiseinTowardsaTheoryof Contract,inOXFORDESSAYSINJURISPRUDENCE,4THSERIES(JeremyHorder,ed.,2000).Buthetakesittoundermine Fried’scontracttheory,whichIdonot.

8

sincethereareotherwaystoargueforadeontologicalbasisofthedutytokeeppromises— evenothers,suchasRawls’s,thatalsoinvokethevalueofthepracticeofpromise.19 WhatismostimportantinFried’scontracttheory,andwhatjustifiestreatinghisasthe exemplarymoralisticaccount,isthefocusonthemoralobligationofthepromisorasthemain justifyinggroundofcontractlaw. Themoralistofdutythuspositsageneralobligationtokeeppromises,ofwhichthe obligationofcontractwillbeonlyaspecialcase—thatspecialcaseinwhichcertain promiseshaveattainedlegalaswellasmoralforce.Butsinceacontractisfirstofalla promise,thecontractmustbekeptbecauseapromisemustbekept.20 Themessageisclearenough.JustaslegalͲmoralisttheoriesofcriminallawholdthatthelegal dutynottomurderhasasitspointtheenforcementofthemoraldutynottokill,moralistic contracttheoryholdsthatthelegaldutyofcontractualperformancehasasitsaimthe enforcementofthemoraldutyofperformanceofpromise. Friedbelievesthatthestandardcommonlawremedyforbreachofcontract, expectationdamages,achievesthisaim:“IfImakeapromisetoyou,IshoulddoasIpromise; andifIfailtokeepmypromise,itisfairthatIshouldbemadetohandovertheequivalentof thepromisedperformance.”21Fried’sadvocacyofexpectationdamageshasdrawn considerablecriticism,notallofwhichiseffective.22Themainquestiontoaskiswhy,if

19

SeeJOHNRAWLS,ATHEORYOFJUSTICE,93Ͳ8(rev.ed.,1999). FRIED,supranote6,17. 21 Ibid. 22 SeeRichardCraswell,supranote13,andAgainstFullerandPerdue,67Univ.ofChi.L.Rev.99(2000);Gillian Hadfield,OfSovereigntyandContract:DamagesforBreachofContractbyGovernment,8S.Cal.Interdisc.L.J.467 (1999).Craswell’swellͲknowncomplaintthattheremedyofexpectationdamages“cannotbederivedsolelyfrom 20

9

enforcementofmoralobligationistheaim,theappropriateremedyisnottobefiguredouton retributiveand/ordeterrencegrounds.Whatevernormativeforcewegivetotheboundary betweencriminalandcivillawisirrelevanthere,sincethecivillawdoeshavetheoptionof punitivedamages. Anargumentcanbemadeforthenonpunitiveremedyofspecificperformance.Inthe caseofapromise,thereisaverystraightforwardwayinwhichtheobligationcanbeenforced bylaw:thestatecanforcethepromisortoperform.Inthisrespectpromissoryobligation differsfrommostoftheobligationsthelegalmoralisttakestobethebusinessofthecriminal law,whichmayonlybe“enforced”bywayofdeterrenceandretribution.Thoughinsomecases thetimeforperformancewithoutlosstothepromiseehaspassedbythetimeoflitigation, whenthatisnotthecasetheinjunctionsimplyisthelegalenforcementofthemoralobligation. Ofcourse,onecouldgofurtherandargueforapunitivesanctionforallwhowaverinthe performanceoftheirobligation,buttheveryideaoflegalenforcementofmoralobligation doesnotrequirethatpurelyretributiveelement. Moralistictheoriesdofaceafurtherdecision:Shouldthecourt’sorderofperformance bebackedupwiththefullrangeofcriminalsanctions,includingimprisonment,asisthecasein Germanyand,inprinciple,inthecommonlawworldviathemechanismofcriminalcontempt ofcourt,orshouldonlysomeweakercivilenforcementoftheinjunctionbeavailable,asin France?23Butthisisachoiceaboutthelengthstowhichthelawshouldgoinenforcingcourts’ injunctions,orthisoneinparticular,notachoiceaboutwhethertheenforcementof thevalueofindividualfreedomandautonomy,”Craswell,supranote13,517,misreadsFriedasofferingan instrumentalaccountofpromiseandcontract. 23 OnFranceandGermany,seeHEINKÖTZANDKONRADZWEIGERT,INTRODUCTIONTOCOMPARATIVELAW(1998).

10

contractualobligationshouldbeinherentlypunitive,sinceinallcasesthepromisorwillbein theclearifshecomplieswiththeinjunction. Soagoodcasecanbemadeforanaturalassociationbetweenmoralisticcontract theoryandtheremedyofspecificperformance.Whetherornotlegalenforcementof promissorymoralityshouldgobeyondthis,itshoulddoatleastthismuch.Therelevant complainttomakeagainstFried’sdiscussioninContractasPromisewouldseemtobethathe ignoredtheimportantdifferencesbetweenspecificperformanceandexpectationdamages fromthepromisee’spointofview.24Expectationdamagesaimtoputthepromiseeinasgooda positionasshewouldhavebeeninhadthepromisebeenperformed,andsointhatsensethey areideallythefinancialequivalentofthepromisedperformanceforthepromisee.Butina situationwhereapromisorcouldcommitthepromisedperformancetoahigherͲpayingthird party,payexpectationdamagestotheoriginalpromisee,andstillcomeoutbetteroff,paying expectationdamagesisnottheequivalent,forthepromisee,ofperformingaspromised. InhismostrecentwritingonthisissueFriedsuggeststhatexpectationdamagesarebest understoodasadefaultrule,justifiedastherulethatmostpartieswouldchooseoron instrumentalgrounds.25(Idiscusstheideathattheremedyforbreachisforthepartiesto determineexantebelow.)ThisdoesnotmeanthatFriedthinksthatnonperformanceisnot alwaysmorallyandlegallywrong.26Thepromisorshouldkeephispromise.Butifhedoesnot,

24

SeeSeanaValentineShiffrin,TheDivergenceofContractandPromise,120Harv.L.Rev.708(2007). CharlesFried,TheAmbitionsofContractasPromise,ThirtyYearsOn,thisvolume,xxͲxx. 26 Courtstypicallydonothavetotakeastandonthatpreciseissue,since,inthecommonlawworld,the expectationdamagesruleissowellentrenched.Butthereisusuallyawayforfoundationalissuestomakeittothe surfaceofdoctrine:InthewonderfulcaseofAhmedAnguillaBinHadjeeMohamedSallehAnguillav.Estateand TrustAgencies(1927)Ltd.,[1938]A.C.624,thequestionwaswhethertheexecutorofanestatewasrequiredto 25

11

andlegalenforcementisrequired,andthepartieshavenotstipulatedspecificperformancein advance,thenanaccurateawardofexpectationdamagesgivesthepromiseenomorenorless thanwasagreedto.27 

Inanyevent,theimportantobjectiontothemoralistictheoryliesnotwithits

implicationsfortheremedy,but,initsveryfoundationasanapplicationoflegalmoralismto contractlaw.28 

Friedwritesthat,“Lawcanbe,shouldbe,butneednotbeasetofinstitutionsthat

underwrite,facilitate,andenforcethedemandsandaspirationsofmoralityinourdealingswith eachother.”29ItisthisviewabouttheproperroleoflegalcoercionthatsetsFried’scontract theoryapartinaspecialcategoryand,formanyofus,allowsustosetitaside.ForMillian liberals,whorejectcoercionmerelyforthesakeofimprovingaperson’sownwelfare,or enforcingtheirobligations,ormakingthemmorevirtuous,themoralisticviewofcontractlaw doesnotgetofftheground.30 Havingsaidthis,itseemsclearthatFrieddoesnotregardtheenforcementofpeople's obligationsjustforitsownsakeasthesolepointofcontractlaw.Heclearlyregardsmore ordinaryinstrumentalbenefitsaspartofthepoint.31Perhapsifitdidnotalsoproduce

breachacontractwhenthiswouldhavelefttheestatebetteroffevenafterpayingexpectationdamages.ThePrivy Councilheldthat“thebreakingofanenforceablecontractisanunlawfulact,and...itcanneverbethedutyofan executororanadministratortocommitsuchanact.”[1938]A.C.624,635. 27 Friedacknowledgesthatexpectationdamagesfrequentlyundercompensateinpractice.CharlesFried,The ConvergenceofContractandPromise,120Harv.L.Rev.F.1,6(2007). 28 SeeJosephRazPromisesinMoralityandLaw,95Harv.L.Rev.916(1982). 29 Fried,supranote27at3. 30 Butnotbecauseitimposesanobligationtobenefitothers—asSmith,supranote18,argues.Millhasno objectiontopositivelegalduties;infact,heexplicitlyembracesalegaldutytorescueinOnLiberty.Forfurther discussion,seeLiamMurphy,Beneficence,Law,andLiberty:TheCaseofRequiredRescue89Geo.L.J.605(2001). 31 SeeFried,supranote25.

12

significanteconomicbenefitsalegalapparatusthatenforcedpromissoryobligationwouldnot beworththecost.Furthermore,muchofwhatFriedwritesalignshimcloselywiththebroadly Kantian,expectationͲbasedcorrectivejusticeviewdefendedbyErnestWeinrib,discussedinthe nextsection.SoweshouldclassFriedasapluralistcontracttheorist—butasonewho nonethelessstandsoutforholdingthatoneaimofcontractlaw,anaimthatconstrainsits content,istheenforcementofpromisors’moralobligations.  4.CorrectiveJusticeI:ThePromisee’sRighttoPerformance. Correctivejusticeviewsofprivatelawseethepointofcontract,ortort,astherightingof wrongsintheparticularsenseofcompensationfor,orundoingof,theharmsufferedasaresult ofanother’swrongdoing.Takingthisperspectiveoncontractlaw,ourfocusisonthepromisee. Asweknow,correctivejusticeaccountsofcontractcouldunderstandthewrongdonetothe promiseeaslyingwithhisexpectationorperformanceinterestorinsteadwithhisreliance interest. ThereareatleasttwoimportantlydifferentwaysaperformanceͲinterestaccountcould befurtherspelledout.Thefirstisthatpromisestransferpropertyrightsfromthepromisorto thepromisee. PeterBenson’sbrilliant,thoughtomymindQuixotic,32reconstructionofcommonlaw contractdoctrinealongtheselines—findingtheessenceofcontractinthetransferofpersonal

32

Bensongoessofarastoattempttoprovideanindependentlyplausiblenormativerationaleforthecommonlaw doctrineofconsideration.TheIdeaofConsideration61U.T.L.J.241(2011).Formanycontractscholars,thisis almostareductioadabsurdumofBenson’sproject.

13

proprietaryrights33—islimitedinitsjustificatoryaims,sincehisprojectistouncoverthe normativestructureofcontractdoctrine.34Totakethislineofthoughtfurther,sothatit generatesstandardsfortheevaluationofcontractlawratherthanathickdescriptionofit,we wouldhavetoagreethatthetransferofrightsrecognizedbycontractlawflowsfromthe moralityofproperty.Ihaverightstomypersonandmylegitimatelyacquiredholdings,and implicitintheserightsistherighttoalienatethem.Twowillsarerequiredfortheeffective transferoftheright,sincewecannotforcepropertyrightsonotherswithouttheirconsent. Whentwowillshavejoinedinanagreement,oragratuitouspromise(onthisview,gratuitous promisesmustbeacceptedbythepromiseetotakeeffect,asKantemphasizesandcivilian contractlawrequires),thepromiseeacquiresanewright,andifthepromisorfailstoperform, sheviolatesthatright.Contractlawensuresthatsuchwrongdoingisappropriately compensated.Thereisnomysteryaboutwhatformthatcompensationshouldtake:itshould undotheviolationofrightbyrequiringperformanceorsomethingjustasgood,alongwith disgorgementofanyprofitmadebythepromisorfromviolationofthepromisee’sproperty right. Myownobjectiontothisapproachisagainfundamental:Irejectmoralpropertyrights intheLockeansense,andespeciallytheideaofselfͲownership.35Sothoughitistruethatif naturalpropertyrightsalongLockeanlinesmadesense,thentherighttoalienatewouldbea naturalimplicationthatwouldofferastraightforwardjustificationforcontractlaw,Icannot acceptthefoundationsofthisargument.AdefenseofthisrejectionoftheLockeanviewis 33

SeePeterBenson,ContractasTransferofOwnership,48Wm.&MaryL.Rev.1673(2006Ͳ2007). SeeBenson,supranote4. 35 Fordiscussion,seeG.A.Cohen,SELFͲOWNERSHIP,FREEDOM,ANDEQUALITY(1995). 34

14

obviouslybeyondmyscopehere.Butevenapartfromthistheoreticalobjection,thereisa primafacieoddnesstotheassimilationofcontracttopropertysincecontractsforservicesare notmostnaturallythoughtofastransferringapropertyrightto(somepartof)aperson’s freedomofaction. ThesecondpossibleexpectationͲfocusedcorrectivejusticeaccountisonitsfacemuch moreplausible.Insteadoflocatingtherelevantmoralinterestsofpromiseesinthemoralityof property,itlaysoutanindependentmoralityofcontract. ThekindofviewIhaveinmindissetoutwithexemplaryclaritybyErnestWeinrib.36 Theaimofprovidingaremedyforbreachofcontract,onthisview,istorestoretotheplaintiff thatwhichisrightfullyhis;specificperformanceorexpectationdamagesdothis,andarethus theproperremedies.Thepromisee’srightunderacontractisnotapropertyright,oranykind ofrighttothesubjectͲmatterofthecontract.Rather,asKantemphasizes,thepromisee’sright istothepromisor’sperformance.37 Nowthiskindofviewmakesexcellentsenseofthestructureandcontentofcontract lawasitisfoundvirtuallyeverywhere,includingthefactthatcontractremediesarenot generallyaimedatpunishmentofthepromisor,ordisgorgementofhergains.Contract remediessimplyrequirethepromisortogivetothepromiseewhatwasrightfullyhisallalong, thepromisedperformanceoritsmonetaryequivalent.Butsuchaviewdependsuponan independentaccountofwhyexactlyapromiseeacquiresarighttothepromisor’sperformance. TheinspirationforthiskindofviewisKant’sremarksoncontractintheMetaphysical 36 37

EarnestWeinrib,PunishmentandDisgorgementasContractRemedies,78ChiͲKentL.Rev.55(2003). Ibid.67;seeKant,THEMETAPHYSICSOFMORALS6:273.

15

PrinciplesofJustice.ButwhatKantwritesisverydisappointing,sinceittooisheavyonform andlightonjustification.Wearetoldthatthesimultaneousjoiningtogetheroftwowillsin contracttransfersaright.(Kant’sphilosophicalexertionislimitedtoanalmostparodic transcendentalargumentthattwoempiricallynonsimultaneousassentsmustbeconceivableas noumenallysimultaneous,lestcontractbeimpossible.)Whilecontractasthejoiningofwills maybeasatisfactorydescriptiveaccountofsomelegalregime,itfailstoexplainwhysucha regimewouldmakesenseorbedesirable. Thenaturalplacetolookforsuchajustificationwouldbeinthemoralityofpromise. Butthereisnoplausibledeontologicalaccountofpromisethatwouldestablishthatpromisees havearighttothepromisedperformance.38Rawls’spracticeͲbasedaccountofpromisedoes provideadeontologicalreasonforkeepingapromise:someonewhomakes,andthenbreaks,a promisecanbeseenasfreeͲridingonabeneficialsocialpracticeinwhichheparticipates voluntarily.Thisisanattractiveaccountofthemoralityofpromiseanditdoesgrounda deontologicalreasonforfidelitytopromise.Butthatreasonrelatestotheinterestsof everyoneengagedinthepractice;itdoesnotgroundanaccountofwhybreachviolatesthe rightsofaparticularpromisee.AndofcourseapracticeͲbasedaccountofthepurely consequentialistvarietydoesnotgroundadeontologicalreasonforfidelitytopromise:the reasontoperformpromisesmade,isthereisone,turnsontheharmthatnoncompliancewould dotothevaluablesocialpractice. ForallpracticeͲbasedaccounts(otherthanFried’s,discussedabove)thereasonstokeep

38

SeeMurphy,supranote2.

16

apromise—onemadeatarm’slength,atanyrate—relatetothepracticeofpromisingatlarge, andarenotgroundedontherightsorinterestsofthepromisee.Inthecaseofpromisesmade tointimatestherecanbespecialkindsofexpectationsthedisappointmentofwhichwoulddo significantharm.Butthereisnoreasontothinkthattheharmnonperformancewoulddoisjust thesameasthelossinvaluetothepromisefromnonperformance.39 ItisnodoubtbecauseFullerandPerduedidnotconsiderthepossibilitythatpromisees simplyhadarighttoperformancethattheybelievedthatexpectationdamagestobe,onthe faceofit,anunjustifiedremedy.Theydeclarethattheexpectationinterestofpromiseeshas verylittlemoralimportance.40Thewaytheywriteaboutit,itisasifunfulfilledexpectationson thepartofallpromiseesshouldbelikenedtoachild’sdisappointmentatnotgettinga promisediceͲcream.Butonthecorrectivejusticeview,theremedyofexpectationdamagesis appropriatenotbecausethepromiseehasaspeciallyvaluableinterest,orbecauseshewill sufferalossfromnonperformance,butbecauseshehasarighttoperformance.Justas,ifwe believeinpropertyrights,restoringmystolenpropertyismorallyappropriate(sinceIhavea righttotheproperty)evenwhenthelossdidnotsetbackmywelfareinterestsatall. Similarly,JosephRazarguesthatexpectationdamagesforthesakeofthepromisee alone(asopposedtothesocialgood)areincompatiblewithMill’sharmprinciple.41Aswith FullerandPerdue’sdiscussion,Razhereseemstobelievethatexpectationlosses,sincetheyare inanimportantsensehypothetical,measuredagainstabaselineofwhatmighthavebeen,are notrealharms.Onthecorrectivejusticeviewnowbeingconsidered,wearenotlookingto 39

SeeMurphy,supranote2. SeeL.L.FullerandWilliamR.Perdue,Jr.,TheRelianceInterestinContractDamages:I,46YaleL.J.52(1936). 41 SeeRaz,supranote28. 40

17

preventmaterialharm,butprotectrights. ItisworthpointingoutthatFullerandPerdue’sskepticismabouttheimportanceofthe promisee’sexpectationsisfullycompatiblewithrecognizingthatpromiseesunderavalid contracthavealegitimateexpectationofperformance.Apromisee’slegitimateexpectations canbeunderstoodtoflownotfromthepromisor’snaturaldutytoperform,butfromher participationinalegitimatepracticejustifiedonothergrounds.Wherecontractlawmustbe justifiedonothergrounds,promisees’expectations,eventhoughtheyarelegitimateoncethe systemisupandrunning,donotprovideanyadditionaljustificationforhavingsuchasystem. Wemustn’tconfuseamoralsideͲeffectofthesystemwithitsunderlyingjustification.Takea welfaresystemthatisjustifiedbysomeaccountofsocialjustice.Individualslivingunderthat schemehavealegitimateexpectationtothedeliveryofwhattheyarelegallyentitledto.But thoseexpectationsdonotexplainwhythewelfaresystemisagoodidea.Thekeypointtomake aboutFullerandPerdue,then,isthattheysimplydidnotconsiderthatcontractlawmightbe justifiedasawaytoenforcetheindependentlygeneratedrightofpromiseestothepromised performance.42 IconcludethatWeinrib’sKantiancorrectivejusticeaccountisthemosteligible candidatenonͲinstrumentalcontracttheory,particularlyinmakingsenseofexistinglawissuch aclearandcompellingway.Asanormativereconstructionofthelaw—whichmayalsobeall thateitherKantorWeinribthoughtbelievedtheywereoffering—itisfarsuperiortoaccounts thatlinkcontracttoproperty,or,theaccountweturntonext,thosethatfocusonreliance.The

42

SeeWeinrib,supranote36at63Ͳ4.

18

problemwiththisaccountiswhereitstops.Itoffersnoargumentatallfortheideathatall promiseeshavemoralrightsthatitisthebusinessofthelawtoprotect.Icannotdefendthe claimhere,butitismyviewthatpromiseeshavenosuchrights.  5.CorrectiveJusticeII:CompensationforDetrimentalReliance. ThoughintheendIagreewithFullerandPerdueinrejectinganexpectationͲfocusedcorrective justiceaccount,Icannotseeanyplausibilityintheviewtheyputinitsplace—theideathat contractlawisaboutcompensationfordetrimentalreliance. Despiteitspopularityinthetwentiethcentury,anddespiteitsaffinitywiththeU.S. doctrineofpromissoryestoppel,the“reliancetheory”ofcontractisperhapstheleastplausible oftheviewsconsideredsofar.Theonlywayitcanbesavedfromincoherenceisby transformingintoaviewthatnoonecouldaccept. Inanutshell,thetheoryisthatbreachofpromise(usually)causesreliancelosses,that thewronginflictedonthepromiseejustistheinflictionoftheselosses,andthattherefore correctivejusticerequirestheircompensation,whichiswhatcontractlawaimstoensure.In justificationofthisaccount,onecouldputforwardthemoralviewthatanyinducedrelianceis theresponsibilityoftheinducer,independentofpromise.IfBruceinducesAlicetobuyan aeroplanetickettoAustraliabysayinginpublicthatheisonhiswaythere,Bruceisresponsible forAlice’slossifhefailstogo.Butit’sprettyclear,Ithink,thatthisisanunacceptablemoral view—ourresponsibilityforlossesothersincurinrelianceontheirexpectationsaboutwhatwe

19

willdocannotpossiblybeasextensiveasthis.43Therearelegaldoctrines,suchastherecently forgedAustraliandoctrineof“equitableestoppel”whichrecognizesa(verylimited)causeof actionforreliancedamagesintheabsenceofpromise,andsomehavedefendedthisdoctrine byappealtoanentirelygeneralprincipleofresponsibilityforinducedreliance.44Butifevera floodͲgatesobjectionwereappropriateinlegalargument,itwouldbehere.(TheAustralian doctrinestopsthefloodbyincludingunconscionabilityasaconditionofrecovery.)45 Thewayreliancetheoristsofcontracttypicallylimitthescopeofcompensatory responsibilityisbyinsistingthatitisonlyrelianceonpromisesthatcounts.Notallrelianceis theresponsibilityoftheinducerofit,onlythatinducedbypromise.Butthis,presumably,can onlybebecausethepromisoroughttokeephispromise.46Andifthatisright,itishardtosee whytheresponsibilityofthepromisorislimitedtoreliancelosses—ifthepromiseistheground oftheresponsibilityinthefirstplace,whyisthepromisornotresponsibleforthepromisee’s expectationlosses?Sotheproblemwiththereliancetheoryisnotjustthatitimpliesaremedy, reliancedamages,thatisnowhereawardedforbreachofcontract(theU.S.doctrineof promissoryestoppelprovidingonlyapartialexception),thoughthatisveryimportant;the problemisratherthattheveryideathatpromises(alone)generateresponsibilityforreliance lossesmakeslittlesense. PatrickAtiyahattemptedtoavoidthisproblembytakingaformalviewoftheroleof

43

SeeMurphy,supranote2. SeeMichaelSpence,PROTECTINGRELIANCE(1999). 45 SeeWaltonsStores(Interstate)LtdvMaher(1988)164CLR387,62ALJ110. 46 Fried,supranote6at10Ͳ11,20,makesalltheimportantpointsaboutreliancetheorieswithgreatclarity. 44

20

promiseincontract.47Atiyahrecognizedthatnotallinducedreliancecouldbetheresponsibility oftheinducerofit;onhisview,responsibilityislimitedtocasesofreasonablereliance.Andthe relevanceofapromise,onhisaccount,isnotthatthemoralforceofthepromiseitself generatesresponsibilityforreliance,butratherthattomakeapromiseisto“admit”that relianceisreasonable.Butapromisedoesn’tatallseemlikeanadmission.Andevenifitwere, admittingoneisresponsibledoesn’tmakeitso.Generally,one’sresponsibilityisnot determinedbywhatonedeclaresoneisresponsiblefor.  6.InstrumentalContractTheory Ifcontractlawisnotgroundedintheideathatthemoralobligationtokeeppromisesshouldbe enforcedbylaw,orthatthelawshouldprotectandcompensatefortheviolationoftherights ofpromisees,weareleft,byprocessofelimination,withinstrumentalaccounts.Contractlaw doesnothaveasitsmainjustificationsomegoalofpolicingthemoralsignificanceofthe relationshipbetweenpromisorsandpromisees,butratheroneofpromoting,protecting,and policingthesocialpracticeofmakingandkeepingofagreementsandpromises. 

Themostpopularinstrumentaltheoryisthatoftheeconomicanalysisoflaw.Many

articlesoncontracttheorycontrasttheeconomicapproachwiththatofthephilosophers.That isseriouslymisleading,sincetheeconomicapproachneedstobejustasphilosophicalasany otherifitistoprovideajustificatoryorcriticalaccountofcontractlaw.Defenseofthe economicapproachrequiresanargumentofrelativeplausibility:Dowehavemorereasonto

47

SeePATRICKATIYAH,PROMISE,MORALS,ANDLAW(1983).

21

embracethisparticularinstrumentalcontracttheoryasopposedtosomeother,orsome noninstrumentalaccount?Theanswertothisquestioncannotbedeterminedbydeclaring disciplinaryaffiliation. Iagreewitheconomicanalyststhatthebestcontracttheorywillnottrytotrackthe moraldutiesandinterestsofpartiestoparticularagreementsbutwillrathertakeabroader view,findingthepointoftheinstitutionintheoverallsocialgooditproduces.Whatiswrong withthetraditionaleconomicapproachisitsimpoverishedcriterionofthesocialgood—thatof economicefficiency.Economiccontracttheoryisaverystrongtheory,inthesensethatittries tojustifyalotwithextremelylittle;onthefaceit,itwouldbesurprisingiftheresultingaccount wereadequate.



Thisisnottheplacetoreviewthedeficienciesofeconomicefficiencyasasocialaim. Therearereasonswhyeconomistsabandonedamoreplausibleversionofwelfarismthat allowedforcomparisonsamongpeople’sabsolutelevelsofwelfareandthusalsodistributive information—reasonshavingtodowithmisguidedworriesaboutthe“meaningfulness”of interpersonalcomparisonsofwelfareandexcessiveappreciationforthetheoremsofwelfare economics.48ButsufficeittosaythattheinstrumentalapproachtocontracttheoryIembrace doesnotlimititselftoeconomicefficiencyastheproperaim.Theaimofcontractlaw,onany instrumentaltheory,istomakethingsgobetter.Inmyviewtheproperaimisplural,comprising totaloraveragewelfareanditsdistributionalongwithnonwelfaristaspectsofsocialjustice suchasequalityofsocialstatus,aswell,perhaps,asthepreventionoftheunfairnessthat 48

SeeAMARTYASEN,ONECONOMICINEQUALITY(2nded.,1997).

22

resultsfromfreeͲridingonafairpractice.49 Economicanalysisoflawmakesitsinvaluablecontributiontoinstrumentalcontract theorynotbypostulatinganimpoverishedaccountofthesocialgood,butinofferingtheonly sustainedattemptatexplaininghowlegalrulesaffectbehavior.50Anyinstrumentaltheoryof anyareaoflawrequiresatheoryofhowlawachievesgoodthings.Theonlywaychanginglaw canmakethingsbetterisbyinducingpeopletoactinwaysthatmakethingsbetter;soany instrumentaltheoryofcontractlawrequiresatheoryofbehavior.Onlyeconomictheoryhas attemptedtoexplainjusthowlegalrulesaffectpeople’sdecisionsabouthowtoact.Itishere alsothatcontemporaryeconomicanalysisismakingthemostprogressinrecentyears,moving beyondtheimplausibleassumptionthatpeoplealwaysreacttolegalrulesaspricesaffecting theirrationalcalculationsofselfͲinterest.Behaviorallawandeconomicsattemptstotakeinto accounttheratherobviousfactthatwearenotalwaysfullyrational.51Andveryrecently RebeccaStonehasmadethecrucialstepofacknowledgingtheequallyobviousfactthatpeople don’talwayssimplyreacttolegalrulesasprices.Stoneoffersusatheoryofhowtomodel behaviorofthosewhoacceptlegalrules,inH.L.A.Hart’ssenseoftreatingthem(forsome reasonorother)asprovidingstandingreasonsforaction.52 Anyinstrumentalcontracttheorymustdrawheavilyonthecontributionsofthe 49

Fromthepointofviewofindividualmorality,adeontologicaldutynottofreerideonafairpracticemayhave greatweightforaparticipantinthepractice.Butfromthepointofviewofthirdpartiesandthelaw,the importanceofpreventingtheunfairnessthatresultsfromfreeͲridingmaybeinsignificantcomparedtothe beneficialeffectsofthepracticeitself.Afullaccountofthesocialgoodscontractlawshouldbeaimingat,including theirrelativeweights,isbeyondthescopeofthischapter. 50 SeeLewisA.Kornhauser,AnIntroductiontotheEconomicAnalysisofContractRemedies,57U.Colo.L.Rev.683 (1986). 51 Forastateoftheartstudy,seeORENBARͲGILL,SEDUCTIONBYCONTRACT(2012) 52 RebeccaStone,EconomicAnalysisofContractLawFromtheInternalPointofViewunpublishedms.(2013).

23

economicanalysisofcontractlawasmanyofitsresultsareeasilygeneralizabletoinstrumental accountsgenerally.Butononetopic—thefoundationaltopicofremediesforbreach—the influentialideaofefficientbreachhasledmanyastray.ThepointsIwillmakeaboutefficient breacharenotespeciallynovel,butitisworthrehearsingthemtohighlightthedangerof myopiaininstrumentallegaltheory—bywhichImeanatendencytoapplytheanalysisretail, forgettingthatitalwaystheentireschemethatrequiresjustification.  7.InstrumentalRemedies. Therearetworatherdifferentwaysofconceptualizingtheissueofthechoiceofcontract remedies.Wecould,first,seetheremedyassuppliedbythelawinjustthewaytortremedies are:thisiswhatyougetiftheothersidebreaches.Callthisthefixedremedyapproach.The alternativeistoregardtheenforcementofagreements—specificperformance—asthe inescapablebackgroundremedy.Wethenallowthatpartieshavetheoptiontochooseexante, withinlimits,anoninjunctiveremedy,ortheexͲpostoptionofone,asatermoftheircontract. Callthisthemodelofremediesbyagreement.(Thoughthatispotentiallymisleadinginthatthe modelofcoursebuildsonthefixedremedythattheagreementwillbeenforcedaswritten. Theideathattheremedyforbreachisorshouldbeentirelyuptotheparties—alltheway down,asitwere—isincoherent.53)Thetwomodelscanoverlap.Supposeitissaidthatthe fixedremedysuppliedbylawisexpectationdamages.Wecouldalsopresentthisintermsof themodelofremediesbyagreementbysayingthatexpectationdamagesisamandatoryterm

53

SeeT.M.Scanlon,PromisesandContractsinBENSON,supranote4,107.

24

ofallagreements. 

Onthewhole,sincecontractlawinmostplacesallowssomecontroloverremediesby

theparties,themodelofremediesbyagreementallowsformoreclarity.Recenteconomic analysisofcontractremediestendstoemploythismodel. 

Thereisapotentialproblem,however,withtheremediesbyagreementmodel,whichis

thatitmightbethoughttocountenanceunjustifiedinterferencewiththejudicialrole.Parties mightagreetopunitivedamagesbut,itcouldbesaid,courtscannotsimplyberequiredto honorthatagreement.Butitisimplausibletothinkthatanyagreementonremediesisan infringementontheproperauthorityofthecourts.WhentheU.S.governmententersinto procurementcontracts,itgenerallyinsistsona“terminationforconvenience”termthat stipulatesthatthegovernmentcancancelatanytime,incurringliabilityforreliancelosses only.54Thereisnothingobjectionableaboutthecourtshonoringsuchaterm.Theconcern aboutjudicialauthorityisbetterexpressedthisway:thelawcanalwayslegitimatelysetlimits towhatterms(remedialorotherwise)itwillenforce. 

Nowtheterminationforconvenienceclausefoundingovernmentcontractsmightbe

understoodnotasanagreementabouttheremedyforbreach,butasapromiseinthe alternative:thegovernmentwilleitherperformorcoveritscontractpartner’soutofpocket expenses.Perhaps.Butnotalllimitationsondamagescanbeseenthatway—thusforexample theverycommonexclusionofconsequentialdamagesisclearlyanagreedlimitationonthe remedyavailableintheeventofbreach.

54

Fordiscussion,seeHadfield,supranote22.

25



Usingthemodelofremediesbyagreement,whatremedydoestheeconomicanalysisof

contractlawrecommend?Itwasoncethoughtthatsinceexpectationdamagesgaveefficient incentivesforthedecisionwhethertoperformorbreach,economicanalysissupportsthe commonlaw’smandatoryremedyofexpectationdamages.(Morefully,themandatoryremedy isexpectationdamagesorless,asthepartiesmightagreeexante,withinjunctiverelief potentiallyavailableatthediscretionofthecourtwheremoneydamagesareclearly inadequate).Butitwasquicklypointedoutthatthedecisionwhethertoperformorbreachwas justonedecisioncontractpartiesorpotentialpartieshadtomake;othersincludehowmuchto spendinrelianceontheotherparty’sperformance,withwhomtocontract,whethertoentera contractatall,andsoon.Workhasbeendoneonwhatmightbetheefficientremedyin respectoftheincentivesprovidedfortheseotherdecisions.Itseemsclearthatitwillbe impossibletocomeupwithananswertothequestionofwhatremedyisefficient,allrelevant decisionsconsidered.Butthemainpointtomakeabouttheeconomictheoryofcontract remediesisnotthatitisindeterminate,butratherthat,asCraswellhassoclearlyexplained, thereisnoreasontoexpectthattheefficientremedywilllineupwithoneofthosestandardly discussedbycontracttheorists.55Inparticular,thereisnoreasontothinkeconomicanalysis wouldbeabletojustifytheperformanceorexpectationdamagesremediesprovidedforbreach ofcontracteverywhere.Forallweknow,Craswellwrites,themostefficientremedy,allthings considered,mightbe66%ofexpectationdamages. Bethatasitmay,thereisafundamentalandimportantprobleminthetextͲbook 55

SeeCraswell,supranotes13and22;Craswell,”TwoEconomicTheoriesofEnforcingPromises,”inBENSON,supra note4.

26

presentationoftheargumentthatexpectationdamagesisefficientwithrespecttothedecision whethertoperformorbreach. ThetextͲbookargumentthatexpectationdamagesprovidetherightincentivesforthe decisionwhethertoperformorbreachisfamiliar.Therightincentiveisonewhereapartywill bemovedtobreachjustincasebreachleavesatleastonepersonbetteroffandnoperson worseoffthanperformancewould;thatwillbeaParetoimprovement.Underthecommonlaw, thisisexactlytheincentivepartieshave,sincetheywillbemovedtobreachjustincasethiswill leavethembetteroffevenafterpayingdamagesthataimpreciselytoleavethepromiseeno worseoffthanperformance. Nowthereisconsiderablediscussionaboutwhetherspecificperformancewoulddojust aswellasexpectationdamages,sincetheoriginalpromiseemaybeabletodealwithahigherͲ valuingthirdͲparty,andevenifnot,thetwooriginalpartiesmaybeabletoreachadealthat willreleasetheoriginalpromisor.Everythingturnsonwhatwebelieveabouttheabilityof courtsaccuratelytodetermineexpectationsdamages,relativetotheoutcomeoftheparties’ bargainoverreleasefromaninjunction,andtherelativecostsofthesetwoprocesses.56Butmy issuewithtraditionalefficientbreachanalysisisdifferent.Itisthatthereisnoreasonwhythe interestsoftheoriginalpromiseeshouldbesingledoutasespeciallyimportant. UndereithertheParetoorKaldorͲHickscriteriaofefficiency,anefficientbreachisone thatyieldsenoughsurplustothepromisorthatwouldenablehimtofullycompensatethe promiseeforhislostexpectancy.Butthequestionisthis:Whyshouldthepromisee’s

56

SeeAlanSchwartz,TheCaseforSpecificPerformance89YaleL.J.(1979).

27

expectancyasmeasuredagainstabaselineofthecontractbeofanysignificanceatall?Herewe findanotherrespectinwhichFullerandPerduegotitright.LeavingasidehurtͲfeelings,orany kindofpsychicharmofdisappointment,denyingapromiseehisexpectationinterestisnotto makehimworseoff.DenialoftheexpectancymakesapromiseeworseͲoffrelativetoa baselineofperformanceofthecontract.Butthatbaselinecannotsimplybetakenforgranted; itisaproductoftheverysystemofcontractlawthatwearetryingtojustify.Wecannothelp ourselvestotheideathatthepromiseehasanentitlementtoperformancewhentryingtogive aninstrumentaljustificationforcontractremedies. TherearetwoaspectstotheobjectionIamraising:Whythepromisee’sinterestsonly? Anywhymeasuretheseagainstthebaselineofthecontract?Whenmakingherdecisionabout breachversusperformance,thepromisorissupposedtobeconcernedthatthepromiseecan bemadeindifferentbetweenperformanceorbreach.Butwhataboutanyoneelsewhomight beinterestedinthesubjectͲmatterofthecontract?Thepromisorcouldgivethegoodsawayto abystander;thatbystanderprefersbreachwithgifttohimtoperformance,sowhydoesthat notfigureinthecalculation?Andwhenthinkingaboutthepromisee’spreferences,whyisthe contractpriceassumedtobetherightbaseline?Supposethepromiseevaluesthegoodat$10, butthecontractpriceis$2;wesayheneedsafull$8beforeheisindifferentbetween performanceandbreach.Butthebaselineofthecontractpricehassignificanceonlyonthe assumptionthatthepromiseeisalreadyinsomewayentitledtoperformanceofthecontract. Thestoryofefficientbreachtakesthestructureofcontractlawforgranted,andhelps itselftotheideathatapromiseeisentitledtohisexpectancy,sincethat,afterall,ishowweall

28

seeit.57Butweonlyseeitthatwaybecausewetakeforgrantedthatenforcementofcontracts isagoodidea.ConsideredasastandͲalonedefenseofexpectationdamages,thestandard theoryofefficientbreachisentirelyquestionͲbegging. Ananalogycanbedrawnheretostandarddiscussionsoftaxjusticeinpublicfinance economics.Inthosediscussions,itissaidthattaxfairnessconsistsincriteriaofverticaland horizontalequityintheburdensoftaxation,wherethoseburdensaremeasuredagainsta baselineofpretaxincome.Tousethatbaselineismyopicbecausetaxationisonlyonepartof thewholesetofeconomicandlegalinstitutionsthatstructureamarketeconomy.Wecannot treatpretaxincomeasifitwereinsomesenseanentitlementwithinthesystem,againstwhich taxburdenscanproperlybeassessed,sincepretaxincomesareaffectedbylegalrules, includingrulesoftaxation.58 ThefundamentalinsightofFullerandPerduewasthatanaccountofthesignificanceof theexpectationinterestisrequired,sincelostexpectancyisnot,asitwere,anaturalloss;itisa theoreticallyconstructedloss.Treatingitasalossrequiresjustificationfortheentiresystemof contractlaworelsesomeaccountofthemoralrightsofpromisees.Itisthereforeamistaketo argueforaparticularremedy—afoundationalelementoftheoverallsystem—bysimply assumingthatitisaloss.Itisalossfromtheperspectiveofasystemofcontractrulesofwhich therulegoverningremediesisacentralpart.Ifwearegoingtojustifyexpectationdamages,we havetoliftoureyesfromparticulartransactions,andarguethatitfindsitsplaceinanoverall schemeofcontractlawthatproducesthebestresults. 57 58

SeeMelvinEisenberg,TheFoundationalPrinciplesofContractLaw(unpublishedms.,2013). SeeLIAMMURPHYandTHOMASNAGEL,THEMYTHOFOWNERSHIP(2002).

29

Ifwedoliftoureyes,itisobviousthatthemostimportantreasontoprotectpromisees’ performanceorexpectationinterestsistogivepeoplereasontoenterintomutuallybeneficial agreementsthatotherwise,forwantofconfidenceinperformance,wouldnotbeenteredinto. IthusagreewitheconomicanalystsSchwartzandScott,whowrite: Contractremediesarethoughttoprotectinjuredpromisees...byawardingthe expectationinterest.Thisviewistruebutshallow.Ifcontractswerenotenforceable, sophisticatedcommercialpartiesseldomwouldputthemselvesinpositionswherethey neededthelaw’said....Enforcement...insum,permitspartiestomakebelievable promisestoeachotherwhenreputationalorselfͲenforcementsanctionswillnotavail.59 NowthesepointsnotonlyshowthatthestandardtextͲbookdefenseofexpectation damagesastheremedyforbreachisquestionͲbegging.Theyalsounderminethethoughtthat, whateverthelawmaybe,itwillbeefficienttobreachsolongasthepromiseeisgivenher expectancy.Supposethereisnoremedyforbreachofcontract.Wecannotsaythatthe promisorshouldbreachwhenthatwouldleaveherbetteroffevenafterpayingthepromisee herlostexpectancy.Thelossofthepromisee’sexpectancyisnotaharminthesenserelevant toParetoefficiency.Neithercanwesaythatbreachwheneverthegaintothepromisorfrom breachisgreaterthanthepromisee’slossofexpectancywillleadtoallocativeefficiency. Supposethatanoriginalbuyerat$5valuesthesubjectmatterofthesaleat$10.Tertiuscomes alongandoffers$9fortheitem,whichhevaluesat$11.Thesellerwillnotgainfrombreachif shehastotransfer$5totheoriginalbuyer,soshewillnotbreach,andTertius,thehighestͲ

59

AlanSchwartzandRobertE.Scott,ContractTheoryandtheLimitsofContractLaw,113YALEL.J.,541,562.

30

valuinguserdoesnotgetthegoods.Itistimetodropthephrase“efficientbreach”fromour discoursealtogether. 

Now,thetextͲbookaccountofwhyexpectationdamagesgiveefficientincentivesover

thedecisionwhethertoperformisnottheonlyargumentthateconomicanalysisoffersfor expectationdamages.Thealternativeapproachadoptstheremediesbyagreementmodel.The fundamentalideaisthat,withinlimits,itmakessensetoenforcewhateverrationalpartiesdo orwouldagreetobywayofremediesforbreach.Soweshouldnotthinkofcontractremedies ascompensatoryofaharmwecanindependentlymakesenseof.Whatwearedoingis enforcingagreements.60Ofcourse,therearelimits.Twodaysinthestocksasapenaltyfor breachispresumablyout,andperhapspenaltyliquidatedͲdamagesclausesshouldnotbe enforceableinconsumercontracts. 

Anargumentcanbemadethatrationalcontractingpartieswillelectexpectation

damagesratherthanspecificperformanceinthestandardcase,sincetheadditionalcoststoa breachingpromisorofbargainingherwayoutofaninjunctionwillleadhertodemandahigher price,exante.61Ifthatisso(andmuchcouldbesaidabouttheassumptionsthisargument requires),thenwehaveacaseforexpectationdamagesasadefaultrule,sincethatwouldsave rationalpartiesthetroubleofwritingdownwhattheywant.(Suchanargumentcannotjustify

60

SeeRobertE.ScottandGeorgeG.Triantis,EmbeddedOptionsandtheCaseAgainstCompensationinContract Law,104COLUM.L.REV.1428(2004). 61 SeeStevenShavell,DamageMeasuresforBreachofContract11BellJ.ofEcon.466(1980).Forarecent statementofthisargument,seeDanielMarkovitsandAlanSchwartz,TheMythOfEfficientBreach:NewDefenses OfTheExpectationInterest,97Va.L.Rev.1939(2011),thoughMarkovitsandSchwartzfurtherarguethatthe rationalityofchoosingexpectationdamagesexantejustifiesinterpretingthecontentoftheagreementasperform orpay.Forcriticismofthisadditionalclaim,seeGregoryKlass,ToPerformorPayDamages,98Va.L.Rev.143 (2012);SeanaValentineShiffrin,MustIMeanWhatYouThinkIShouldHaveSaid?,98Va.L.Rev.159(2012).

31

thecommonlawrule,however,sinceifinaparticularcasethepartiespreferspecific performanceexante,thecommonlawwillnotnecessarilyenforcethatpreference.) Itwouldbegoodtohavesomeevidencethatinlegalsystemswherespecific performanceisthebackgroundremedybutpartiescanchoosedamagesexanteasatermof theircontractandhavethatchoicehonoredbythecourts—Germany,forexample— sophisticatedpartiesdochoosedamagesinordertolowertheprice.Ihavenotbeenableto findanysuchevidence,evenanecdotal.Bethatasitmay,thereisamoregeneralconcern aboutanapproachthatputsalltheweightonwhatrationalcontractingpartiesdoorwould haveagreedto. Onceagain,theapproachismyopic.Whywouldtheappropriaterulebetheonethat particularpartiesmightchoose,ratherthantheonethatdoesbestoverall,forsocietyatlarge? Mostcommentatorssimplytakeforgrantedthattheseareequivalent.StevenShavell,the pioneerofthisapproach,doesnot.Buthewritesthatthe“utilityofdamagemeasuresto contractingpartiesthemselvesisnodoubtaandperhapsthemajoraspectinwhichthesocial advantageofdamagemeasuresinheres.”62Thisseemsplausiblebut,mostly,Ibelieve,because wetakeforgrantedtheongoingstabilityofthesystemofprivateorderingwithoutwhichwe cannotevenmakesenseofwhattwopartiestoacontractmightrationallyagreeto. Thereisnoguaranteethatwhatisbestforeachcontractingpairisbestforallofus. Supposeexpectationdamagesarebestforeachcontractingparty.Supposefurtherthatparties cannotsimultaneouslyholdintheirmindstheknowledgethatiftheybreachtheyarelegally

62

Shavell,supranote61,489.

32

liableforexpectationdamagesonlyandthethoughtthatitisanorm,arequirementofthe socialpracticetheyareengagedin,thattheyperformtheiragreements.Noharmisdoneto anythingifonecontractingpairstarttobelievethatperformanceisoptional,solongasthe legallyrequiredcompensationispaid.Butifeveryonebelievesthat,thenthingshavegone badlyawry. Nowinfactunlesstheunfortunateideaofefficientbreachisintheair,thereisno reasonwhycontractingpartiescannotregardthemselvesasobligedtoperformwhilefully awarethatiftheydonotperform,allthatwillhappentothemisthattheywillhavetopay damageswhichmaybelessthanthegainsfrombreach.Thisisthesituation,forexample,of participantsintheAmericancottonindustryasdescribedbyLisaBernstein,wherethedamages awardsprovidedbytheprivatearbitraltribunalsareundercompensatory,butthenormof performanceremainsextremelystrong.63Theimportantpointhereisthatthisisthelevelat whichinstrumentalanalysismustfocus:thelevelofgenerallyacceptednormsandoverallsocial practice.  8.ContractandPromise. AgainstthetextͲbookefficientbreachanalysis,Ihavesaidthatanevaluationofcontract remediescannotassumethatpromiseesareentitledtotheirexpectationwhendiscussing whetherthatiswhattheyshouldget.Itisonlyoncewehaveconcludedthatpromiseesare entitledtotheirexpectancythatitmakessensetoregarddenyingitasaharmtothem.Against 63

LisaBernstein,PrivateCommercialLawintheCottonIndustry:CreatingCooperationThroughRules,Norms,and Institutions,”99Mich.L.Rev.1724(1991).

33

economicargumentsforexpectationorotherdamagemeasuresthatturnonwhatrational partieswouldagreeto,Ihavearguedthatthisanalyticframeworkriskslosingsightofthe normativesignificanceofthesocialandlegalpracticewithinwhichitmakessensetodiscuss whatrationalpairsmightchoose.Thefirstorderofbusiness,whenthinkingaboutremedies, andrationalesforthem,isthehealthofthatbackgroundpractice. Themostobviouswaytosupportthepracticeofmakingandkeepingagreementsisto enforcethem—byorderingperformanceorsomethingjustasgood.Absentspecial circumstancessuchasacloseͲknitcommercialcommunitywherenonlegalsanctionsare especiallyeffective,anyremedyshortofperformanceorexpectationdamagesseemsvery likelytoleadtofeweragreementsbeingmade.This,ofcourse,isnotsomethingtheeconomist needdisagreewith.Itseemsunlikelythatthechoicebetweenperformanceorexpectation damageswouldhaveanyeffectonthebackgroundpracticeonewayoranother.Butitdoes seemlikelythatgeneralrecognitionoftheideaofagood—becausesociallybeneficial—breach woulddoso.Heredisagreementisreached. 

Thesimplestwaytostatethepointofcontractlawisthatitsupportsandshapesthe

socialpracticeofmakingandkeepingpromisesandagreements.64Andwithinthatsocial practice,theexpectationisthatwhenpeoplemakeagreements,theyshouldkeepthem.My claimisthatwhiledeparturesfromaperformanceremedymaydonoharm,apubliclyaccepted justificationofasuchalegalregimeaccordingtowhichbreachisoftentherightthingtodo fromasocialpointofviewwilltendtounderminethepracticeofpromiseandcontract.

64

SeeRaz,supranote28,933.

34



MyargumentresemblesthatofSeanaShiffrin,especiallyinitsreferencetotheeffects

ofcertainunderstandingsofthejustificationoflegalrightsandobligationsonthepoliticaland legalculture.65ButShriffin’sconcernlieswiththeeffectsofdeparturesincontractlawfromthe moralityofpromiseonmoralagency.Iseepromissorymoralityasitselflargelyofinstrumental significance,tobepromotedbecauseofitsoverallgoodsocialeffects,andmyclaimisthat departuresfromtheconventionsofthepracticeofpromisewithincontractlawwilltendto underminetheformer,andthusalsothepointofthelatter—whichistostrengthen,not weaken,thesociallybeneficialpracticeofmakingandkeepingagreements. 

Themerefactthatthecommonlawremedyisnotaperformanceremedyisnotitself,in

myview,adeparturefromthepracticeofpromise.Afterall,inourordinaryethicallives,wedo nothaveanaccountofremediesatall.Ifyoumakeapromiseyoushouldkeepit.66Whatifyou don’t?Herethereisnoclearanswer.Certainlythereisnoclearpracticeofproviding compensatorydamages.Whatweexpectinthemoraldomainisperformance,anditishardto seehowthispracticecouldbemademoresophisticated. 

Thispointimmediatelybringstomindanobjection,however.Let’sforgetabout

informalpromises,ornoncommercialpromisesthatmightbelegallyenforceable.Let’srestrict contracttheorytocommercialtransactionsbetweenmediumͲsizedsophisticatedfirms.67Such actorsneednotconfusecontractlawwithanymoralpractice;theyarequitecapableof distinguishingthetwodomains.Evenifinabroadsenseboththelegalandnonlegalpractices 65

SeeShiffrin,supranote24. Withinlimits,ofcourse.Evenintheabsenceofexcusingconditionssuchasduress,misrepresentation,mistake, andimpracticability,theinformalpracticedoesnotalwaysdemandsperformancewherethatwouldinvolve,for example,enormousexpensetocorrectaminormistake.Mostlegalsystemsreflectthiscommonsenseview. 67 SeeSchwartzandScott,supranote59. 66

35

aimtobringaboutsomegoodthroughfacilitatingbeneficialcooperativearrangements,thereis noreasonwhytheyshouldtakeexactlythesameform.Forsuchparties,whomayinsiston performancewhenthepromisoristheirfriend,theremaybenoharmdonetothemoral practiceiftheybelievethatitisallrighttobreachcommercialagreementssolongasdamages arepaid.Forthatmatter,damagesof66%ofthepromisee’sexpectancymaybeenoughto encouragethemtodealwithothersinthefirstplace. 

Itcannotbedeniedthatthisisapossibility.Mymainreactiontoitisthatthereisample

evidencethatsophisticatedcommercialpartiesexpectperformancefromtheirpromisors. Economistsrightlyemphasizetheroleofreputationalfactors,evenamongsophisticated parties.Ifharmisdonetoyourreputationwhenyoubreechanagreement,thatsimplyshows thatwhatisexpectedisperformance.HughCollins’sdiscussionoftheseissuesisespecially illuminating.68Collins’saccountcloselyresemblesthatofHume,accordingtowhichlegal sanctionsareabackͲupsystemofenforcement,togroundconfidencewheninformalsanctions turningonreputationwouldnotbesufficienttogenerateconfidenceinperformance.69For Hume,theneedforcoerciveenforcementbythestateonlyariseswhensocietiesbecomebig enoughtomakeitplausiblyrationalnottoperformyoursideofanagreement.Buttheroleof nonlegalsanctionsdoesn’tdisappearoncegovernmentappearsonthescenetoenforce agreements.Thetwosystemsofenforcementworktogetherintandem.The“constructionof markets,”touseCollins’sphrase,isasocialprocessthattakeplacebothoutsideoflawand withinit. 68 69

HUGHCOLLINS,REGULATINGCONTRACTS,chapter5(1999). HUME,supranote2.

36

Nownoneofthissomuchasprovesthatitwouldnotbebetterforcontractlawto breakfreefromnonlegalexpectationsregardingdecentcommercialbehavior.Perhapsitcould bedone,buttheresultwouldbeaverydifferentsocialworld,andthereisnoreasontothinkit wouldbeabetterone.Absentacompellingreasontomakethisdrasticchange,itis overwhelminglyplausibletoinsistthatinourthinkingaboutwhatthebestlegalremedywould be,andwhattheproperpublicjustificationforthatremedywouldbe—bothbylegaltheorists andjudges—weshouldcountasaseriouscostanytendencytounderminethebanalbut beneficialdispositiontoregardbreachofcontractasbadpractice.

37