Abstract
This chapter reviews the three main theories of contract and contract law, namely promissory, reliance, and economic theories. It inquires, firstly, into the nature of the contractual obligation with the aim of identifying why breach of contract is an act possibly perceived by individuals as a wrong in need of redress. Among the candidates advanced by those theories are the violation of the moral norm of keeping promises, or of pacta sunt servanda (as advanced by promissory or deontological theories), the loss of reliance suffered by the promisee (in reliance theories), and the loss of welfare associated with breach in certain circumstances (in consequentialist or economic theories). The chapter studies, secondly, the reasons and justifications for legal enforcement of contractual promises from the perspective of those same theories, focusing on the law’s contribution to the welfare of society by providing incentives for individuals to behave in socially optimal manners.
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Notes
- 1.
The Path of the Law, 10 Harvard Law Review 457, 476 (1887).
- 2.
Cf. 1 Jean Domat, Les Lois Civiles dans Leur Ordre Naturel, in Ouvres de Jean Domat 75, 121 (Joseph Remy ed., Paris, Firmin Didot 1828) (1695) (“les conventions sont les engagements, qui se forment par le consentement mutuel de deux ou plusieurs personnes, qui se font entre elles une loi d’exécuter ce qu’elles promettent.”); 1 Robert-Joseph Pothier, Traité des Obligations, in Ouvres de R.-J. Pothier 1, 2–3 (Ainé Dupin org., Bruxelles, J. P. Jonker 1761) (1831) (“on doit définir [le contrat comme] une convention par laquelle les deux parties réciproquement (…) promettent et s’engagent envers l’autre à lui donner quelque chose, où à faire ou à ne pas faire quelque chose.”).
Domat and Pothier both relied on the idea that contracts are agreements formed by consent, and in which parties promise performance to each other. The element of promise was, however, omitted in the French civil code’s definition of contract. For the historical development from unilaterally binding promises to the principle of consent, see Marc-Phillippe Weller, Die Vertragstreue 59f. (Tübingen, Mohr Siebeck 2009). For the influence of Domat and Pothier’s scholarship, especially concerning the contract law, on the Code Civil, see, e.g., Marc-Phillippe Weller, Das Vertrags- und Konsensprinzip: Vom Naturrecht über Domat und Pothier zum Code Civil, in Weitsicht in Versicherung und Wirtschaft—Gedächtnisschrift für Ulrich Hübner 435, 451 (Roland Beckmann et al. eds., Heidelberg, Müller 2012) (“Domats Arbeiten waren wichtige Impulsgeber für den Civil Code. … Gewisse Formulierungen des Code Civil selbst, besonders im Bereich der Verträge, wurden durch die Werke Domats beeinflusst oder stammen von ihnen ab.”)
- 3.
Own transl. In original: “Le contrat est une convention par laquelle une ou plusieurs personnes s'obligent, envers une ou plusieurs autres, à donner, à faire ou à ne pas faire quelque chose”.
- 4.
See 2 Henry Mazeaud, Léon Mazeaud and Jean Mazeaud, Leçons de Droit Civil 45 n. 52–53 (3rd ed., Paris, Montchrestien 1966) (1955) (“Comment le contrat engendre-t-il un droit personnel, une obligation?… la création des obligations demeure gouvernée par la règle ‘solus consensus obligat.’”).
- 5.
Own transl. In original: “Il contratto è l'accordo di due o più parti per costituire, regolare o estinguere tra loro un rapporto giuridico patrimoniale.”
- 6.
Cf. Gaius, Institutiones III 88 (“Nunc transeamus ad obligationes, quarum summa divisio in duas species diducitur: omnis enim obligatio vel ex contractu nascitur vel ex delicto.”) (“Let us now move on to obligations. The principal division of these puts them into two species: for every obligation arises either from contract or from delict.”) Gaius later expanded the number of species of obligations to include, thirdly, “other events foreseen by the law.” See D.44.7.I pr. (Gaius libro secundo aureorum) (“Obligationes aut ex contractu nascuntur aut ex maleficio aut proprio quodam iure ex variis causarum figuris.”) (“Obligations are born either of contract or of wrongdoing or, by virtue of some particular law, from a variety of types and causes”) (transl. by Peter Birks, The Roman Law of Obligations 17–18, Oxford, Oxford University 2014).
The Civil Code practically translated the division advanced by Gaius in Art. 1173. (“Fonti delle Obbligazioni. Le obbligazioni derivano da contratto, da fatto illecito o da ogni altro atto o fatto idoneo a produrle in conformità dell’ordenamento giuridico.”)
- 7.
Own transl. In original: “Zur Begründung eines Schuldverhältnisses durch Rechtsgeschäft sowie zur Änderung des Inhalts eines Schuldverhältnisses ist ein Vertrag zwischen der Beteiligten erforderlich, soweit das Gesetz ein anderes vorschreibt.”
- 8.
Cf. Dieter Medicus & Stephan Lorenz, Schuldrecht I: Allgemeiner Teil 2 Rn. 4,5 (18th ed. Munich, Beck 2008).
- 9.
See further Medicus, Schuldrecht II: Besonderer Teil op. cit. supra, at 7 Rn. 19 et. seq. (obligations of the seller), 10 Rn. 27 et. seq. (obligations of the buyer).
- 10.
Own transl. In original: “Een overeenkomst in de zin van deze titel is een meerzijdige rechtshandeling, waarbij een of meer partijen jegens een of meer andere een verbintenis aangaan.”
- 11.
Domat and Potheir still relied on the element of promises in the understanding and definition of contracts. In Germany, independent of the BGB’s acceptance of Savigny’s understanding of contracts as “corresponding declarations of will” (übereinstimmende Willenserkärungen), the undertaken commitment to future behavior is still recurrently referred to by legal scholars as a promise to perform. Cf. Claus-Wilhelm Canaris, Zur Bedeutung der Kategorie der „Unmöglichkeit “ für das Recht der Leistungsstörungen, in 3 Gesammelte Schriften 423, 441 (Berlin, Walter der Gruyter 2012) (2001) (“M.E. erklärt sich die Haftung des Schuldners auf Schadensersatz wegen Nichterfüllung bei einem anfänglichen Leistungshindernis einfach daraus, dass dieser die Leistung versprochen hat und sie nun nicht erbringen, also sein Versprechen nicht erfüllen kann und dass daher folgerichtig an die Stelle der versprochenen Leistung deren Äquivalent in Geld trifft.”) (own emphasis); Horst Ehmann & Holger Sutschet, Modernisiertes Schuldrecht 125 (München: Vahlen 2012) (“Der Schuldner haftet auf das Erfüllungsinteresse, weil er die Leistung versprochen hat”) (own emphasis).
In effect, the BGB itself often refers to the promised performance in several parts, as in title 3 of book 2 (“Versprechen der Leistung an einen Dritten”), §§ 340–341 (“Strafversprechen”), § 518 (“Schenkungsversprechen”), § 520 (“Rentenversprechen”), § 780 (“Schuldversprechen”), among others.
- 12.
Cf. Riccardo Fercia, Le Obbligazzioni Naturali, in Trattatto delle Obbligazzioni 165, 216 (Luigi Garofalo ed. Padova, Wolters Kluwer 2010).
- 13.
Paulus, Iustinian Digesta 44.7.3 pr. (“obligationum substantia non in eo consistit, ut aliquod corpus nostrum aut servitutem nostram faciat, sed ut alium nobis obstringat ad dandum aliquid vel faciendum vel praestandum.”) (translation into English by Helge Dedek & Martin Schermaier, Obligation (Greek and Roman), in Encyclopedia of Ancient History, Roger Bagnall et. al. eds. Oxford, Wiley & Blackwell 2011).
- 14.
Iustinian Institutiones 3.13.pr (“Obligatio est iuris vinculum, quo necessitate adstringimur alicuius rei solvendae secundum iura nostrae civitatis.”) Translation into English in Justinian’s Institutes 105 (Peter Birks and Grant McLeod trans., Ithaca: Cornell University 1987).
- 15.
Restatement (Second) of Contracts § 1.
- 16.
Restatement (Second) of Contracts § 2.
- 17.
Cf. with the definition provided by Judge Learned Hand: “A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent.” Hotchkiss v. National City Bank, 200 F. 287, 293 (S.D.N.Y. 1911).
- 18.
As the result reached in Kirksey v. Kirksey, 8 Ala. 131 (1845), further described in the explanatory notes of the Restatement (First) of Contracts § 90 (“the injustice of the result is manifest.”)
- 19.
See Restatement (First) of Contracts §90; Restatement (Second) of Contracts § 90 (1) (“a promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third party and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.”)
- 20.
Papinianus, in Corpus Iuris Civilis, Digest, D.50.17.75 Pap. 3 quaest. (De Diversis Regulis Iuris Antiqui), (Paul Krueger et al. eds., Princeton: Princeton University), 870 (1893).
- 21.
Cf. Holmes, The Common Law, op. cit. supra, at 277 (“Where parties having power to bind themselves do acts and use words which are fit to create an obligation, I take it that an obligation arises.”)
- 22.
See Holmes, The Path of the Law, op. cit. supra, at 462 (“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.”) Id. at 466 (“The only universal consequence of a legally binding promise is, that the law makes the promisor pay damages if the promised event does not come to pass.”)
- 23.
Richard Posner, Let us Never Blame a Contract Breaker, op. cit. supra, at 1350.
- 24.
Cf. Holmes, The Path of the Law, op. cit. supra, at 462 (“If you commit a contract, you are liable to pay a compensatory sum unless the promised event comes to pass.”)
- 25.
Holmes recognized that not all individuals understand breach of contract followed by the payment of compensation as amoral, and that those that believe that there is some ethics in the law do understand breach of contract differently. He famously recognized that his understanding of the contractual obligation was not universal: “such a mode of looking at the matter stinks in the nostrils of those who think it advantageous to get as much ethics into the law as they can.” Holmes, The Path of the Law, op. cit. supra, at 462.
- 26.
Cf. Holmes, The Common Law, op. cit. supra, at 6–7 (“vengeance imports a feeling of blame, and an opinion, however distorted by passion, that a wrong has been done.”)
- 27.
See Stephen Smith, Contract Theory 43–46, 54–55 (Oxford, Clarendon 2003).
- 28.
The answer provided by theory can at times justify the autonomy of contract law vis-à-vis other legal obligations such as those arising by tort and property law, because of the distinctive nature of the contractual obligation. Or it may point to the convergence of contract law with tort or property law, because the contractual obligation is not theoretically distinct for those other obligations. This is the conclusion reached by the “death of contract” movement, advanced, e.g., by Grant Gilmore, The Death of Contract 87 (1st ed. Columbus, Ohio State University 1974), (“we might say that what is happening is that ‘contract’ is being reabsorbed into the mainstream of ‘tort.’”) For a more recent discussion, see Robert Scott, The Death of Contract Law, 54 University of Toronto Law Journal 369, 369 (2004) (mentioning how, for Gilmore, “the triumph of reliance over bargain was an entirely salutary development” before criticizing Gilmore’s prediction that the bargain theory of contract was dying).
- 29.
Although it is possible to develop a moral argument in favor of efficient breach on a utilitarian basis, scholars in economic analysis of law have refrained from doing so. Perhaps the single exception is Steven Shavell’s recent attempt to establish the immorality of breach in an imaginary consent, justifying efficient breach in terms of consent present in the hypothetical complete contract. See Shavell, Is Breach of Contract Immoral?, op. cit. supra, at 439, and Why Breach of Contract may not be Immoral given the Incompleteness of Contracts, 107 Michigan Law Review 1569 (2009).
- 30.
Robert Summers & Robert Hillman, Contract and Related Obligation: Theory, Doctrine and Practice 50 (6th. ed. St. Paul, West 2011).
- 31.
Id.
- 32.
See also the detailed discussion, and the implications for social welfare, in Chap. 6 infra.
- 33.
Cf. Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition 770–773 (Oxford, Oxford University 1990); Reinhard Zimmermann, Roman-Dutch Jurisprudence and its Contribution to European Private Law, 66 Tulane Law Review 1685, 1698 (1992).
- 34.
Cf. Reinhard Zimmermann, Roman-Dutch Jurisprudence and its Contribution to European Private Law, op. cit. supra, at 1698–1699.
- 35.
Jean Domat, Les Loix Civiles dans Leur Ordre Naturel, in Ouvres de Jean Domat, op. cit. supra, at 134 (“le premier effet de la convention, est que chacun des contractants peut obliger l’autre à exécuter son engagement.”) (own transl.).
- 36.
- 37.
1 Robert J. Pothier, Traité des Obligations et Traité du Contrat de Vente, in Ouvres de R.-J. Pothier, op. cit. supra, at 39 n. 157 (explaining that, with respect to obligations to do, “[l]orsque quelqu’un s’est obligé à faire quelque chose, cette obligation ne donne pas au créancier le droit de contraindre le débiteur précisément à faire ce qu’il est obligé de faire, mais seulement celui de le faire condamner en ses dommages et intérêts, faute d’avoir satisfait à son obligation. C’est en cette obligation de dommages et intérêts que se résolvent toutes les obligations de faire quelque chose; car nemo potest praecise cogi ad factum.”)
- 38.
Own transl. In original: “Toute obligation de faire ou de ne pas faire se résout en dommages et intérêts en cas d'inexécution de la part du débiteur”.
- 39.
See 2 Henry Mazeaud, Léon Mazeaud & Jean Mazeaud, Leçons de Droit Civil n. 946 (3rd ed., Paris, Montchrestien 1966) (1955).
- 40.
See also Art. 1138 and Art. 1583.
- 41.
Id. (“Les effets de l’obligation par rapport au créancier sont 1° le droit qu’elle lui donne de poursuivre en justice le débiteur, pour le paiement de ce qui est contenue dans l’obligation.”), with the important remark that paiement denoted not only monetary payment but also the traditio (delivery of possession with the intention of passing ownership) of the promised good (“le paiement est la donation et translation de la proprieté de cette chose.”).
- 42.
Id. (“un débiteur ne peut obliger son créancier à recevoir en paiement autre chose que ce qu’il lui doit.”) Or, in English, “a debtor cannot oblige the creditor to receive in payment another thing than the one she owes.” (own transl.).
- 43.
Specifically concerning sales contracts, Art. 1610 follows Pothier’s understanding (“Si le vendeur manque à faire la délivrance dans le temps convenu entre les parties, l'acquéreur pourra, à son choix, demander la résolution de la vente, ou sa mise en possession, si le retard ne vient que du fait du vendeur.”) See further Art. 1184, which gives the opportunity for the aggrieved party to choose between performance in specie (exécution en nature) or the resolution of the contract and recovery of damages for breach in bilateral, synallagmatic contracts. The promisee can demand specific performance only if performance is still possible. Cf. Art. 1184 (“La condition résolutoire est toujours sous entendue dans les contrats synallagmatiques, pour le cas où l'une des deux parties ne satisfera point à son engagement. Dans ce cas, le contrat n'est point résolu de plein droit. La partie envers laquelle l'engagement n'a point été exécuté, a le choix ou de forcer l'autre à l'exécution de la convention lorsqu'elle est possible, ou d'en demander la résolution avec dommages et intérêts.”).
- 44.
Friedrich Karl von Savigny, Pandektenvorlesung 1824/25 vol. 1, book 3, at 279 (Horst Hammen org. Frankfurt, Klostermann 1993) (1824–1825) (“Ein Verhältnis zwischen zwei bestimmten Individuen, worin eine einzelne Handlung des einen der Willkühr des andern unterworfen wird, ist das Wesen der Obligatio. Obligatio ist ein Rechtsverhältnis.”) (own transl.).
Savigny argued that this subjugation to the will of another is not incompatible with individual freedom and individual rights of personality, nor does it treat persons as objects, for it is restricted to one specific action and does not extend to the whole person, and thereby does not conceive individuals as objects. Cf. Friedrich Karl von Savigny, System des heutigen Römischen Rechts (1840), vol. 1, book 2, at 338–339 (“Soll dieses nicht sein, wollen wir uns vielmehr ein besonderes Rechtverhältnis denken, welches in der Herrschaft über eine fremde Person, ohne Zerstörung ihrer Freiheit besteht, so dass es dem Eigentum ähnlich, und doch von ihm verschieden ist, so muss die Herrschaft nicht auf die fremde Person im Ganzen, sondern nur auf eine einzelne Handlung derselben bezogen werden; diese Handlung wird dann, als aus der Freiheit des Handelnden ausgeschieden, und unserem Willen unterworfen gedacht. Ein solches Verhältnis der Herrschaft über eine einzelne Handlung der fremden Person nennen wir Obligation.”)
- 45.
Similarly, in the evolution of Dutch law, specific performance acquired prominence at the detriment of the Roman principle of omnis condemnation pecuniaria. See Reinhard Zimmermann, Roman-Dutch Jurisprudence and its Contribution to European Private Law, op. cit. supra, at 1700–1701 (“Dutch legal science had conclusively abandoned the concept of a necessary condemnatio pecuniaria and had achieved, in theory as well as in actual practice, the uniformity on the basis of a claim to demand specific performance which is characteristic of, for example, modem German law.”)
- 46.
See Mark-Phillippe Weller, Der Vertragstreue 371f. (Tübingen, Mohr Siebeck 2009); Thomas Riehm, Der Grundsatz der Naturalerfüllung 219f. (Tübingen, Mohr Siebeck 2015).
- 47.
Own transl. In original: “Kraft des Schuldverhältnisses ist der Gläubiger berechtigt, von dem Schuldner eine Leistung zu fordern. Die Leistung kann auch in einem Unterlassen bestehen.”
- 48.
See Medicus & Lorenz, Schuldrecht I, op. cit. supra, at 8 Rn 18. (For example, “the seller will be sentenced to deliver and transfer the car brand x vehicle identification number y next to the registration papers to the buyer.”)
- 49.
With respect to the reform and its far-reaching changes in the German law of obligations, see Claus-Wilhem Canaris, Die Reform des Rechts der Leistungstörungen, op. cit. supra; Canaris, Das allgemeine Leistungsstörungsrecht in Schuldrechtmodernisierungsgesetz, in 3 Gesammelte Schriften 541, op. cit. supra; Gerhard Wagner, Das Zweite Schadensersatzrechtsänderungsgesetz, 55 Neue Juristische Wochenschrift 2049 (2002); Gerhard Wagner, Schadensersatz—Zwecke, Inhalte, Grenzen, in 35 Schriftenreihe der Zeitschrift Versicherungsrecht 5 (Egon Lorenz ed. Karlsruhe, Versischerungswirtschaft 2006); Reinhard Zimmermann, The New German Law of Obligations (Oxford, Oxford University 2005).
- 50.
The promisee must, if she prefers to claim damages for breach, fix a reasonable time limit for the promisor to perform before doing so (BGB § 281 I 1, dispensable under the conditions foreseen by § 281 II, i.e., “wenn der Schuldner die Leistung ernsthaft und endgültig verweigert oder wenn besondere Umstände vorliegen, die unter Abwägung der beiderseitigen Interessen die sofortige Geltendmachung des Schadensersatzanspruchs rechtfertigen.” The norm respects the promisor’s right to cure (Recht zur zweiten Andienung). See the discussion infra in Chap. 6, Sect. 6.3 infra.
- 51.
- 52.
Cf. Reinhard Zimmerman, Breach of Contract and Remedies under the New German Law of Obligations, 48 Saggi, Conferenze e Seminari 9 (2002), adapted and reproduced in Remedies for Non-Performance, 6 Edinburgh Law Review 271 (2002).
- 53.
Cf. Ulrich Huber, Schadensersatz statt der Leistung, 210 Archiv für die Zivilistische Praxis 319, 322–323 (2010); Ulrich Huber, 2 Leistungsstörungen 138 (Tübingen, Mohr Siebeck 1999).
- 54.
In a nutshell, the main impact of the reform, for the questions under discussion here, is the dispensing of the requirement of fault by the promisor for her possible release from the obligation to perform, under specific conditions. Cf. BGB § 275 I (“Der Anspruch auf Leistung ist ausgeschlossen, soweit diese für den Schuldner oder für jedermann unmöglich ist.”) to the older version of the same article, before the reform of 2002 (“Der Schuldner wird von der Verpflichtung zur Leistung frei, soweit die Leistung infolge eines nach der Entstehung des Schuldverhältnisses eintretenden Umstandes, den er nicht zu vertreten hat, unmöglich wird.”).
- 55.
Huber, Schadensersatz statt der Leistung, op. cit. supra, at 350 (“die überragende praktische Bedeutung des Schadensersatzanspruchs.”) (own transl.).
- 56.
Own transl. In original: “Wer zum Schadensersatz verpflichtet ist, hat den Zustand herzustellen, der bestehen würde, wenn der zum Ersatz verpflichtende Umstand nicht eingetreten wäre.”
- 57.
See Medicus & Lorenz, Schuldrecht I, op. cit. supra, at 303 Rn. 624.
- 58.
Id. at 304 Rn. 625 (“Vielmehr soll der Schädiger den Zustand herstellen, der ohne das Schadensereignis bestünde.”).
- 59.
- 60.
See Lon Fuller & William Perdue, The Reliance Interest in Contract Damages I, 46 Yale Law Journal 52 (1936).
- 61.
Restatement (Second) of Contracts § 344.
- 62.
See n.12–14, chap. 1, supra and accompanying text, and e.g., Farnsworth on Contracts 730 § 12.1.
- 63.
See, e.g., the original formulation of the efficient breach theory by Robert Birmingham, Breach of Contract, Damage Measures, and Economic Efficiency, 24 Rutgers Law Review 273, 284 (1969) and John Barton, The Economic Basis of Damages for Breach of Contract, 1 Journal of Legal Studies 277, 300 (1972) (expectation damages provide optimal incentives for breach).
Steven Shavell introduced the incentives provided by different measurements of damages for the parties to make reliance investments. See Shavell, Damage Measures for Breach of Contract, op. cit. supra; The Design of Contracts and Remedies for Breach, op. cit. supra.
Robert Cooter further introduced incentives for parties to take precautions. See Cooter, Unity in Torts, Contracts, and Property: The Model of Precaution, op. cit. supra. For a survey of the different incentives provided by contractual remedies and different types of decisions that can be influenced by them, see Craswell, Instrumental Theories of Compensation: A Survey, op. cit. supra, at 1135.
- 64.
Cf. Craswell, Instrumental Theories of Compensation: A Survey, op. cit. supra, at 1178 (“In short, in economic theories the concept of compensation can be dispensed with entirely, whereas in corrective justice theories that concept is absolutely crucial.”)
- 65.
Id. at 1138.
- 66.
From an empirical point of view, see Tess Wilkinson-Ryan & Jonathan Baron, Moral Judgment and Moral Heuristics in Breach of Contract, 6 Journal of Empirical Legal Studies 405, 406 (2009) (“Most people agree that breaking a promise is immoral … Our results suggest that people are quite sensitive to the moral dimensions of a breach of contract”); Tess Wilkinson-Ryan & David Hoffman, Breach is for Suckers, op. cit. supra, at 1004 (“ordinary people think that breach is morally wrong and believe that contract damages should reflect the ethical culpability of the breaching party.”); 1011 (even in single commercial arrangements, individuals “believe that breach is immoral”); Tess Wilkinson-Ryan, The Commonsense of Contract Formation, Stanford Law Review (forthcoming), at 1 (“we also document a series of situations in which misunderstandings have limited practical repercussions, because even parties who believe that legal obligation is about formalities take seriously the moral obligations associated with informal promises and exchanges.”)
- 67.
- 68.
See Smith, Contract Theory, op. cit. supra, at 43, 54, 56 et. seq.
- 69.
See, e.g., Neil MacCormick, Voluntary Obligations and Normative Powers, 46 Proceedings of the Aristotelian Society supp. 59 (1972) (voluntary obligations are those that arise from promises).
- 70.
See Fried, Contract as Promise, op. cit. supra, at 2–3 (also criticizing and rebuffing several “lines of attack” on that conception).
- 71.
For its historical development in civil law systems, see James Gordley, The Philosophical Origins of Modern Contract Doctrine 161–229 (Oxford: Clarendon 1991) (summarizing will theories of contract law in Europe). For its development in England, see Patrick Atiyah, The Rise and Fall of Freedom of Contract 405–419 (Oxford, Clarendon 1979).
- 72.
See Fried, Contract as Promise, op. cit. supra, at 2, 5–6 (“I begin with a statement of the central conception of contract as promise. This is my version of the classical of contract proposed by the will theory and implicit in the assertion that contract offers a distinct and compelling ground of obligation.”)
- 73.
See Johnson & Johnson v. Charmley Drug Co., 95 A.2d 391, 397 (N.J.1953) (“A contract is a voluntary obligation proceeding from a common intention arising from an offer and acceptance”); Petruska v. Gannon University, 462 F.3d 294, 310 (3d Cir. 2006) (“contractual obligations are entirely voluntary.”)
- 74.
See Smith, Contract Theory, op. cit. supra, at 57.
- 75.
In this, promises are distinct from vows, which are also voluntary self-imposed obligations upon oneself that are not made to another person.
- 76.
Cf. Joseph Raz, The Morality of Freedom 173 (Oxford, Clarendom 1986) (“The promising principle establishes that if we promise we are obligated to act as we promised. It also establishes a present obligation to keep our promises, i.e., we are obligated to perform action X, if we promised to perform X.”)
- 77.
See Joseph Raz, Promises in Morality and Law, 95 Harvard Law Review 916, 928 (1982) (“All promises communicate an intention to undertake, by that very act of communication, an obligation”); Joseph Raz, Authority and Consent, 67 Virginia Law Review 103, 121 (1981) (“promises are made by acts intended to undertake obligations and confer right”); Joseph Raz, Promises and Obligations, in Law, Morality and Society: Essays in Honour of H. L. A. Hart 210, 225–26 (Peter Hacker & Joseph Raz eds. Oxford, Oxford University 1977).
- 78.
See Joseph Raz, The Problem of Authority: Revising the Service Conception, 90 Minnesota Law Review 1003, 1003 (2006).
- 79.
John Rawls, A Theory of Justice 344–345 (1st ed. 1971). Rawls’ original understanding is in his classical article Two Concepts of Rules, 64 The Philosophical Review 3 (1955). See also Thomas Scanlon, Promises and Practices, 19 Philosophy & Public Affairs 199, 214 (1990) (“Saying ‘I promise to… normally binds one to do the thing promised, but it does not bind unconditionally or absolutely. It does not bind unconditionally because the binding force of promises depends on the conditions under which the promise is made: a promise may not bind if it was obtained by coercion or through deceit. It does not bind absolutely because, while a promise binds one against reconsidering one’s intention simply on the grounds of one’s own convenience, it does not bind one to do the thing promised whatever the cost to oneself and to others.”)
- 80.
Cf. Fried, Contracts as Promise, op. cit. supra, at 14 (“The institution of promising is a way for me to bind myself to another so that the other may expect a future performance, and binding myself in this way is something that I may want to able to do.”)
- 81.
Id. As the author resumes, “there exists a convention that defines the practice of promising and its entailments. This convention provides a way that a person may create expectations in others. By virtue of the basic Kantian principles of trust and respect, it is wrong to invoke that convention in order to make a promise, and then to break it.” Id. at 17.
- 82.
Id. (“The moralist of duty thus posits a general obligation to keep promises, of which the obligation of contract will only be a special case—that special case in which certain promises have attained legal as well as moral force.”)
- 83.
Rawls, A Theory of Justice, op. cit. supra, at 345.
- 84.
Id. at 346 (“It is essential to distinguish (…) between the rule of promising and the principle of fidelity. The rule is simply a constitutive convention, whereas the principle of fidelity is a moral principle, a consequence of the principle of fairness.”) As Thomas Scanlon notes, “Rawls invokes what he calls the Principle of Fairness: If you have voluntarily helped yourself to the benefits of a just social practice, then you are obligated to do your part in turn as the rules of that practice specify. This is a general moral principle, meant to capture the wrong involved in many forms of free-riding. (…) A person who makes a promise helps himself to the good that the practice provides. According to the Principle of Fairness, then, he is obligated to comply with the rules of the practice, hence to keep his promise.” Cf. Thomas Scanlon, Promises and Practices, op. cit. supra, at 199, 199–200.
- 85.
Rawls, A Theory of Justice, op. cit. supra, at 345 (“unavoidably the many complications here cannot be considered.”)
- 86.
Patrick Atiyah, Promises, Morals and Law 142 (Oxford, Oxford University 1981).
- 87.
See Stephen Smith, Contract Theory, op. cit. supra, at 147, arguing that existing rules of contract law are consist with the rights-based conception of legal remedies (“Consistent with a right-based account, the only interests represented before the court in a contract case are those of the parties; the court does not hear from representatives of the public or other persons whose future behavior is, according to utilitarian theories, the law’s real concern”) before presenting fit objections.
- 88.
Fried, Contract as Promise, op. cit. supra, at 57–58. Id. at 1–6 (arguing that those grounds of resolution are incompatible with liberal individualism), 72–73 (discussing when the application of the principle of sharing does not conflict with the will, autonomy or intentions of the parties).
- 89.
See Lon Fuller, Consideration and Form, 41 Columbia Law Review 799, 815 (1941) (“A delivers a horse to B in return for B’s promise to pay him ten dollars; B defaults on his promise, and A sues for the agreed price.”)
- 90.
See Samuel Pufendorf, De Jure Naturae et Gentium, book III, ch. v, sec. 11 (1688) (“If a man has suffered any damage from the non-fulfilment of a promise …, the promisor is bound by natural law to make good the matter.”)
- 91.
Cf. H. L. A. Hart, Are There any Natural Rights?, 64 The Philosophical Review 175, 183 (1955) (“By promising to do or not to do something, we voluntarily incur obligations and create or confer rights on those to whom we promise.”)
- 92.
In civil law systems, specific performance is in fact the default remedy for breach, and it is justified precisely on that basis, and on the vindication of the principle of pacta sunt servanda. The contract realizes private autonomy and imposes an obligation to do exactly what one promised to do, since this is what one “willed.” For Canaris, “Für Verträge führt dies folgerichtig grundsätzlich zur Haftung auf Erfüllung, weil (und sofern) diese im Vertrag versprochen wird. Demgemäss ist der Grundsatz pacta sunt servanda insoweit einer zusätzlichen Legitimation weder zugänglich noch bedürftig.” Claus-Wilhelm Canaris, Die Vertrauenshaftung im Lichte der Rechtsprechung des Bundesgerichtshof, in 2 Gesammelte Schriften, op. cit. supra, at 814. (“For contracts this leads naturally to liability for performance, because (and if) this is promised in the contract. Accordingly, an additional legitimacy of the principle pacta sunt servanda is so far neither accessible nor in need.”) (own transl.).
Others have pointed that the remedy for breach of contract has the primary function to sanction violations of contractual obligations in order to realize and stabilize the principle of pacta sunt servanda. Cf. Huber, Schadensersatz statt der Leistung, op. cit. supra, at 320 (“Die Rechtsbehelfe, die das Gesetz dem Gläubiger für den Fall der unterbliebenen und der mangelhaften Erfüllung zur Verfügung stellt, haben in erster Linie die Funktion, die Verletzung vertraglicher Verbindlichkeiten, vor allem von Verbindlichkeiten aus entgeltlichen Austauschverträgen, mit effektiven Sanktionen zu versehen und auf diese Weise das Prinzip ‘pacta sunt servanda’ zu verwirklichen und zu stabilisieren.”) Or, in English, “The remedies that the law provides to the creditor in the event of nonexistent and improper performance have in the first place the function to attach effective sanctions for breach of contractual obligations, especially obligations from monetary exchange contracts, and in this way to realize and stabilize the principle of ‘pacta sunt servanda.’” (own transl.).
- 93.
See Kaplow & Shavell, Fairness versus Welfare, op. cit. supra, at 1107 (“Based on their rationales for the promise-keeping notion, one might imagine that the theory’s proponents would have a preference for a remedy of specific performance—for such a remedy amounts to a requirement that the promisor keep his word.”)
- 94.
See Seana Shiffrin, The Divergence between Contract and Promise, 120 Harvard Law Review 708 (2007), the criticism by Shavell, Is Breach of Contract Immoral?, op. cit. supra, at 439, the reply of Seana Shiffrin, Could Breach of Contract be Immoral?, 107 Michigan Law Review 1551 (2009), and the last comments by Shavell, Why Breach of Contract may not be Immoral Given the Incompleteness of Contracts, op. cit. supra, at 1569. See further the discussion by Jody Kraus, The Correspondence of Contract and Promise, 109 Columbia Law Review 1603, 1606 (2009).
- 95.
Cf. Shiffrin, The Divergence between Contract and Promise, op. cit. supra, at 718–19.
- 96.
Patrick Atiyah, Contracts, Promises and the Law of Obligation, 94 Law Quarterly Review 193, 203.
- 97.
Stuart Mill, On Liberty 21–22 (Oxford, Oxford University 1859).
- 98.
Smith, Contract Theory, op. cit. supra, at 69.
- 99.
Id. at 71–72 (“nevertheless, Fried’s book, Contract as Promise, remains the most sophisticated and complete defence of a promissory theory to date.”)
- 100.
Id. at 69.
- 101.
The fundamental piece that stresses the importance and centrality of reliance for the contract law is Fuller & Perdue, The Reliance Interest in Contract Damages I, op. cit. supra. The authors’ focus was, however, to deliver an explanation of damages and not to develop a general theory of contract. In effect, Fuller reiterated and exploited ideas associated with promissory theories later on in Consideration and Form, op. cit. supra, at 799.
The best expositions of reliance theories were developed by Atiyah, The Rise and Fall of the Freedom of Contract, op. cit. supra and by Gilmore, The Death of Contract, op. cit. supra. See also Smith, Contract Theory, op. cit. supra, at 78–85, and Randy Barnett, The Death of Reliance, 46 Journal of Legal Education 518 (1996) for an analysis and review of the theory.
- 102.
See Atiyah, Promises, Morals, and Law, op. cit. supra, at 123–29.
- 103.
Id. at 184–202.
- 104.
Cf. Fuller & Perdue, The Reliance Interest in Contract Damages, op. cit. supra.
- 105.
See Kirksey v. Kirksey, 8 Ala. 131 (1845). Adopting promissory estoppel, see Ricketts v. Scothorn, 57 Neb. 51, 77 N.W. 365 (1898) (“Having intentionally influenced the plaintiff to alter her position for the worse on the faith of the note being paid when due, it would be grossly inequitable to permit the maker, or his executor, to resist payment on the ground that the promise was given without consideration.”); An expansion of such theory is found in Hoffman v. Red Owl Stores, 26 Wis.2d 683, 133 N.W.2d. 267 (1965) (allowing recovery for precontractual reliance).
- 106.
See Restatement (First) of Contracts § 90.
- 107.
Victims of negligent, even if innocent, misrepresentations are entitled to rescind the contract and to recover consequential damages due to detrimental reliance. See Restatement (Second) of Torts § 552C. Victims of fraudulent misrepresentations can also recover expectation damages. See Gibbs v. Citicorp Mortgage, Inc., 246 Neb. 355, 518 N.W.2d 910, 592 (Neb.1994) (victim can recover under a negligence or a fraud theory).
- 108.
Cf. Neil MacCormick, Voluntary Obligations and Normative Powers, op. cit. supra, at 68 (“If one persons acts in potentially detrimental way in reliance upon beliefs about another’s future conduct, and if the latter person has by some act of his intentionally and knowingly induced the former to rely upon him, then the latter has an obligation not to act in a manner which will disappoint the other’s reliance”) (own emphasis stressing that the obligation is not to breach, or, conversely, to perform).
- 109.
Id. at 80 (and following pages) (noting that while Fuller and Perdue, as well as Atiyah possibly regarded the making of a promise as a precondition for a reliance-based obligation, this position is in fact difficult to defend, for “if the aim of the contract law is to protect the reliance interest, there seems to be no good reason why reliance that is induced without a promise should be ignored.”)
- 110.
See Atiyah, Promises, Morals, and Law, op. cit. supra, at 202–215.
- 111.
See Smith, Contract Theory, op. cit. supra, at 83–85.
- 112.
Cf. Milton Friedman, The Methodology of Positive Economics, in Essays in Positive Economics 3 (Chicago, University of Chicago Press 1966) (Economics as positive science is based on the assumption that individuals behave as if they were rational); Gary Becker, The Economic Approach to Human Behavior 5 (Chicago, University of Chicago Press 1976) (“The combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach”); James Buchanan, The Constitution of Economic Policy, 77 American Economic Review 243 (1987) (methodological individuals and homo economicus as the constitutive elements of that provide the foundations of choice theory—when attached to with “politics-as-exchange,” then they constitute public choice theory); Daniel Hausman & Michael McPherson, The Philosophical Foundations of Mainstream Normative Economics, in The Philosophy of Economics 226, 235 (Daniel Hausman ed., 3rd ed. Cambridge, Cambridge University Press 1984) (“If one conjoins this basic view of human nature [that human beings are rational] with explanatory individualism, one arrives at the view that the central explanatory principles of economics should be principles of rational individual choice”); Robert Sugden, Rational Choice: A Survey of Contributions from Economics and Philosophy, 101 Economic Journal 751 (1991), 751 (“In mainstream economics, explanations are regarded as ‘economic’ to the extent that they explain the relevant phenomena in terms of rational choices of individual economic agents.”)
- 113.
Cf. Daniel Markovits, Making and Keeping Contracts, 92 Vanderbilt Law Review 1325, 1333–34 (2006) (“it is famously difficult for utilitarian and economic approaches to agreements to account for the obligations of agreement-keeping.”)
- 114.
Holmes, The Path of the Law, op. cit. supra, at 462.
- 115.
For a newer defense and reconstruction of the disjunctive structure of the contractual obligation, see Markovits & Schwartz, The Myth of Efficient Breach: New Defenses of the Expectation Interest, op. cit. supra (defending the “dual performance hypothesis”); Markovits & Schwartz, The Expectation Interest and the Promissory Basis of Contract, 45 Suffolk Law Review 799, 808–811 (2012).
- 116.
Cf. Craswell, Instrumental Theories of Compensation, op cit. supra, at 1138 (“the concept of compensation itself plays no independent role in economic analysis.”)
- 117.
Cf. Benjamin Hermalin, Avery Katz & Richard Craswell, Contract Law, in Handbook of Law and Economics 3, 8 (A. Mitchell Polinsky & Steven Shavell eds. Amsterdam, North Holland 2006) (“Contracting becomes worthwhile when there is a temporal element to their exchange or one party, at least, is unsure as to what her counterparty will do. For example, when the item to be exchanged needs to produced or the service being rendered takes time. Absent a contract, the parties could be reluctant to trust each other to complete the agreed upon exchange at the called-upon time, and thus valuable exchange is forgone.”)
- 118.
Sales contracts, for example, are necessary whenever the good requires time to be produced or when the future need cannot be met on the spot, such as when the good is not readily available in the market by the time the buyer needs it. If the good can be acquired, at that time, directly on the market, then parties can well simply implement a “simultaneous exchange” at that time, with no need for a prior contract. See Shavell, Foundations of Economic Analysis of Law, op. cit. supra, at 296 (“it is mainly for custom or specialized goods and services, not readily available on markets, that production contracts may be necessary.”)
Services contracts, differently, take time to perform, such that “an exchange of services for payment cannot be simultaneous—an extension of credit by one of the parties is inevitable.” Farnsworth on Contracts 7 §1.3. See also Patrick Atiyah, Introduction to the Law of Contracts 6 (Oxford, Clarendon 1989) (“Only the simplest of the transactions can be consummated by a simultaneous exchange, such as takes place at a supermarket check-out, where the consumer unloads his trolley and hands over his money. Most exchanges of any complexity cannot be performed simultaneously. One or both parties will have to perform in the future, which means that the other party has to trust him so to perform, has to have confidence that he will perform.”)
- 119.
See Hermalin, Katz & Craswell, Contract Law, op. cit. supra, at 4 (“More generally, some form of commitment is necessary in any exchange in which performance is sequential, because the party who performs first is effectively extending credit to the party who performs second.”)
- 120.
See Farnsworth on Contracts 4.
- 121.
As argued by Fuller and Perdue in The Reliance Interest in Contract Damages, op. cit supra, at 61 (“as we have suggested, the rule measuring damages by the expectancy may also be regarded as a prophylaxis against the losses resulting from detrimental reliance.”)
- 122.
See Barton, The Economic Basis of Damages for Breach of Contract, op. cit. supra, at 277; Birmingham, Breach of Contract, Damage Measures, and Economic Efficiency, op. cit. supra, at 273. The term efficient breach theory was introduced by Goetz & Scott, Liquidated Damages, Penalties and the Just Compensation Principle, op. cit. supra, at 554.
- 123.
One major refinement is the introduction of reliance investments. See Shavell, Damage Measures for Breach of Contract, op. cit. supra; Shavell, The Design of Contracts and Remedies for Breach, op. cit. supra.
- 124.
This surely requires the assumption that the promisee does not attach any value to performance per se, and is indifferent between receiving performance or its monetary equivalent. This assumption is made throughout the whole body of the literature on the economic analysis of law.
- 125.
According to the distinction, or “view of the cathedral” advanced by Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules and Inalienability: One View of the Cathedral, 85 Harvard Law Review 1089 (1972).
- 126.
An entitlement is an individual’s right to a value granted by the law or by the contract itself. If parties agree on a liquidated damages clause and specify in the contract the amount of damages to be paid in case of breach, and this clause is valid (because it is not punitive, in general), then the promisee is entitled only to that amount agreed by the parties. If parties do not specify in their (incomplete) agreement how much a promisor must pay in case of breach, then it is the law, through its default rule, that defines the victim’s entitlements and the available remedy.
- 127.
Property rule protection also involves sanctions imposed by courts upon the promisor in order to encourage, “force” or “oblige” her to perform. In French law—with influence upon many other continental legal systems—this is reflected in the astreintes, increasing sanctions that courts may impose on the promisor until he or she performs, and that can be directed to the disappointed promisee. In Germany, Zwangsgeld play the same role but are directed to the state. See Law n. 91–650 of 9 July 1991 (abrogated) and the new regulation in art. 51–53 of Decree n. 92–755 of 31 July 1992, as well as, in Germany, §§ 888 and 890 Zivilprozessordnung (ZPO).
- 128.
Cf. Richard Posner, Economic Analysis of Law, op. cit. supra, at 57 (often a party “would be tempted to breach the contract simply because his profit from breach would exceed his expected profit from completion of the contract. If his profit from breach would also exceed the expected profit to the other party from completion of the contract, and if damages are limited to loss of expected profit, there will be an incentive to commit a breach. There should be.”)
- 129.
Cf. Ian Macneil, Efficient Breach of Contract: Circles in the Sky, 68 Virginia Law Review 947, 952 (1982) (“It is, therefore, illogical to conclude that either a right to specific performance or a right to expectation damages will lead to such a [efficient, although with a different wealth distribution] result in the real world. Whatever “direction” towards or away from efficiency either of these rules has depends entirely upon the relative transaction costs each will generate”); Markovits & Schwartz, The Myth of Efficient Breach: New Defenses of the Expectation Interest, op. cit. supra, at 1944 (“The theory of efficient breach is vacuous, however.”)
- 130.
See Markovits & Schwartz, The Myth of Efficient Breach, op. cit. supra, at 1945.
- 131.
See Eric Posner, Economic Analysis of Contract Law After Three Decades: Success or Failure?, 112 Yale Law Journal 829, 836 (2003) (going further and mentioning that the argument presented by the efficient breach theory suggests that specific performance would be efficient, and not expectation damages: “the argument [the theory of efficient breach] neglects the ability of the parties to design remedial provisions for their contract. If expectation damages are optimal, the parties can achieve the effect of this remedy by giving each side the option to perform or pay an amount that is the function of revealed ex post values. If expectation damages are not optimal, then the parties can choose some superior remedy that would, for example, take account of reliance incentives. These considerations suggest that specific performance of the remedial portion of the contract would be efficient, not expectation damages, which in essence convert the obligation to perform into an option to perform or pay an amount determined by a court.”)
- 132.
Markovits & Schwartz, The Myth of Efficient Breach, op. cit. supra, at 1945.
- 133.
Id.
- 134.
As Hermalin, Katz and Craswell put it, “larger monetary remedies increase the non-breacher’s payoff (and reduce the breacher’s payoff) in the event of a breach, while smaller remedies produce the opposite effect. However, this effect by itself is merely distributional, and will not by itself change the transaction’s expected value. As long as both parties correctly estimate the probability of a breach, the prospect of liability for higher (or lower) damages can be offset by charging a higher (or lower) price, leaving both parties with the same expected return.”) Hermalin et al., Contract Law, op. cit. supra, at 97.
- 135.
The remedy of specific performance also has, ex post, its own redistributive effects, since in any obligation to do something, courts would transform that obligation into an obligation to pay monetary damages, and in any obligation to give something, courts would simply order the “redistribution” of the promised good to the promisee.
- 136.
Kaplow & Shavell, Fairness versus Welfare, op. cit. supra, at 1143 (adding that “we do not mean to suggest that there never could be a compensatory function. Because breach will sometimes occur (in our example and with expectation damages, only when breach is desirable), and because promisees may be risk-averse and uninsured, awarding damages may enhance well-being.”) Basing the value of compensation on parties’ risk-aversion makes it at the most an accessory function and purpose of remedies for breach, disposable whenever parties are risk-neutral.
- 137.
Craswell, Instrumental Theories of Compensation, op. cit. supra, at 1138.
- 138.
Id. at 1178.
- 139.
See Shavell, Foundations of Economic Analysis of Law, op. cit. supra, at 311.
- 140.
Id.
- 141.
Id.
- 142.
Id.
- 143.
Moreover, such a system would equally encourage entering into mutually beneficial contracts, since promisees would anticipate that while promisors would perform whenever it is still socially efficient to so (if they do not, they would have to pay the fine), thus earning the expected gains through performance that would always be realized when performance is socially efficient. In such a system, promisors would not perform only when breach is socially efficient, in which case promisors would prefer to pay the optimally defined penalty (without the compensatory character, could be directed to the state) instead of performing.
These are the cases in which any hypothetical complete contract would not call for performance, since inefficient, although would still entitle the promisee to compensation whenever breach occurs, independent of the social efficiency of the breach. This would not, however, discourage individuals from entering into contracts because the equivalent value of the expected compensation that promisors would receive in a system of compensation should be reflected on the price paid negotiated between the parties in a system of penalties. Both systems would however equally maximize social welfare.
- 144.
See Shavell, Foundations of Economic Analysis of Law, op. cit. supra, at 588.
- 145.
See supra chap. 1, n.2, n.3, n.6, and accompanying text.
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Mittlaender, S. (2022). Theories of Contract and Contract Law. In: Equity, Efficiency, and Ethics in Remedies for Breach of Contract. International Law and Economics. Springer, Cham. https://doi.org/10.1007/978-3-031-10804-4_2
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