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MAKING AND KEEPING CONTRACTS
Daniel Markovits*
I NTRODUCTION
ONTRACTS—and indeed agreements more generally, as I shall call contracts and promises when I refer to them to- gether^1 —present two basic practical questions. First, what reasons exist for making agreements; and second, what reasons exist for keeping such agreements as have been made?
C
The second of these two questions is more familiar than the first, and it certainly establishes a more immediate claim on our unre- flective curiosity about the morality of agreements. Questions con- cerning why one should keep one’s promises, for example, and, in- evitably, questions concerning when one might break them, are among the mainstays of casuistic moral philosophy and, indeed, figure prominently in everyday moral practice. And questions con- cerning why one should keep one’s contracts, and when one might break them, figure prominently in everyday legal practice.
- (^) Associate Professor of Law, Yale Law School. Thank you to the participants in the Contemporary Political Theory and Private Law Symposium at the University of Vir- ginia for an incisive and enlightening discussion of an earlier draft of this Essay. Thanks especially to Barbara Fried, who provided immensely helpful and generous suggestions in her formal role as commentator, and to Arthur Ripstein, who sent in- formal comments that helped to clarify the structure of the argument. Thanks also to Kevin Kordana, David Tabachnick, and the editors of the Virginia Law Review for all the work associated with convening the Symposium and publishing the papers. Fi- nally, thanks to Alan Schwartz for careful and perceptive comments on the penulti- mate draft. 1 I am using “agreement” here narrowly, as a term of art. Others have of course used the term differently, and more broadly, as for example in Hume’s observation that “[t]wo men, who pull the oars of a boat, do it by an agreement or convention, tho’ they have never given promises to each other.” David Hume, A Treatise of Hu- man Nature 490 (L.A. Selby-Bigge ed., 1978) (bk. III, pt. II, sec. II). This broader us- age, moreover, probably more nearly tracks ordinary language, which readily recog- nizes agreements entirely apart from promise and contract, as when a husband and wife, deliberating about what to do for dinner, agree to eat out. I employ the term more narrowly nevertheless, because the overlap between theories of promise and contract makes it helpful to treat them together, and agreement remains the best available word for the pair. The narrower usage will cause no problems as long as its unconventional nature is kept in mind.
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The first question—the question about making agreements— might seem somehow more alien, but reflection reveals that it stakes no less immediate or firm a claim on our attention. Thus it is natural to ask whether individual persons should arrange their af- fairs and pursue their ends by means of promises rather than by some other means, and to ask what values are most effectively (or perhaps even distinctively) served by adopting promise-based forms of coordination and planning.^2 The institution of marriage, for example, is based on the idea that persons in a certain form of relationship should not merely display loyalty and fidelity but should also promise it. Conversely, some forms of trust highlight the value of dealing honestly with others entirely apart from any promise to do so. Similarly, it is natural to ask what reasons a society has to pro- mote or support contractual accommodations of its members’ in- terests, as opposed to accommodations achieved by some other means—say, by bureaucratic regulation, by the tort system, or by less formal mechanisms of social control that lie outside the market and indeed beyond the law. When presented in this context, ques- tions concerning the value of making contracts strike a familiar (and familiarly important) cord. Indeed, they have recently re- ceived extensive attention under a variety of headings—including the rise of the welfare state,^3 the tortification of contract law,^4 and
(^2) A surprisingly common answer is that there is never any independent reason to
make promises—that promises have merely instrumental value—so that there is never any reason to employ promises insofar as people can achieve their ends without them. Richard Craswell, for example, observes that it is not surprising that the prob- lem of making promises has “received little attention in philosophical writings about promising as such” because, as he puts it, “[i]f a person is wondering whether to promise money to the poor, the most interesting question (from the standpoint of eth- ics) is whether she ought to help the poor at all” rather than the “subsidiary question” whether she ought to do so by promising. Richard Craswell, Contract Law, Default Rules, and the Philosophy of Promising, 88 Mich. L. Rev. 489, 491–92 (1989). Others have adopted similar positions; for example, that it cannot be “a reason for someone to make a promise that she would be able to fulfill it later on.” Holly M. Smith, A Paradox of Promising, 106 Phil. Rev. 153, 183–84 (1997). This view seems to me simply wrong: promises can have intrinsic value, so that there can be reasons—indeed, very strong reasons—for promising even when the con- sequences of the promises may be achieved just as effectively through other methods. 3
4 See, e.g., Patrick Atiyah, The Rise and Fall of Freedom of Contract (1979). See, e.g., Grant Gilmore, The Death of Contract (1974). Gilmore, needless to say, laments rather than celebrates this trend.
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propose, in other words, that the two questions with which I be- gan—concerning, respectively, the reasons for making and for keeping agreements—are intertwined. The reasons for achieving coordination through making agreements cannot be understood except by reference to the special reasons that exist for keeping agreements, and these reasons for keeping agreements cannot be understood except by reference to the reasons that exist for mak- ing agreements in the first place. These suggestions are, in the end, two expressions of a single idea—namely, that the morality of agreements grows out of the value of the relation that agreements engender between promisors and their promisees. Partial theories of agreements may differ on many points, but they share in com- mon that they ignore the value of the agreement-relation and con- centrate instead on the effects of agreements for promisors or promisees taken severally. And this, I shall conclude, is the original source of the difficulties that the theories all share. I develop these claims by illustrating their operation in connec- tion with three familiar accounts of agreements, and in particular of contract: the consequentialist theory presented by the law and economics movement, and two non-consequentialist theories that propose to explain the morality of contract by reference to the harm suffered by disappointed promisees on the one hand and by reference to the will of the promisor on the other.^6 Each of these approaches addresses only one of the two elements of the morality of agreements, to the exclusion of the other: the economic view fo-
(^6) I shall not directly address another, and very different, kind of theory, which ac-
counts for the morality of agreements by reference to the existence of practices con- cerning agreements. Theories of this kind, including most notably the theory ad- vanced in connection with the principle of fairness in the mature work of John Rawls, propose that persons generally have a duty to support fair collective schemes in whose benefits they voluntarily participate. See John Rawls, A Theory of Justice 111– (1971). These theories argue that our practices concerning agreements are just such schemes, which persons support by making and especially keeping agreements in ap- propriate circumstances. See id. at 344–50. I set practice-based theories aside because they recognize no distinctively agree- ment-based moral principles, preferring instead to find all the morality elsewhere, in general considerations in favor of supporting collective schemes and against free- riding. While it may be possible to account, in this way, for many of the moral obliga- tions that arise in and around agreements, practice-based theories (unlike the theories that I consider) do not actually address the morality of agreements, properly so called, at all.
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cuses exclusively on agreement-making; and the harm and will views focus on agreement-keeping.^7 I shall argue that each theory’s failure adequately to address both elements of the morality of agreements, rather than just opening up a gap in the theory, in- stead undermines that theory’s capacity to account even for the element of the morality of agreements that it does address:^8 the economic view’s failure independently to address the morality of contract-keeping undermines its ability to explain the morality of contract-making; and the harm and will views’ failures independ- ently to address the morality of contract-making undermine their capacity to explain obligations of contract-keeping. Indeed, this unconventional framework usefully organizes the principal objec- tions familiarly raised against all of these views, as well as some novel objections that I develop below, within a coherent and re- peating structure. I will necessarily argue from stylized versions of all three of the theories that I discuss, and I will therefore lump together variations that are (properly) the subjects of intense intramural disputes within each camp. This approach is suitable for a programmatic ar- gument such as the one that I am developing, although it is impor- tant that my objections not be taken in the wrong way. I do not, nor could I plausibly, claim in these brief remarks dispositively to reject any of the theories of agreements that I address, which have been developed and refined over many, many iterations. Instead, I
(^7) This pattern finds a parallel in the contrast between consequentialist and non-
consequentialist approaches to the regulative role of law itself. As Jody Kraus has ob- served, “[i]t is natural to align deontic theories with the ex post perspective, and eco- nomic theories with the ex ante perspective in adjudication.” Jody Kraus, Philosophy of Contract Law, in The Oxford Handbook of Jurisprudence and Philosophy of Law 687, 701 (Jules Coleman & Scott Shapiro eds., 2002). Consequentialist theories insist that the parties may abandon their pledges when this is all-things-considered best and that judges may abandon past precedent when that is best. Non-consequentialist theo- ries, on the other hand, insist that persons must display fidelity to their words and that judges must, looking backward, display fidelity to the law. 8 I do not claim that it is impossible to say anything about one question without also addressing the other. In some circumstances—for example, involving the return per- formance of a reciprocal promise in which one party has already performed (say, a seller’s promise to transfer a good pursuant to a contract of sale in which the buyer has already paid)—the obligation to keep an agreement may be so clear and so over- determined that it can be explained without reference to the value of making the agreement. I claim only that it is impossible to construct a satisfactory general answer to either question without also taking up the other.
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den of that article was to elaborate the form of respectful commu- nity that agreements involve and to render plausible that contract, in particular, participates in this form of community even as each party to a contract typically proceeds, in a competitive context, in the service exclusively of her own interests and without any inde- pendent motive to assist the other party in promoting his. It is not obvious how a contract that is motivated in this way can constitute a relation of respect or establish a form of community, and the the- ory sought to say how by elaborating a version of community, which I call collaborative , that is sufficiently thin to apply to con- tract and yet thick enough to be a form of moral life. Thus the col- laborative view seeks to demonstrate that parties to contracts (even as they remain motivated by self-interest) adopt intentions such that each takes the other’s as reason-giving for herself and seeks to cast the pattern of interlocking contractual intentions that it reveals as a form of reciprocal respect. In the process of defending these claims, I observed that the the- ory I was developing has the appealing feature that it explains ex- plaining the reasons both for making and for keeping contracts in a naturally unified way, specifically by grounding each in the value of the communal relations that making contracts invites and that breaking contracts betrays.^11 My energies were dominated by the effort of getting the collaborative theory of contract off the ground, however, and so I did not enlarge on the claim or even say why I took it to be appealing that my view underwrites a unified answer to the questions why make and why keep contracts. The argument in these pages provides the necessary background for those earlier observations, and insofar as it succeeds, it therefore gives a boost to the collaborative view of agreements that I prefer (although it is not my purpose here to promote that view, which remains subject to its own difficulties).^12
(^11) See id. at 1420. (^12) Perhaps the most notable difficulty, which I have acknowledged, id. at 1464–73,
and which others have pursued, see e.g., Ethan J. Leib, On Collaboration, Organiza- tions, and Conciliation in the General Theory of Contract, 24 Quinnipiac L. Rev. 1 (2005), is that the forms of respect that my theory emphasizes seem to depend on the mental qualities of natural persons, and therefore do not comfortably extend to con- tracts that involve organizations.
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I. THE E CONOMIC THEORY OF MAKING C ONTRACTS Perhaps the most prominent approach to contract today— certainly the approach that dominates the legal literature—seeks to understand contract law in terms of its economic consequences. This approach generates powerful insights, to be sure. But in spite of these insights, the economic approach to contract cannot sustain a sympathetic reconstruction of the central role that agreements play in contract law. In particular, the economic approach cannot naturally accommodate contract law’s broad preference (in many doctrinal areas, some of which I address below) for coordination that takes the agreement form. Moreover, the difficulties that the economic approach faces in explaining the law’s attachment to agreement-based coordination are not just expressions of the fa- miliar fact that non-economic values such as freedom and justice properly inform contract law. Instead, I shall argue, these difficul- ties in explaining contract law’s emphasis on making agreements are also products of the economic view’s resistance to the idea that there exist independent reasons to keep agreements. The economic view of contract thus serves as the first illustration of my broader theme, namely that a successful account of agreements must ad- dress, together and in a unified way, reasons for making and for keeping agreements. Although the economic approach does not style itself a philoso- phical argument, it nevertheless has philosophical foundations. These foundations are consequentialist and indeed roughly utilitar- ian,^13 so that the economic account of contract displays analogies to utilitarian accounts of promising, and it will be useful to treat them
(^13) I say roughly utilitarian in recognition of the difficulty that the economic idea of
efficiency departs significantly from utility maximization in that it employs, in the Kaldor-Hicks test, a monetized rather than a direct measure of the individual benefits and burdens that, in aggregate, determine efficiency. This conception of efficiency en- ables the interpersonal comparability necessary for balancing the individual gains and losses that legal choices inevitably involve. But it achieves this end only at the cost of removing the economic approach from any direct focus on well-being. Indeed, people who are richer will place a higher dollar value on any absolute change in their well- being than people who are poorer, at the cost of importing into efficiency analysis what might be seen as a bias in favor of the rich. For a further discussion of this and related points, see infra notes 29–31 and accompanying text; see also Richard S. Markovits, On the Relevance of Economic Efficiency Conclusions, 29 Fla. St. U. L. Rev. 1 (2001).
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cause of other knock-on effects—can sustain only a degenerate ideal of agreement-keeping. Such proposals cannot account for any number of familiar (if somewhat artificial) cases involving death- bed promises or other arrangements constructed to eliminate any chance of knock-on effects,^17 and efforts to bend the utilitarian ap- proach to accommodate such cases inevitably look like artificial “just so” stories. Moreover, and much more importantly, these ar- guments cannot capture the way in which principles of agreement- keeping figure in our practical deliberations, not as summary re- ports of the balance of other reasons (for example, involving prom- ise-making and the health of promissory practice) but as stating freestanding reasons.^18 On the other hand, more sweeping and theoretically ambitious suggestions that considerations of what is best overall come into play only in determining what general rules should govern conduct, and that a freestanding principle of agreement-keeping represents the best such rule in the context of agreements, inevitably fail be- fore utilitarianism’s unrelenting commitment to optimization. Al- though I shall not argue the point here, such rule-utilitarianism has, as Charles Fried observes, been “demonstrated” to be “incoher- ent.”^19 In the case of promising, either rule-utilitarianism requires that rules of promise-keeping be followed even when this under- mines the ends that promising serves, in which case the utilitarian theory of promise-making is abandoned, or rule-utilitarianism ac- cepts qualifications of the principle of promise-keeping to exclude individual cases as utility requires, in which case the freestanding obligation of promise-keeping is abandoned.^20
(^17) See, e.g., William David Ross, The Right and the Good 39 (1988); A.I. Melden,
Two Comments on Utilitarianism, 60 Phil. Rev. 508, 518–23 (1951); John Rawls, Two Concepts of Rules, 64 Phil. Rev. 3, 15 (1955). 18 See J. Raz, Promises and Obligations, in Law, Morality, and Society: Essays in Honor of H.L.A. Hart 210, 221–22 (P.M.S. Hacker & J. Raz eds., 1977). 19
20 Charles Fried, Contract as Promise 16 (1981). This formulation follows Charles Fried. See id. For the locus classicus of this ar- gument, see generally David Lyons, Forms and Limits of Utilitarianism (1965). It is sometimes suggested that rule-utilitarianism can serve as an adequate theory of how legislators ought to choose among legislation. But rule-utilitarianism succeeds as a moral theory for the legislature only by sleight of hand, because the only acts open to the legislature involve the adoption of rules, so that, in connection with legislative choices, rule- and act-utilitarianism might appear to coincide. And even with respect to the legislature, this sleight of hand succeeds only by artificially limiting the range of
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These failed experiments in its utilitarian cognates suggest that the reticence of the economic view of contract with respect to con- tract-keeping is not accidental or shallow, but instead reflects the necessary structure of the broader class of theories of agreements to which it belongs, which cannot transcend a narrow focus on agreement-making to accommodate free-standing reasons for keeping agreements. Although the economic approach recognizes that keeping and enforcing contracts is usually efficient, it insists that promisors should break contracts, and contracts should not be enforced against promisors who propose to break them, insofar as this serves efficiency, either as a general rule (for example, by dis- couraging inefficient tendencies to rely too readily on insubstantial or ill-considered promises), or simply because of the way in which economic forces happen, in the totality of the circumstances, to align.^21 This is a familiar drawback of the economic approach: as John Rawls observed in discussing its utilitarian counterpart a half cen- tury ago, the idea that a person has a reason to keep a promise only insofar as doing so is best overall “conflict[s] with the way in which the obligation to keep promises is regarded.”^22 Indeed, one might even think that the whole point of promising, on ordinary under-
legislative choices that rule-utilitarianism purports to inform. As soon as a legislator steps back from the (for her) act-like choice among legal rules and considers, for ex- ample, the second-order question of what criteria she should apply in choosing legal rules, the incoherence of rule-utilitarianism (as applied to this choice by the legislator) reappears. The rule-utilitarian would have the legislator adopt the rule for legal rule selection that is generally best and then follow that rule even in those circumstances in which it turns out not to be best. But now the rule-utilitarian dilemma reasserts it- self: either the legislator follows her rule-choosing rule even in this circumstance, in which case she has abandoned utilitarianism, or she disobeys the rule-choosing rule, in which case she has abandoned her rule (and returned to act-utilitarianism). 21 This position should not be confused with the familiar proposal of the economic approach (discussed in greater detail infra in text accompanying notes 48–60) that the expectation remedy should be preferred over supracompensatory remedies, involving specific performance or disgorgement, because it encourages promisors to make effi- cient choices whether to perform or pay damages. However things stand with respect to this question, the economic view (because it recognizes no freestanding obligation of contract-keeping) also countenances that promisors should refuse to perform with- out paying any damages (that the contracts should not be enforced against them), in- sofar as this is efficient. 22 Rawls, supra note 17, at 13.
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tions that the systematic pursuit of efficiency would impose on con- tract law are substantial, as lawyer-economists have increasingly recognized, and reformist efforts in the law and economics of con- tract carry burdens of their own. To begin with, the reformist agenda forsakes the natural appeal of received wisdom and requires the efficiency norm to bear the weight of justifying a regime of contract law, all things considered, and there are good reasons to doubt whether it can. Thus, many have thought that contract implicates egalitarian and libertarian values that the efficiency paradigm improperly ignores.^29 And be- cause economic efficiency departs from utility maximization,^30 even the utilitarian tradition that provides law and economics with its philosophical foundations remains skeptical of any suggestion that efficiency can directly justify a legal rule, as sophisticated propo- nents of efficient contract law acknowledge. Instead, the case for efficient contract law turns on the idea that it is generally counter- productive, or at least not optimal, to pursue equality, freedom, or even utility maximization through contract rules—that it is better to keep contract law efficient and promote these other values through other policies such as direct redistribution.^31
theless. Jody Kraus, for example, claims that “economic theorists are methodologi- cally committed to undertaking the explanatory task first, and justifying the existence of contract law later.” Kraus, supra note 7, at 696. I suspect that Kraus, himself a phi- losopher, reaches this conclusion in part because, as he observes, many philosophers regard the principle of efficiency as “an implausible normative principle.” Id. 29 A call for introducing egalitarian themes into contract appears in Anthony Kron- man, Contract Law and Distributive Justice, 89 Yale L.J. 472 (1980). Libertarian ap- proaches to contract include Fried, supra note 19, and Randy Barnett, A Consent Theory of Contract, 86 Colum. L. Rev. 269 (1986). 30
31 See supra note 13. Various of the relevant difficulties are discussed in Posner, supra note 24, at 508– 10; Bruce Ackerman, Regulating Slum Housing Markets On Behalf of the Poor: Of Housing Codes, Housing Subsidies and Income Redistribution Policy, 80 Yale L.J. 1093 (1971); Richard Craswell, Passing On the Costs of Legal Rules: Efficiency and Distribution in Buyer-Seller Relationships, 43 Stan. L. Rev. 361 (1991); Duncan Ken- nedy, Distributive and Paternalist Motives in Contract and Tort Law, With Special Reference to Compulsory Terms and Unequal Bargaining Power, 41 Md. L. Rev. 563 (1982); Richard S. Markovits, The Distributive Impact, Allocative Efficiency, and Overall Desirability of Ideal Housing Codes: Some Theoretical Clarifications, 89 Harv. L. Rev. 1815 (1976); Alan Schwartz, A Reexamination of Nonsubstantive Un- conscionability, 63 Va. L. Rev. 1053 (1977).
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Moreover, and in the context of the present argument more im- portantly, the transformations in contract law that the economic approach recommends are not friendly (or even neutral) to the promissory ideas that occupy the core of contract law as it is tradi- tionally understood. Instead, across a wide range of doctrinal areas, considerations of efficiency are hostile to contract law’s traditional roots in promising, including in particular its support for securing coordination distinctively through agreements. Indeed, although an efficient scheme of coordination would of course employ agree- ment-like mechanisms, it increasingly appears that such a scheme would abandon the connection that the law currently draws be- tween contract and the promissory form , so that contract would no longer be the law of agreements at all. The economic approach to contract therefore does not just fail to explain agreement-keeping; it also cannot explain our practices specifically of agreement- making. An efficient regime of contract would depart from the current law’s emphasis on agreements in three main ways. To begin with, it would retreat from the law’s current preference for reliance on promises over reliance on non-promissory representations. More- over, it would abandon the law’s more specific preference, even within the promissory realm, for agreements that take the nar- rower bargain form. And finally, even within the class of cases that involve promise- and indeed bargain-based reliance, an efficient law of contract would reject the current law’s tendency to structure its interventions according to the dictates of the promissory form. In all three respects, an efficient law of contract (which recognized no freestanding duty of agreement-keeping) would cease specifi- cally to encourage agreement-making. Indeed, this is well-known, and may be illustrated simply by collecting and reporting familiar results from the law and economics of contract. First, the economic view cannot naturally explain why the law should encourage reliance specifically on promises —why the law should give promises special legal recognition and support that other methods of giving assurances and sustaining coordination do
However these questions are resolved, it is worth remembering that economic effi- ciency is not intrinsically desirable (not even for a utilitarian) and that the connection between efficiency and other values must always be established.
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have found their way into the law. Even as these theories support contracts without consideration, they continue to insist specifically on promises rather than more general representations of firm in- tentions or predictions of future conduct. The reliance-based the- ory of obligation arising under the heading “Promissory Estoppel” and codified in section 90 of the Restatement addresses only reli- ance on a promise ,^36 and the restitutionary theory of obligation aris- ing under the heading “The Material Benefit Rule” and codified in section 86 of the Restatement also applies exclusively in connec- tion with promises made in recognition of benefits previously re- ceived.^37 This insistent emphasis on promise-based reliance resists eco- nomic explanation. According to the economic view, there is noth- ing intrinsically special about promise-based reliance, so that it be- comes a contingent, empirical question whether efficiency is best
(^36) Restatement (Second) of Contracts § 90 (1981). See generally Edward Yorio &
Steve Thel, The Promissory Basis of Section 90, 101 Yale L.J. 111 (1991). Admittedly, over the years courts have become increasingly generous concerning the range of speech acts that may properly be considered promises for purposes of Section 90- based obligation and now accept that this form of liability can arise not just out of promises but also out of their close cousins, offers. Compare James Baird Co. v. Gim- bel Bros., 64 F.2d 344 (2d Cir. 1933) with Drennan v. Star Paving Co., 333 P.2d 757 (Cal. 1958). But courts do not, even today, generally apply Section 90 to generate ob- ligation in connection with representations made entirely outside any promissory con- text. There are exceptions to this rule in which courts have imposed legal liability en- tirely apart from any promise or agreement. See, e.g., Hoffman v. Red-Owl Stores, 133 N.W.2d 267, 274–75 (Wis. 1965) (imposing liability in the context of representa- tions that were expressly judged too vague to constitute an offer). These cases have suggested to some that “a general obligation of fair dealing may arise out of the nego- tiations themselves,” which may be triggered even without agreement. Farnsworth, supra note 35, at 239. But these cases remain outliers, and are typically not followed, even in their own jurisdictions. See Schwartz & Scott, supra note 34, at 10 (pointing out that Hoffman itself was not followed in Beer Capitol Distributing, Inc. v. Guinness Bass Import Co. , 290 F.3d 877 (7th Cir. 2002) (Applying Wisconsin law)). A better account of such cases is that they present the rare circumstances in which tort liability for misrepre- sentation may be sustained quite apart from any contractual ideas. See, e.g., Fried, supra note 19, at 24; Mark P. Gergen, Liability for Mistake in Contract Formation, 64 S. Cal. L. Rev. 1, 34–36 (1990) (both cited in Schwartz & Scott, supra note 34, at 10 n.19). Indeed, even Farnsworth acknowledges that, in spite of these cases, the law generally remains much more solicitous of reliance based on agreements than it is of reliance more generally. See generally E. Allan Farnsworth, Contracts 189–201 (4th ed. 2004). 37 Restatement (Second) of Contracts § 86 (1981).
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served by offering greater encouragement to reliance on promises than to reliance on other representations. It would therefore be surprising if the answer to this empirical question lined up in any way precisely with the law’s preference for agreements proper over mere convergence. As James Gordley has observed, the economic approach makes it “puzzling, to put it mildly, that the law enforces promises more readily than other commitments.”^38 Indeed, the re- cent learning among lawyer-economists embraces the contingency of promise’s role in contract and argues for diminishing it to the point of eliminating many of the boundaries that the law has tradi- tionally established between the forms of promissory assurances that it supports and their non-promissory near neighbors that re- ceive less support. Thus, one of the leading themes in recent eco- nomic analysis of contract has been to argue that the law should be more solicitous of reliance on pre-contractual representations than it traditionally is.^39 Some lawyer-economists have even suggested abandoning entirely the law’s traditional insistence that mutual as- sent is a qualitatively distinctive basis for legal liability, so that the agreement ideal establishes a boundary between contract and other legal regimes.^40 They have proposed, instead, that the law should adopt a “no-retraction” principle, according to which legal liability grows continuously as pre-contractual bargaining gives rise to bilateral options under which each party may hold the other to its representations even when no agreement whatsoever has been
(^38) James Gordley, The Philosophical Origins of Modern Contract Doctrine 235
(1991). A similar point is made in Patrick Atiyah, Promises, Morals, and the Law 50– 51 (1981). 39 See, e.g., Lucian Arye Bebchuk & Omri Ben-Shahar, Precontractual Reliance , 30 J. Legal Stud. 423, 427 (2001); Omri Ben-Shahar, Contracts Without Consent: Explor- ing a New Basis for Contractual Liability, 152 U. Pa. L. Rev. 1829 (2004); Richard Craswell, Offer, Acceptance and Efficient Reliance, 48 Stan. L. Rev. 481 (1996); Ja- son Scott Johnston, Communication and Courtship: Cheap Talk Economics and the Law of Contract Formation, 85 Va. L. Rev. 385 (1999); Avery W. Katz, When Should an Offer Stick? The Economics of Promissory Estoppel in Preliminary Negotiations, 105 Yale L.J. 1249 (1996). Schwartz and Scott, citing Teachers Ins. & Annuity Assoc. v. Tribune Co. , 670 F. Supp. 491 (S.D.N.Y. 1987), suggest that for the limited case of reliance based on pre- liminary promises , the law is moving in the direction that these economic models rec- ommend. Schwartz & Scott, supra note 34, at 15–16. 40 See Omri Ben-Shahar, supra note 39, at 1830.
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they see as the consideration doctrine’s “mysterious”^45 emphasis on the formal properties of agreements in favor of a more open-ended regime under which legal enforcement of representations may arise independent of the agreement form. Third, the economic approach to contract cannot naturally ex- plain why, in addition to treating agreement as a necessary condi- tion for triggering contractual liability to begin with, contract law returns to the agreement form to fix the contours of the liability that it imposes. For example, the status of the expectation remedy as the pre- ferred remedy for breach of contract 46 cannot be explained in eco- nomic terms. The expectation remedy—not understood narrowly as a damages formula based on contract-market price differentials but broadly as a general insistence that promisees receive the bene- fits of their bargains^47 (benefits that contract-market differentials sometimes, but not always, secure)—introduces the agreement form into the administration of contracts in ways that economic concerns for efficient reliance cannot accommodate. To be sure, initial work in the theory of efficient breach drew a rough connection between expectation damages and economic ef- ficiency.^48 Moreover, subsequent work has extended this connec- tion to certain aspects of the law’s administration of the expecta- tion remedy: for example, developing efficiency-based explanations of doctrines that limit expectation damages to those that were foreseeable or foreseen at the time of contracting,^49 that
tional reassurance from legal enforcement outweighs [sic] the transactions costs.” Goetz & Scott, supra note 15, at 1303. 45
46 Posner, supra note 42, at 420. See, e.g., Restatement (Second) of Contracts § 344 (1981). Non-economic theories have also found it difficult to justify the expectation remedy, as Richard Craswell has pointed out with respect to two prominent examples, see Craswell, supra note 2, at 517–20, and as I argue with respect to a third example in Part II, infra. I establish the connection between the account of the morality of agreements that I prefer and the expectation remedy in Markovits, supra note 10, at 1511–14. 47 See Restatement (Second) of Contracts § 344 (1981) (defining the “expectation interest” as a party’s “interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed”). 48 See, e.g., Robert L. Birmingham, Breach of Contract, Damage Measures, and Economic Efficiency, 24 Rutgers L. Rev. 273, 285–86 (1970). 49 The canonical statement of the foreseeability rule appears in Hadley v. Baxendale , 156 Eng. Rep. 145 (1854). For an economic account of this rule, see Gwyn Quillen,
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impose duties to mitigate damages on disappointed promisees,^50 and even that determine when the uniqueness of a promised per- formance makes a contract specifically enforceable. 51 But although these arguments establish a significant overlap be- tween contract law’s remedial rules and economic efficiency, the connection turns out to be imperfect and incomplete, and the law’s categorical commitment to the expectation remedy (to securing a promisee the benefit of her bargain but declining to require promi- sors to disgorge any additional gains that they achieve through effi- cient breaches) outstrips the economic case for expectation dam- ages and extends even to circumstances in which the expectation remedy is inefficient. The expectation remedy, for example, applies even when it induces promisees whose expectation diverges from their reliance costs to devote inefficient care to deciding whether or not to contract.^52 Similarly, the rule that supracompensatory liq- uidated damages provisions are invalid penalty clauses^53 applies even when such clauses function to induce efficient relation- specific investment.^54 Nor are these the only circumstances in which the positive law’s focus on the expectation remedy departs from ef- ficiency’s recommendations.^55
Note, Contract Damages and Cross-Subsidization, 61 S. Cal. L. Rev. 1125, 1128 (1988). 50 See, e.g., Rockingham County v. Luten Bridge Co_._ , 35 F.2d 301 (4th Cir. 1929). An economic explanation appears in Goetz & Scott, The Mitigation Principle: To- ward a General Theory of Contractual Obligation, 69 Va. L. Rev. 967 (1983). 51 See, e.g., Van Wagner Adver. Corp. v. S & M Enters., 492 N.E.2d 756 (N.Y. 1986). The economic analysis appears in Anthony Kronman, Specific Performance, 45 U. Chi. L. Rev. 351, 355–65 (1978). Specific performance is, conceptually, a special case of the expectation remedy rather than a competitor remedial regime: it is the way to secure a promisee’s expectation when a contract is best interpreted to deny her pro- misor the option of treating damages as a substitute form of performance. I develop this theme more fully in Markovits, supra note 10, at 1496–1501. 52 See, e.g., Richard Craswell, Precontractual Investigation as an Optimal Precaution Problem, 17 J. 53 Legal Stud. 401, 402 (1988). See, e.g., U.C.C. § 2-718(1) (2005); Restatement (Second) of Contracts § 356 (1981). 54 See, e.g., Aaron S. Edlin, Cadillac Contracts and Up-front Payments: Efficient In- vestment Under Expectation Damages, 12 J.L. Econ. & Org. 98, 104–11 (1996); Aaron S. Edlin & Alan Schwartz, Optimal Penalties in Contracts, 78 Chi.-Kent. L. Rev. 33, 44–52 (2003); see also Steven Shavell, Damage Measures for Breach of Con- tract, 11 Bell J. Econ. 466, 472 (1980). 55 See, e.g., A. Mitchell Polinsky, Risk Sharing Through Breach of Contract Reme- dies, 12 J. Legal Stud. 427, 433 (1983) (arguing that when both parties to contracts are
