Contract: Daniel Markovits

Contract 17
Daniel Markovits
....................................................................................................................
Introduction
Contracts characteristically involve agreements, and contract law is – both

conventionally and properly – understood as the law of agreements.
The central role that agreements play in contract law may be read off the
face of contracts that arise in the orthodox fashion, through offer, accept-
ance and consideration. According to the US American Restatement, an
offer ‘is the manifestation of willingness to enter into a bargain, so made as
to justify another person in understanding that his assent to that bargain
is invited and will conclude it’.1 Acceptance, for its part, involves ‘a
manifestation of assent to the terms [of the offer] made by the offeree in
a manner invited or required by the offer’.2 All orthodox contracts –
contracts that arise through offer and acceptance – thus contain agree-
ments. But not all agreements establish contracts. Most notably,3 the
common law further requires all valid contracts to be supported by con-
sideration, which means (on the modern version of the doctrine) that ‘a
performance or a return promise must be bargained for’, which is to say
that ‘it is sought by the promisor in exchange for his promise and is given
1
Restatement (Second) of Contracts § 24 (1981).
2
3
Two very different additional sets of doctrines further limit the class of agreements that
might establish contracts.
On the one hand, doctrines concerning fraud, duress, and incapacity insist that the
agreements behind valid contracts must be knowingly and freely made. And on the other
hand, doctrines that deny contractual recognition to illegal agreements or, more broadly, to
agreements that violate public policy, prevent contract law from lending its aid to projects
that the broader legal order considers unacceptably undesirable.
The first set of doctrines might be explained as shoring the central role of agreements in
contract law, by requiring that the agreements at the heart of valid contracts be, in some
general sense, genuine or full-throated. The second set of doctrines, by contrast, subjects
contract law to limits based on values that come from outside the morality of agreements.
Downloaded from https://www.cambridge.org/core. University of Exeter, on 15 Jun 2020 at 22:03:52, subject to the Cambridge Core terms of
use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/9781316104439.018
332 Daniel Markovits
by the promisee in exchange for that promise’.4 It is therefore not enough,

for establishing an orthodox contract, that the parties happen, or fall into,
an agreement, as might occur when a promissor offers a gift and her
promisee accepts (both the gift itself and the conditions under which she
might take possession of it).5 Rather, the parties to a contract must be
motivated to agree, in the sense that each must seek the other’s agreement
to the contractual proposition. The consideration requirement thus redoubles
or deepens the role that agreements play in the common law of contracts, by
giving contract law’s concern for agreements a nested structure.
The orthodox regime does not exhaust contract law, to be sure. In the
United States, for example, contract doctrine has at least since the Restate-
ment (First) of Contracts and more expansively in the Restatement (Second)
included the rule that ‘[a] promise which the promisor should reasonably
expect to induce action or forbearance on the part of the promisee or a third
person and which does induce such action or forbearance is binding if
injustice can be avoided only by enforcement of the promise’.6
But even this principle of promissory estoppel operates, in judicial
practice, in a manner that places agreements near the contract’s core. Early
courts thus insisted that contract liability might arise, under the principle
of promissory estoppel, only where there had been reliance on a completed
promise (and indeed, almost always, in connection with an exchange of
promises), so that an orthodox contract failed on account only of the
technical niceties of the consideration doctrine. Reliance on a mere offer –
even where the relying party enjoyed but did not exercise the power to
accept the offer – was thus expressly held insufficient to sustain liability.7
Moreover, when courts liberalised liability under promissory estoppel, they
4
5
This distinction is famously illustrated by the case of Williston’s tramp, who is told by a
benevolent passer-by that if he walks to a nearby clothier, he may select an overcoat on his
benefactor’s credit. See Williston and Jaeger, A Treatise on the Law of Contracts, 3rd ed.,
Vol. 1 (Baker, Voorhis, 1957), § 112. Whether or not this promise is supported by good
consideration depends on the parties’ intentions with respect to the tramp’s walking to the
store. If the benefactor intends the promise to induce the tramp to walk to collect the coat
(perhaps to assuage her guilt on going to a warm home), and if the tramp intends the walk to
induce the provision of the coat, then there is consideration. If, on the other hand, the
benefactor is merely offering to buy the tramp a coat but not to get it for him, and the tramp
is merely deciding whether or not to collect on the offer, then there is no consideration.
6
7
See, e.g. James Baird Co. v. Gimbel Bros, 64 F.2d 344 (2d. Cir. 1933).
Contract 333
did so through doctrinal arguments that implied fully consummated agree-

ments to underwrite plaintiffs’ claims (for example by implying secondary
promises to grant options that made primary offers irrevocable).8 Finally,
although some courts have imposed reliance-based obligations in the
absence of any completed agreement, and based simply on manipulative
(but not tortious) representations made during pre-contractual negoti-
ations,9 these decisions have attracted no substantial following. The over-
whelmingly dominant view continues to insist that pre-contractual
understandings can underwrite contract obligations only where there is
‘overall agreement . . . to enter into the binding contract’.10
Thus, while there was a time when Grant Gilmore could reasonably
worry that promissory estoppel constituted a kind of ‘anti-contract’,11
which might swallow orthodox contract whole, the doctrine has not played
out this way. Even departures from the orthodox model of offer, accept-
ance and consideration continue to place agreements front and centre in
contract’s constellation.
1 Understanding Contract Law as the Law of Agreements
The central place of agreements in the law makes it tempting to suppose

that contract law simply and directly implements the morality of agree-
ments, so that to understand this field of law, one must first and exclu-
sively study that branch of morals. But such reasoning, although tempting,
is mistaken.
To begin with, legal obligation is a creature of law, not morals; and so
the grounds of every legal obligation must be found in considerations that
reflect legal values. As one court has perceptively said, the
obligation of the contract does not inhere or subsist in the agreement itself proprio
vigore, but in the law applicable to the agreement, that is, in the act of the law in
binding the promisor to perform his promise. When it is said that one who enters
8
See, e.g. Drennan v. Star Paving, Co., 333 P.2d 757 (Cal. 1958).
9
See, e.g. Hoffman v. Red Owl Stores, Inc., 133 N.W.2d 267 (Wisc. 1965).
10
See, e.g. Teachers Ins. & Annuity Assoc. v. Tribune Co., 670 F. Supp. 491, 497
(S.D.N.Y. 1987). For a systematic survey of the US American decisions, see A. Schwartz
and R. Scott, ‘Precontractual liability and preliminary agreements’, Harvard Law Review
120 (2007), 661–707, 672.
11
G. Gilmore, The Death of Contract (Ohio State University Press, 1974), 61.
upon an undertaking assumes the legal duties relating to it, what is really meant is
that the law imposes the duties on him. A contract is not a law, nor does it make
law. It is the agreement plus the law that makes the ordinary contract an enforce-
able obligation.12
Thus, although contract law might refer to the morality of agreements

in elaborating its doctrines, that is a choice for the law to make, and the
law must present legal justifications for whatever doctrinal choices it
does make.
Moreover, there are good reasons for contract law to hold the morality
of agreements at a distance.
To begin with, one of the foundational tenets of the liberal political
values that dominate states in which contract law flourishes holds that a
society’s laws may not enforce controversial moral ideals. This principle
entails that controversial moral ideas about agreements – including, most
particularly, familiar but disputed ideas about the moral obligation to keep
promises – are not appropriate grounds for legal doctrine. As Joseph Raz
has observed, the moral good of enforcing agreements ‘is not itself a proper
goal for contract law’, because to adopt this goal would be ‘to enforce
morality through the legal imposition of duties on individuals’.13 Indeed,
as Raz also says, a contract law that directly imposes the morality of
agreements does not, ‘[i]n this respect . . . differ from the legal proscription
of pornography’.14
Moreover, even those who believe that a community’s law might prop-
erly reflect or promote its moral commitments need not adopt the simple-
minded view that the law should do so directly, by implementing them.
Oliver Wendell Holmes forcefully illustrates this point. Holmes believed
that ‘[t]he law is the witness and external deposit of our moral life’,15 and
even that by attending to this feature of law, the student of law might
‘connect [his] subject to the universe and catch an echo of the infinite, a
glimpse of its unfathomable process, a hint of the universal law’.16 But he
also took a decidedly un-moralistic view of contract, observing that ‘the
12
Groves v. John Wunder, Co., 286 N.W. 235 (Minn. 1939).
13
J. Raz, ‘Promises in morality and law’, Harvard Law Review 95 (1982), 916, 937 (reviewing
P. Atiyah, Promises, Morals, and the Law).
14
Ibid.
15
O.W. Holmes, ‘The path of the law’, Harvard Law Review 10 (1897), 457–78, 459.
16
Ibid.
Contract 335
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’17 and, in this
connection, dismissing ‘those who think it advantageous to get as much
ethics into the law as they can’.18 Contract law ought, that is, to hold the
morality of agreements tightly, but at arm’s length.
A theory of contract law cannot, therefore, mechanically adopt or
mindlessly mimic one or another preferred account of the moral obliga-
tions associated with the agreements, or promises, through which contracts
typically arise. Instead, explaining or justifying agreement’s central place
in contract law requires an independent inquiry into the distinctively
political and even legal values that this area of doctrine promotes, includ-
ing through enforcing agreements.
As it happens, the most prominent theories of contract law all
proceed in just this fashion – they set out from distinct (sometimes
overlapping, sometimes competing) accounts of the point of contract
and indeed of the point of contract’s emphasis on enforcing agreements.
The theories may be loosely classified by reference to these accounts of
contract’s purpose. The classification is necessarily imperfect, as the
theories must be interpreted before they may be assigned to categories
and are in any event not so monolithic as the categories suppose.
Nevertheless, even an imperfect organising frame helps for understand-
ing contract law and theory, most notably because it reveals that the
several most prominent approaches to contract differ not just at their
margins but, instead, understand this body of law in fundamentally
different ways.
One class of theories, which includes both economic accounts of con-
tract and philosophical theories that seek to connect contract to the
morality of harm, understands contract law in allocative terms – that is,
as a technology for distributing benefits and burdens across persons.
A second class of theories understands contract in integrative terms – that
is, in virtue of the relations among persons that contracts engender.
Intramural differences also exist within each class, of course, and
attending to these reveals both the internal flexibility of the allocative
and integrative approaches to contract and the deep structural differences
that nevertheless separate them.
17
Ibid.
18
Ibid.
2 Allocative Theories of Contract
The two most prominent allocative theories of contract law are the effi-
ciency-based account that has come to dominate the academic study of
contract in the United States and the harm-based theory that seeks to
assimilate contract to the broader morality of injury and, most narrowly
within the law, to tort.
a Contract Law and Economic Efficiency

Begin by considering the efficiency-based account of contract law and
with it the economic analysis of contract law that accounts for much of the
efficiency-based account’s success, especially in the United States.
As Hume observed, ‘experience has taught us, that human affairs wou’d
be conducted much more for mutual advantage, were there certain sym-
bols or signs instituted, by which we might give each other security of our
conduct in any particular incident’.19 Contract, according to the economic
view, establishes the requisite symbols or signs, perhaps borrowing some
from the moral practice of promising, and adds formalisms and third-party
enforcement. These additions, and especially enforcement, immensely
increase the social good – over and above what promise simpliciter pro-
vides – that contract can accomplish. Because legal enforcement ‘allows
individuals to bind themselves to a future course of conduct’, which is to
say to make credible commitments, contract ‘makes[s] it easier for others to
arrange their lives in reliance on [a] promise’.20 Contract should thus be
understood as a technology for promoting efficient coordination. Indeed,
lawyer–economists may be heard to argue that contracts should be
enforced only to the extent and in the specific fashion that establishes
optimal incentives for reliance on promises and thus maximises the joint
gains from trade the contractual coordination produces.21
19
D. Hume, A Treatise of Human Nature, at bk. III, pt. II, sec. V, 522, L.A. Selby-Bigge (ed.),
(1978) (emphasis removed).
20
R. Craswell, ‘Contract law, default rules, and the philosophy of promising’, Michigan Law
Review 88 (1989), 489, 496.
21
See, e.g. A. Schwartz and R. Scott, ‘Contract theory and the limits of contract law’, Yale Law
Journal 113 (2003), 541, 556. Some theorists have developed analogous accounts according
to which contract law maximises not efficiency but party choice or autonomy (the fact that
the Kaldor–Hicks conception of efficiency at the root of the economic theory constructs
efficiency out of party choice accounts for the closeness of the analogy). One example of such
Contract 337
A comprehensive and thoroughgoing economic reconstruction of

contract law would thus make optimal coordination and joint-surplus-
maximisation into contract’s lodestar. And some economically inflected
scholars of contract have taken this lesson to heart, especially in commer-
cial law. Thus one prominent view, after limiting its range of application to
contracts that have sophisticated commercial parties on both sides, seeks
expressly to reconstruct contract doctrine with the single-minded purpose
of ‘facilitating the ability of firms to maximise welfare [which in this
context means joint contractual surplus] when making commercial con-
tracts’.22 This single-minded pursuit of joint surplus is justified by the
focus of the theory on commercial firms. Because firms are not natural
persons, commercial contract law need not consider values like autonomy
and recognition (even if these properly figure in the morality of promising).
And because firms are – the economic approach assumes – all owned by
perfectly diversified shareholders (who thus possess equal interests on both
sides of every commercial contract), commercial contract law need not
consider either corrective or distributive justice.
These observations reveal that the economic analysis of contract pos-
sesses a deep radicalism and aims (foundationally) less at reconstructing
conventional legal doctrine and more at law reform. It is commonly noted
that even where economic analysis recapitulates conventional doctrinal
themes – as in economic defence of the expectation remedy associated
with the theory of efficient breach23 – the conventional categories of
promissory morality (fidelity, for example, or the agreement-based idea
of securing the promisee’s benefit of her bargain) ‘will not have played any
[independent] role in the analysis leading up to [the] conclusion’ that the
law should enforce promises.24 (And some scholars have thought, for this
a theory is J. Kraus, ‘The correspondence of contract and promise’, Columbia Law Review 109
(2009), 1603. Some have suggested that Charles Fried’s view of contract law, elaborated in his
book Contract as Promise, possesses this structure: C. Fried, Contract as Promise: A Theory of
Contractual Obligation (Oxford University Press, 1981). See, e.g. E. Weinrib, The Idea of
Private Law, revised ed. (Oxford University Press, 2012), 50–1. Another interpretation,
pursued below, treats Fried’s view as an integrative rather than an allocative theory.
22
Schwartz and Scott, ‘Contract theory and the limits of contract law’ at 556.
23
For an early statement of this theory aimed at academic lawyers, see R.L. Birmingham,
‘Breach of contract, damage measures, and economic efficiency’, Rutgers Law Review
24 (1970), 273.
24
R. Craswell, ‘Against Fuller and Perdue’, University of Chicago Law Review 67 (2000), 99,
107.
reason, that the economic approach makes it ‘puzzling, to put it mildly,

that the law enforces promises more readily than other commitments’.25) In
fact, the radicalism of the economic analysis of contract law goes deeper
still. A bedrock principle of conventional contract law, understood as the
law of agreements, is that contracts establish obligations between two
separate parties. But the deep structure of the argument just rehearsed –
the fact that economic analysis achieves its elegant simplicity by imagin-
ing that all contracts in the end redound to the benefit of a perfectly
diversified shareholder – reveals that the economic approach to contract
contemplates just one party.
Indeed, contract law on this allocative view is perhaps best understood
not as a theory of obligation at all but as a department of transactions
costs economics and, even more narrowly, of the theory of the firm. As
Ronald Coase famously proposed, the scope of the firm – the boundary
between coordinating economic activity within a firm through ownership
and managerial control and coordinating economic activity across firms
by contract – is fixed by the balance between the transaction costs of each
coordinating mechanism.26 The economic approach to contract may be
interpreted as an effort to reduce the transactions costs of contractual
coordination across the firm boundary, with the consequence of reducing
the optimal size of firms and, finally, increasing the efficiency of economic
coordination overall.
b Contract Law and Harm

A second class of allocative theories of contract also poses a radical,
structural challenge to conventional doctrinal understandings of contract –
this time by seeking to explain contract law in terms of the law and morals
of harm. These theories thus reject the conventional understanding that
contract fundamentally concerns voluntary or chosen obligations and
instead seek to understand contract as, at root, a particular elaboration
of the general and unchosen duty not to harm others. In their doctrinal
expressions, such theories seek to assimilate contract to tort.
25
J. Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford University
Press, 1991), 235. A similar point is made in P. Atiyah, Promises, Morals, and the Law
(Clarendon Press, 1981), 50–1.
26
See R. Coase, ‘The nature of the firm’, The Firm, The Market, and the Law 33 (1988), 43–4.
Contract 339
Some versions of such harm-based accounts of contract again have

economic roots and thus approach the law’s basic doctrinal categories
with an openly reformist attitude. There exist economic accounts of con-
tract law that propose mitigating losses – an immediately tort-like notion –
as the root of a comprehensive theory of contract.27 Contract law,
according to these approaches, is just a special case of the broader tort
duty not to impose unreasonable costs on others, adapted to the special
circumstances in which the mechanisms of imposing costs involve
inducing expectations and reliance concerning future conduct and the
technologies of loss avoidance centrally include information exchanged
between parties who are already in communication.28 These arguments
constitute a special case of the economic analysis of law’s general disre-
gard for doctrinal categories, which is itself a natural and direct conse-
quence of a methodological commitment to directing legal theory toward
explaining case outcomes and treating law’s rule-based and hence doctri-
nal pronouncements as epiphenomenal.29
But other harm-based accounts of contract – including those proposed
by genealogical thinkers as different as Patrick Atiyah and Margaret Jane
Radin and by philosophical thinkers such as T.M. Scanlon – have sought to
assimilate contract to tort while, and even through, respecting conven-
tional doctrinal and moral categories.30 These reconstructive approaches
do not reject doctrinal distinctions out of hand, as the economic view does.
Instead, they propose that the best and deepest reconstructions of legal
27
See C. Goetz and R. Scott, ‘The mitigation principle: toward a general theory of contractual
obligation’, Virginia Law Review 69 (1983), 967.
28
For a judicial application of this approach, per Judge Richard Posner, see Evra Corp.
v. Swiss Bank Corp., 672 F.2d 951 (7th Cir. 1982).
29
See J. Kraus, ‘Philosophy of contract law’ in J. Coleman and S. Shapiro (eds.), The Oxford
Handbook of Jurisprudence and Philosophy of Law (Oxford University Press, 2002), 687.
Kraus argues that the economic analysis of law ‘rejects the significance of traditional
distinctions between apparently different bodies of law’ (699), such as contract and tort,
and, moreover, ‘does not take the doctrinal invocations and restatements as legal data to be
explained’ (692), but instead focuses its attention on explaining case outcomes. Earnest
Weinrib has made a similar point. See E. Weinrib, The Idea of Private Law, revised ed.
(Oxford University Press, 2012).
30
For genealogical arguments, see, e.g. P. Atiyah, The Rise and Fall of Freedom of Contract
(1979) and M.J. Radin, ‘Market inalienability’, Harvard Law Review 100 (1987), 1849. For
philosophical arguments, see, e.g. T.M. Scanlon, What We Owe to Each Other (Harvard
University Press, 1998), 295–327 and ‘Promises and contracts’ in P. Benson (ed.), The
Theory of Contract Law: New Essays (Cambridge University Press, 2001), 86, 93–4.
practice require re-evaluating doctrinal categories that, even though they

loom large in the unreflective dogmas of the legal profession, in fact
merely skim the surface of the phenomena they purport to describe.
These efforts to assimilate contract to tort – precisely because they seek
to explain rather than to abandon familiar doctrinal and legal principles –
immediately confront two formidable doctrinal and structural hurdles.
First, contract law imposes strict liability rather than fault-based obli-
gations: a contractual promisor might have exercised reasonable care both
in making her promise and in attempting to keep it and yet remain liable in
case she breaches. By contrast, the misrepresentation torts generally
require that defendants have failed to exercise reasonable care in making
their false statements and, additionally, require justifiable reliance as an
element of a plaintiff’s claim.31 Indeed, certain doctrines – for example,
concerning fraudulent misrepresentation – expressly add that tort liability
requires that the party asserting liability has relied specifically on the truth
of the representation upon which the claimed liability is based, rather than
just ‘upon the expectation that the maker [of the false statement] will be
held liable in damages for its falsity’.32 Once again, the bootstrapping that
tort law refuses is of the essence of contract.
And second, contract law establishes forward- rather than backward-
looking obligations: contract remedies thus expressly vindicate a prom-
isee’s expectation interest, ‘by attempting to put him in as good a position
as he would have been in had the contract been performed’;33 that is, by
securing the promisee’s ‘benefit of the bargain’.34 Tort, once again, takes a
contrasting tack. The misrepresentation torts generally limit a plaintiff’s
recovery to losses sustained on account of the misrepresentation, that is, to
the amount required to put the plaintiff in the position that she would have
occupied had the misrepresentation never been made.35
31
See, e.g. Restatement (Second) of Torts § 552, Information Negligently Supplied for the
Guidance of Others (‘One who, in the course of his business, profession or employment, or
in any other transaction in which he has a pecuniary interest, supplies false information for
the guidance of others in their business transactions, is subject to liability for pecuniary
loss caused to them by their justifiable reliance upon the information, if he fails to exercise
reasonable care or competence in obtaining or communicating the information.’).
32
See Restatement (Second) of Torts § 548 (1977).
33
Restatement (Second) of Contracts §344 (1981).
34
Restatement (Second) of Contracts §344 (1981).
35
See Restatement (Second) of Torts § 552B (1977). An exception to this principle exists for
certain frauds, established (in part) to prevent promisors from being able reduce the extent
Contract 341
Some reconstructive thinkers address their interpretive and theoretical

energies directly to explaining these legal doctrines, or at least to explain-
ing them away. These thinkers argue, in various ways, that nominal
distinctions between contract and tort just rehearsed are illusions, even
on a doctrinal level. They argue, that is, that the best purely doctrinal
account of contract law directly assimilates contract to tort.
With respect to the first apparent distinction between contract and tort –
concerning strict rather than fault-based liability – such thinkers empha-
sise that considerations of reasonableness run through contract doctrine
and operate in ways that bend contract in the direction of fault-based
liability.36 For example, the doctrines governing orthodox contract forma-
tion make contractual obligations turn not on the parties’ actual or sub-
jective intentions but rather on so-called objective understandings of
promissory utterances: the US American Restatement, once again, defines
an offer as ‘the manifestation of willingness to enter into a bargain, so
made as to justify another person in understanding that his assent to that
bargain is invited and will conclude it’.37 Similarly, doctrines concerning
contract interpretation and mistake connect the content of contractual
obligations to the reasonable understandings of the parties: the Restate-
ment, for example, allocates the risk of mistake as to the assumptions
underlying a contract or the meaning of its terms based on a decidedly
tort-like accounting of the parties’ relative costs of mistake-avoidance.38
of their liability by arguing that their breaches are not innocent but fraudulent. Compare
Reno v. Bull, 124 N.E. 144 (N.Y. 1919) with Morse v. Hutchins, 102 Mass. 439 (1869) and
see, e.g. Restatement (Second) of Torts § 549(2).
36
For a recent general argument assimilating contract and tort, see M. Gergen, ‘Negligent
misrepresentation as contract’, California Law Review 101 (2013), 953.
37
Restatement (Second) of Contracts § 24 (1981) (emphasis added). Note that although this
definition of offer invokes intentions to assume obligations, the contemplated obligations
need not, under US American law, be specifically legal. Thus the Restatement adds that
‘Neither real not apparent intention that a promise be legally binding is essential to the
formation of a contract, but a manifestation of intention that a promise shall not affect
legal relations may prevent the formation of a contract.’ Restatement (Second) of Contracts
§ 21 (1981). English contract law takes a different view and includes intent to create legal
relations among the elements required for establishing an enforceable contract. See
e.g. Balfour v. Balfour [1919] 2 K.B. 571, 579. English law also acknowledges a strong
presumption that, in contexts involving commercial agreements, the required intent exists.
As Patrick Atiyah has observed, this presumption entails that in practice, in most commer-
cial cases, ‘no positive intention to enter into legal relations needs to be shown’. P.S.
Atiyah, An Introduction to the Law of Contract, 5th ed. (Clarendon Press, 1995), 153.
38
See Restatement (Second) of Contracts § 154 (1981).
With respect to the second apparent distinction between contract and

tort – concerning the forward- rather than backward-looking content of
contractual obligation – such thinkers argue that the distinction is less
crisp in theory and less honoured in practice than those who trumpet
contract’s distinctiveness suppose. Where markets are thick, every con-
tractual expectation may be recharacterised in terms of the lost opportun-
ity of dealing with an alternative counterparty and thus as a reliance cost.
And where markets are not thick, any number of doctrines – such as those
that limit recovery to expectations that were foreseeable at contracting39
or that subject plaintiffs to the burden of establishing the value of their
expectations with certainty40 – effectively limit damages for breach to
something like the recovery of costs incurred in reliance on the breached
contract.41
Finally, the rise of promissory estoppel as an unorthodox ground of
contract obligation (unorthodox insofar as it dispenses not just with
consideration but with offer and acceptance42) and the rise of the uncon-
scionability doctrine as a means by which courts might inject substantive
notions of fairness into bargains, invited those who would assimilate
contract to tort’s doctrinal logic of harm to treat lost reliance as not just
necessary but also sufficient for contractual obligation. These and other
developments went so far as to lead Atiyah to propose that the best
39
See, e.g. Hadley v. Baxendale, 156 Eng. Rep. 145 (Court of Exchequer, 1854).
40
See, e.g. Rombola v. Cosindas, 220 N.E.2d 919 (Mass. 1966). Some cases even make reliance
an express element of a claim for breach of contract and refuse to award damages for lost
expectations that cannot be recast as reliance. See, e.g. Overstreet v. Norden Laboratories,
Inc. 229 F. 2d 1286 (6th Cir. 1982). But these cases are probably outliers, and other opinions
take the opposite view. See, e.g. Texaco, Inc. v. Pennzoil, Co., 729 S.W. 2d 768 (Tex. App.
Hous. (1 Dist.) 1987).
41
These points have been familiar for some time. See L.L. Fuller and W.R. Perdue Jr, ‘The
reliance interest in contract damages: 1’, Yale Law Journal 46 (1936), 52.
42
Once again, the doctrinal path by which this result was approached proceeded in stages.
First, older holdings insisting that promissory estoppel might properly be applied only in
the shadow of completed promises (involving both offer and acceptance and lacking only
consideration), see, e.g. James Baird Co. v. Gimbel Bros., 64 F.2d 344 (2nd Cir. 1933), were
replaced with holdings that applied promissory estoppel in the absence of any express
accepted promise, that is, to mere offers, see, e.g. Drennan v. Star Paving Co., 333 P.2d 757
(Cal. 1958). And second, a few opinions went so far as to apply promissory estoppel even
where there existed neither a promise nor even a completed offer, and based instead on
manipulative (but not fraudulent or otherwise conventionally tortious) representations
made during pre-contractual negotiations. See Hoffman v. Red Owl Stores, Inc., 133
N.W.2d 267 (Wis. 1965).
Contract 343
reconstruction of contract law, in its full historical development, de-

emphasises chosen obligation and the promissory or agreement form in
favour of the thought that contract law coordinates conduct, and rational-
ises socially productive reliance on promises, based not on individual
private wills but rather on shared public norms – in Atiyah’s words, on
‘the social and legal morality of a group of persons’.43 Others took a less
salutary view of the same doctrinal developments. Grant Gilmore44 and
Charles Fried,45 for example, openly despaired that lawmakers were codi-
fying the relevant public norms and legal morality, at least for consumer
contracts and possibly beyond. Gilmore, recall, went so far as to call
promissory estoppel ‘anti-contract’46 and worry that it opened up a class
of reliance-based, essentially tort-like obligation that would one day
swallow contract whole.
Other reconstructive thinkers address their arguments to deeper or more
foundational matters. Such thinkers do not just reinterpret contract doc-
trines to show that, beneath a thin veil of editorialising about promises or
agreements, tort-like notions explain contract law’s actual operation.
Instead, these thinkers seek to establish a fundamental unity between
contract and tort at these practices’ moral and political foundations. In
particular, these thinkers seek to recast promise itself as a special case of
the morality of harm.
The leading contemporary proponent of this view is T.M. Scanlon, who
argues, first, that promissory obligation should be understood in terms of
the duty to avoid harming others and, second, that contract should be
understood to import the moral principles governing promising into law.47
With respect to promising, Scanlon proposes to find the grounds of the
duty to vindicate promissory assurances in pre-promissory moral prin-
ciples that forbid certain forms of manipulating others and, moreover,
require that persons exercise due care in leading others to form certain
expectations.48 These pre-promissory principles, Scanlon proposes,
explain the wrongfulness of making lying or careless promises. Scanlon
43
Atiyah, Promises, Morals, and the Law, 121.
44
See Gilmore, The Death of Contract.
45
See Fried, Contract as Promise.
46
Gilmore, The Death of Contract, 61.
47
See T.M. Scanlon, What We Owe to Each Other, 295–327 and T.M. Scanlon, ‘Promises and
contracts’ in The Theory of Contract Law: New Essays, 93–4.
48
See T.M. Scanlon, What We Owe to Each Other, 298–300.
then defends a broader principle of promissory fidelity49 by reference to

the fact that promisees might reasonably trust promisors to avoid these
narrower wrongs.50
Scanlon acknowledges that his view must account for the ways in which
promise and contract depart from the tort-like norms that generally govern
the morality and law of harm: including in particular the strict liability and
forward-looking character of promissory and contractual obligations.51
Scanlon defends these principles for promise and contract through the
49
This is Scanlon’s principle F, which states:
If (1) A voluntarily and intentionally leads B to expect that A will do X (unless B consents
to A’s not doing so); (2) A knows that B wants to be assured of this; (3) A acts with the aim
of providing this assurance, and has good reason to believe that he or she has done so; (4)
B knows that A has the beliefs and intentions just described; (5) A intends for B to know
this, and knows that B does know it; and (6) B knows that A has this knowledge and intent;
then, in the absence of special justification, A must do X unless B consents to X’s not
being done.
Ibid. at 304.
50
See ibid. at 308–9.
51
Scanlon says:
[I]t is reasonable to want a principle of fidelity that requires performance rather than
compensation and that, once an expectation has been created, does not always recognize
a warning that it will not be fulfilled as adequate protection against loss, even if the
warning is given before any further decision has been made on the basis of the
expectation.
Scanlon, ibid. at 304. Furthermore, Scanlon defends a principle for contract law, which he
calls EF (for enforcing fidelity) which holds:
It is permissible legally to enforce remedies for breach of contract that go beyond
compensation for reliance losses, provided that these remedies are not excessive and
that they apply only in cases in which the following conditions hold: (1) A, the party
against whom the remedy is enforced, has, in the absence of objectionable constraint and
with adequate understanding (or the ability to acquire such understanding) of his or her
situation, intentionally led B to expect that A would do X unless B consented to A’s not
doing so; (2) A had reason to believe that B wanted to be assured of this; (3) A acted with
the aim of providing this assurance, by indicating to B that he or she was undertaking a
legal obligation to do X; (4) B indicated that he or she understood A to have undertaken
such an obligation; (5) A and B knew, or could easily determine, what kind of remedy
B would be legally entitled to if A breached this obligation; and (6) A failed to do
X without being released from this obligation by B, and without special justification
for doing so.
Scanlon, ‘Promises and contracts’, at 105. Scanlon believes that his argument shows only
that such legal enforcement of contracts is permitted, not that it is required. See Scanlon,
ibid. at 106.
Contract 345
methods of the broader moral theory that he calls ‘contractualism’:52 he

compares the benefits that the rules confer to the burdens that they impose
and argues that, given the balance between these, it would be unreason-
able for promisors who must bear the burdens to reject the rules and that
promisees may justifiably insist on the benefits of the rules. For example,
Scanlon argues that the benefits to promisees of protecting promissory
expectations are substantial and that, given the conditions of mutual
knowledge, etc. that are built into the general account of promising, the
burdens that this rule imposes on promisors are slight.53 And similarly,
with respect to contract, Scanlon argues that the benefits of legal enforce-
ment of contractual expectations are substantial,54 while the costs of
enforceability are much less weighty.55 Given the balance, Scanlon con-
cludes, promisees have reason to insist on a moral regime that protects
promissory expectations and to prefer a legal regime that enforces con-
tractual expectations, and promisors cannot reasonably reject either the
moral or the legal regime.56
52
According to contractualism, ‘[a]n act is wrong if its performance under the circumstances
would be disallowed by any system of rules for the general regulation of behaviour which
no one could reasonably reject as a basis for informed, unforced general agreement’. T.M.
Scanlon, ‘Contractualism and utilitarianism’ in A. Sen and B. Williams (eds.), Utilitarian-
ism and Beyond (Cambridge University Press, 1982) 103, 110.
53
These include the psychological benefit of the confidence such protection promotes as well
as the more direct benefit of increasing the likelihood that promisors will perform as
promised. Scanlon, What We Owe to Each Other at 302–3. Here Scanlon might have added
the benefits associated with encouraging reliance that figure so prominently in utilitarian
and economic accounts of promise and contract.
Scanlon believes the burdens slight because a person can always avoid the obligation to
satisfy expectations simply by warning that she is not making any promises.
54
These benefits accrue, moreover, not just to the promisees who receive them directly but
also to promisors who desire to be able to give firm assurances in order to increase the
value of their promises and hence of what they can demand in exchange for them. See
Scanlon, ‘Promises and contracts’, at 108.
55
The error costs that accrue when legal enforcement is ordered against a person who has not
in fact made an enforceable contract are kept small, Scanlon asserts, by the strict and fairly
formal requirements for entering into a contract. See ibid. And the compliance costs that
accrue when a promisor must make good the expectations created by a promise she has
come to regret command little respect in the contractualist calculus, because they can be
avoided ex ante at a low cost by refraining from making contractual promises and can be
avoided ex post only by neglecting a moral obligation imposed by the moral principle of
promise-keeping, and this is not a cost that promisors can reasonably cite as a ground for
rejecting the legal enforcement of contractual expectations. Ibid.
56
Scanlon, ibid., at 304–5.
In this way, Scanlon’s theory seeks to reconstruct contract in terms of

principles that concern the allocation of benefits and burdens – the morality
of harm – through arguments that penetrate the surface of legal doctrine and
go right down to the deepest roots through which contract and promise draw
their vitality and appeal. Scanlon’s theory of contract might thus be harm-
based in its roots even as it also accepts, and indeed encourages, more
superficial doctrinal distinctions between contract and tort.
3 Integrative Theories of Contract
A second class of theories seeks to understand contract not – or at least not

fundamentally – in terms of the manner in which contract law allocates
individual benefits and burdens across persons but rather in terms of the
relations among persons that contracts establish and that contract law
sustains. Such integrative theories of contract once again come in two
principal varieties. The first variety understands contract as a site of thick
relations modelled on ideals of fidelity and trust. The second variety of
integrative theory takes a thin view of the contract relation, which it
understands as an arm’s length relation constituted by good faith.
a Thick Integrative Theories

Thick integrative theories share with harm-based theories an inclination to
assimilate contract to a neighbouring body of law – in this case not to tort
but rather to fiduciary law. These theorists elaborate what they sometimes
call ‘robust notions of contractual duty’,57 according to which contracting
parties establish relations of mutual trust, fidelity and affirmative other-
regard. Thick integrative theories typically begin from accounts of prom-
issory obligation that propose that promises establish faithfulness and
even egalitarian intimacy among the parties who make and receive them.58
The theories then import their notions of promissory fidelity into contract
law, to argue that the law should acknowledge and enforce fidelity
and associated ideals of other-regard – constructed to resemble ideals of
57
R.R.W. Brooks, ‘The efficient performance hypothesis’, Yale Law Journal 116 (2006), 568, 573.
58
See, e.g. S.V. Shiffrin, ‘Promising, intimate relationships, and conventionalism’, Philo-
sophical Review 117 (2008), 481.
Contract 347
fiduciary-like loyalty – as between contracting parties. Insofar as current

doctrine departs from principles of promissory fidelity and requires con-
tracting parties to display not fiduciary loyalty but only contractual good
faith, these theories lament what they have called ‘the divergence of
contract and promise’.59 Thick integrative theories thus tend (as did eco-
nomically inflected allocative theories) toward recommending law reform.
The thick integrative theories’ reformist agenda proceeds along several
fronts. Perhaps most famously, those who understand contractual obliga-
tions to involve fidelity or quasi-fiduciary loyalty object to the common
law’s provision of expectation damages for breach of contract60 and prefer
specific performance, restitution (and other gain-based damages), or even
punitive damages. The expectation remedy, these critics observe, does not
sanction but merely prices breach; and it sets the price of breach suffi-
ciently low (at a level that enables a breaching promisor to profit from her
breach) to encourage breaches of the very promissory obligations that
contract law purports to recognise and enforce. (The well-known theory
of efficient breach of contract openly acknowledges and even celebrates
this alleged moral defect in the doctrine.) By pricing and encouraging
breach, the critics say, the law undermines the immanent normativity of
contract obligation and introduces a demoralising and destructive tension
between law and morality.61 Other doctrines (which often interact with the
expectation remedy in contractual practice) exacerbate the problem. The
mitigation doctrine, for example, supports the expectation remedy by
requiring promisees to respond to breach by taking steps to minimise their
contractual disappointments. This requirement, thick integrative theories
worry, empowers breaching promisors to draft their promisees involun-
tarily into their service, specifically by requiring promisees to exercise
initiative in order to reduce the damages that breaching promisors owe.62
A single ideal animates and unifies these several complaints. This
is the principle – which comprises the thickness of the thick integrative
59
S.V. Shiffrin, ‘The divergence of contract and promise’, Harvard Law Review 120 (2007), 708.
60
See, e.g. Restatement (Second) of Contracts § 344 (1981).
61
Various of these claims appear in, for example, D. Friedman, ‘The efficient breach fallacy’,
The Journal of Legal Studies 18 (1989), 1; S.V. Shiffrin, ‘Could breach of contract be
immoral?’, Michigan Law Review 107 (2009), 1551; S.V. Shiffrin, ‘The divergence of
contract and promise’, 708; R.R.W. Brooks, ‘The efficient performance hypothesis’, 568.
62
S.V. Shiffrin, ‘Must I mean what you think I should have said?’, Virginia Law Review
98 (2012), 159.
view – that promises and contracts fundamentally re-orient the attitudes

with which the parties to them approach one another. Before contracting,
the parties hold each other at arm’s length and may thus pursue their
narrowly private interests, subject only to the side-constraint that they do
not abuse each other through force or fraud. But a contractual promise
transforms this relation into one of mutual trust and affirmative other-
regard, which promisors who remained narrowly self-interested would
wrongfully exploit (including even if they constrained their self-interest
according to the terms set out in the contracts).
Contractual fidelity, according to the thick integrative view, cannot be
vindicated by merely honouring the ex ante division of surplus established
by a contract; instead, contractual fidelity requires an additional, affirmative
inclination to share ex post, including in ways that the contract did not
anticipate. The supracompensatory remedies that thick integrative theories
prefer enforce precisely such ex post sharing: these remedies require, in their
implementation, that the parties to contracts renegotiate in the face of
temptations to breach. Whereas defenders of the conventional doctrine
understand the renegotiation as imposing transactions costs that the parties,
and the law, have reason to avoid,63 thick integrative theories view renegoti-
ation in terms of a sort of transactions benefit, concomitant to bringing
contract law into alignment with the morality of promise and the affirmative
other-regard between promisor and promisee that morality requires. Cham-
pions of thick contractual integration would achieve these moral ends by
inserting fiduciary norms into contract law.64
b Thin Integrative Theories

A second class of integrative theories of contract retains the thought that
contracts should be understood in terms of the relations that they establish
between the parties to them but insists that these relations take a thin form,
in which the parties recognise and respect each other not as intimates but
rather while remaining at arm’s length. As Charles Fried has observed,
even as contracts involve and invoke trust between the parties, contractual
63
Cf. D. Markovits and A. Schwartz, ‘The myth of efficient breach: new defenses of the
expectation interest’, Virginia Law Review 97 (2011), 1939.
64
Cf. D. Markovits, ‘Sharing ex ante and sharing ex post’ in A.S. Gold and P. Miller (eds.), The
Philosophical Foundations of Fiduciary Law (Oxford University Press, 2014), 209–24.
Contract 349
trust does not establish intimacy but rather serves ‘humdrum ends: We
make appointments, buy and sell.’65
Some thin integrative theories of contract law associate themselves with
moral views that understand even personal promises as establishing thin
relations among parties who remain, within and indeed through their
promises, at arm’s length.66 Other thin integrative theories propose that
contract law, by replacing the trust that lies at the heart of personal
promises with external enforcement, sustains constructive relationships
among parties who remain impersonally detached.67 Regardless of their
internal differences, all thin integrative theories share that contractual
sharing is cabined, ex ante, by the agreement of the parties and thus
differs – structurally and qualitatively – from the open-ended sharing ex
post contemplated by fiduciary obligations.
Thin integrative theories set their trajectory by the observation that
‘[o]ne of the hallmarks of [the] common law is that it does not have a
doctrine of abuse of rights: if one has a right to do an act then, one can, in
general, do it for whatever reason one wishes’.68 This entails that ‘[e]xcept
where the contracting parties are also in a fiduciary relationship, self-
interest is permissible, and indeed is the norm in the exercise of contractual
rights’.69 Thin integrative theories thus embrace the contract doctrines –
the expectation remedy, for example, and the mitigation requirement –
that thick integrative theories condemn. With respect to remedies, for
example, thin integrative theories celebrate the ways in which expectation
damages encourage promisors to avoid the trades that their contracts
describe when the gains from doing so exceed the costs. The thin theories
applaud this practice of ‘efficient breach’ not only, and indeed not princi-
pally, because it increases the contractual surplus available for the parties
to share. More fundamentally, a legal regime that permits efficient breach
of contract permits promisors (and promisees) to fix the limits of their
contractual relations at contract formation and thus to coordinate their
65
Cf. Fried, Contract as Promise, 8.
66
See, e.g. D. Markovits, ‘Promise as an arm’s length relation’ in H. Sheinman (ed.), Promises
and Agreements: Philosophical Essays (Oxford University Press, 2010) and D. Markovits,
‘Contract and collaboration’, Yale Law Journal 113 (2004), 1417.
67
See, e.g. D. Kimel, From Promise to Contract: Towards a Liberal Theory of Contract (Hart,
2003).
68
J. Beatson, ‘Public law influences in contract law’ in J. Beatson and D. Friedmann (eds.)
Good Faith and Fault in Contract Law (Clarendon Press, 1995), 263–88, 266–7.
69
Ibid. at 267.
conduct, ex ante, free from any concern that they will be required to make
additional adjustments, or show additional concern, toward each other ex
post. The thin conception of contract thus supports coordination among
parties who take each other’s contractual intentions at face value and
neither ask nor worry about the interests and motives that lie behind them.
This renders contract especially well suited to sustaining private orderings
in open, cosmopolitan societies, in which traders share little outside a joint
commitment to honour the agreed terms of their trades.
Thin integrative theories thus propose that contract’s foundational value
is not trust, fidelity, loyalty or some other fiduciary ideal but rather good
faith. A fiduciary is ‘required to treat his principal as if the principal were
he’.70 But good faith, by contrast, ‘does not mean that a party vested with a
clear right is obligated to exercise that right to its own detriment for the
purpose of benefiting another party to the contract’.71 Rather, in place of
‘loyalty to the contractual counterparty’, good faith requires ‘faithfulness
to the scope, purpose, and terms of the parties’ contract’,72 which is to say
‘honesty in fact and the observance of reasonable commercial standards of
fair dealing’.73 Thus, as one prominent judge has more colourfully
explained, ‘even after you have signed a contract, you are not obliged to
become an altruist toward the other party’.74 Nor does good faith require
contracting parties to adopt even an attitude of substantive impartiality
between their contractual interests and the interests of their contracting
partners. The law does not seek, ‘in the name of good faith, to make every
contract signatory his brother’s keeper’.75
Indeed, the duty of good faith in performance ‘does not create a separate
duty of fairness and reasonableness which can be independently breached’.76
Instead, good faith characterises contract obligations’ (thin) form and
70
Mkt. St. Assocs. Ltd. P’ship v. Frey, 941 F.2d 588, 593 (7th Cir. 1991).
71
Rio Algom Corp. v. Jimco Ltd., 618 P.2d 497, 505 (Utah 1980).
72
ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, L.L.C., 50 A.3d
434, 440–1 (Del. Ch. 2012) aff’d in part, rev’d in part on other grounds, 68 A.3d 665
(Del. 2013). I owe this reference to Andrew Gold.
73
Uniform Commercial Code §§ 1–201, 2–103.
74
Mkt. St. Assocs. Ltd. P’ship v. Frey, at 594 (7th Cir. 1991) (Posner, J.). Not every court has
always adopted this approach. See, e.g. Parev Prods. Co. v. I. Rokeach & Sons, Inc., 124
F.2d 147 (2d Cir. 1941), which comes close to taking a fiduciary duty view of contractual
obligations, seeking ‘the really equitable solution’ as opposed to ‘a limited rule of good
faith’ (at 150).
75
Mkt. St. Assocs. Ltd. P’ship v. Frey, at 593.
76
Uniform Commercial Code § 1–304 [cmt. 1] (2003).
Contract 351
identifies an attitude toward contractual obligations: good faith supports the

parties’ contractual settlement, working to ‘effectuate the intentions of the
parties, or to protect their reasonable expectations’.77 It is thus, fundamen-
tally, an attitude of respect for the contract relation, and the measure of good
faith is the contract itself. In particular, good faith precludes using the
inevitable room to manoeuvre that arises within every contract, and the
strategic vulnerabilities that a contract itself thus creates, ‘to recapture
[during performance] opportunities forgone upon contracting’.78
The duty of good faith in performance thus permits the parties to remain
as self-interested within their contracts as they were without them, save
that they must respect the terms of their contractual settlements as side-
constraints on their self-interest. Taking this duty as capturing contract’s
core value is what makes thin integrative theories thin.
Conclusion
The recognition that contract law is the law of agreements thus frames
understandings of contract law; but it does not fill the frame with specific
content. Instead, the law’s enforcement of agreements might serve very
different kinds of purposes; and it might serve very different particular
purposes within each kind.
Contract law has thus been thought, variously, to promote the efficient
allocation of economic resources or to protect against harms incurred
when promisees rely on promises. And contract law has been thought to
establish intimate and loyal relations between the contracting parties or to
establish respectful coordination among parties who hold one another at
arm’s length.
Contract theory has thus developed a flexibility that mimics the variety
of contractual practice.
77
S.J. Burton, ‘Breach of contract and the common law duty to perform in good faith’,
Harvard Law Review 94 (1980), 369, 371. For cases see, e.g. Sessions, Inc. v. Morton, 491
F.2d 854, 857 (9th Cir. 1974); Ryder Truck Rental, Inc. v. Cent. Packing Co., 341 F.2d 321,
323–4 (10th Cir. 1965); Perkins v. Standard Oil Co., 383 P.2d 107, 111–12 (Or. 1963) (en
banc).
78
Burton, ‘Breach of contract and the common law duty to perform in good faith’, 373.

Contract: Daniel Markovits

Uploaded by

Copyright:

Available Formats

Contract: Daniel Markovits

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Contract: Daniel Markovits

Uploaded by

Copyright:

Available Formats

Contract 17

Contracts characteristically involve agreements, and contract law is – both

by the promisee in exchange for that promise’.4 It is therefore not enough,

did so through doctrinal arguments that implied fully consummated agree-

1 Understanding Contract Law as the Law of Agreements

The central place of agreements in the law makes it tempting to suppose

Thus, although contract law might refer to the morality of agreements

2 Allocative Theories of Contract

a Contract Law and Economic Efﬁciency

A comprehensive and thoroughgoing economic reconstruction of

reason, that the economic approach makes it ‘puzzling, to put it mildly,

b Contract Law and Harm

Some versions of such harm-based accounts of contract again have

practice require re-evaluating doctrinal categories that, even though they

Some reconstructive thinkers address their interpretive and theoretical

With respect to the second apparent distinction between contract and

reconstruction of contract law, in its full historical development, de-

then defends a broader principle of promissory ﬁdelity49 by reference to

methods of the broader moral theory that he calls ‘contractualism’:52 he

In this way, Scanlon’s theory seeks to reconstruct contract in terms of

3 Integrative Theories of Contract

A second class of theories seeks to understand contract not – or at least not

a Thick Integrative Theories

ﬁduciary-like loyalty – as between contracting parties. Insofar as current

view – that promises and contracts fundamentally re-orient the attitudes

b Thin Integrative Theories

identiﬁes an attitude toward contractual obligations: good faith supports the

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.