1 This is a rough draft version of April, 2009. Do not quote without permission. Comments may be sent to mhevia@utdt.edu 2009 Martín Hevia. FULLER, FRIED AND THE NATURE OF CONTRACTUAL RIGHTS AND REMEDIES Martín Hevia I. Introduction In 1936, contract law scholarship experienced a major revolution: in their seminal Yale Law Journal piece, The Reliance Interest in Contract Damages, Lon L. Fuller and William R. Perdue, Jr. develop a classic argument against the understanding of contractual rights and duties developed by will theorists of contract that had prevailed in the 19 th century. That article has become a classic not only in contract scholarship but in general legal scholarship as well. 1 In that piece, Fuller and Perdue challenge the rationale for the common law standard rule of awarding expectation damages for the breach of a contract. For them, if private law is understood in terms of corrective justice, then it is not clear why the expectation remedy is taken to be a compensatory measure. In their view, the expectation measure has to be explained in terms of independent social goals that the remedy is supposed to serve. Thus, Morton Horwitz explains that Fuller and Perdue s famous 1936 article on contract damages demonstrated that awarding damages for breach of contract could not be deduced from the logic of contract or from the will of the parties, but was a state-imposed sanction determined by the choice among policies. 2 This account of contractual damages has been extremely influential, to the extent that it has shaped the way in which contract law courses in common law jurisdictions have been taught for a long time. 3 Those courses usually start with a distinction between the different types of contractual remedies that Fuller and Perdue advanced in that seminal article. Furthermore, although most contract law courses in common law jurisdictions are based on cases, against this norm, The Reliance Interest in Contract Damages is one of the only law journal articles that is always included in their bibliography. Fuller and Perdue were not alone. Their attack was contemporary to the legal realist critique of contract and property. 4 For instance, in 1930, a leading jurist of that time and an influential contract theorist, Arthur Corbin, had argued that it is irrelevant whether judges subsume the rights of the parties to an agreement within contractual Escuela de Derecho, Universidad Torcuato Di Tella; SJD, Faculty of Law, University of Toronto. This paper is based on Chapter V of my doctoral dissertation, Separate Persons Acting Together A Theory of Contract Law. 1 (1936) 46 Yale Law Journal 52, 373. 2 Morton J. Horwitz, The History of the Public/Private Distinction (1982) 130 University of Pennsylvania Law Review 1423. 3 For this point, see Richard Craswell, Against Fuller and Perdue (2000) 67 University of Chicago Law Review 99. In that essay, Craswell discusses their understanding of contractual remedies, though he does so on grounds that are different from those I use in this paper. Craswell wants to show that their account of contractual remedies is no longer useful to understand the remedies that courts are currently awarding in cases of breach of contract. 4 For an excellent reconstruction of the realist critique, see Peer Zumbansen, The Law of Society: Governance Through Contract [forthcoming in the Indiana Journal of Global Legal Studies].
2 rights, as rights that arise out of the reliance by the promisee on the promisor s actions, or whatever. For him, the way in which rights are classified is completely irrelevant. What really matters, so Corbin would say, is that in the end, the plaintiff has a right as against the defendant, that is, a right that the promisee can enforce in the courts. 5 Corbin seems to be expressing skepticism about the exercise of classifying obligations. This skepticism was not unusual. In a similar vein, years before, in The Common Law, Oliver Wendell Holmes had claimed that the life of the law has not been logic: it has been experience. 6 Decades after, the realists were followed by scholars like Grant Gilmore and Patrick Atiyah, who became famous for their attempt to show that the distinction between contract and tort is absurd. 7 After years of attack, at the very beginning of the 1980s, contract was revitalized by Charles Fried s Contract as Promise 8. Just as the piece by Fuller and Perdue had changed contract theory in the 30s, arguably, the landscape of contract scholarship was changed by Fried s contribution. Until today, all contract scholars, even those who approach contracts from a Law and Economics perspective, feel compelled to address Fried s arguments. Fried s main claim is that contracts are like promises. Thus, breaking a contract is like breaking a promise: when the promisor breaches, he is violating the autonomy of the promisee and treating her as a mere means to the promisor s aims. Perhaps with the economic analysis of contract law 9, I take The Reliance Interest 5 Corbin wrote that [t]he definition and classification of such fundamental terms as right and duty depend upon results reached, and not upon formalities of the procedure used in reaching them. See Arthur L. Corbin, Contracts for the Benefit of Third Persons (1930) 46 Law Quarterly Review 12, 16. 6 O. W. Holmes, The Common Law [1881] (Boston: Little Brown, 1963) 1. 7 In his The Death of Contract, a work that has now become a classic in the literature about contract, Grant Gilmore comes out very explicitly, as the title of his book suggests, against the contract-tort dichotomy, which he regards as an absurd dichotomy that started in the 19 th century: Speaking descriptively, we might say that what is happening is that contract is being reabsorbed into the mainstream of tort. Until the general theory of contract was hurriedly run up late in the nineteenth century, tort had always been our residual category of civil liability. As the contract rules dissolve, it is becoming so again. It should be pointed out that the theory of tort into which contract is being reabsorbed is itself a much more expansive theory of liability than was the theory of tort from which contract was artificially separated a hundred years ago. See Grant Gilmore, The Death of Contract (Columbus: Ohio State Press, 1974) 87, cited in Peter Birks, Definition and Division: A Reflection on Institutes 3.13, in Peter Birks (ed), The Classification of Obligations (Oxford: Oxford University Press, 1997) 1, 22. On its part, Patrick Atiyah s The Rise and Fall of Freedom of Contract (Oxford: Oxford University Press, 1979) argues for a redesign of the map in a way that would include benefit-based and reliance-based obligations. Atiyah argues that only in the nineteenth century did the conceptual apparatus that distinguishes between contract and tort came up: What I do wish to discuss is the conceptual framework of contract and its place in the law of obligations as a whole. I want to suggest that, despite the increasing attacks on freedom of contract, and the increasing divide between Contract and Tort, the conceptual apparatus which still dominates legal thinking on these issues is the apparatus of the nineteenth century. It goes, indeed, far beyond the law itself. Our very processes of thought, our language in political, moral, or philosophical debate, is still dominated by this nineteenth century heritage, to an extent which I venture to suggest, is rarely appreciated. I want to suggest that this conceptual apparatus is not based on any objective truths, it does not derive from any eternal verities. See Atiyah, Essays on Contract (Oxford: Oxford University Press, 1986) 10, 11 [Essays]. 8 Charles Fried, Contract As Promise A Theory of Contractual Obligation (Cambridge, Mass.: Harvard University Press, 1981). 9 For a classic account, see Richard Posner, Economic Analysys of Law 7 th ed. (New York: Aspen Law & Business, 2007). For a more recent account, see Louis Kaplow and Steven Shavell, Fairness Versus Welfare (Cambridge, Mass.: Harvard University Press, 2002).
3 in Contract Damages and Contract as Promise to be two of the main contributions to contract theory in the last hundred years. My aim in this paper is to reflect upon them critically. I want to suggest that, as theories of contract law, both fail because they cannot account for a fundamental feature of contractual relations. I will argue that, although for different reasons, neither Fuller and Perdue nor Fried can properly account for the transactional nature of contract rights and remedies. The paper is organized as follows. First, I will concentrate in Fuller and Perdue s idea that from the perspective of corrective justice the expectation remedy cannot be justified. Against that view, I ll argue that, if a contract gives the plaintiff an entitlement against the defendant, then the expectation remedy makes sense. Section III focuses on my critique to Contract As Promise. In particular, I discuss Fried's idea that contracts are a special case of promises. I argue that his account cannot explain the sense in which contractual rights and duties are personal and correlative. Finally, Section IV offers a brief conclusion. II. AGAINST FULLER AND PERDUE 10 Fuller and Perdue famously distinguished between three different types of remedies for breach of contract, each of which has the purpose of protecting a particular interest. 11 1. If the plaintiff has in reliance on a promise made by the defendant conferred some value to the latter, who fails to perform his or her promise, the law prevents the unjust enrichment of the defendant by giving back to the plaintiff what he gave to the defendant. In this case, the law protects the restitution interest of the defendant. 2. If in reliance on a promise made by the defendant, the plaintiff has changed his position, and the defendant fails to perform his promise, the law protects the reliance interest of the defendant by putting him in a position that is as good as the position in which he was before the defendant made his or her promise. 3. If the defendant fails to perform a promise that he or she has made to the plaintiff, and the law does not insist on the reliance which the plaintiff incurred nor on the enrichment of the defendant, the law protects the expectation interest of the defendant by putting the plaintiff in the position he would have occupied had the promise been performed. This can be done in two different ways. On the one hand, the law compels the defendant to deliver the specific performance of what was promised. On the other hand, the law can compel the defendant to pay to the plaintiff the money value of what the former promised. This last measure is usually called expectation damages. After presenting these different remedies, Fuller and Perdue argue that, if, following Aristotle, we claim that the role of corrective justice is to maintain an equilibrium of goods among the members of society, it makes sense for the law to award 10 I borrow the title from this section from Craswell, n 2 above. 11 Fuller & Perdue, n 1 above, 53-55.
4 compensatory damages to heal a disturbed status quo. 12 If that s the case, so Fuller and Perdue say, then both the restitution and the reliance interests present a much more pressing case for protection than the expectation interest. Both the reliance and restitution involve a loss for the plaintiff. In addition, the restitution interest also involves a correlative gain by the defendant. In both cases the defendant relies on a promise that is not performed and, thus, he or she loses. Consequently, Fuller and Perdue think that the law ought to put him or her in the position in which he or she would have been had the promise been fulfilled. 13 For Fuller and Perdue, in a corrective justice framework, however, expectation damages make no sense: they re a queer kind of compensation. 14 They ask: Where s the loss that would justify awarding expectation damages? Expectation damages protect the plaintiff s expectancy of something he never had, rather than the loss of something he already owned, which, for Fuller and Perdue, seems to be the case with both the restitution and reliance interests. Thus, Fuller and Perdue conclude that, because expectation damages are not awarded to maintain the existing equilibrium of goods, they do not belong to the domain of corrective justice, but to that of distributive justice: [i]n passing from compensation for change of position to compensation for loss of expectancy we pass from the realm of corrective justice to that of distributive justice. The law no longer seeks merely to heal a disturbed status quo, but to bring into being a new situation. It ceases to act defensively or restoratively, and assumes a more active role. 15 For Fuller and Perdue, then, because the standard rule of expectation damages cannot be explained in terms of corrective justice, it has to be explained in a different way: for them, it has to be explained in terms of independent social goals that the remedy is supposed to serve. Weinrib points out that Patrick Atiyah makes a similar point about the expectation measure. 16 For Atiyah, the expectation measure only makes sense if it is assumed that the plaintiff already owns something. Atiyah explains his concern in the following way: The truth is, it seems to me, that the enforcement of contracts is only justifiable on the assumption that we have already distributed a property-like entitlement to the promisee: the promisee is entitled to the benefit of the promise, and the promisor is not entitled to change his mind. Without that initial distribution of entitlements, there is no case for enforcing contracts. But although this entitlement is like property in the purely definitional sense that allowing a promisee to hold a promisor to his 12 Ibid 56. 13 In fact, they claim that the restitution interest presents the strongest case for relief since it not only involves a loss for the plaintiff, but the defendant also has to give back what he has appropriated illegitimately. Ibid 14 Ibid 53. 15 Ibid 56-57. 16 Ernest Weinrib, The Juridical Classification of Obligations in Peter Birks (ed), The Classification of Obligations (Oxford: Oxford University Press, 1997) 37, 52.
5 promises analytically requires us to presuppose that the promise has this entitlement, it differs from more conventional forms of property in that there is no way in which liberal theory can justify this distribution of entitlements by invoking Lockean Natural Law, or indeed any other moral principle. It seems, indeed, impossible to explain why the promise has this entitlement except by begging the very questions at issue. 17 Let me now explain why I think that these arguments are misleading. First, against what Fuller and Perdue claim, the aim of corrective justice is not to maintain the existing equilibrium of goods but to rectify wrongs. In order to make this point, it is useful to distinguish between corrective and distributive justice. The most famous and earliest formulation of both these ideas was provided by Aristotle in the Nichomachean Ethics. Most scholars that discussed the topic after him start their discussion by making some kind of reference to the Aristotelian formulation. In Book V of that book, Aristotle introduced the notions of distributive justice and corrective justice. He presented them as two contrasting forms of justice. 18 In a nutshell, in distributive justice, something is distributed to persons on the basis of a particular criterion that the distribution is intended to realize: every citizen receives a portion of whatever there is to be divided according to the chosen criterion of distribution. 19 In contrast, corrective justice deals with interpersonal interactions. 20 It looks back to a certain interaction between two parties and gives reasons for restoring the parties relative positions to what they were before, or would have been but for, that specific interaction. 21 What that means is that what rightfully belongs to one party is wrongly possessed by another party and must therefore be shifted back to its rightful owner. 22 Corrective justice protects each person s entitlements as against each other (private) person, but says nothing about the distributive justice of any of those entitlements: whether an entitlement is legitimate or not is not a question of form, but of substantive justice; therefore, Aristotle was not concerned about such a question in his formulation of corrective justice. But corrective justice aims neither at protecting entitlements qua distributive shares nor at preserving a certain distributive scheme. Corrective justice is concerned only with the reparation of wrongs and with rectifying wrongful gains. For Aristotle, corrective justice entails an arithmetical equality (as opposed to 17 See Atiyah, Essays, n 4 above, 125. Atiyah is discussing executory contracts. 18 John Gardner, The Purity and Priority of Private Law (1996) 46 University of Toronto Law Journal. 459, 468. As I think Gardner correctly explains, Aristotle s point about justice is often misunderstood. Aristotelian principles of formal justice are often contrasted with principles of substantive justice as if he had a preference for formal justice over substantive justice. But Aristotle was only analyzing the different forms that justice can adopt (distributive, corrective, etc.) As Gardner explains, in fact, [n]o principle of justice is or could be identical with its form, since its form is by definition what is left of it once its substance is removed. Thus the idea of a principle of formal justice is unintelligible and cannot be contrasted with any other kind of principle of justice. Ibid 19 Peter Benson, The Basis of Corrective Justice and Its Relation to Distributive Justice (1992) 77 Iowa Law Review 515, 535. 20 Aristotle and other scholars that have discussed corrective justice used the term transaction to make reference to interpersonal interactions. 21 Gardner, n 18 above, 467. 22 See Ernest Weinrib, The Idea of Private Law (Cambridge: Harvard University Press, 1995), 62. The emphasis in wrongly is mine.
6 the geometrical equality of distributive justice). As Aristotle explained, in corrective justice [I]t does not matter if a decent person has taken from a base person, or a base person from a decent person Rather, the law looks only at differences in harm, and treats the people involved as equals, when one does injustice while the other suffers it, and one has done the harm while the other has suffered it. 23 In corrective justice, the parties to an interaction are taken to be equal in terms of a form of equality that does not refer to any criterion based on merit, need or whatever distributive criterion. In this view, corrective justice is not the same as distributive justice. The purpose of corrective justice is to protect entitlements because interference with them entails wronging the entitlement-holder. 24 There are different ways in which people can interact with one another. One of the ways in which they can do so is consensually, as they do when they conclude contracts. 25 From the perspective of corrective justice, a contract arises because the parties voluntarily assume a correlative change in their position. The contract creates legitimate entitlements for both of the parties, rather than creating rights and duties on the basis of entitlements the parties already have. A contract gives rise to a regime of correlative right and duty. Within the distributive and corrective justice framework, contractual interactions may only give rise to corrective injustices, but not to distributive injustices. The principles of contract law refer only to the interaction between the parties to the contract, and not to distributive considerations. Although the breach of a contract can lead to a distributive injustice, so can the completion of a contract. That is, if one says that distributive justice is vulnerable to transactions between private parties, it is vulnerable both to contracts that are honoured and those that are breached. But that is just to say that distributive and corrective justice are different. Let me now address Fuller and Perdue s idea that expectation damages are a distributive measure and explain why it is mistaken. Since Roman times, the law has distinguished between the formation and performance of a contract. At the time of formation, the promise acquires a personal right against the promisor. This is the transactional nature of contractual rights. The content of the promisee s right is the performance by the promisor. The promisee acquires a right in personam as against the promisor. That right entails a correlative duty on the part of the promisor: he or she has to render the promised performance to the promisee. In this understanding of contractual rights, then, if the promisor breaches his or her duty, the promisee is entitled to demand 23 Aristotle, Nichomachean Ethics, 1132a2-1132a6. 24 See Stephen Perry, On the Relationship between Corrective and Distributive Justice in Jeremy Horder (ed), Oxford Essays in Jurisprudence Fourth Series (Oxford: Oxford University Press, 2000) 237. 25 In fact, interpersonal relations may take three different forms. Besides consensual interactions through contract, there are also involuntary interactions, with which tort law deals, and cases of one person acting on behalf of another. An example of this last category is the relationship between parents and their children who obviously are not asked to consent to being brought into the world. Because of that, and as in other relationships based on trust, when they make decisions regarding their children, parents may only act to benefit them. This point was made by Kant in his Doctrine of Right.
7 something that already belongs to him or her. This explains why in the common law the traditional rule for breach of contract is the award of expectation damages. When the promisor breaches his or her duty, the promisee can demand to be put in the same position he or she would have enjoyed had the promisor discharged his or her duty. In this view, remedies for breach are compensatory, that is, they compensate promisees for something that they are entitled to have, to wit, the performance by the promisor. 26 In other words, what the promisee acquires through contract is not a right to a thing but a right against the specific person obligated to perform the requisite act. 27 The obligation to perform a contract is an obligation to give the plaintiff something to which he or she has a right, to wit, the performance by the promisor as specified in the terms of the agreement between the promisor and promisee. Because of this, if the promisor breaches, the promisee is entitled to be put into a position that is as good as the position in which he or she would have been had the contract been performed When contracts are understood in this way, the objection of Fuller and Perdue loses all of its appeal, and the same applies to Atiyah s concern. 28 As I mentioned earlier, Fuller and Perdue also point out that the award of expectation damages could be explained by making reference to other social goals that the remedy may serve. This is inconsistent with the idea that contract rules are an expression of corrective justice. As I explained earlier, corrective justice offers moral reasons for a wrongdoer as opposed to any other - to make reparation or restitution to the person she wronged because and only because she wronged her. In corrective justice, the remedies for breach of contract are based on the particular type of interaction between promisor and promisee. The breach of the promisor s duty interferes with the promisee s right. The nature of the right that has been violated and its unfulfilled correlative duty determines what the remedy should be. When a defendant does something that implies violating the plaintiff s right, the plaintiff suffers an injustice at the hand of the defendant. As a consequence, the law requires the defendant to restore the plaintiff s right. The remedy in corrective justice simply undoes the injustice between the 26 As Ripstein explains, [if] I fail to perform as required, I wrong you in pretty much the same way as I would have wronged you had I given you something, either as a gift or in exchange for something else, and then taken it back. In a contract, I have given you that thing, as a matter of right, and so if I fail to deliver, I wrong you in the way I would if I took it back. See Ripstein, Kant on Law and Justice [forthcoming]. 27 See Weinrib, n 22 above 67. 28 I do not mean to say that other points that Fuller made about contract elsewhere are also mistaken. In fact, in The Role of Contract in the Ordering Processes of Society Generally, Fuller makes a very interesting point when he describes contract as a form of social ordering. There, Fuller showed the centrality of contracts for the way in which people construct their relationships with one another. I am attracted to that view since elsewhere I argue for an understanding of contract that emphasizes the role and the importance of private ordering without neglecting the role of distributive justice and, thus, of some instances of public law. See Lon L. Fuller, The Role of Contract in the Ordering Processes of Society Generally in Kenneth Winston (ed), The Principles of Social Order: Selected Essays of Lon L. Fuller (Durham: Duke University Press, 1983) and my Separate Persons Acting Together A Theory of Contract Law (SJD Thesis at the University of Toronto).
8 parties. 29 Corrective justice requires the defendant to put the plaintiff in the position that the latter would have enjoyed had the contract been performed, but no more than that. As I explained earlier, at the time of the formation of the contract, the promisee acquires a right to the promisor's performance. So, the award of damages gives the promisee that to which she had a right, to wit, the promisor's performance. Depending on the nature of the contract, sometimes the promisor will be asked to perform and, so, the contractual remedy will be specific performance. In other cases, the remedy will be expectation damages. In both scenarios, the promisee received something that she already has a right to. Against what Fuller and Perdue say, this is not about distributive justice at all; instead, it is what a contract is all about. Take, for example, a debt. Suppose that A lends $100 to B and that, then, B has a duty to pay A his money back. Making B pay back is not a requirement of distributive justice; it's just what a loan is all about: A lends money or goods to B who, in return, agrees to give B money. In contrast to the corrective justice account of contractual remedies, instrumental conceptions of contractual remedies justify different contractual remedies by pointing to different social goals. There could be many examples of those goals: efficiency, the deterrence of future violation of the rights of promises, distributive justice, etc. Furthermore, the structure of corrective justice is such that instrumental conceptions of contractual remedies are precluded. But, even if those were the goals we choose to pursue, even if they were valuable goals, as Weinrib points out, the problem is that [q]uestions that attend either to the deterrence of defendants or to the protection of plaintiffs focus on one or the other of the parties and thus fail to capture the correlativity of their situations. Instead, corrective justice requires only that one ask what remedy would undo the injustice to the extent that the law can. 30 Fuller and Perdue's account of contract is one that focuses only on one of the parties. But not only that: their account overlooks the nature of the relationship between the parties to a contract. Fuller and Perdue show that both the reliance and the restitutionary remedy are relational. However, they fail to show the sense in which expectation damages are relational as well. And that, in turn, takes them to the mistaken idea that expectation damages are about distributive justice. III. AGAINST FRIED Let me now consider Charles Fried s approach in his Contract as Promise. 31 Fried starts from the idea of autonomy. For him, autonomous individuals have a capacity to develop their own conception of the good. In order to exercise their autonomy, people can make use of external objects, but not of other persons. This is because, following Kant, Fried distinguishes between external objects and persons. Persons share the power 29 Weinrib explains that a similar notion appears in what German legal textbooks call Rechtsfortsetzungsgedanke, the idea that the injured right lives on in a claim for damages. See Ernest J. Weinrib, Punishment and Disgorgement as Contract Remedies (2003) 78 Chicago-Kent Law Review 55, n. 12. 30 Ibid 31 Fried, n 8 above.
9 of self-determination. Fried says that, if we were to use one another, we would be treating each other as mere objects and, then, we would be poisoning the source of our capacity for self-determination. 32 Now, as Fried explains, even though it is morally wrong to use others as mere means to pursue our ends, morality itself must be enlisted to assure not only that you respect me and mine but that you actively serve my purposes. 33 Fried s point is that to the extent that people respect each other s autonomy, there s nothing wrong in using others to serve our purposes. Furthermore, using one another to serve our purposes expands greatly the scope of our tools to pursue our plans. Fried then argues that [w]hen my confidence in your assistance derives from the conviction that you will do what is right (not just what is prudent), then I trust you, and trust becomes a powerful tool for our working our mutual wills in the world. 34 In Fried s view, the device that gives trust its sharpest, most palpable form is the practice of promising. In other words, promising allows us to do things together. It should be clear that, even though Fried s account does not deny that the institution of promise is a useful device to do things together, his account of individual obligation is not based on the utility that we can derive from it: An individual is bound to keep his promises because he has intentionally invoked a convention whose function is to give grounds moral grounds - for another to expect the promised performance. To renege is to abuse a confidence he was free to invite or not, and which he intentionally did invite. 35 Then, he summarizes his point by saying There exists a convention that defines the practice of promising and its entailments. This convention provides a way that a person may create expectations in others. By virtue of the basic Kantian principles of trust and respect, it is wrong to invoke that convention in order to make a promise, and then to break it. 36 In Fried s view, contractual obligations are a special case of promissory obligations: contracts must be kept because promises must be kept. 37 In this view, clearly, the binding nature of contract has nothing to do with social policies such as wealth maximization and economic efficiency. 38 Now, because we are free, we also can and should take responsibility not only for what we achieve but for our failures and mistakes as well. 39 This is why Fried famously argued that 32 Ibid 8. 33 Ibid. 34 Ibid. 35 Ibid, 16. 36 Ibid 17 [emphasis omitted]. 37 Ibid. 38 See Ernest Weinrib, The Idea of Private Law (Cambridge, Mass.: Harvard University Press, 1995) 51. 39 Fried, n 8 above, 8.
10 [i]f I make a promise to you, I should do as promised; and if I fail to keep my promise, it is fair that I should be made to hand over the equivalent of the promised performance. In contract doctrine this proposition appears as the expectation measure of damages for breach. The expectation standard gives the victim of a breach no more or less than he would have had there been no breach in other words, he gets the benefits of his bargain. 40 For Fried, then, the binding force of promises and, therefore, of contracts - entails that the appropriate contractual remedy is the expectation remedy. Consider now Fried's analysis of the reliance and restitution measures of damage. In his view, those measures express the idea that if a person has relied on a promise and been hurt, that hurt must be made good; and if a contract-breaker has obtained goods or services, he must be made to pay a fair (just?) price for them. For Fried, however, the reliance on a promise cannot explain the force of a promise: [t]here is reliance because a promise is binding, and not the other way around. 41 He explains that, sometimes, the value of the reliance in which the promisee has incurred is inferior to that of the performance promised. That means that, if the reliance remedy were adopted, the promisor would not be allowed to perform the obligation that he had chosen to undertake when he promised to do something for the promisee. 42 In other words, in Fried s view, if the reliance measure were adopted, we would not be taking the promisor seriously because doing so requires taking seriously [his] capacity to determine [his] own values. Fried accepts that, sometimes, the expectations of a promisee cannot be properly measured. It is in those cases where the reliance measure can be helpful as a surrogate. 43 But no more than that. He illustrates this point by making reference to Security Stove & Mfg. Co. v. American Railway Express Co. 44 As we know, in that case, because it was not possible to determine how much the manufacturer would have made had he exhibited his product, the court awarded reliance damages. 45 Fried's point is that promisors should be held to their promises because, 40 Ibid 17. 41 Ibid 19. 42 Ibid. 43 Ibid 22. 44 227 Mo. App. 175, 51 S.W. 2D 572 (1932). In that case, a stove manufacturer expected a new kind of stove that was to be shipped to a trade convention. The manufacturer expected to get new buyers by showing this new product. The express company did not deliver all the exhibit in time. The stove manufacturer had invested in the convention; for instance, the president of the company and his workmen had travelled to attend the convention. But they had nothing to show there. Because of the failure of the express company to deliver the good, the stove manufacturer lost the opportunity to try and get new customers. Of course, it was impossible to know what the stove manufacturer would have got from the convention. But it was certain that the manufacturer would have put the new product to a certain use, that is, to attract new customers from whom they would potentially get new revenues. In that case, then, even though the stove manufacturer company couldn't be certain as to how much profit it would have made from showing the new product at the convention, the expected income is part of their means as well. 45 Fried, n 8 above, 21-22. Note that Fried does not discuss whether, in this case, the plaintiff should be awarded consequential damages: he just assumes that that should be the case. As I explain elsewhere, in order to determine whether consequential damages shall be awarded, it's necessary to determine whether the uses that the plaintiff claims that he would have put his means to a use that should have been reasonably contemplated by the parties at the time of the formation in light of the particular circumstances of their interaction. See my Separate Persons Acting Together.
11 otherwise, their capacity as free and rational individuals to choose their own good and to take responsibility for what they choose would not be respected. If that were the case, so Fried says, promisors would be treated as infants who do not understand the consequences of their actions. 46 Summing up, in Fried s own words, [t]he freedom to bind oneself contractually to a future disposition is an important and striking example of this freedom [the freedom to dispose of one s talents, labor, and property as one sees fit] because in a promise one is taking responsibility not only for one s present self but for one s future self. 47 In Fried s view, then, this is, in essence, what the institution of contract law is all about. 48 Before starting to criticize Fried's account, let me say why it's prima facie attractive: Fried takes the idea of personal autonomy very seriously: in his view, contracts are devices to pursue one s conception of the good. This is a very important starting point. Now, in spite of this, for reasons that have been pointed out by different commentators, his account of contractual obligation is unsatisfactory. First, as Michael Trebilcock points out, Fried resorts to some rather vague social conventions to define the practice of promising and its entailments. 49 For Trebilcock, this is problematic for at least three different reasons. On the one hand, by making reference to social conventions, against what Fried says, his theory of contracts is not based on the idea of autonomy, but on values that are external to the parties and that determine when a contract should be enforced. On the other hand, Trebilcock asks how courts are supposed to determine what those social conventions are. Finally, Trebilcock argues that even if courts were able to clearly identify those social conventions, as Buckley and Craswell argue, those social conventions may be immoral or unfair social conventions: the fact that there is a social convention for something does not give a reason to follow it; what matters is whether the convention is a good one. In defense of Fried, against what Trebilcock says, to be fair the fact that Fried appeals to social conventions is not a problem in and of itself. We appeal to social conventions in more than one area of law and we don t see that appeal as necessarily problematic. For instance, in the law of torts, in figuring out whether someone was careful enough, presumably, we appeal to a social convention to give content to the idea of reasonable care. In the same way, it could be necessary to appeal to social conventions 46 Ibid 21. Here, I think that it would make sense to ask the following question: assuming that a person is perfectly rational and knows very well what she thinks is best for her, would she be treated as an infant if she were allowed to breach her obligations? The answer is positive if we think, as Fried seems to do, that the only thing that matters is that, if she's autonomous, such person should understand the consequences of the obligations she undertakes. But, if other things are also relevant, say, her interest in undertaking other duties that are not compatible with those that she undertook before, would she be treated as an infant if she were allowed to breach her previous duty for free? 47 Ibid. 48 Ibid. 49 Michael Trebilcock, The Limits of Freedom of Contract (Cambridge, Mass.: Harvard University Press, 1993) 165.
12 in order to determine whether someone has made a promise, what the content of that promise is, and so on. Furthermore, in interpreting legal rules, we re always already in a specific situation where we re interacting with one another in the midst of several presuppositions. In this sense, social conventions are relevant for contract law as well. The real issue is that the appeal to promises is ambiguous between, on the one hand, the claim that, in interpreting legal rules, we re always in a situation where several presuppositions are in place and, on the other hand, the claim that promises create binding legal obligations. Against what Trebilcock says, the first claim is not necessarily problematic because, as I mentioned, we re constantly appealing to social conventions to understand each other - to give an easy example, language is an example of a social convention. In contrast, the second claim is problematic because the fact that there is a social convention that promises are to be respected does not suffice to justify the claim that promises create binding legal obligations. Second, against what Fried explicitly says, Dori Kimel argues that the gist of Fried s thesis is his invocation of trust, and not the existence of a social convention of promising. 50 Recall that Fried argues that the convention of promising allows a person to create expectations on others. And, because individuals are free to invoke or not to invoke that convention, if they do invoke it, they have to take responsibility in case they fail to fulfill the expectations that they create on others. 51 According to Kimel's reading, Fried's argument is that the value of promising depends on the fact that it enables us to make use of the remarkable tool of trust. Against this statement, Kimel rightly suggests that whether one provides moral grounds for another person to expect the performance of a promise does not depend on the invocation of a social practice; in fact, in the absence of a social convention, one can invoke trust in a relationship with another with the same normative implications. 52 In this sense, then, the social practice thesis of contract does not make much sense. Although I think that those arguments are fatal to Fried's position, I now turn to what I take to be the two most powerful objections against him. First, there is no necessary correlation between all moral and all legal obligations; so, for example, if I promise that I will read your paper for tomorrow and then I do not do so, hardly anyone would argue that, in order to make me perform, the coercive machinery of the state should be used. 53 Something else, then, is needed in order to justify the legal enforcement of a moral obligation. The problem is that Fried does not provide us with that. Second, if it's not the case that what makes a promise legally binding is the invocation of a social convention, could it be the case that Fried thinks that promises have legally binding effects because of a pre-conventional idea of holding the promisor to his choice? The problem with that interpretation of Fried's argument is that, as Weinrib explains, even if, for the sake of the argument, we accept that moral duties are or should be legally binding - and, thus, that all promises are or should be legally binding-, much more has to be shown in order to make the case for the use of the device of contract law: 50 Dori Kimel, From Promise to Contract towards a liberal theory of contract (Oxford: Hart Publishing, 2003) 11. 51 Fried, n 8 above, 17. 52 Kimel, n 50 above, 11-12. 53 I borrow the example from Eduardo Rivera Lopez, Promises, Expectations, and Rights (2006) 81 Chicago Kent Law Review 21.
13 [t]he wrongfulness of breaking one s promises can receive legal expression in other ways besides the enforceability of contracts through the application of criminal sanctions, for instance, or of private law remedies in tort or restitution. 54 As I explained earlier, contracts have a distinctive structure. A contract gives rise to a regime of correlative right and duty. This is the transactional nature of contractual rights. The problem with Fried's account of contract law is that it does not explain this particular nature of contractual interactions. As Peter Benson explains, The argument does not establish that the promisee has a right against the promisor to the promised performance: holding the promisor to his or her conception of the good can be intelligibly viewed as requiring merely internal self-consistency on his or her part and not as vindicating another s right that is correlative to the promisor s duty in the external relation between the parties. In other words, the argument does not go so far as to explain a duty that is owed to another as a matter of justice, in contrast to a duty of fidelity or self-consistency that, though it may relate to another, is required only as a part of virtue. 55 Contractual rights are rights in personam: they give rise to a correlative duty in the person who becomes directly obliged by the agreement. In a contract, it is not only that the promisor should perform: what's distinctive is that he or she should perform for a particular promisee. 56 Fried is right to say that, whenever a promisor does not perform, he is using the promisee merely as a means to his ends: the promisor invoked the social convention of trust and, now that it's inconvenient for him to live up to his promise, he decides not to carry on with it without taking into account how doing so may affect the promisee. I agree. However, Fried cannot explain the sense in which, by failing to perform, the promisor is depriving the promisee of one of her means, that is, of the promisor's performance. This is because the mere fact that I promise you to do something does not make you the owner of anything and, thus, breaking my promise does not deprive you of anything that is yours. You may have relied on my promise and, thus, I may be responsible for inducing you to do so, but no more than that. Another objection to Fried is the following. If the promisee does not acquire anything by the promisor's promise, why is it that the promisee has a right to get expectation damages? As I indicated in my discussion of Fuller and Perdue, their objection against the expectation measure was, precisely, that it gives the promisee the value of something that does not yet belong to her. They claimed that, by using the expectation remedy, we are passing from the domain of corrective to that of distributive justice because the expectation remedy awards to the promisee the value of something 54 See Weinrib, n 38 above, 51. 55 Peter Benson, Abstract Right and the Possibility of a Non-distributive Conception of Contract: Hegel and Contemporary Contract Theory (1989) 10 Cardozo Law Review 1077, 1116, cited in Weinrib, n 38 above, 51-52. 56 Ibid 52.
14 that he does not own but that he should somehow get. In Fried's account of contract, it's also the case that the promisor does not transfer anything to the promisee. If that's the case, then, Fuller's objection to the expectation remedy also applies to Fried. In other words, in Fried's framework, the award of expectation damages would be required by distributive justice, and not by corrective justice. And the reason why this is so is that Fried cannot account for the fact that, in a contract, at the time of formation, the promisee acquires something as against the promisor. That's why, whenever the promisor breaches the agreement, he has to give back to the promisee what already belonged to her. 57 To sum up, Charles Fried's account of contract law is, prima facie, very attractive in that it takes seriously the idea that individuals should be free to pursue their projects by exchanging goods and providing services for others. The problem is that Fried cannot explain the sense in which contractual rights are personal rights or even rights at all. IV. Conclusion I started this paper by saying that any account of contract law needs to explain the transactional nature of contractual interactions and all of its implications. In light of this, I explained why two very prominent alternative accounts of contract law fail to do so. Now, whether other competing and historically less prominent accounts in the last 100 years say, an Aristotelian or a Rawlsian account - are successful as theories of contract law is an open question that deserves further explanation. 58 57 There is another possible explanation for this point. For Fried, the reason why the promisor should pay expectation damages is that she should take responsibility for her promises - or, otherwise, she'd be treated as an infant. Understood in this way, the promisor's duty is not necessarily grounded on reasons of distributive justice - that is, on reasons that have to do with the distribution of burdens and benefits in society. Now, against Fried, if I'm right about saying that through a contract the promisee acquires something from the promisor, then Fried's explanation of the expectation measure is still unsatisfactory: he doesn't explain why the promisee should get something that she does not yet own. In this view, in some sense, the promisee would be receiving something for free or, perhaps, as compensation for her reliance. I owe this point to Diego Papayannis. 58 In Separate Persons Acting Together, I develop a Rawlsian account of a contract that I think takes those central features of contracts very seriously. See, also, Peter Benson, The Unity of Private Law in Peter Benson (ed), The Theory of Contract Law -New Essays (Cambridge, UK: Cambridge University Press, 2001) 128. For an Aristotelian account, see James Gordley, Contract Law in the Aristotelian Tradition in Benson, ibid, 265. For an argument that the distributive account of contracts also fails, see my Kronman on Contract Law and Distributive Justice (2007) 23 Journal of Contract Law 105.