The Equitable Dimension of Contract

Article excerpt

I. INTRODUCTION

Contract theory has long been preoccupied with the common law. Contracts is taught in the first year of law school along with the other "common law subjects." The rise of the modern view of contracts as involving mutually dependent undertakings--as opposed to the earlier independent covenants model--was carried out by the common law courts. Contracts are usually enforced with damages, the classic common law remedy. From proto-realists like Holmes, through the realists and their successors in law and economics, theorists have emphasized the law and downplayed the special role of equity, as developed over the centuries by Chancery and building on a tradition of thought going back at least to aristotle. Equity is treated either with disdain as useless moralizing or with impatience as a mere proto-version of freewheeling contextualized inquiry that the law courts should be engaging in without artificial constraints of a separate "equity." Whether they have been antimoralists, formalists, realists, or consequentialists, commentators have been quite unified in their preference for contract law over equity.

This orientation to the common law, narrowly conceived, is even true of Charles Fried's landmark book Contract as Promise, (1) which did much to bring a moral approach to contracts back into the spotlight. In this Essay I will argue that Fried conceded too much to the conventional exclusive focus on the common law, but that once we recapture an older tradition of equity, the central role of morality in contracts comes more clearly into view. Equity is the missing dimension from contract theory.

This older tradition uses equity as a structured safety valve to deal with the opportunism arising from the simple structures of the common law. At the same time, equity as a safety valve can be justified on both deontological and consequentialist approaches to contract law. Thus, the Kantian and utilitarian views of contract can converge at the descriptive level. If so, then the disagreement between promise theorists like Fried and legal economists is a foundational rather than a descriptive one.

II. PROMISE AND THE MORALITY OF THE COMMON LAW

Fried's great innovation was to place contract on a moral footing. More specifically, as his title reflects, Fried argues for the centrality of the moral obligation of promise to the law of contract. To do so, he must explain why not all promises are enforced, and why the law does not allow an unconstrained and therefore "tyrannical" direct implementation of judicial views on morality through courts' remedial responses to contract.

Fried was not writing on a blank slate, even if it was one from which morality had largely been erased. Two currents made a morals-based theory of contract implausible at the time he wrote. On the one hand, starting with proto-realists like Holmes, some had grown skeptical of traditional and a priori moral notions in the law and sought to put them on a more objective footing. (2) on the other, the realists and their successors saw a need for a wider version of morality, to include social and class justice and distributive concerns, rather than corrective justice or personal morality. (3) Such expansive notions could then be part of the greater context to which realist courts could and should respond when deciding in common law mode. Interestingly, modern law and economics, which is often taken as a main counterpoint to Fried's Kantian theory of contract, partakes somewhat of both of these currents. In law and economics, notions of fairness are often (but not always) dismissed as fussy ex post thinking that gets in the way of more generalizable rules that can better guide ex ante behavior with proper incentives. (4) At the same time, much of traditional law and economics incorporates a version of utilitarianism and cost-benefit analysis that tends, despite some attention to administrative cost, to treat contextual information as presumptively relevant, although more recently, especially in contracts, a new formalism has emerged--to which i will return. …