Promissory Autonomy, Imperfect Courts, and the Immorality of the Expectation Damages Default

Article excerpt

INTRODUCTION

To a generation of law students, lawyers, and legal scholars, Contract as Promise (1) has provided a liberal theory of contract that explains fundamental features of contract law and provides a normative foundation for evaluating the legal doctrine. as is well known by now, the promissory theory of contracts justifies the legal enforcement of contracts in terms of respect for individual freedom and autonomy to make binding commitments. The touchstone of contractual analysis from this perspective is the intent of the promisor. Together with other moral theories of promising, this perspective on contract law has generated voluminous scholarship. Thirty years after the book's publication, I am unlikely to shed new light on the merits of the perspective. rather, I take the occasion of this symposium as an opportunity to explore how economic analysis since the book's publication might elaborate its thesis.

Significant insights have been made in the theory of incomplete contracts, particularly with respect to the existence and consequences of imperfect information. one might speculate as to how a hypothetical new edition of Contract as Promise, published today, might address the effect of imperfect information on the making and enforcement of promises. Working within or at least consistently with Professor Fried's perspective, this essay revisits the justification for expectation (compensatory) damages in light of two observations: (a) judicial determinations are costly and prone to error, and (b) parties have various motivations for promising beyond promoting reliance and collaboration (notably, credit and insurance). In light of this heterogeneity, I suggest that fully compensatory expectation damages may be preferred by no more than a plurality of contracting parties. in addition, the legitimacy given to expectation damages under various moral theories, such as the promissory principle, as well as the instrumental doctrine of efficient breach, in fact increases the cost of opting out and undermines the promissory autonomy they are thought to vindicate. In passing, I also take issue with the categorical distinction that Professor Fried and other moral theorists draw between contractual conditions and contract remedies, particularly damages. Damages, whether judicially measured or liquidated by contract, should be viewed as substitutes for conditions. Thus, if the parties are morally free to condition their promises, they should also be free to set their own level of damages or to let the court impose them by default.

I. INTERPRETATION AND INTERPOLATION

To create a contract, the promisor invites a court to enforce her promise (or some part of it). In the event of a subsequent dispute between promisor and promisee, the court must determine (a) whether a legally binding promise has been made, and (b) the content of the promise. The promissory language of the promisor is the basis for both decisions, (2) but the language may be vague, ambiguous, or incomplete. Professor Fried distinguishes between two tasks facing the court: interpretation (determining what the promisor had in mind) and interpolation (filling the gap left by the absence of intention). (3)

in interpreting the promise, the court may imply elements from the circumstances. Professor Fried provides the example of a sale of a bolt for use in a machine, after which the bolt fails and damages the machine. He writes that

   it is a fair implication of the simple-seeming original transaction
   that manufacturer not only delivered and promised to transfer good
   title to the bolt, but promised at the same time that the bolt
   would do the job it was meant to do.

      ... [B]uyer justifiably relied on manufacturer ... because of
   the (implied) promise or warranty, and of course it is a primary
   function of promises to induce reliance. (4)

Although there may be other grounds for liability, Professor Fried brings the implied warranty of fitness in this case under the promissory theory. …