CONTEMPORARY CONTRACT THEORY IN A PARADOXICAL SITUATION

Basic form and concepts of contract doctrine in
both common & civil law jurisdictions are, for the
most part, FIRMLY & CLEARLY ESTABLISHED AS
WELL AS WIDELY ACCEPTED.
World of Contract theory presents itself as a
multiplicity of mutually exclusive approaches.
These theories provide complete explanations and
EACH OF THEM REJECTS THE OTHER
(MONISTIC THEORIES)

Today there is no generally recognized theory of contract.

… The effort to develop a coherent explanation of contract seems to have reached an impasse.

In the face of apparent insufficiencies of these monistic theories, some contract scholars have more recently
suggested the need for “mixed” theories that suitably incorporate or order more than one of these approaches
as aspects of a comprehensive theory.

He suggests that the first step toward getting beyond the current paradoxical situation of contract theory is the
DEVELOPMENT OF SUCH PUBLIC BASIS OF JUSTIFICATION which he will call by the end of the chapter.

OBJECTIVES
Major Obj:
● To present the main contemporary theoretical approaches
● To contract & suggest the direction that future theorizing should take
Minor Obj:
● To identify & explore the basic presuppositions of each of the principal efforts
● To provide a coherent and plausible explanation of contract
● To see whether a theory is able to live up to its own demands of completeness and adequacy
THREE CATEGORIES OF THESE THEORIES THAT WILL BE CONSIDERED IN DETAIL

The Challenge to the Distinctiveness and the Coherence of Contract

FULLER (Expectation Damages)
● And Purdue’s 1936 article, “The Reliance Interest in Contract Damages”
○ The most influential single article in the entire history of modern contract scholarship in
the common law world
○ MAIN TOPIC: the seemingly technical issue of the choice of the appropriate measure of
damages for breach of contract.
● Three Purposes or interests that the law may pursue in awarding contract damages
i. The law may deprive a defaulting promisor of gain obtained at the promisee’s expense
and award it to the promisee to prevent unjust enrichment Art. 23
ii. Law may compensate the promisee for loss suffered through detrimental reliance on the
promisor Art. 23
iii. Law may give the promisee the equivalent of what was promised him in order to place
him in the position he would have been in had the promise been performed (expectation
interest) Art. 22
○ The analysis of contract damages in both judicial opinions and scholarly writing is now
invariably conceived
● THEORETICAL CONTRIBUTION:

Influential classification of remedial interest or, for that matter in its important claim that courts in fact,
protect the reliance interest along with the expectation interest in awarding contract damages and
that they should openly acknowledge this.

Fuller’s puzzlement over the rational basis of expectation damages and his effort to make sense of
 them that give the piece genuine theoretical significance.
● ON EXPECTATION DAMAGES
○ A promises to sell a portion of land to B. But A sold it to C. B will be awarded expectation
damages for the purpose of placing him in the position that he would have been in had A
performed the promise
○ FULLER’s VIEW: B never had the expectancy because it was only promised to him. Since he
NEVER had it, he could not have lost it.
i. The awarding of expectancy according to Fuller seems on the face of things a queer
kind of compensation.
ii. Expectation interest < Restitution and Reliance Interests
iii. Premise: A promise, even if accepted, does not give the promise anything; it is only if
and when a promise is actually performed that the promisee acquires something.
iv. The principle that promise or consent creates an obligation is foreign to the idea of
justice
● RELIANCE LOSSES AND EXPECTATION DAMAGES
○ It may sometimes be difficult to prove or measure reliance losses than expectation losses,
making an award of expectation damages easier to administer.
○ Aim is to protect reliance interest not expectation interests
○ If a court awards expectation damages, they can no longer be viewed as compensatory
but assume a quasi-punitive character.
● INADEQUACY FROM A LEGAL POINT OF VIEW OF THE ATTEMPT TO EXPLAIN EXPECTATION
DAMAGES SIMPLY AS MEANS OF CURING ANF PREVENTING RELIANCE LOSSES
○ Even if it difficult to or impossible to prove one kind of loss why should we use another measure
of damages?
○ That even if one measure may be more readily ascertained and administered in CERTAIN
circumstances is insufficient to legitimate its use by the courts
● We might easily base the whole law of contracts on a fundamental premise that only those promises
which have been relied on will be ENFORCED. As the chief exception to this principle, we should
have to list the bilateral business agreement. The rationale for this exception could be found in the fact
that in such agreements reliance is extremely likely to occur and extremely difficult to prove.

ATIYAH
● Challenge of Fuller: To show that contractual liability can and should be entirely explained on the basis
of just the two sources of obligation implied by the restitutionary and reliance interests, namely, the
receipt of benefits at another’s expense and the inducement of justified detrimental reliance.
○ Atiyah represents to date the most sustained effort to do this.
● According to Atiyah: classical view of contract, roots contract liability in the ACTUAL INTENTIONS of
the parties and attributes to promises the power to generate full-fledged enforceable obligations
● Persons are liable for what they do rather than for what they intend, and which doubts and may even
deny, that a promise can bind absent the receipt of an actual benefit or the inducement of reliance.
● Promissory Liability
○ Accgd to him, every theory of promising must explain how a promise can be entitled to expect
the promisor not to change his mind (this for him is the fundamental question for contract
theory)
■ PREMISE: People regularly and normally have the liberty to change their minds
■ With that premise which should be ACCORDED PRIORITY? Promisor’s change of mind
of promisee’s expectation to have his expectations fulfilled? NO BASIS, unless and until
entitlement decision is made, for ascribing any loss or disappointment of expectations
suffered by a promisee to the promisor.
■ All theories of promising are obliged to settle this question on pain of begging the issue.
■ But he did not find a satisfactory answer. Consequently they do not explain why a bare,
unpaid-for and unrelied-on promise should by itself give rise to an obligation, whether
moral or legal.
● If a promise is to be ENFORCEABLE, Atiyah said that it must be in virtue of the reasons for which it
was given or because of the consequences that it has had.
● CONFERRAL OF BENEFIT AND DETRIMENTAL RELIANCE are the two main types of acts that can
take place in a contractual setting. They are also consequences of promising.
● Promises are enforceable only when a benefit has been conferred or when reliance has taken place,
and the basis for enforcement is in UNJUST ENRICHMENT OR IN TORT RESPECTIVELY.
● A promise may function, not as a separate substantive basis of obligation, but as a conclusive
admission by the promisor that clarifies and sometimes settles a variety of issues pertinent to the
existence and the extent of his obligation in unjust enrichment
 ○ promise is usually evidence that the transaction is an exchange and not a gift and evidenced of
the fair value of the exchange. Promise is evidence that the promisor himself thought that the
promisee would be justified in acting in reliance on the assertion expressed in or implicit in the
promise

FOUR AUTONOMY-BASED THEORIES

Autonomy based theories view contract law as a legal institution that recognizes and respects THE POWER
OF PRIVATE INDIVIDUALS to effect changes in their legal regulations inter se, within certain limits.

An autonomy-based contract law should be attentive to the pluralist prescription of offering

people a sufficiently diverse set of robust frameworks to organize their various endeavors and
interpersonal relationships. And it should actively empower people’s attempts to form
collaborative contractual arrangements ― both discrete and impersonal, as well as long-term
and relational ― by providing the necessary background regime for such risky undertakings.

RAZ
several aspects of the reasons promises generate. Promises are generally content independent: the reason
they bind does not depend on the act promised. Some acts, however, cannot be promised, such as selling
oneself into slavery. Raz explains this fact by arguing that the power to promise exists only because, and to the
extent that, it enhances our moral lives. There is no value to giving people the power to enslave themselves.
Working from the same premise, Raz argues that promisors need not have the power to determine the
strength of the reasons for performance that their promises create—to determine the strength of their
promises. The fact that having the power to promise is valuable “does not mean that there is value in people
being able to determine the strength of the reasons that promises generate.”6 Raz then asks how it is that the
mere act of promising can create a new reason to act. He argues contra Owens that the reason to act is
not a “bare reason” generated by the mere fact of the promise. Rather a promise gives the promisor a reason
to perform because of the “normative assurance” that a promise provides the promisee, which is the
promisee’s opportunity to receive performance.
● Protecting the reliance interest and the estoppel principle belong to tort.
○ They do not require anything more than a conception of promising in which the promise
functions as a representation inducing detrimental reliance- that is, an “intention” conception of
promising.
○ How there can be contract formation prior to and independent of reliance cannot be explained in
their basis.
● Raz leaves autonomy theorists wth the callenge of seeing WHETHER IT IS POSSIBLE TO ACCOUNT
FOR CONTRACT ON THE BASIS OF A CONCEPTION OF AUTONOMY THAT NEED NOT INVOKE
NONPROMISSORY CONSIDERATIONS SUCH AS THE PROMISEE’S RELIANCE..
Raz explains that a promise gives the promisor a reason to perform because of the “normative assurance” it
provides; the value of that assurance, and thus its associated strength, varies with each promise.
● Postulates the goodness of voluntarily created bonds as part of the justification of contractual
obligation.

FRIED
● Aims to vindicate the distinctive character of contract and the primacy of the expectation interest.
● Saying all that does not yet say what the relation between the legal obligation and the moral one is.
One answer is that contract law functions to enforce certain promises. In contemporary Anglo-American
scholarship, the thesis is most closely associated with Charles Fried’s 1981 book, Contract as Promise.
Fried’s chapter in this volume updates that theory in light of subsequent work in the field. As Fried
points out, dominant trends in contract theory have changed considerably in the past thirty years. The
reliance-based and critical approaches that ruled when he wrote the book have been supplanted by
economic analysis, corrective justice, and new autonomy theories. Fried’s chapter discusses the
relationship between his approach in Contract as Promise and subsequent work in the field. And he
uses his chapter to provide new thoughts on topics such as the common law’s preference for
expectation damages, the consideration doctrine, unconscionability, the mitigation rule, contract
interpretation, and the objective theory
● “If I make a promise to you, I should do as I promise; and if I fail to keep my promise, it is fair that I
should be made to handover the equivalent of the promised performance.”
● Fried viewed the claim of Fuller and Atiyah that damages should be so limited in principle as destructive
of the very moral basis of contract, which is the duty to keep one’s promises.

SCANLON
 ●The term ‘contractualism’ can be used in a broad sense—to indicate the view that morality is
based on contract or agreement—or in a narrow sense—to refer to a particular view developed
in recent years by the Harvard philosopher T. M. Scanlon, especially in his book What We
Owe to Each Other.
● Scanlon introduces contractualism as a distinctive account of moral reasoning. He summarises his
account thus:
○ An act is wrong if its performance under the circumstances would be disallowed by any set
of principles for the general regulation of behaviour that no one could reasonably reject as
a basis for informed, unforced, general agreement. (Scanlon 1998, p. 153).
● But Scanlon’s version of contractualism is not just concerned with determining which acts are right
and wrong. It is also concerned with what reasons and forms of reasoning are justifiable. Whether or
not a principle is one that cannot be reasonably rejected is to be assessed by appeal to the
implications of individuals or agents being either licensed or directed to reason in the way required
by the principle. Scanlon’s version offers an account both of (1) the authority of moral standards and
of (2) what constitutes rightness and wrongness. As to the first, the substantive value that is realised
by moral behaviour consists in a relation of “mutual recognition”. As to the second, wrongness
consists in unjustifiability: wrongness is the property of being unjustifiable. The wrongness of an
action is not to be equated with the properties that make it unjustifiable. Rather, it is to be equated
with its being unjustifiable; the character of wrongness is captured by the higher order fact that
wrong acts are unjustifiable. What wrong acts have in common is that they cannot be justified to
others. Thus the various moral considerations that guide our substantive moral reflection are unified
by a single normative subject matter. In this way, contractualism guides our substantive reflection
about wrongness. Wrong is the primary moral predicate; right is defined as “not wrong”. One reason
for focusing on wrong is to draw attention to the domain that contractualism is concerned to map,
concerning what it is for one person to have been wronged by another.
● Moral requirements determine what it is to respond properly to the value of persons as rational
agents. The distinctive value of human life lies in the human capacity to assess reasons and
justifications. Therefore, appreciating the value of a person involves recognising her capacity to
appreciate and act on reasons. The way to value this capacity is to treat persons in accord with
principles they could not reasonably reject. In doing so, the agent is guided by a principle that can
rightly be characterised as one that the person herself authorised that agent to be guided by, in
thinking about the appropriate way to relate to her. Contractualism illuminates the compelling
Kantian insight that we ought to treat persons never as mere means but always as ends in
themselves. It interprets this as treating them according to principles they could not reasonably
reject.
● The fact that promising involves an intentional giving of assurance in circumstances where
the promisor knows that the promisee wants the assurance does not, in and of itself, make it
juridically unreasonable for the promisor to fail to perform, at least in the absence of invited
detrimental reliance by the promisee upon the promise.
● There is nothing in Scanlon’s first step that entitles the use of the idea of “owing” as between
the parties. In Scanlon’s argument, it is the second step, not the first which embodies
requirements of the reasonable.But this second step contributes nothing positive toward the
existence and the specificity of the contractual obligation
BARNETT
● Consent Theory of Contract
● Contract on a Consent to transfer rights rather than on promising which is Fried’s
● If justified this approach would provide a complete answer to the challenge raised by Fuller
and Atiyah against the compensatory character of the expectation interest.
○ Contract could now be conceived as a mode of acquisition.
○ At the formation and therefore, independent of any detrimental reliance or passing of
benefits, the promisee would acquire an enforceable entitlement to the promisor’s
performance
○ Measure of that performance would be its value and the vindication of that entitlement
would be the expectation measure.
● A promisor in breach could be viewed, not merely as failing to confer a benefit on the
promisee, but as interfering with what already belongs to the promisee in virtue of their
contract.
 ● This theory is the most promising variant of autonomy-based approaches because it goes
furthest in elucidating a structure of correlative rights and duties that is specifically contractual,
Barnett’s account of this idea is incomplete
○ While Barnett is correct in emphasizing the promisor’s consent as a necessary
conditioin of a valid transfer, it is not a sufficient condition. Act by the promisee is also
needed, otherwise there can not be a transfer.
● Until a consent theory in particular and autonomy based approaches in general fill out the main
features of the structure of contract, they will be vulnerable to the charge of indeterminancy.
● Autonomy theories do not contain the conceptual resources to asnwer a variety of important
doctrinal issues ranging from the choice of damage rules to the determination of implied terms
in cases of contractual gaps.
● It is impossible to account for central features and principleds of contract law, especially where
parties have not provided explicit contractual provisions to settle the issue that requires
resolution.
● Which substantive values should be invoked at this basic level.? Three Teological Theories
TEOLOGICAL THEORIES
● They argue that contract law is best understood and justified if it is viewed as directed toward
the fulfillment of some good
GORDLEY
● The problem with autonomy theories is that they seek the ultimate source of obligation in
human choice alone, without giving the reason other than the mere fact that the promisor
willed to be bound. We cannot explain why the law enforces certain commitments or choices
and not others
● The fact that promises are treated differently than other commitments, we must identify some
goal ot outcome that the former but not the latter enable a promisor to achieve.
○ Gordley proposed that the virtues of liberality and commutative (or corrective) justice
constitute the two main ends of contracting.
○ A party’s obligation should depend on which virtue he has exercised.
● Main thesis: a commitment should count as promise and therefore should be enforceable as
such only if doing so will instantiate liberality or commutative justice
● So in a contract where one will receive a grossly inadequate consideration is not and should
not be enforced unless the side intended this deprivation as a gift, manifesting virtue of
liberality
● LIBERALITY, virtue that has to do primarily with the state of a person’s character--his motives
and manner-- in accomplishing certain acts
● COMMUTATIVE JUSTICE, realized primarily in transactions, an objective requirement that
can be quantitatively determined and that must be respected in interaction with others. Not
only orders how one acts toward others; it is essentially defined in terms of relation to another.
● Contended that the function of commutative or corrective justice is to ensure that whatever
distribution of holdings exists at any given time is preserved and not disturbed by transactions.
● One is compelled to evaluate the fairness of the presupposed distribution in deciding whether
a particular transaction is morally acceptable or not.
● Entailed that the moreal acceptability of a given transaction depends, not just on commutative
justice, but also on considerations of distributive justice.
KRONMAN
● Consent has any morally significant role to play.
● Idea of voluntary agreement is necessarily distributive rests on his claim that the liberty
principle is empty and circular.
● He said that autonomy theorists should accept the Paretian principle because it gives them a
theory of rights that, while distributive, enables them to apply the liberty principle consistently
with their underlying moral premises of individualism and equality.
● Paretian unlike utili takes seriously the separateness of individuals by holding that no one
should have to sacrifice his welfare just to promoste the greater welfare just to promote the
greater welfare of others or to advance some collective value.
On Kronman’s view, it is not a person’s consent but the Paretian principle that settles whether one can
have the exclusive use of an asset.
● Impact on the welfare of others is the decisive moral factor.
● Kind of Welfare analysis required by the Paretian principle necessarily goes beyond the immediate
interaction between the parties to a given transaction
 ● Validity of contract does not depend on the nature of their interaction but on how a rule making the
contract valid or invalid would affect less advantaged parties in a whole range of subsequent
transactions,
○ It’s hard how the courts could make this determination with the req. Certainty.
● This distributive analysis does not seem to lend itself readily to decision making in the relevant public
institutional setting.

ECONOMIC ANALYSIS OF CONTRACT LAW

● Basic premise of economic analysis is the assumption that if two informed parties have voluntarily
transacted they must have judged that they would be better off as a result of transacting, otherwise they
would not have done so.
● Economic analysis expresses this conclusion by saying that the transaction is Pareto superior
○ Pareto superior if it makes at least one party better off without making the other worse off, in
comparison to their pretransaction circumstances. This depends crucially on the fact that neither
party has changed his mind and has come to regret the decision to transact.
CONCLUDING REMARKS
● This gap between LAW AND THEORY is the single most IMPORTANT CHARACTERISTIC FEATURE
of contract theorizing since fuller.
○ This gap is most explicit and therefore most visible in economic analysis.
○ This gap is present in different ways in every theory discussed, beginning with Fuller’s.
○ RESOLUTION: the first item on the agenda for future theoretical reflection about contract.