Contract law minimalism a formalist restatement of commercial contract law

Fortin: Children’s Rights and the Developing LawGhai & Woodham: Practising Self-Government: A Comparative Study of AutonomousRegions Glover-Thomas: Reconstructing Mental Health Law and P

Commercial contract law is in every sense optional, given the choice betweenlegal systems and between law and arbitration Its ‘doctrines’ are in factvirtually all default rules Contract Law Minimalism advances the thesis thatcommercial parties prefer a minimalist law that sets out to enforce what theyhave decided – but does nothing else The limited capacity of the legal process

is the key to this ‘minimalist’ stance This book considers evidence that suchminimalism is indeed what commercial parties choose to govern their trans-actions It critically engages with alternative schools of thought, that call foractive regulation of contracts to promote either economic efficiency or thetrust and co-operation necessary for ‘relational contracting’ The book alsonecessarily argues against the view that private law should be understood non-instrumentally (whether through promissory morality, corrective justice, taxo-nomic rationality, or otherwise) It sketches a restatement of English contractlaw in line with the thesis

Jonathan Morgan is Fellow of Corpus Christi College and University Lecturer inLaw, University of Cambridge He was previously Fellow and Tutor in Law at

St Catherine’s College, Oxford, and Fellow and Director of Studies at Christ’sCollege, Cambridge He has for many years also taught English law at WarsawUniversity and elsewhere in Central and Eastern Europe His teaching andresearch interests range across the law of obligations and public law

Editors: William Twining (University College London),

Christopher McCrudden (Queen’s University Belfast) and

Bronwen Morgan (University of Bristol)

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Contract Law Minimalism

A Formalist Restatement of Commercial Contract Law

JONATHAN MORGAN

Corpus Christi College, Cambridge

Published in the United States of America by Cambridge University Press, New York

Cambridge University Press is part of the University of Cambridge.

It furthers the University’s mission by disseminating knowledge in the pursuit of

education, learning and research at the highest international levels of excellence.

www.cambridge.org

Information on this title: www.cambridge.org/9781107021075

© Jonathan Morgan 2013

This publication is in copyright Subject to statutory exception

and to the provisions of relevant collective licensing agreements,

no reproduction of any part may take place without the written

permission of Cambridge University Press.

First published 2013

Printed in the United Kingdom by CPI Group Ltd, Croydon CR0 4YY

A catalogue record for this publication is available from the British Library

Library of Congress Cataloguing in Publication Data

Morgan, Jonathan (Jonathan Edward)

Contract law minimalism : a formalist restatement of commercial contract law / Jonathan Morgan pages cm – (Law in context)

Cambridge University Press has no responsibility for the persistence or accuracy of

URLs for external or third-party internet websites referred to in this publication,

and does not guarantee that any content on such websites is, or will remain,

accurate or appropriate.

For I am possessed of a Cat, surpassing in beauty, from whom I take occasion tobless Almighty God.

Let Ithream rejoice with the great Owl, who understandeth that which heprofesses

For I pray God for the professors of the University of Cambridge to attend and

to amend

Christopher Smart, Jubilate Agno

Preface page xiii

Part I Clearing the ground

Part II Social sciences and the law of contract

5 Extra-legal norms: the irrelevance of the law (of contract)? 71 Part III Contract law minimalism

6 Defining contract law minimalism, or the ‘new formalism’ 89

9 What business wants: evidence from the ‘markets for law’ 173

This book advocates a minimalist law of contract as the best possible work for commercial law – the law that best satisfies the preferences of (most)commercial parties This preference-satisfaction is vital because sophisticatedparties can and do opt out of rules – indeed entire laws of contract – that theyjudge to be suboptimal for them The minimalist claim is in sharp contrastwith calls for the greater regulation of contracts that arise from a number oftheoretical perspectives The basic theses defended here are three in number:first, that commercial contract law has a central purpose, namely, to provide asuitable legal framework for trade; secondly, that the nature of commercialcontract law is radically optional, that is, it exists only as a body of defaultrules; and, thirdly, that when contract law is as simple, clear and strict –formalist – as it can be made, commercial preferences are best satisfied and itsrules flourish because opting out from them is infrequent The book boldlyclaims that to succeed in its purpose, given its optional nature, commercialcontract must be (quite deliberately) unambitious.

frame-The first thesis might seem too obvious to need much discussion However,the renaissance of non-instrumental theories of private law generally (and thepromissory approach to contract in particular) makes some defence of theclaim necessary Part I of the book (Chapters 1 and 2) elaborates a critique ofanti-instrumentalism How then should contract law best fulfil its socialpurpose? Against the doctrinal tradition of English contract scholarship, it isnecessary to turn to the social sciences for illumination Part II (Chapters 3 to5) examines the research of economists and sociologists Law and economicshas had great influence, especially in the United States, although its intellectualgodfather has noted it is ‘strong on theory if weak on facts’.1 More realisticapproaches, considering the effect of transaction costs on legal institutions andthe empirical reality of contracting behaviour, produce strikingly differentconclusions The best-known rival to law and economics is the theory ofrelational contract It calls for the ongoing, close commercial relationship tobecome the paradigm for contract law – in place of the anonymous one-off

1 R H Coase, ‘The new institutional economics’ in E Brousseau and J.-M Glachant (eds.), The Economics of Contracts (Cambridge University Press, 2002), 46.

transaction Such relationships pervade the economy Trust and co-operationare crucial to their success The selfish behavioural assumptions behind trad-itional contract doctrine have therefore – it is argued – been falsified There is

a wide gap between real-world contracting behaviour and contract law thatrelational scholars believe their approach would help to close

Relational contract theory has proved influential Even in anti-theoreticalEngland it has not been completely ignored.2After all, the need to infuse legaldoctrine with commercial practice has long been the mantra of commerciallawyers – at least since Mansfield’s tenure as Lord Chief Justice (1756–88) Theintuition is sound in that commercial preferences must be respected or the lawwill be an obstacle to the trade that it exists to serve – or shunned and avoidedaltogether However, it is a great mistake to infer from relational contracttheory (and the empirical studies on which it draws) that commercial partiesdesire the active promotion of trust through contract law (and the regulation

of opportunism and other relational difficulties) Part III of the book(Chapters 6 to 10) defends the radical thesis that formalist legal doctrine is,paradoxically, the ideal complement for the practice of relational contracting.The thesis derives from a combination of positive and negative considerations

On the positive side, sophisticated parties are better able to draft optimal tracts than the law can supply optimal default rules Also, extra-legal sanctionscan support relational norms more effectively than the adversarial legal process.More negatively, we must recognise the limited capacity of courts, legislaturesand agencies to engage successfully in the active regulation of contracts Whethertheir aim is the ‘efficient default rules’ of law and economics, or to uphold trustand co-operation pursuant to relational contract theory, legal institutions willprove inadequate in practice These limitations tend to be underplayed by thechampions of such theories (if not ignored altogether), but a practical approachcannot neglect them Furthermore, there is evidence that attempts to enforceco-operation by legal sanctions may actually be counterproductive Even morepertinent for the thesis of the book (which rests on ‘what commercial partieswant’) is evidence of contractors’ actual preferences There is good evidence infavour of minimalism: whether in the choice of jurisdiction in the global marketfor contract laws, or the design of rules and procedures for ‘private legal systems’(e.g trade arbitrations) The final chapter sketches a minimalist critique ofcontemporary English contract law The lessons for more ‘contextual’ laws ofcontract (as in California and many other US jurisdictions), or for the doctrinalsystem-builders at the pan-European level, would be sharper still

con-The argument might risk being misunderstood as reactionary ‘Formalism’ ismore commonly employed as a term of abuse (although really it is just a prudentconclusion from reflecting on the limits of the legal process) It is important tostress, therefore, that, even if this book’s conclusions on the proper shape of

2 H Collins, Regulating Contracts (Oxford University Press, 1999).

contract law bear superficial resemblance to the black-letter approach, theargument for their derivation could not be more different Instead of dogmaticattachment to doctrine for doctrine’s sake, the minimalist thesis proceeds byconsidering the best way, in practice, for contract law to achieve its social goals.

It is important to be open about these goals, the method and their derivation –and also to acknowledge that the thesis is ultimately falsifiable If it could beshown that despite the arguments of this book there is general commercialdemand for interventionist, regulatory, relational contract law then the thesisfails But its falsifiability is its strength It is in notable contrast with the abstractdoctrinal certainties of those who would draft a European Civil Code Theargument for minimalism is pragmatic, and even contingent – the best availableexplanation for the current research into contract law and practice Its recom-mendations are, moreover, themselves only ‘defaults’: the law should unhesitat-ingly accept an expressed preference for contextual adjudication and theenforcement of relational norms

It might seem a remarkable coincidence that traditional common law doctrinefits these sophisticated social-scientific recommendations so well Has Englishcontract law, like Molière’s Bourgeois Gentilhomme, been speaking the prose of

‘neo-formalism’ unawares, all along? Does the common law process inexorablyproduce efficient rules?3A more likely explanation is that business preference forthe permissive clarity of formal rules is well understood by London law firms(which are consciously promoting their services, and so English law’s attractions,

in the global market) The elite judges who apply and develop the common lawinvariably sympathise, being drawn from the ranks of such practitioners as most

of them are Reformers and agencies (such as the Law Commission) that wouldlegislate to curb Freedom of Contract are lobbied ferociously by City lawyers, topreserve the minimalist regime which suits their clients (and therefore theirbusinesses).4The British government is a vigorous promoter of the legal servicessector, an adjunct of the City of London’s wider economic importance.5 So itheeds such calls – as it would presumably accept hypothetical lobbying for arelational or contextual revolution in the law of contract (calls that are, bycontrast, notable for their absence) It seems inconceivable that judges, lawyersand lobbyists would be ignorant about the preferences of contract law’s commer-cial customers – or uncharacteristically mute and passive were the law seriouslyout of line with commercial expectations On the contrary, the resilient formal-ism of English contract law is in all probability driven, like this book, by coldcalculation of what commercial parties want The answer is minimalism

3 G Priest, ‘The common law process and the selection of efficient rules’ (1977) 5 Journal of Legal Studies 65.

4 H Beale, Mistake and Non-Disclosure of Fact: Models for English Contract Law (Oxford University Press, 2012), 106–8.

5 E.g Lord Irvine of Lairg LC, ‘The law: An engine for trade’ (2001) 64 MLR 333.

For funding the initial research upon which this book is based I must thankthe Arts and Humanities Research Council, the Newton Trust and theModern Law Review I also record my thanks to Sinéad Moloney and WilliamTwining for their encouragement, and to everybody who has assisted inproduction at Cambridge University Press Many colleagues have generouslyhelped also The list (which I fear is incomplete given the ‘uncertain testimony

of slippery memory’) includes: John Armour, Hugh Beale, Sir Jack Beatson,David Campbell, Peter Cane, Simon Deakin, Richard Fentiman, Steve Hedley,David Ibbetson, Roderick Munday, Erin O’Hara O’Connor, Janet O’Sullivan,Giesela Rühl, Jane Stapleton and Stefan Vogenauer I sincerely thank them all,but especially Professor Campbell (for inspiration that changed my wholeapproach) and Professor Ibbetson (for his ineffable support throughout –from giving me the initial idea down to publication)

The debt of gratitude to my incomparable parents is really too great to repay

in words Finally but not least I thank my wife, to whom this book is dedicatedwith love

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Smith v Eric S Bush [1990] 1 AC 831; 112Smith v Hughes (1871) LR 6 QB 597; 10, 67, 140, 157, 220Somerfield Stores Ltd v Skanska Rasleigh Weatherfoil Ltd [2006] EWCA Civ1732; 236

Spring Finance v HS Real Company [2009] EWHC 3580 (Comm); 245

Stevenson v Rogers [1999] 1 All ER 613; 111Stilk v Myrick (1809) 2 Camp 317; 6 Esp 129; 245

SW v United Kingdom (1995) 21 EHRR 363; 164Sweet v Parsley [1970] AC 132; 3

Taylor v Caldwell (1863) 3 B & S 826; 120-121, 239Teacher v Calder [1899] AC 451; 16

Tesco Supermarkets Ltd v Nattrass [1972] AC 153; 11The Achilleas [2008] UKHL 48; [2009] 1 AC 61; 135-136, 249The Afovos [1983] 1 WLR 195; 147

The Alev [1989] 1 Lloyd’s Rep 138; 244The Atlantic Baron [1979] QB 705; 244The Company of Shipwrights of Redderiffe’s Case (1614) 2 Bulstrode 233; 11The Diana Prosperity [1976] 1 WLR 989; 234

The Eurymedon [1975] AC 154; 6The Evia Luck [1992] 2 AC 152; 243The Golden Victory [2007] 2 AC 353; 95, 179, 228The Hongkong Fir [1962] 2 QB 26; 186, 234The Laconia [1977] AC 850; 234, 247The Maratha Envoy [1978] AC 1; 207The Original Great American Chocolate Chip Cookie Co v River Valley Cookies

970 F 2d 273, 282 (7th Circuit, 1992); 152The Penelope [1928] P 180; 240

The Reborn [2009] EWCA Civ 531; 238The Rozel [1994] 2 Lloyd’s Rep 161; 249The Scaptrade [1983] 1 QB 529; [1983] 2 AC 694; 6, 146, 147The Sea Angel [2007] 2 Lloyd’s Rep 517; 239

The Siboen and The Sibotre [1976] 1 Lloyd’s Rep 293; 244The “Sine Nomine” [2002] 1 Lloyd’s Rep 805; 10, 16, 117, 199, 251The Super Servant II [1990] 1 Lloyd’s Rep 1; 239

The Universe Sentinel [1983] AC 366; 244Thorner v Major [2009] UKHL 18; 227Tilden Rent-A-Car Co v Clendenning (1978) 83 DLR (3d) 400; 223Tinn v Hoffman (1873) 79 LT 271; 221

Toll Pty Ltd v Alphapharm Pty Ltd (2004) 211 ALR 342; 224Total Gas Marketing v Arco British [1998] 2 Lloyd’s Rep 209; 235Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL48; [2009] 1 AC 61; 135-136, 249

Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514; 146, 187, 233, 239,247

United States v Stump Home Specialties Inc, 905 F 2d 1117 (1990); 245United Steel Workers, Local 1330 v US Steel Corpn, 631 F 2d 1264 (6th Cir.1980); 141

Universe Tankships v International Transport Workers Federation (TheUniverse Sentinel) [1983] AC 366; 244

Vallejo v Wheeler (1774) 1 Cowp 143; 95, 218Van der Garde v Force India Formula One Team Ltd [2010] EWHC 2373(QB); 16, 252

Vantage Navigation v Bahwan Building Materials (The Alev) [1989] 1 Lloyd’sRep 138; 244

Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch); 16, 251Vincent v Lake Erie Transportation Co (1910) 109 Minn 456; 32

Wachtel v Wachtel [1973] Fam 72; 132Walford v Miles [1992] 2 AC 128; 67, 101Walgreen Co v Sara Creek Property Co, 966 F 2d 273 (7th Cir 1992); 48Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 226Watford Electronics Ltd v Sanderson CFL Ltd [2001] 1 All ER Comm 696; 246White Arrow Express Ltd v Lamey’s Distribution Ltd [1995] CLC 1251; 252William Sindall plc v Cambridgeshire County Council [1994] 3 All ER 932; 241Wood v Lucy, Lady Duff-Gordon, 222 NY 88, 91 (1917); 229

Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 789; 16,251

Table of Legislation

Arbitration Act 1996; 175

Consumer Credit Act 1974; 122, 150

Contracts (Rights of Third Parties) Act 1999; 18, 178-9

Corporate Manslaughter and Corporate Homicide Act 2007; 4, 12

Data Protection Act 1998; 105

Freedom of Information Act 2000; 105

Human Rights Act 1998; 40, 158

Late Payment of Commercial Debts (Interest) Act 1998; 82

Misrepresentation Act 1967, Section 3; 246

National Minimum Wage Act 1998 153

Rome I Regulation, Article 3; 176

Sale of Goods Act 1979, Section 15A; 138, 139, 141, 143

Statute of Frauds 1677, Section 17; 84-5

Unfair Contract Terms Act 1977; 112, 178, 234, 241

Unfair Terms in Consumer Contracts Regulations 1999; 149-50, 248Uniform Commercial Code; 86, 90, 97, 123, 133-4, 143, 167, 170, 187, 197,

200, 206, 209, 213, 217, 218-9

Part I

Clearing the ground

The thesis of this book is that the core task of the law of contract is to supportcommercial transactions, and that the best way to do this is through a clearand minimal set of hard-edged rules In later chapters, we will defend both thisgoal and the means of achieving it First we must consider a more fundamentalcritique Many scholars contend that contract law is to be justified by itsinherent moral value, as an end in itself In short, it should be approachednon-instrumentally If correct, this argument would peremptorily rule out ourthesis It is accordingly necessary to engage the non-instrumental school ofcontract theory, to clear the ground for the main argument of the book.Should contract law be understood instrumentally, as a means to an end(e.g economic efficiency, or European integration), or non-instrumentally, as

an end in itself (perhaps as a self-evident aspect of moral goodness, or somePlatonic form of justice)? Few contract lawyers would contest the propositionthat a contract creates positive legal ‘rights’ (claim-rights in a true, Hohfeldiansense) But this hardly exhausts the controversy What justifies the legalrecognition of such rights (and correlative duties)? The first question for anycontract theorist – indeed any contract lawyer – should be the choice betweenthese two ways of thinking

Part I rejects the non-instrumental approach The methodology is pretive’ Chapter 1 examines the ‘fit’ of the instrumental and non-instrumentalapproaches with extant English contract law Chapter 2 inquires which pro-vides the better ‘justification’ for it We aim to show that an instrumentalvision better fits the existing legal rules (and underlying attitudes) and that thejustification for a moral-promissory law of contract is unpersuasive

‘inter-We are not hunting paper tigers The dominant tradition of Englishcontract scholarship might appear black-letter – notoriously so – and accord-ingly atheoretical.1 But in recent years, the courts have proved receptive tomoral-promissory approaches that have borne fruit of questionable taste, in agrowing crop of ‘performance oriented’ remedies for breach of contract.2The

1 Potentially multi-theoretical: cf Stephen Waddams, Principle and Policy in Contract Law: Competing or Complementary Concepts? (Cambridge University Press, 2011).

2 Cf pp 15–16 and 250–2 below.

best-known theoretical defence of the promissory approach remains Fried’sContract as Promise,3 with powerful reinforcement from Smith’s ContractTheory.4The renewed interest in non-instrumental theories of contract reflectsmoves throughout private law English tort law has seen a striking renaissance

of rights-focused reasoning.5Yet more influential are the wide-ranging ies of Weinrib and Birks.6 Weinrib’s insistence on corrective justice and

theor-‘formalism’ as the basis for an ‘immanently rational’ private law, and Birks’sheroic project to impose conceptual taxonomy upon English private law, drive

a powerful anti-instrumental intellectual current.7 Most portentous of all arethe recent moves towards a pan-European contract law in the ‘Draft CommonFrame of Reference’ All these developments require to be discussed, meaning

a lengthy preamble to prove what many will accept without further stration – that commercial contract law’s purpose is to provide a suitableframework for commercial relations

demon-3 C Fried, Contract as Promise (Cambridge, MA: Harvard University Press, 1981).

Does instrumentalism ‘fit’ contract law?

The first and most obvious task in clearing the ground for the minimalistthesis is to show that an instrumental approach fits the existing rules ofcontract law For an account of any legal institution to count as a validinterpretation, it is necessary to achieve a degree of descriptive accuracy Wewill argue that treating contract law as a tool of social policy, as opposed to aninstantiation of the morality of promise-keeping, describes it more accurately.This is true both at the general level (the characteristic attitude of contractlawyers, especially judges developing the common law) and in the detailedrules

In particular, this chapter will address three distinctive phenomena of theEnglish law of contract: the strictness of liability; the position of corporations;and remedies for breach of contract The first two questions have been littlediscussed, which is itself of significance In areas of law that are (fairlyuniversally acknowledged to be) concerned with the moral status of agentsand their actions, liability varies sharply with the degree of fault of the

defendant Strict liability is seen by tort and criminal lawyers to require careful

justification.1 The role of fault is prominent in the definition of differentcrimes and torts, for the extent of tortious liability, and in criminal sentencing.Yet contractual liability is usually very strict – virtually absolute2– drawing nomajor distinctions between unavoidable, careless and deliberate breach More-over, this seems uncontroversial These are uncomfortable truths for themoral-promissory school, in which deliberate promise-breaking attractsgreater condemnation

Similarly, the legal fiction of corporate personality proves troubling in areas

(predominantly the criminal law) where culpable states of mind are takenseriously Hence the difficulty of prosecuting corporate manslaughter atcommon law, and the need for a new statutory offence tailored to the

1 Cf Sweet v Parsley [1970] AC 132, 148 (‘there has for centuries been a presumption that

Parliament did not intend to make criminals of persons who were in no way blameworthy in what they did’, Lord Reid).

2 Cf D J Ibbetson, ‘Absolute liability in contract: The antecedents of Paradine v Jane’ in

F D Rose (ed.), Consensus Ad Idem: Essays in the Law of Contract in Honour of Guenter Treitel

(London: Sweet & Maxwell, 1996).

artificiality of attributing mens rea to a non-natural ‘legal person’.3 Yetcontract lawyers experience no difficulty in holding corporations to be

principal bearers of contractual duties If making a contract is really a

matter of promising, gaining some or all of its force from a moral obligation

to keep one’s promises, it is surprising that contract lawyers and theorists findcorporate contracting so unproblematic, indeed unworthy of comment Aninstrumental approach, being indifferent to the morality of promising, doesnot suffer this embarrassment

If these first two areas are significant silences – dogs that didn’t bark in thenight4 – the third (contract remedies) has suffered from the very opposite of

neglect, namely, extensive scholarly (and judicial) attention The avid interestdates back at least to Oliver Wendell Holmes’s provocative statement aboutthe nature of contractual obligation, based on the remedies for breach ofcontract.5For this reason, it is impossible to ignore the subject of remedies.6

To the extent that the Holmesian critique is valid, it is a firm rebuff to the

‘moral obligation’ school of contract law: as it was intended to be But there arecertainly counter-examples: some recent (the debates over the ‘performanceinterest’ and ‘restitutionary damages’), others dating from Holmes’s time (thetort of inducing breach of contract) It will be argued that the modern Englishlaw on remedies for breach of contract bears out Holmes and his ‘cynicalacid’7– but in a victory on points rather than a knockout

Before turning to these three specific areas of the law – illuminating because

of their distinctiveness – we consider the attitude of English contract lawyersmore generally It is necessary first to meet the challenge of Stephen Smith’s

Contract Theory which provides a lucid guide to the competing theoretical

approaches to the law of contract, concluding in favour of the promissory school

moral-Characteristic attitudes and transparency: questioning S A Smith

Arguably Smith’s most significant contribution is a clear and explicit of-theories: what is it that makes a good contract theory?8 It should be

of those who think it advantageous to get as much ethics into the law as they can.’ O W.

Holmes, ‘The path of the law’ (1897) 10 Harvard LR 457, 462.

6 S A Smith, Contract Theory (Oxford: Clarendon Press, 2004), 115, focuses on remedies as the

area that has received the most attention from efficiency theorists.

7 Cf Holmes, ‘The path of the law’, n 5 above: ‘[T]he vague circumference of the notion of duty shrinks and at the same time grows more precise when we wash it with cynical acid and expel everything except the object of our study, the operations of the law.’

8 Smith, Contract Theory, n 6 above, ch 1.

coherent It should fit the legal rules These desiderata are surely

uncontro-versial Smith also requires that the theory should have ‘moral’ appeal Thissounds like question-begging in the current context, but it is made clear thatthis is a very easy criterion to satisfy: the theory need not actually satisfy anypreferred theory of morality so long as it shows a sense in which moral appealcould be claimed for it So, utilitarian theories (of which this book may be anexample) satisfy the morality requirement since, even if not ultimately con-vincing, they are still recognizable as moral principles

More interestingly, Smith stresses the importance of accounting for theattitudes of lawyers and judges towards contract law, or the ‘internal point

of view’.9 Smith derives from this the criterion of ‘transparency’, which

‘evaluates contract theories according to how well they account for whatmay be called the “legal” or “internal” explanation of contract law’.10So, atheory which takes seriously the reasons given by judges and lawyers inarguing and deciding cases scores highly for transparency A Legal Realistwho maintains that these reasons are not the ‘real reasons’, or a feminist whocomplains that contract law is actually the product of male hegemony, wouldfail the transparency test Such theories, argues Smith, may have a crucial role

in evaluating the law, or in proposing reforms of it, but they are not

interpret-ations of the law as it stands, since they fail to take the internal point of view

seriously.11Thus, they are incomplete as theories of contract law

Having exhaustively analyzed contract doctrine, Smith concludes thatmoral, promise-based theories are the best fit with the law as a whole, although

he admits that the fit is not perfect.12 However, that would be true of anyconceivable rival theory, also Moreover, he argues, while lack of fit is typically

an objection only in certain areas of the law, for a theory to lack transparency

is a more serious flaw, because it is a general failing, across the board.13It is onthe basis of transparency, then, that Smith condemns instrumental accounts

of contract law.14 We reject the criticism On the contrary, instrumentalreasoning is thoroughly characteristic of English contract law Therefore, thetransparency criterion does not provide a reason to reject instrumentalaccounts of contract law outright for want of ‘fit’

Smith objects that judicial reasoning in contract cases, as elsewhere in thelaw, is concerned with individual rights and responsibilities, rather thaneconomic efficiency: ‘To be sure, judges sometimes explicitly consider theeffects that their rulings will have on commercial activities, social welfare,and contracting activity generally But in the main this is not the way judgesreason.’15 And the difference is said to be a difference in kind, not a mere

9 Cf H L A Hart, The Concept of Law (Oxford: Clarendon Press, 2nd edn, 1994), 77–99.

10 Smith, Contract Theory, n 6 above, 24. 11Ibid., 30–2.

12 The absence of punitive remedies for breach of contract presents a particular ‘puzzle’ for such

theories: ibid., 156, 418–20.

13 Ibid., 162. 14 Or, as Smith prefers, ‘utilitarian’ theories: ibid., 132–6. 15Ibid., 133.

matter of degree Damages are awarded not to provide incentives for potentialcontracting parties in the future, but to compensate a particular plaintiff forthe harm that has been done to him by a particular defendant Efficiencytheories, on the other hand, would view the court’s orders as signals, ratherthan ‘remedies’ in the true sense Such a theory requires no necessary linkagebetween the parties: damages could be paid by defendants into a state fund,and plaintiffs compensated from the fund Giving the right of action to theplaintiff is then a matter of ‘administrative convenience’ only; the equivalent of

a public prosecutor, with incentives to enforce the law.16 Legal arguments,conversely, ‘are essentially about individual rights and individual responsi-bilities’ Smith concludes: ‘There is virtually no point of contact, then, betweenthe legal explanation and the efficiency-based explanation.’17

These are serious charges An economist might dismiss the transparencycriterion altogether, concerning himself only with the rules and their effectsand ignoring the reasons proffered by the courts – a wholly external perspec-tive But this book, at least, wishes to account for the internal understanding ofthe law, and to take seriously the reasoning of judges and lawyers.18There arevarious responses to Smith’s peremptory use of ‘transparency’ to reject instru-mental approaches in favour of moral ones The first is to emphasize thedecidedly instrumental and pragmatic orientation characteristic of Englishjudicial reasoning, in contract cases especially It is not that judges ‘sometimes’explicitly consider the effects of their rulings, as Smith puts it, but that they

consistently do so This claim will not be defended in detail, since it is

submitted that any English contract lawyer would recognize the truth in it.19Great judges have consistently kept the needs of commerce before them, fromAtkin LJ’s purge of equity from the Sale of Goods Act,20to Lord Wilberforce’s

overt manipulation of contract doctrine in The Eurymedon.21

Such characteristic instrumentalism should not come as a surprise Indeciding cases, common law judges are all too aware that as well as settlingthe dispute before them, they are creating a precedent which will govern future

than in any other’ See further S Waddams, Dimensions of Private Law: Categories and

Concepts in Anglo-American Legal Reasoning (Cambridge University Press, 2003), ch 10.

20Re Wait [1927] 1 Ch 606: ‘I feel bound to repel the disastrous innovations which in my opinion

the judgments under review would introduce into well settled commercial relations.’ See also

Robert Goff LJ in The Scaptrade [1983] 1 QB 529: a ‘credo’ of commercial law reasoning (F M B Reynolds, ‘Maritime and other influences on the common law’ [2002] LMCLQ 182).

21 [1975] AC 154, 167: ‘English law, having committed itself to a rather technical and schematic doctrine of contract, in application takes a practical approach, often at the cost of forcing the

facts to fit uneasily into the marked slots of offer, acceptance and consideration.’ Cf Scruttons

Ltd v Midland Silicones Ltd [1962] AC 446.

litigation The ‘Janus faced’ nature of adjudication means that the courtscannot do other than consider the effect of their decisions on the conduct offuture parties Waddams, for example, agrees that this is to some degree

‘inevitable’ and finds extensive historical evidence that courts have ‘often takenaccount of social, economic and political considerations’.22Waddams’s exten-sive historical survey finds such ‘policy’ reasoning pervasive in the commonlaw of contract, albeit (importantly) constrained by the need to be acceptable

as ‘principle’ (i.e in a form sufficiently stable to be applied by judges).23Waddams cogently argues that principle and policy have a complex relation-ship of mutual interdependence; the implied dichotomy between them isoversimplified.24It is not enough to conclude (as Smith seems to) that, becausecourts do not reason instrumentally in a direct fashion unmediated by law,

instrumental concerns therefore have no influence Legal reasoning is practical

and instrumental, within the constraints of the law’s historical categories, rulesand principles

The forward-facing or ex ante perspective stressed by, for example,

econo-mists25is then an intrinsic part of the common law Moreover, pace Smith, the

backward-facing aspect can be readily explained by instrumental accounts.Rules might, indeed, exist as incentives for economically efficient behaviour

but the application of those rules to an individual dispute obviously requires

the court to look back to the facts of the case.26If judges are mostly involved inthis kind of reasoning, as Smith asserts, then that is no doubt because mostcases involve the application of law to facts, rather than development of thelaw, when a forward-facing, consequence-examining stance must be (and is)taken

The characteristic pragmatism of the common law is thrown into relief by acomparison with civilian contract law An Anglo-French colloquium on con-tract remedies revealed evident Gallic distaste for the ‘rather immoral’ attitude

of the ‘commercially inspired’ English lawyers, in their ready acceptance ofbreach-and-pay-damages (as opposed to compulsion of performance).27Smith’s slightly desperate argument that the common law’s terminology of

‘promisor and promisee’ is fraught with morality when compared with thetypical civilian ‘creditor and debtor’ is, in fact then, precisely wrong.28Englishcommercial lawyers are well aware of the difference in attitudes, and promote

22

Stephen Waddams, Principle and Policy in Contract Law: Competing or Complementary

Concepts? (Cambridge University Press, 2011), 217.

23 Ibid., 223. 24 Ibid., xv.

25 E.g Frank H Easterbrook, ‘The Supreme Court: 1983 Term – Foreword, the Court and the

economic system’ (1984) 98 Harvard LR 4.

26 Cf Nathan Oman, ‘Unity and pluralism in contract law’ (Review of Smith, Contract Theory) (2005) 103 Michigan LR 1483, 1493–4.

27 D R Harris and Denis Talon (eds.), Contract Law Today: Anglo-French Comparisons (Oxford:

Clarendon Press, 1989), 298.

28 Smith, Contract Theory, n 6 above, 58, n 11.

it – in the global ‘market for law’ the formalist English law of contract isbelieved to be particularly well suited to the resolution of commercial dis-putes.29It is anyway hard to see what ‘cultural values’ are in play in litigationbetween multinational corporations.30

Following on from these rather general introductory remarks, identifyingthe good ‘fit’ between English contract law and instrumental attitudes, it will

be argued that the relatively neglected questions of strict liability and corporatecontracting are considerably easier for instrumental than for moral-promissory theories to explain – including the neglect itself In the keybattleground of contract remedies, the instrumental approach remains dom-inant although, a full century after Holmes’s famous ‘thought experiment’ ofthe Bad Man, moralism is now fighting a counter-attack

Fault in the law of contract

Contractual liability is usually strict.31 Liability once established is notbroadened by fault – even deliberate breach Nobody minds That such axiomsare rarely questioned or barely discussed is problematic for the promissorytheory.32If breach of contract were a moral wrong one would expect liability

to depend intimately upon the degree of culpability But it clearly does not.33Kimel notes the ‘obvious feature’ that both liability and remedies are ‘largelyinsensitive to questions concerning fault on the part of the party in breach’.34Contract lawyers devote little attention to fault and the standard of liability,questions ‘with which tort lawyers are so familiar’.35

Moreover, this strictness dovetails with another characteristic feature of thecommon law of contract (discussed below), that damages are the primaryremedy for breach of contract whereas specific performance is theoretically thestarting point in civilian systems.36Of course, culpability of breach has to betaken into account when courts routinely order parties to perform on pain of

29

Cf Chapter 9 below.

30

Cf E McKendrick, ‘Traditional concepts and contemporary values’ 10 European Review of

Private Law 95 (on Bunge v Tradax [1981] 1 WLR 711) But cf Catherine Mitchell,

‘Obligations in commercial contracts: A matter of law or interpretation?’ (2012) 65 Current

33Cf S V Shiffrin, ‘The divergence of contract and promise’ (2007) 120 Harvard LR 708, 710:

‘Contract law’s stance on the wrongfulness of promissory breach is equivocal at best, manifested most clearly by its general prohibition of punitive damages.’

34D Kimel, ‘The morality of contract and moral culpability in breach’ (2010) 21 King’s LJ 213.

35G H Treitel, ‘Fault in the common law of contract’ in M Bos and I Brownlie (eds.), Liber

Amicorum for Lord Wilberforce (Oxford: Clarendon Press, 1987), 185 There are, of course,

exceptions to this rule (e.g Sale and Supply of Goods Act 1982, s 13).

36 Cf H D Lando and C Rose, ‘On the enforcement of specific performance in civil law

countries’ (2004) 24 International Review of Law and Economics 473; DCFR III – 3:302.

punishment.37 But the common law gives the ‘promisor’ (according toHolmes) a free election to perform or pay damages38– providing therefore

he pays, he has not really done anything wrong and fault does not come into it.The point may be clearer still (and psychologically more appealing) withliquidated damages, viewed as the price to be paid for not performing.39Strictliability and the election conferred by the damages remedy are of a piece.The typical reaction of a promissory theorist when confronted with these(irrefragable) data is to call for contractual liability and remedies to be

‘moralized’ – radically reformed to reflect the culpability of the defendantthrough both the standard of liability and the remedies for breachonce established There are examples of this tendency in English contractscholarship.40 It may be questioned whether such commentators satisfy the

‘transparency’ and ‘fit’ criteria to be good accounts – rather than externalcritiques – in accordance with Smith’s methodological injunction

Kimel’s criticisms of that position do not depend on an outright objection tomoral considerations, for he defends a particular kind of ‘moral law ofcontract’.41But he points out that using law to enforce moral obligations per

se contravenes the tenet of classic liberal thought – the state should intervene

only to prevent harm to others.42Harm from breach of contract, as Kimel

crucially points out, ‘tends to be entirely insensitive to fault; its occurrence as

well as magnitude doesn’t usually correspond to the moral quality of theconduct that has brought it about’.43Thus, as contract remedies are justified

only for redressing harm, but harm is insensitive to fault, ergo fault is irrelevant.

Kimel’s argument based on Mill is a brilliant attempt to justify the strictness

of liability in contract But it runs into problems when we examine tortious

liability Of course, tort law is shot through with fault – but, pace Kimel’s

implied suggestion, not because intentional wrongs necessarily do more harm.Fraud has always been actionable whereas for many years negligent misstate-ments were not,44 and fraud liability still remains more extensive.45 Yet

37

R A Posner, ‘Let us never blame a contract breaker’ in Ben-Shahar and Porat (eds.), Fault in

American Contract Law, n 32 above.

38

Holmes, ‘The path of the law’, n 5 above; D Markovits and A Schwartz, ‘The myth of efficient

breach: New defenses of the expectation interest’ (2011) 97 Virginia LR 1939.

39

T Wilkinson-Ryan, ‘Do liquidated damages encourage breach? A psychological experiment’

(2010) 108 Michigan LR 633.

40

Cf N J McBride, ‘A case for awarding punitive damages in response to deliberate breach of

contract’ (1995) Anglo-American LR 369; Ralph Cunnington, ‘The border between compensation, restitution and punishment’ (2006) 122 LQR 382.

41 Kimel, ‘The morality of contract and moral culpability in breach’, n 34 above.

42 J S Mill, On Liberty (1859) Cf pp 22–4 below.

43 Kimel, ‘The morality of contract and moral culpability in breach’, n 34 above (emphasis added).

44 Le Lievre v Gould [1893] 1 QB 491; cf Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964]

AC 465.

45 Cf 4 Eng Ltd v Harper [2008] EWHC 915 (Ch); Parabola Investments v Browallia Cal Ltd

[2010] EWCA Civ 486.

negligent mistakes can be every bit as damaging as deliberate deception Theloss caused depends on the severity of the error and its context, rather than thedefendant’s state of mind Despite Mill’s (and Kimel’s) argument, it is clear

that tort lawyers do condemn fraud morally (at least in part).46

The contrast with the insouciant amoralism in contract is striking.47tract lawyers robustly ignore the morality, or wrongfulness, of breach ofcontract Promissory theorists do not generally consider the customary strict-ness of liability in contract, its fault-insensitivity But it remains an importantchallenge Kimel’s Harm Principle argument – although initially appealing inits contractual setting – does not account for the fluctuating attention paid to

Con-fault, across the law of obligations, i.e the difference between contract and tort.

An instrumental approach to contract, on the other hand, suggests a number

of plausible explanations for the fault-insensitivity of contract An obviouspoint is that strict liability eliminates the factually difficult question of faultfrom the inquiry into whether there has been a breach of contract Thispromotes the clarity, certainty and predictability to which English contractlaw characteristically aspires Fuller-blooded is to defend the positive desir-ability of deliberate breach of contract in certain circumstances (‘efficientbreach’).48 Therefore, an instrumental defence is available for a prominentand characteristic feature of the law of contract which is, by contrast, a seriousembarrassment for the moral-promissory school

Corporations in contract law

Corporate contracting also undermines promissory theories of contract – i.e.those that justify the law of contract by the moral obligation to keep one’spromises Corporate defendants are omnipresent in contract litigation.Accordingly, some obvious (but difficult) questions arise: in what way cancorporations meaningfully make promises, and does the moral obligation tokeep one’s promise apply to corporations? That such questions are rarelydiscussed strongly suggests that contract lawyers do not consider themimportant; this suggests in turn that the law of contract is not generallybelieved to rest upon any meaningfully moral foundations

In the leading modern account of the rules whereby acts are attributed tocorporations, Lord Hoffmann noted that the difficult areas are those in which

‘the general rules by which liability for the acts of others can be attributed tonatural persons’ (e.g agency or vicarious liability) do not apply.49 This is

‘generally true of rules of the criminal law’.50The question for promissory

46Cf Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC

theorists then becomes why, under this approach, corporate criminal

responsi-bility should be deemed ‘exceptional’ but not in contract law If making a

contract meant making a morally binding promise, that too would seem

‘primarily applicable to a natural person and requir[ing] some act or state ofmind on the part of that person “himself ”’.51 Of course, it will readily beobjected that following such an approach would disapply the entire law ofcontractual agency But that is the point: the very ubiquity of agency, indis-pensably useful and basically uncontroversial, shows that the law of contract isnot founded upon the morality of promising

The point of greatest contrast is with the criminal law Its doctrines,squarely based on individual responsibility and moral culpability, have proveddifficult and controversial in their application to corporate defendants.52Some, taking the view that corporations have (in Lord Thurlow’s words) ‘nosoul to damn, no body to kick’,53hold that they cannot be guilty of crimes atall The English approach has been to attribute the guilt of those individual(s)

in control of the company to the corporation itself: the ‘identificationprinciple’.54But identifying an individual as ‘the directing mind and will ofthe corporation, the very ego and centre of the personality of the corporation’presents obvious difficulties.55The doctrine has been heavily criticized.One line of criticism would be that to establish true, independent moralagency on the part of a corporation it is necessary that the corporation may be

morally responsible when no individual member is.56If we are barred fromlooking at individual directors or employees to ‘attribute’ their fault to thecorporation in some way, then the obvious problem is that the corporation

‘has no mind of its own’ How can an entity lacking a mind satisfy even basicpreconditions of moral agency, the ability to choose autonomously whether

to act?57French is the best-known protagonist of independent moral agencyfor corporations.58 His thesis, although much discussed, has attracted fewfollowers.59 French relies upon the Corporate Internal Decision Structure(CIDS) as an intentional, i.e directed, ‘system’ for decision-making Thisstructure distinguishes a corporation from a mere aggregation or mob of

Cf The Company of Shipwrights of Redderiffe’s Case (1614) 2 Bulstrode 233: ‘no subpoena lieth

against [corporations] because they have no conscience nor soule’ (Coke CJ).

54 Tesco Supermarkets Ltd v Nattrass [1972] AC 153.

55 Cf Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, 713 (Viscount

individuals The company’s policies determine the goals that the ‘CIDS’ mustpromote However, Ronnegard’s critique seems unanswerable: intention and

choice both require awareness, and so are metaphysically mental states.60It is

at least highly problematic to locate the sort of moral responsibility owed bynatural human beings in the decision-making rules of a corporation

From this flows the second critique of the ‘identification principle’ As Wellsargues:

Criminal law is inextricably tied to notions of individual moral responsibility

It is only by escaping that paradigm that a constructive debate about the structure ofcorporate liability can take place.61

On this argument, the correct response to the difficulties of applying the ordinarycriminal law to corporate defendants is to redefine the crimes, because ‘liabilitybased on an individualistic model does not confront the reality of corporatedecision-making’.62Professor Wells has therefore called for the law to ‘go holistic’,

fixing truly organizational liability on corporations: there may be an

organiza-tional failing even when no one individual, or set of individuals, was to blame.63The statutory offence of corporate manslaughter reflects this view (death causedthrough gross breach of duty by ‘the way in which [the corporation’s] activitiesare managed or organised’).64As the Law Commission had noted, however,since gross negligence manslaughter is ‘not a crime of conscious wrong-doing

at all’, most of the fundamental objections to corporate criminality involving

‘concepts of mens rea and conscious intention or risk-taking assum[ing] the

mechanisms of human, individual, choice and decision-making’ fall away.65Outside the new statutory crime of corporate manslaughter, companiesmight still, in theory, be prosecuted for intentional crimes at common law.But here of course ‘human, individual, choice and decision-making’ is verymuch implicated, and convictions under the ‘identification principle’ are likely

to remain rare In other words, traditional criminal liability remains ably tied to notions of individual moral responsibility’ and highly problematic

‘inextric-in its application to corporate defendants

Making promises would seem to be just as much a matter of ‘consciousintention’ as committing crimes Yet corporations are omnipresent bearers ofcontractual obligations In sharp contrast to the criminal law, no jurist seems

to find this quotidian observation problematic, or even worthy of note Therehas been no need to create a special ‘organizational’ redefinition of contractual

60Ibid., 20, 34, 36.

61Celia Wells, ‘Corporations: Culture, risk and criminal liability’ [1993] Criminal LR 551, 560.

62Ibid., 563. 63Wells, Corporations and Criminal Responsibility, n 52 above, ch 8.

64 Corporate Manslaughter and Corporate Homicide Act 2007, s 1(1) ‘An organisation is guilty

of an offence under this section only if the way in which its activities are managed or organised

by its senior management is a substantial element in the breach’, s 1(3) (for ‘senior management’ cf s 1(4)(c)).

65Law Commission Report No 237, Involuntary Manslaughter (1996), 7.3–7.4.

obligation to accommodate the corporate promisor, by contrast with therecent homicide reforms This might possibly indicate some unfortunateover-compartmentalization between ideas of criminal and contractual respon-sibility.66 Much more likely, however, is that contract law does not have ameaningful moral (i.e promissory) basis at all – unlike the criminal law.

If contract law is instrumental towards certain social goals, on the otherhand, its unconcerned acceptance of the so-called corporate ‘promisor’ is readilyexplicable Corporations ‘differ from moral agents in that they are not ends inthemselves Instead, actual corporations and the corporate legal form are bothcreated for certain instrumental purposes.’67The central role of corporations

as bearers of contractual obligations, although rarely if ever remarked upon,

is another powerful reason to prefer instrumental instead of moral-promissoryapproaches, in producing an accurate descriptive account of the law

Remedies for breach of contract

The moral conception of contracts as binding promises should entail, quitestraightforwardly, judicial enforcement of the contract as the standard remedy.That it is not, in the common law tradition, is a major embarrassment forpromissory theorists.68Conversely, cogent instrumental arguments are avail-able to explain the various limits on remedies for breach of contract – includingwhy deliberate breaches of contract should be tolerated or even encouraged.Thus, the rather limited nature of remedies for breach in English law seems to fitmuch better with instrumental accounts of the law

The distinctly secondary position of contractual enforcement in English lawthrough the equitable remedy of specific performance is typically explainedaway as an historical anomaly, born of equity functioning as a secondary gloss

on the common law rather than as a primary source of either rights orremedies.69Smith argues that a convincing moral explanation for the subsid-iary nature of specific performance may also be found, namely, the intrusionmade upon personal liberty by such a court order.70As he admits, however,there are very many contracts where specific performance would not infringethe defendant’s autonomy, but yet the order is not made – in particular,where the defendant is a corporation.71Moreover, if breach of contract were

66

Cf (in another context) P S Atiyah, ‘Economic duress and the overborne will’ (1982) 98 LQR

197.

67 Ronnegard, Corporate Moral Agency, n 56 above, 12.

68 E.g Co-op Insurance v Argyll Stores [1998] AC 1 C Fried, Contract as Promise (Cambridge,

MA: Harvard University Press, 1981), copes with the embarrassment by not discussing specific performance at all!

69 Smith, Contract Theory, n 6 above, 399. 70Ibid., 400–2.

71 Ibid., 402 Smith blames this upon the rule ‘throughout private law’ which treats corporations as

natural persons As argued out in the last section, this fiction would prove considerably more controversial if contract lawyers took moral culpability as seriously as criminal lawyers.

truly (legally and morally) wrongful, one would expect to see punitive damagesavailable.72 That they are axiomatically never awarded in contract poses

another major ‘puzzle’ for moral approaches.73

A fortiori, the argument that breach of contract might be economically

efficient – and therefore positively to be encouraged by the law of contract(‘efficient breach’)74 – is anathema to such theories, and provides a clearcontrast between the two schools While there is a fierce debate amonglawyer-economists as to whether breach really is ‘efficient’, our present con-cern is not to decide whether damages or specific performance should bepreferred as the efficient default remedy.75 Rather, the question here iswhether this efficiency-maximizing stance fits the law on remedies forbreach of contract

It clearly does The US Restatement (Second) of Contracts also summarizes

the classical approach of English law Its inconsistency with the promissory approach is patent:

moral-The traditional goal of the law of contract remedies has not been compulsion

of the promisor to perform his promise but compensation of the promisee forthe loss resulting from breach ‘Willful’ breaches have not been distinguishedfrom other breaches, punitive damages have not been awarded for breach ofcontract, and specific performance has not been granted where compensation

in damages is an adequate substitute for the injured party In general, fore, a party may find it advantageous to refuse to perform a contract if he willstill have a net gain after he has fully compensated the injured party for theresulting loss.76

there-Campbell and Harris suggest an important qualification to Parke B’s

cele-brated dictum:77

72 Of course, there are well-known problems with ‘punishment through litigation’ – not least the absence of the procedural protections for defendants in criminal proceedings Should breach of

contract therefore be a crime? One who believes that breach is morally wrongful but objects to

punitive damages should, presumably, advocate criminalization We are not aware that any promissory theorist advocates this, however, or that any legal system in history has treated

breach of contract per se as a criminal offence.

73

Addis v Gramophone Co [1909] AC 488 Smith, Contract Theory, n 6 above, 156, 417–20.

(Smith’s declaration that ‘so far as I am aware, no judge or legal scholar has ever argued that deliberate breach should, in principle, attract punishment’ overlooks the fundamentalism of McBride and now Cunnington: cf n 40 above.)

74

The argument, in outline, may be illustrated by a simple example A agrees to sell a certain cow

to B for £1,000 C then offers to buy the cow for £1,500 A (according to ‘efficient breach’) should sell the cow to C, and pay damages for breach to B Assuming that B’s expected profit

from this transaction would have been £200, it may be seen that A and C are both left better off

by A’s breach (C gets the cow, A keeps £300 of the £500 ‘overbid’, less the £200 paid to B) and

B is left no worse off, since his ‘expectation interest’ has been fully compensated Cf pp 44–50

below.

75 Cf pp 48–50 below.

76Restatement (Second) of Contracts (ALI, 1979), ch.16 (remedies), introductory note.

77Cf Robinson v Harman (1848) 1 Exch 850, 855.

[T]he fundamental rule of the law of contract is to put the claimant in theposition he would have been in had the contract been performed (that is, to

protect the claimant’s expectation) by the means which impose least cost on the

defendant.78

If we view breach as morally wrongful, this concern to minimize the burden

on the defendant wrongdoer looks very puzzling.79The traditional law on remedies, which is of great importance in telling usabout the nature of the obligations that the remedies are afforded to protect,thus gives feeble support to the moral-promissory view of contract There islittle concern with enforcing promises, either directly by specific performance,

or indirectly by exemplary damages While damages compensate the isee’s lost bargain, this is fully reconcilable with the requirements of ‘efficientbreach’ Efficiency is further advanced by the so-called duty to mitigate, whichredounds solely to the benefit of the party in breach of contract.80

prom-Some elements of this conventional account of the law on remedies havebeen under pressure recently with discussion of the promisee’s ‘performanceinterest’.81In practice, however, this has led only to greater recognition of thenon-economic gains that certain promisees can be foreseen as deriving fromthe contract (the ‘consumer surplus’).82The mitigation principle has remained

of central importance in limiting the court’s compensation of the ‘performanceinterest’.83 Prior to the Contracts (Rights of Third Parties) Act 1999 it wastouted as a solution to the supposed conundrum that the promisee (who alonehad a right of action) could recover merely nominal damages because the thirdparty suffered the actual loss from non-performance Such breach was sug-gested as a loss in itself for the person to whom performance had beenpromised.84 However, a majority in the leading case directly rejected thisview.85 Lord Clyde held that breach of contract is not itself a loss ‘in any

78 D Campbell and D Harris, ‘In defence of breach’ (2002) 22 Legal Studies 208, 220 (emphasis

added).

79

S V Shiffrin, ‘The divergence of contract and promise’ (2007) 120 Harvard LR 708, 724,

suggests that limiting recovery of the promisee’s consequential loss to that which was foreseeable

at the time of entering into the contract is ‘[f]rom a moral perspective quite strange’.

80

Cf M G Bridge, ‘Mitigation of damages in contract and the meaning of avoidable loss’ (1989)

105 LQR 398.

81

D Friedmann, ‘The performance interest in contract damages’ (1995) 111 LQR 628; C Webb,

‘Performance and compensation: An analysis of contract damages and contractual obligation’

(2006) 26 OJLS 41; D Pearce and R Halson, ‘Damages for breach of contract: Compensation, restitution and vindication’ (2008) 28 OJLS 73; R Stevens, ‘Damages and the right to performance: A Golden Victory or not?’ in J Neyers et al (eds.), Exploring Contract Law

(Oxford: Hart Publishing, 2009).

82 Non-commercial – may one say atypical? Cf Lord Bridge of Harwich in Ruxley Electronics Ltd

v Forsyth [1996] AC 344, 353.

83 Ruxley Electronics, ibid., illustrates both the development of the consumer surplus and the

continuing dominance of the mitigation policy.

84 Linden Gardens Trust v Lenesta Sludge Disposals [1994] 1 AC 85, 96–7 (Lord Griffiths).

85 Alfred McAlpine Construction v Panatown [2001] 1 AC 518.