In its boldest version, the promise to perform specific acts, expressed in contract X, signifies adherence to an implicit and more general contract Y always to perform as promised, always to keep one’s word. Contract Y standing behind contract X is “a convention whose function it is to give grounds . .. for another to expect the promised performance.”7 Contract Y, however, is in no better shape than was contract X to constitute an enforceable obligation; if X needed a more general Y to back it up, Y needs an even more general Z, and so forth. What constitutes a satisfactory stopping-point behind which we need not go in order to establish that promises of a certain form and context are morally binding can perhaps be made a matter of metaphysical agreement. However, agreement to regard the rath back-up contract-to-respect-contracts as the ultimate, irreducible source of the obligation does not really meet the question why “society” should use force to ensure conformity to it.
In place of a regress of implicit secondary, tertiary, etc. contracts, cut off somewhere by agreement, one can proceed by putting a different construction on what being a party to the primary, overt contract X signifies. Respect for contracts in general is conducive to the public good of safe reliance on them; respect is produced by enforcement. Anyone becoming party to a contract benefits from the public good. By accepting the benefit, he effectively incurs a liability8 to contribute to its production. Consequently, not only must he recognize the binding character of his promise and if need be submit to its enforcement, but he must also do his best to help enforce the contracts of others. All doing their bit, e.g., by paying taxes to finance it, adds up easily enough to public enforcement by “society.”
This doctrine declares the inadmissibility of free riding. There are places in the subsequent argument of this book where this question plays a more central part; I will not pursue it here. Suffice it to note in passing that whatever the weight of the anti-free-rider argument in the case made for contract enforcement, it amounts to little as a reason for indiscriminately enforcing all formally valid contracts regardless of the substantive merits of each. If a particular party to a particular contract derives little or no benefit from the social institution of contracts, he should, on grounds of the fairness principle, neither have to submit nor be asked to contribute to maintaining the public enforcement apparatus. The working class is presumably a massive case in point. Marxist thought would seem to lead to the claim that while it is a party to the wage contract, the proletariat derives no benefits from bourgeois law in general and from the enforceability of contracts in particular; it is not a free rider on the social co-operation practiced in capitalist society, it should not submit to enforcement, and still less should it be required to contribute to it. The very imperfect enforceability of labor contracts and the legal immunities of trade unions, though usually supported by other types of arguments, square well with such a principle of fairness, as does the reluctance of the courts to order poor tenants to be evicted. The anti-free-rider principle of fairness cannot be applied without answering questions of fact about the limited capacity of a perhaps helpless, plodding pedestrian—if not positively downtrodden—contracting party to free-ride on the enforceability of contracts; general in intention, it ends up dealing with cases on their merits.
3. The legal doctrine which avowedly treats each case on its merits is guided by the requirement of upholding one of a number of other fairness principles, each more private than Hart’s general anti-free-riding, public-goods type of fairness. Contracts must be enforced if, but only to the extent that, default by the promisor gives him an unfair advantage or constitutes unfair treatment of the promisee. This is the case in two kinds of circumstances.
Under the circumstances of what I propose to call first-degree default, the unfairness is “benefit-based.” To be complete, the relevant fairness principle must posit a theory of consideration. The formal requirement that “a bargain must have two sides,” that there is no due performance without consideration, and neither party stands to get something for nothing, is an insufficient test of fairness. It must be shown, in addition, that in terms of the theory the consideration was adequate, that it provided full justification of the performance called for under the contract. It is unfair to the promisee to receive unrequited benefit from him by defaulting. Yet the promisor’s obligation goes no further than the “real” benefits conferred by the consideration—whatever else the contract may say. Whether the consideration is a fair match for the performance is a matter of separate judgment on merits and not an analytic consequence of the agreement of the parties to the terms of the contract. The terms are enforceable if they were fair, equal, and not contrary to public policy. It is obvious enough that in becoming subject to judgments of this nature contract enforcement ceases to be a relatively straightforward, invariant practice of rule-application. It passes into the realm of judicial discretion and becomes in fact a motive force in the expansion of this realm.
Under the circumstances of second-degree default, the “benefits-based” doctrine of fairness might well point to unenforceability, for if no consideration changed hands there was no unrequited benefit. However, an unconsummated, wholly “forward” contract can nevertheless give rise to unfairness under the “reliance-based” doctrine of fairness if one party has effectively discounted in advance the anticipated performance of the other party and suffered actual demonstrable damage as a result of the latter’s default. Once again, by the recourse to fairness, a field is opened up to judgments of merits and to the application of discretion. It is perfectly possible to hold that discretion offers a greater likelihood of attaining just judgments than do blind rules; it is not unreasonable to believe the contrary. Our concern is not to weigh such beliefs against one another but to deduce, if we can, the influence of alternative doctrines and practices of contract-enforcement upon the social structure.
Modern legal theory takes the view that if pure Formalism in contract law ever existed (which is doubtful, for if common law leaned to Formalism it was always and everywhere checked in its leanings by the competing royal justice in Equity and by the natural-law doctrines of the Church), it is gone for good and cannot be brought back due to its own inherent weaknesses, which, now that we know better, we could not tolerate. Those who call for indiscriminating enforcement of formally valid contracts betray their incomprehension of what good law should be like and could do. “To a lawyer acquainted with the difference between expectation, reliance and restitution damages,”9 the very meaning of redress for default in a wholly executory forward contract can be puzzling. Where neither party has performed and neither has suffered from reliance on the other’s expected performance, where is the basis for prescribing a remedy?
To a layman observing what changes in legal doctrine do to the way society functions, this sort of argument merits little patience. Lawyers, modern or ancient, have never been long at a loss to specify remedies in civil law when it suited them to do so, however problematical the basis for it may have been. A more effective reason cited by certain authors for being at a loss to find a basis to repair default in forward contracts is their intrinsic bias. This type of contract, being a device for risk-redistribution, favors the shrewd, the strong, the clever at predicting the future—hence its enforcement would be anti-egalitarian.10
Once again, the point with which my argument takes issue is not how justice is best served. It is perhaps pertinent to say all the same that if the equal distribution of income, wealth, or anything else that is both desirable and transferable is to be the set objective, there must be more direct ways of achieving it than by indifference to the observance of contracts that are thought to favor the rich—however laudable a by-product of modern contract law it may be to make them poorer. Regardless of this by-product, however, how should we assess the doctrine on the merits of its main bias? It may be unjust to a class of contract parties who fail to get the performance that was agreed to be due to them. With this aspect we are not concerned. It may also little by little distort, if not undermine, the institution of contract, the manner in which it helps promote social co-operation. In particular, contract law and its application are bound to affect the “dynamics” of the balance
