relation originating in history. Explanations of the state are often of this latter kind.
Reliance on minimal explanation for contract and the need for non-minimal ones for command seem to me a simpler, less unsatisfactory way of dividing non-affective co-operative social arrangements into contract and command than the recourse to slippery notions of freedom and rights. Even so, the dividing-line remains blurred.
Promise, Performance, and Enforcement
Unless there is specific occasion for proceeding otherwise, I shall argue as if all contracts were bilateral, two-sided. (Lawyers sometimes call a contract “bilateral” only if it still involves two unexecuted performances, or duties, in satisfaction of two promises, or rights; while if one has been already executed, leaving only one outstanding, they call it “unilateral.” This usage is misleading and should, I think, be avoided.) Although there may be several persons to a side, for the moment it will do to suppose one person or “party” on either side. The essential elements of bilateral contracts are:
1. two promises; each party is both promisor and promisee;
2. two sets of performances, one by each promisor. They have two configurations:
(a) one performance set is contingent on the other;
(b) the two performances or performance-sets are mutually contingent.
The decisive dimension of the structure is the timing of its elements relative to each other. Following Hobbes,1 one can distinguish three timing patterns. A given pattern must first and above all be looked at to see whether fulfilling its terms represents an “equilibrium-point”2 in the sense that, faced with the choice between “perform” and “default,” each party will prefer to perform unless the other party defaults first. A contract having such an equilibrium-point is self-enforcing. Non-self-enforcing contracts pose various enforcement problems.
1. The spot contract. Two actions are promised and performed with little or no time elapsing between promise and performance, and with the two performances being for all practical purposes simulta neous. An ordinary exchange is the standard case, where an offer and its acceptance constitute the two promises, delivering against the agreed consideration the two performances. The element of recipro cal promise may even be lost sight of if it is literally simultaneous with execution. However, the delivery of X against Y is logically always pos terior to an exchange of promises to give X for Kand Yfor X, respec tively, even if in a functioning market, with goods on offer at given prices, promises to buy and sell, and their executions, are instanta neous and merge into each other.
A spot contract is intrinsically self-enforcing since, by the definition of a contract, neither party values what he has to give up by performing more highly than what he stands to get by inciting the other party to perform his half of the bargain.
2. The half-spot, half-forward (also known as part-executed) contract.Two promises are made, as for a spot contract. However, they are not to be executed simultaneously. The second or forward performance is contingent on the first or spot one, but not, as in the spot contract, vice versa. The second performance is typically deferred consider ation, e.g., the repayment of a debt resulting from a first performance such as a loan or the delivery of goods on credit.
A half-spot, half-forward contract is intrinsically not self-enforcing, for once the promised first act has been performed its desirability no longer provides the incentive to perform the second act—though there may well be other incentives, such as keeping one’s good name and credit intact for other contracts. However, they are external to the contract in hand.
3. The forward (also known as wholly executory) contract. Two simul taneous deferred performances are promised, i.e., two parties commit themselves to execute a “spot” exchange at a future date. As the two performances are mutually contingent, this contract has some tendency to enforce itself without being intrinsically self-enforcing. For what is the parties’purpose in committing themselves today to a future exchange of performances, instead of biding their time?
3.1 The classic reason is a divergence of expectations; the two parties both believe they can get better terms from each other today than at the future date foreseen for the actual exchange, and indeed better than at any future date between then and now, working backwards from the date of exchange towards today. Each party, in other words, expects the available terms of exchange to be moving against him over this period. But if this expectation turns out to be true for one party, it must prove to have been false for the other. When the date set for the actual performance comes round, the party whose expectation was proved false would be better off if he had not made the contractual commitment and may have an incentive to default.
3.2 A less classic and less clear-cut reason for contracting forward has to do with the possible value (convenience, assurance, complementarity with some other contract) attaching to the perfect foreknowledge of the terms on which a future exchange will be carried out. This value, if there is one, is eroded over time at a rate which reduces it to zero on the day the exchange is to take place. If on this day the terms that happen to be available for the exchange in question differ from the ones that had earlier been contractually fixed, one of the parties will have a definite incentive to default even if no specific expectation of his has been falsified by events.
3.3 Lastly, there are reasons for forward contracts derived from transactions costs in a wide sense. It may pay, in terms of search, information, and negotiating costs, to hire a man for a whole month rather than to hire one (even if he were the same man) by the day every working day of the month. Likewise it may (but probably does not) pay to own a motor car instead of forever calling taxis. “Vertical integration” instead of ad hoc recourse to bought goods and services, a household’s installed equipment, a firm’s owned and leased factors of production, are explained in these terms. Contracts concluded to economize search and bargaining costs tend to provide not for two mutually contingent discrete performances in the future but more typically for two mutually contingent streams of performances (e.g., work, and wage payments in return for work) running concurrently.
Thanks to simultaneity, they have a strong tendency to enforce themselves, yet remain vulnerable to a marked deviation between newly available terms of exchange and the terms that had been originally contracted for—a deviation which makes default attractive to one of the parties.
In sum, no forward, wholly executory contract is intrinsically self-enforcing. Item 3.1 has some bias to default, 3.2 may go either way, while 3.3 appears strongly biased towards self-enforcement. However, whether every forward contract is tendentially self-enforcing or not cannot be readily detected from its form—the configuration in time of promises and performances that it stipulates—but depends on the parties’motives relative to the facts of the case.
It is now readily apparent that “default” means two radically different events. Default in the half-spot, half-forward contract configuration means that performance by one party is not reciprocated by performance by the other. The first performer has made an unrequited delivery. He parted with the “consideration” (promise fulfilled, service rendered, goods handed over). By the default
