private good of justice in civil cases to individual litigants, the profits of the latter helping to “finance” the emergent general benefits of the former. It was above all the revenue derived from selling justice in matters of property, source of the fattest fees, both in the narrow field of contracts and in unrequited transfers by marriage and inheritance, that most excited the competition between rival communal, ecclesiastical, manorial, and royal jurisdictions, and whose end-result was the emergence of the near universal monopoly of a single public, sovereign agency of law-enforcement. Within this trend there was, at least in England from the fourteenth century onwards, a secondary but none the less portentous development, namely the rise in importance of Chancery as opposed to the common-law courts—a development which, through a few ups and downs, has continued to this day on both sides of the Atlantic, and is giving us the benefits of social policy-making by judicial discretion.
One should perhaps tentatively set down a few markers at this point. The more “micro,” decentralized, and private is contract enforcement:
1. the greater is the share of the total cost of enforcement contributed by those for whom it is a private good, paid for in proportion to their recourse to it;
2. the smaller is the unrequited benefit non-contributing free riders derive from enforceability, hence, from the public good of safe reliance on contracts in general.
The polar case of privateness is that where the seller of enforcement succeeds in completely shutting out non-contributors from the benefits of safe reliance on contracts. The labor racketeer who makes sure that an employer who does not pay him ransom will have his plant struck can be said to accomplish this to the full; he ensures that only those promises are kept whose promisee has paid enforcement costs.
The opposite extreme is purely public enforcement, where recourse to it is costless to the litigant and every promisee benefits from the general reliability of contracts as a free ride.
Generalizing the concept of enforcement over a range from the wholly private to the purely public, involving an unspecified variety of means and practices, a variable dose of externality, and no doubt a varying degree of imperfection and injustice, is perhaps unusual and calls for an apology. The object is to dissipate two facile notions that seem to pervade all discussion of these matters.
One is that contracts are either enforceable or not, instead of enforceability and reliance being stochastic, more or less probable. The other is that only the sovereign state is capable of enforcing contracts. The same unproven and gratuitous supposition underlies the idea of the rule of law being a necessary condition of a “market order.” If this were the case, the political authority would be logically prior to the institution of contract. It would then be difficult, to put it no higher, to view contract as one of the two elementary building-blocks of social co-operation. But perhaps neither is logically prior to the other. Perhaps such causal relation as there is between them is diffuse and roundabout. The more general approach, for which the present book is groping, allows us to stay uncommitted as to the priority, in history and in logic, of contract or society, the chicken or the egg.
What reason is there for fulfilling non-self-enforcing contracts? If it is wrong to lie, it must also be wrong to lie about our future conduct, though the wrong is possibly lessened by the lapse of time between the contractual undertaking to perform an action and the failure to honor the undertaking. If I say “I will do X” have I made a promise or a forecast? And if I do not in fact do X, have I lied, have I broken my promise, or has my forecast about the future conduct of the person “I” was going to become, and about the circumstances “I” was going to face, turned out to be mistaken? When did my statement about the future become a promise, and when did my promise become a contract or, more precisely, a half of one? The analogy between two formally not dissimilar requirements—that a statement be true and that a promise be kept—is not complete. If there are white lies, are there harmless breaches of promise? And can a promissory obligation be justified on other than consequential grounds? Or is the only ethical reason why a promise is binding the difference it makes to others if it is not honored? A different question, straddling ethics and social theory, that is of obvious practical import is as follows. What reason is there, apart from the price he may be willing to pay for justice, for assisting a promisee to obtain the performance due to him from the promisor? More stringently, are there good arguments that he is in fact entitled to assistance without having to pay whatever it takes to call it forth—that it is incumbent upon certain or all others not party to his contract to see that it is fulfilled?
Under enforcement by self-help and bought help, and albeit much less clearly under mutual aid, the reason for enforcing can be reduced to some sort of probabilistic cost-benefit calculus, involving the chances of successful action, its costs, and the benefits of reparation. The question whether the contract ought to be enforced, and the validity of the ground on which a particular promissory obligation can be justified, need not arise. When, however, help in enforcement is requested from some putatively impartial institution, other grounds than the promisee’s own interest, and his resulting capacity and willingness to pay for help, become relevant to the response.
There are then basically only two jurisprudential alternatives. Greatly simplified, one leads to pure rule-application, the other to discretion. The former, sometimes called Formalism and congenial to “classical” liberalism, is content with adequate evidence that a contract of stated terms has come into being. Free of duress and misrepresentation, a contract that is recognized to exist is eo ipso binding and entitles the promisee to enforcement,4 almost entirely regardless of its substantive content; the sale of children and slaves, Shylock’s “pound of flesh,” and Faust’s contract with Mephisto are some of the few culturally bound exceptions.
The contrary doctrine, sometimes called Realism, once a rival of, but for the last half-century the clear victor over, Formalism,5 rejects the claim that promises, however reciprocal, are capable of creating enforceable promissory obligations without being supported by the merits of the case which alone can earn them the socially bestowed rank of enforceability.
“Merits,” in turn, can be more general or more specific, both requiring validation but capable of being validated by different routes. Two routes admit a general presumption in favor of enforceability; the third is rigorously ad hoc, taking notice of specific merits only.
1. Hume formulated a sort of aggregate social cost-benefit view of the presumption in favor of enforcing contracts. Since the ability to rely on such agreements is convenient for society,6 it makes good sense for it to help out with enforcement. Rule-utilitarianism has, of course, found this idea thoroughly to its taste. The point of the argument is not that a promisee should be able to get a contract enforced because it constitutes an obligation of the promisor, nor that all formally valid contracts constitute an entitlement to enforcement. Strictly what the argument implies is that it is rational for society to balance the incremental utility of greater respect for contracts against the incremental cost of more perfect enforcement. A sterner attitude to obligations should then be taken if greater strictness has “net marginal social utility” or some equivalent index of what we should want to maximize. Not altogether unrelated to this way of justifying public enforcement is the “efficiency” theory. For the contemporary American “law and economics” school, in particular, the merit of a contract is proportional to the contribution its observance makes to some maximand of an economic nature, such as Pareto-optimal resource allocation, the gains from exchange, or (in bold contempt of the surrounding conceptual minefield where angels fear to tread) “wealth.”
2. The other way of making a presumptive case for enforcement out of the merits of contracts in general, is deceptively like Formalism while being poles apart from it. There is in this approach some limited recognition of the power of contracting parties
