"The reliance interest in contract damages", Lon Fuller Supposition that law exists as a means to an end -- not new, but hardly enjoys a pervasive application in practice. Esp. in the assessment of damages -- law perceived not as a purposive ordering of human affairs but as a kind of juristic mensuration. However, in actuality the losss that the P suffers (deprivation of expectancy) is rather a normative construction. It is only a loss is we presume that there was some obligation, an implied "ought". So even when the law awards damages acc. to the value of promised performance, it pursues some other end, even if it's not expressly articulated. Therefore, the body of law is indeed intricately connected to more geeral rationales and policies. The purposes in awarding damages 3 principal purposes: Restitution interest -- when the P has conferred some value on D while acting in reliance on D's promise. Purpose -- to prevent unjust enrichment. Has 2 elements: 1). reliance by the promisee and 2). gain to the promisor -- may sometimes be assessed differently depending whether the standard of measurement is the promisor's gain or the promisee's loss. Generally, however they're identical. Reliance interest -- while acting in reliance on D's promise, P has changed his position -- damages that'd put him in as good a position as he was before the promise was made. Expectation interest -- to put the P in as good a position as he would have had had the promise been performed -- award P the value of expectancy that the promise created. 3 interests --- unequal claims to judicial intervention: restitution interest -- most important (b/c of unjust enrichment), and >reliance>expectation. Another explanation -- in expectation interest, the law enters the realm of distributive justice (as opp. to corrective justice). The justification for legal relief is not selfevident.Why enforce? -- is too narrow a question. Compensate detriental reliance rather than "for the good of society". Contract is not that different from torts. Why not award reliance damages? -- hard to prove and calculate, while expectation damages are easier to prove. Expectation damages, however, are a rough approximation of reliance damages. Awarding expectaation damages would also deter breach of contract and would encourage future contracts -- a positive feature, a benfit at large. Fuller -- gives both formal and substantive reasons for enforcing contracts -- anything wrong w/ this view? In practice may be problematic. Why protect the expectation interest? 1st answer -- psychological: breach of promise arises a sense of injury in the P that she was deprived of smth. that was hers. The law then tries to heal the injury. Criticism -- the law does not try to provide relief for all injuries; only those deemed important. Can't resolve the whole issue. 2nd answer -- "will theory": contracting parties are exercising a legislative power; legal enforcement then is just a kind of implentation by the state of a private law. Criticism -- does not help to explain all cases of exp. interest. If it is merely some private law, there is nothing said as to what is to be done when it is violated. Can't explain why not limit damages to just reliance damages. 3rd answer -- economic/institutional approach: more proissing. Expectancy -- regarded as a kind of property; breach then is an injury to that property. Criticism -- expectancy can be regarded to have value only as a consequence of legal intervention, not as its cause. Better approach -- juristic: primacy of law over economics; law not as a subject of social institutions, but its master and creator. Justification then would be some social policy pursued by the courts -- to offer both a cure to such problems and to take measures against their reoccurrence. Cure -- offers damages that accurately reflect P's total reliance that is sometimes diff. to prove b/c the loss actually being compensated is the opportunity cost of not being able to enter into other contracts (analogy to physicians charging full fee for broken appointments) -- the most effective way of compensation for such losses. Prevention -to discourage breach of contract, to penalize breach of promise. Another reason behind it -- more positive in nature -- to encourage and facilitate reliance in business -- stimulates econ. activity. But in order to achieve this purpose -- need to dispense w/ proof -- allow recovery independent of reliance.
"Consideration and Form", Lon Fuller Goal -- to examine the doctrine of consideration in terms of its underlying policies. There is a significant relationship between consideration and form. Consideration can have both a "formal" and a "substantive" aspect to it: formal -- making of the promise is attended by some formality and "substantive" -- the significance of a promise made irrespective of the circumstances. Functions performed by legal formalities Evidentiary -- evidence of the existence of a contract in case of doubt: may need a writing, attestation or a notary's certification. Cautinary -- acts as a bar to thoughtless or inconsiderate action -- e.g., seal. Channeling -- seal can also signalizes the enforceability of a promise; a simple test of legal enforceability to facilitate "juducial diagnosis". As such, it offers a legal framework for parties, but then have to be aware of the forms' legal effect. The 3 functions are closely interrelated -- whatever tends to accomplish one of them also tends to accomplish the other two functions. When is formality needed? Should be used only in relatively important transactions to preserve a proportion between means and ends. Need only in those situations where their presence would be crucially important. Should not be relied on in those cases where there are already definite and clear-cut business categories. But book salesman-housewife example -- may need some channeling due to the uncertainty in the situatuion. Substative reasons for relying on formalities. The Substantive Bases of Contract Liability Private autonomy -- the private individuals' power to effect changes in their legal relations; comparable to the power of a legislature. Related to the "will theory of contract": 1). focus on the inner intentions of the promisor; 2). the minds of the parties must "meet"; 3). the law has no power to fill "gaps"; 4). the promisor must be free to change her mid at any time. Consistent w/ the objective view of contract which has one of its concerns the need to promote the security of transactions. But there must be limitations on the principle of private autonomy. Common view that contracts for the distribution of goods is natural, but it is in fact only one of the ways to achieve the same goal -- could just as well be distributed by a dictator. The law allows individuals to contract. Most people would agree that some kind of regulation is necesary. Fuller's view of private autonomy is reducible to the instrumental view. Reliance -- recognition that a breach of promise may cause some injury to the promisee who has changed her position in reliance on the promise. Reliance vs. private autonomy in a variety of situations: 1). a distinct basis for liability excluding any need to resort to private autonomy. 2). principle of reinbursing R -- in conflict w/ the principle of PA: when the promissor expressly stipulated that the promise should impose no liablity on her. 3). R -- a ground of liability supplementing and reinforcing that of PA: executory agreements (reliance may induce the courts to honor the promise if its breach would lead to serious losses). 4). R and PA -- independently suff. bases for imposing liability. Unjust enrichment -- presents a more urgent case for judicial intervention, an aggravated case of detrimental reliance. May sometimes become an independent ground for liability. In other cases -- supplements and reinforces the principle of PA. Costs of Legal Intervention -- 1). social efforts spent on enforcement; 2). enforcement contracts the field of human interaction free from legal restraints. Relation of Form to Substantive Bases -- the greater the certainty that the desiderata is satisfied, the larger the scope of PA. The Substantive and Formal Policies Underlying the Req. of Consideration
Gratuitous promises -- not enforceable b/c promisee does not change her position and neither has given or promised to give anything in return. No reliance or unjust enrichment here, no acute need to apply the principle of PA here. A gift is a "sterile transmission". Lack of evidentiary and cautinary safeguards. No formality which the cts. could use as a test of enforceability. Half-completed exchange -- A delivers to B as previously agreed, but B defaults on a promise to pay. Here -- all the factors nec. for enforceability. Substantive side -- A's reliance and B's unjust enrichment. Formal approach -- acceptance of delivery constitutes a kind of natural formalit -- satisfies evidentiary, cautinary and channeling purposes. Executory exchange -- need for judicial intervention diminished. No unjust enrichment, reliance not as potentially detrimental if any. No formality. Merely the fact that this was a transaction as opp. to a gift. --> EE are viewed as less important than half-completed promises. The element of an exchange here is the sole potential basis of liability. Transactions ancillary to exchanges -- described by Llewellyn as "going-transaction adjustments"; closely connected w/ exchanges and share w/ them the underlying formal and substantive grounds for enforcement. Unbargained-for reliance -- a change in position that was not bargained for; the element of exchange is removed here --> the need for judicial intervention is not that great; w/ the loss of exchange -- also lose the formal safeguards. Under §90 -- may or may not be enforced depending on the circumstances. 2 criteria -- the seriousness of the promisse's reliance and its foreseeability by the promisor. Minimal consideration -- the formal desiderata are satisfied here: the parties took steps to conform to the form -- similar to enforcement of promises under seal. Moral obligation and consideration -- can be rationally defended. We assume that men ought to participate in an exchange of goods and services, and we enforce such contracts. The need for formal guarantees is not too great when there is evidence of moral consideration. Possible criticism of this position: moral obligation + mere promise to honor the obligation = 0+0. But Fuller says that this can also be viewed as 1/2+1/2=1. The future of form and consideration -- the problem of form is not likely to disappear. The desiderata underlying the use of formalities will still be important. Only doubtful that "blanket formality" would survive. As for modern formal requirements, a nominal consideration + a requirement that the promise is to be entirely in the promisor's handwriting should be adequate. No need to get rid of cosideration -- would be unwise and impossible. The problems assoc. w/ consideration can't be abolished. Rather get rid of the doctrine that assumes that the law can be understood and applied w/o any reference to the purposes it serves. "Beoynd Promisory Estoppel", Farber, Matheson Surveyed over 200 PE cases -- concluded that reliance is no longer key to PE. PE is being tranformed into a new theory which has a distinctly contractural nature. First finding -- somewhat unexpectatly PE was applied in commercial contexts: construction bids, employee compensation, pension cases, lease agreements, etc. Second finding -- PE no longer a fall-back theory of recovery, but a primary basis of enforcement. Third finding -- reliance plays little role in the deterimnation of remedies. Recent cases -- full expectation damages were frequently awarded. Fourth finding -- most important -- diminished role of reliance in determining liability. Req. of an identifiable detriment -- no longer defines the basis of liability. The scope of the expansion 3 factors that influence recovery: 1). the presence of a credible promise; 2). the promisor's authority to make the promise; 3). the existence of a benefit to the promisor from econ. activity.
The presence of a credible promise -- cts. often had trouble distinguishing between binding agreements and other situations. The less formal the parties' actions, the greater must be the court's attention to their context. Cases -- Garcia v. Von Micsky, Burst v. Adolph Coors Co., Campbell v. Sirak. The promisor's authority to make the promise -- often agency issues; common rationale in such cases -- promisee's unreasonable reliance in cases where the promisor's lack of authority is evident. The importance of benefit to the promisor from econ. activity -- esp. unjust when the promisor was willing to reap the benefits w/o fulfilling her obligations; then the absence of econ. benefit to the promisor -- argument againts enforceability. The "economic activity" test in Prudential Insurance v. Clark and Marker v. Preferred Life Insurance. Both cases illustrate that benefit to the promisor is crucial l(which is sometimes obscured in PE cases). In cases where PE has been expanded beyond its traditional boundaries -- 2 factors are present: 1). promisor's primary motive is economic benefit and 2). the enforced promises occur in the context of ongoing rather than discrete transactions. In ongoing transactions -- exchange is a continuing raather than a discrete event, and the economic benefit is likely to be sought in "informal understandings". Typical employer-employee situation -- costs to both -- incentive for both to maintain the relationship --> both sides need a certain amount of trust. True of the whole network of modern econnomic relations -- dependent on institutions which are in turn based on trust. Conditions of trust -- positive externalities for the society as a whole sinch risk aversion would be socially inefficient, e.g., credit allows the modern consumer economy to function. Trust -- public good. Breaking trust --> negative externalities: everyone would have to take certain precautions against fraud, etc. The potential for such externalities exists because the promisor has better infomrmation about her own trustworthiness (assymetrical info). So, extensions of PE beyond its traditional applications are predicated upon the need for a high level of trust. Therefore, the role of reliance in individual cases is on the decline, while the role of reliance in the form of trust is on the rise. Connection between reliance and trust: trust -- ensures that people can rely as opposed to protecting actual reliance per se (as in PE). Convincing? Procedure -- 1). find a promise; 2). establish authority; 3). promise -- enforceable if made in the expectation of economic benefit. Proposed Rule -- a major departure from traditional contract law -- commitments made in furtherance of econ. activity should be enforced. The 3 factors should constitute the limits of PE liability. Notes: They expand the contract law by enforcing unbargained for commercial promises. Contract the contract law by saying that reliance by itself is never a ground for recovery. They take an instrumental view. "The Last PE Article", Feinman PE -- no longer an appropriate doctrine as a substitute for consideration in certain unbargained for promises, such as gratuitous and noncommercial promises, charitable subscriptions, and marriage settlements. §90 and §75 could have been brought together under a general heading "Informal Promises w/ Factors Justifying Enforcement" instead of counterposing reliance and bargain. Fuller & Perdue -- provided a new structure by identifying the purposes of contract law --> §90 came to be view more as protecting reliance rather than enforced promises. Later scholars also viewed reliance damages as more appropriate to protect the reliance interest: "as justice requires" interpreted as a reliance measure. But cts. actually enforce promises instead of protecting reliance in §90 cases. But which should they do? -- this question comes up in the neoclassical contract law. One approach -- first focus on a relatively discrete promise. Second -- the baseline is limited responsibility towards others. The idea of limited liability is central in classical cotract law -- impose it only in bargained for promises; the initial step would always have to be whether there was a promise. Farber and Matheson -- moved the furthest away from the neoclassical framework -- recognize that complex relations other than discrete transactions can be the basic unit of contractual analysis. They emphasize relationships rather than promises. They attempt to redesign the Restatement as attributing enforcement to whether it was made in furtherance of economic activity. The Relational Approach Need to make one step further -- a truly relational analysis. Instead of promise and discrete transactions -- focus on relationships which are more common. RA -- a framework of analysis rather than a bright-line rule or a concrete set of principles. It is based on a set of values which are essentially
different from those of the neoclassical law, while preserving some similarities. Similarity -- in the purposes of both doctrines to regulate and stimulate productive exchanges. But, for example, w/ respect to §90 -- it would no longer be necessary, as the RA would adequately respond to such issues. Differences -- in the approach taken to the nature of obligation. Neoclassical -- the autonomy of individuals; RA -- the interdependence of individuals in social and econ. contexts. Primary focus -- on the nec. and desirability of trust and mutual obligation. RA -- likely to produce a broader set of legal obligations. RA analysis: 1). first step -- describe the range of types of exchange interactions that occur; 2). develop and apply norms relevant to the understanding of the transaction; 3). decide whether and how these norms can be effectively implemented via the rules of obligation. Acknowledges that the application process can be quite complex -- specific to individual situations. Cases -- Prudential Insurance of America v. Clark, Hoffman v. Red Owls Stores -- can hardly be understood within the framework of PE, but rather best uderstood as relational cases. Changes in the doctrine in the future? -- the weight of tradition is "very great". But need to address the more fundamental issues like the framework of thought since they "determine the questions we should ask".
"A Consent Theory of Contract", Randy Barnett Which contracts enforceable? Seeing contractural duties as special duties to keep promise -- wrong. Need some other factor which is extraneous to the promise itself -- a manifest intent to alienate rights=consent. Contractual obligation should be view as a part of a broader system of legal entitlements. Entitlement theory of contract Circumscribes the individual boundaries of human freedom. While viewing contract as part of a more general theory of individual entitlements is not new, this approach has long been neglected. Rights can be alienated either via a voluntary gift or transfer. The enforceability is limited by the right people possess and their capability of effectuating their transfer. Need to examine first the sources of individual entitlements and the means of their acquisition. Any concept of individual right makes sense only in a social context . "Property" rights -- describes an individual's entitlement to use and consume resources. Contractual obligation is then concerned w/ liability arising from a wrongful interference w/ a valid rights transfer -- a fundamental requirement of justice. Need first to identify the rights of individuals and then apply them to justify enforcement. Moral consent a prerequisite to contractual obligation since it concerns the transfer of entitlements that are already vested in someone. Goal -- to facilitate freedom of human action and interaction in a social context. "Freedom of contract" -- several meanings: 1). "freedom to contract" (enables to give up/exchange entitlements); 2). "freedom from contract" -- allows to rely on one's command over resources and makes other be aware of the right holder's welfare in one's allocational decisionmaking. Equation of contract w/ promise -- erroneous. Rather contractual obligation arises from a consent to alienate rights -- largely overlooked. Determining contractual obligation in a consent theory Richard Epstein -- legal principles presumptive in nature; use defense to defeat the prima facie case. In a consent theory, absent any valid defenses, proof of consent --> obligation --> enforcement. 2 ways to manifest one's consent: 1). express consent via the use of formal devices and 2). indirectly conveying one's consent by other types of behavior . Formal consent -- originally formal promises had an uncerain place in contracts w/o any bargained for promises or detrimental reliance. CT -- supplies justification for enforcing such promises. Voluntary use of a formal device -- an express consent to be legally bound --> enforceable. In such case need no bargain or detrimental reliance for enforcement. The same is true of nominal consideration and for false recitals of consideration (contrary to the present view that falsity of a statement to be bound nullifies the transaction). Informal consent -- has been problematic since evidence of the intention to be legally bound is more obscure. 2 types of cases: 1). Bargaining as evidence of consent. Acceptance of smth. of value may indeed indicate that the promise was intended to transfer rights. The mere absence of consideration would not preclude enforcement. Where bargaining is the norm -- do not even have to require explicit proof and intent to be legally bound.
2). Reliance as evidence of consent. May be considered equal to consideration in evidentiary value, esp where the promisor knew about the promisee's reliance. Promisor's silence while observing reliance may constitute consent. If there is consent -- then enforcement is warranted irrespective of whether there was a bargain or some formality. This makes out a prima facie case. Defenses can be of 3 kinds: 1). duress misrepresentation, unconscionability; 2). incapacity, infancy and incapacitation; 3). mistake, impracticability and frustration. All of them share 2 common features: 1). parties implied a possible nonoccurence that 2). for which the promisee should bear the risk. In such cases, appearance of assent lacks moral significance. Need to preserve the actual voluntary nature of rights transfer. Notes: acc. Barnett, intent to ELR -- should replace consideration; sounds like Locke (parallels to Nozick). Govt. should only merely enforce transfers, not acquisitions. The importance of subjective states of mind of the parties. Moral only if voluntary, no additional political criteria. "The Differing Meaning of Contract Formalities", Patricia Williams Notes: accepts th Amer. rule rather than the British rule. Formality -- a good provision. Involvement of the law issue.