Understanding contractual obligations



What justifies the coercion of the State in the domain of private arrangements? Focus on three principles- efficiency, reliance and protection of individual autonomy.

Harm Principle- the dilemma- according to liberalism the coercion of the state is only justified when there is harm. Arguably contractual obligations are grounded in the exchange of promises. However the enforcement of contractual obligations qua promises seems to contradict the harm principle. JS Mill formulates the principle as 'the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of thier number is self protection. That the only purpose for which power can rightfully be exercised over any member of a civilised community against his will is to prevent harm to others. His own good, whether physical or moral is not a sufficient warrant.' Utilitarianism, On Liberty and Considerations on Representitive Government. 

Scepticism concerning contractual obligations- legal realists (Scandinavian and American) argue that legal decisions need to be explained by factors outside the law ie psychological, ideological or sociological features of the judges. Consequently there is no rationality that justifies legal rules. More over this entails the radical view that there are no legal rules. 

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Harm principle

What are the arguments that might both undermine scepticism and show that the coercion of the state in the domain of private arrangments is justified? 

Principles that justify contractual obligations-

1) the efficiency principle- the coercion of the state is justified as long as contract law facilitates the efforts of the parties to maximise their joint gains and community gains from transactions. The ruling criterion is welfare maximisation. 

The freedom of contract is important, however, not because it is the moral basis of a contract but rather because it is the platform for the maximisation of wealth in society. 

The transaction is subject to cost benefit analysis. For some 'law and economic' theorists the process is a 'black box' exactly like free market. 

What matters is not what ought to be done, but rather what are the consequences or outcomes of contractual performance. The parties not only can, but in a sense should, breach when they can do better by breaching, paying damages and taking advantage of an alternate opportunity. 

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Efficiency principle

It also entails ante analysis. The key question for a legal rule is whether it will create incentives for 'value maximising conduct' in the future. Examples: the efficiency of rules on selling and buying will be determined by the maximisation of wealth. Considerations of justice and fairness towards the consumer are irrelevant. 

Objections to the efficiency principle- It involves a reductivist approach: arguably law is a complex phenomenon whos conception cannot be detached from the notion of justice and fairness. Contract law cannot be reduced to the 'law of the market'. 'Law and economics' theorectical framework is insufficient to explain the shared intuitive idea that contracts are about promises, obligations and agreements. 

From the explanatory point of view, EP is unsatisfactory- There are rules that cannot be explained by it eg UCTA 1977. 

From the justificatory point of view EP entails utilatarianism- however this philosophical position presupposes a problematic conception of human agency ie a hydraulic or mechanistic view of agency which is dominated by desires, pleasure or pain.

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Reliance principle

The cost benefit analysis is so intricate that it might be a matter of pure speculation- futhermore recent empirical studies have shown that people misjudge the likelihood of an event, its value and consequences. 

Does 'efficiency breach' involve immoral conduct? 

Reliance principle- Key Features- 

Like the EP it concentrates on 'what are the consequences and outcome of a contract.' However it focuses on the reliance of the defendant. The idea is that statements of intention give rise to reliance based contractual liability. 


Arguably contractual duties that are realiance based occupy a conceptual space between intentions and promises. However the clear determination of such conceptual space is problematic- thus a statement of intention involves the idea that the speakers have a right to change their mind. By contrast, by promising, the speakers bind themselves to do what they said they would do. Reliance based duties presuppose that intentions have the normative force of promises which is unlikely.

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Reliance principle

Reliance based duties presuppose that intentions have the normative force of promises, which is unlikley. Example a swimmer in trouble and an observer at cliff edge.

The reliance principle inadequately dissolves the distinction between Tort and Contract law- 'if we assimilate contractual obligation to the law of torts, our focus shifts to the injury suffered by the plaintiff and to the fairness of saddling the defendant with some or all of it. So for instance, if there has been no palpable injury because the promisee has not yet relied on the promise, there seems to be nothing to compensate, while at other times a generalised standard of fair compensation may move us to go beyond anything the parties have agreed. The promise and its sequelle are seen as a kind of encounter, like a traffic accident or a street altercation or a journalistic exchange, giving rise to losses to be approportioned by a communitys sense of fairness'

'This assimilation of contract to tort is the subordination of a quintessentially individualistic ground for obligation and form of social control, one that refers to the wills of the parties, to set of standards that are ineluctably collective in origin and thus readily turned to collective ends. 

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Autonomy principle

Key Features- Based on a deontic conception (what one ought to do) as oppose to a consequentialist view (what are the consequences/outcomes). A moral obligation is the source of a legal obligation. Moral obligations arise from the promises in contractual relationships. 

What is a promise? The origin of a promise is a convention, which arises from a practise. Analogy with games example chess. 'You want to accomplish purpose A and I want to accomplish purpose B. Neither of us can suceed without the cooperation of the other. Thus I want to be able to committ myself to help you achieve A so that you will committ yourself to try to help me to achieve B. We need a device to permit a trade over time, to allow me to do A for you when you need it, in the confident belief that you will do B for me when I need it. Your committment puts your future performance into my hands in the present, just as my committment puts my future performance into your hands. A future exchange is transformed into a present exchange.And in order to accomplish this all we need is a conventional device which we both invoke. - Fried. 

Additonally a promise is not only a convention, but also relies on a moral element- trust. If the promisor breaks a promise, then he breaches the trust that has been placed on him or her. Like in cases of lying, the liar abuses the trust of others.

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Autonomy principle

To abuse that confidence now is like lying: the abuse of a shared social institution that is intended to invoke the bonds of trust.- Fried. 

Example 1: contract case in which a court applies the doctrine of promissory estoppel to allow one party to recover. The AP theorists will argue that the promisor acted wrongly by making and breaking a promise.

Objections to the autonomy principle- 

Contract law will not enforce promises that are not supported by consideration- Frieds reply is :the doctrine of consideration is inexplicable in principle. A contradiction can be found in the following propositions a) rational individuals are self determined and free arrangement between them should be respected and b) enforceability is limited to the class of arrangements to bargains. There is a clear contradiction between A and B as B is asserting that self determination is not a ground of legal obligation. Problematic cases for the theory of bargain: Williams v Roffey Bros 1991.

There is no clear distinction between legal and moral obligation- the former can only arise from the policitcal goals of association and community. Fried has confused two different kinds of obligation ie self imposed (moral) and associative obligation (legal and political) 

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Autonomy principle

There is only a prima facie obligation to fulfil ones promises- the moral enforceability of our promises depends on content and interests. Eg on monday I promise to help you paint your house on friday. However friday morning, my mother has an accident and I need to take her to hospital. As a result, I dont have an a posteriori moral obligation to fulfill the promise I made to you. 

It is uncertain what the parties agree to or what terms can be reasonably ascribed to the agreement- there is a need of interpretation of the contract by courts. Would this undermine the freedom to contract? 

There is no such thing as self imposed obligation- If the origin of the obligation is a moral requirement ie the trust that is placed on the promisor or the fairness of the exchange then the origin of the obligation is external and not self imposed. 

Objection to all principles- There cannot be a unifying and coherent principle that will both explain the nature of contract law and justify the coercion of the State. 

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Possible responses- a) there is the need for a rational and principled explanation of our social practises including law- pragmatic approaches are irrational and unfair. 

b) law is justified by a cluster of principles. The judge needs to exercise his practical reasoning in each court case and decide what is the most reasonable and coherent answer in terms of fiedlity with the past legal materials and principles that apply to that particular case.

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