## 1. General Theories of the Law of Contracts



This first part examines general theories of contract that take
central features of the common law as their explanatory starting
point. The range of possible contract law regimes is, of course, vast,
and there is a risk of overgeneralization. Still, since many
exchange-regimes share basic features, it is not an unreasonable
expectation that the principles extracted from a sophisticated and
well-functioning body of contract law might aid in our understanding
of contract law as such, at least where the law functions to regulate
economic life in modern market orders.



There are at least five prominent accounts of the fundamental
principles of the common law of contracts. The first, and most famous,
holds that contract law enforces the basic moral duty to keep
promises. A related though distinct view presents contract law as
enforcing a duty not to harm others. A third conceives of the law not
as enforcing parties' non-legal duties, but as promoting
efficient investment and exchange. An association with economic theory
gives this approach a prominence in legal scholarship that outstrips
the philosophical attention it has received. A fourth position
emphasizes that contracts establish a distinctive relationship between
the parties to them and grounds contractual obligations in the value
of acting jointly and cooperatively with others. A fifth position is
pluralistic and proposes that contract law has many fundamental goals
that need not be jointly satisfiable or even consistent. These
competing views can be evaluated along several dimensions, including
"fit" with actual doctrine, success in justifying the law,
and internal coherence.


### 1.1 Bare promissory duties



The law of contracts prominently employs the language of
promise-making and promissory obligation. The Restatement (Second) of
Contracts [henceforth: "R2"] defines a contract as



> 
> 
> a promise or a set of promises for the breach of which the law gives a
> remedy, or the performance of which the law in some way recognizes as
> a duty. (SS1)
> 
> 
> 



Contracting parties are regularly referred to as
"promisor" and "promisee". Where there are
multiple parties to a contract, the Restatement provides that
"some or all of them may promise jointly as a unit, or some or
all of them may each promise severally". Although the
Restatement does not state what a promise is, it defines offer and
acceptance, the pair of acts through which contractual obligations
characteristically arise, in terms that involve an exchange of
promises. An "offer" is



> 
> 
> the manifestation of willingness to enter into a bargain, so made as
> to justify another person in understanding that his assent to that
> bargain is invited and will conclude it. (R2: SS24)
> 
> 
> 



To establish a contract, the offer must be met with an appropriate
"acceptance", typically



> 
> 
> a manifestation of assent to the terms [of the offer] made by the
> offeree in a manner invited or required by the offer. (SS50)
> 
> 
> 



Both formulations closely track conventional philosophical accounts of
promising, in which a promise arises when a person



> 
> 
> communicates ... an intention to undertake by the very act of
> communication an obligation to perform an action and invest the
> addressee with a right to its performance. (Raz 1977:
> 210-211)
> 
> 
> 



Several theorists connect such language to the view that contract law
enforces promissory morality--that is, moral duties incurred by
promising. In *Contract as Promise*, Charles Fried (1981; 2014:
20) argues that the "central organizing moral and doctrinal
principle of contracts is the promise principle", according to
which "a promise is a kind of moral invention... [that]
allows persons to create obligation where there was none
before". While the importance of realizing such ends as
interpersonal trust and coordination may be part of what explains the
value in enforcing promises, on Fried's view, promissory
compliance is "an end in itself". Likewise, Seana Shiffrin
(2007: 721) invokes contract law's "explicit
self-representation" as a law of promissory obligation as a
reason for evaluating the law based on the standards of promissory
morality.



The promise-conception finds support in the prevailing remedial scheme
for breaches of contract. The standard remedy for breach is money
damages that approximate the promisee's valuation of the
promised performance. The law calls the remedy "expectation
damages" (R2: SS344 cmt. A). The expectation remedy does not
simply "undo" harms suffered by the promisee through
reliance on the promisor. Rather, the promisor must affirmatively
vindicate the promisee's expectation of performance by putting
the promisee in as good a position as the promisee would have enjoyed
had the promisor performed. To illustrate, if *S* promises to
sell *B* widgets for $4 that *B* expects to resell at
$10 for a $6 profit and *S* fails to deliver the widgets, then
*B*'s expectation interest is $6 so long as *B*
hasn't yet paid for the widgets. If *B* has already made
the $4 payment to *S*, then the expectation interest is $10.
Since the law opts for expectation over "reliance"
damages--an alternative measure that returns the parties to their
pre-contractual state--it enforces promissory duties indirectly
by requiring the promisor to insure the promisee's value of
performance. This feature of contract law distinguishes it from tort
law, where the remedial aim is very much that of restoring a
*status quo ante* disturbed by a wrong.



The role that fault plays in breach reinforces contract's
connection to promise and its difference from tort. Whereas tort
liability is typically fault-based--most torts require intent or
negligence--contractual liability is strict and can arise without
any fault in a promisor. A person might take all reasonable care to
avoid making promises she cannot keep and might make every
cost-justified effort to keep whatever contractual promises she has
made. Yet (with only a few exceptions under narrow doctrines, such as
impossibility or frustration of purpose) when the promisor makes and
breaks a contractual promise, she remains liable even if performance
becomes unexpectedly burdensome or she is unable to perform because of
the actions of a third party. Standard accounts of contract therefore
emphasize that the duty to vindicate the promisee's expectations
is legally robust and not easily excused; though for an opposing view
on the significance of fault in contract, see Hillman (2014).



The contract-as-promise view confronts challenges along three
dimensions:


1. whether promissory morality is a legitimate ground for state
coercion;
2. whether the moral assumptions underwriting the view are plausible;
and
3. whether a promise-based theory can account for certain prominent
and well-established doctrines of contract law.



First, it is unclear why a liberal state would be justified in
promoting promissory virtue for its own sake, which seems a far more
controversial end for the state to adopt than various others that
might justify enforcing promises (such as preventing harm to promisees
or efficient coordination; see below). Raz (1982: 937) argues that
"enforcing voluntary obligations is not itself a proper goal for
contract law" because "[t]o enforce voluntary obligations
[for their own sake]" would be "to enforce morality
through the legal imposition of duties on individuals". Raz
adds, "[i]n this respect, [enforcing promissory morality] does
not differ from the legal proscription of pornography". This
challenge is aligned with neutralist conceptions of liberalism. A
state that aims at relative neutrality on contested moral claims and
restraint in the exercise of power must connect the enforcement of
contracts to ends that are widely embraced as worthwhile.



Second, the moral assumptions about promising that the view imports
appear questionable. Proponents of the promise-conception endorse what
Raz (2014) calls the "bare reasons" of promising. The view
entails that an act of promising generates a moral reason to keep
one's promise that is independent of (a) the moral desirability
of the promised acts, (b) whether or not the promisee relied on the
promise and might be harmed or disappointed by its breach, and (c) the
value in having a mechanism that allows us to bind ourselves. Of
course, this "bare" reason to keep one's promise
might be overridden by competing considerations. Additionally, a
promise may not generate reasons unless certain conditions are
satisfied, including conditions related to the promisor's
freedom from coercion (for the legal analogue of this moral
requirement, see R2: SS175), their capacity to promise (cf.
SSSS14, 15, 16), and the promise's content falling
within certain moral bounds (compare with the illegality doctrine:
SS178). Still, provided key enabling conditions are met, the
promise-conception proposes that even bare promises--promises
whose breach will not undermine anyone's trust or cause any
reliance-based harms--generate moral obligations. But it is
puzzling why such obligations should arise. The puzzle is clearest if
obligations are grounded in people's interests. It is difficult
to say what interest might support the duty to keep a bare promise,
since the ordinary interests that might be in play--associated
with reliance and expectations--have been excluded by
construction. Thoughts like these led David Hume to worry that
promissory obligations purport to "arise[] from our mere will
and pleasure" and to compare such obligations to the mystery of
transubstantiation, insofar as both involve intentions that purport to
"change[] entirely the nature of an external object, and even of
a human creature" (*A Treatise of Human Nature*, Bk. III,
Pt. 2, Ch. v).



The contract-as-promise view must defend bare promissory reasons
against such skepticism. A proposal owing to Owens (2006) treats the
breach of a promissory duty as a "bare wronging", one that
needn't set back any "non-normative interest" of the
promisee--for example, their general interest in
wellbeing--but does set back the promisee's
"normative interest" in having a measure of authority over
the promisor. This view may be subject to a circularity challenge. The
claim that promisees have normative interests appears to presuppose
the fact that needs to be explained--namely, that promises have
the relevant authority-conferring effects. For a broader discussion of
these and related issues, see the general entry on
 promises,
 bearing in mind that not just any moral theory of promising can be
slotted into the contract-as-promise view. The view is not--and
cannot--be neutral on the nature of promissory obligation, given
the character of the views it opposes.



Finally, a central challenge for the promise conception is the
divergence of well-established legal rules from the rules of
promissory morality. Shiffrin (2007) offers examples of divergence to
criticize the law. For instance, contract law only enforces promises
that are supported by adequate "consideration". The
consideration doctrine, in its modern form, requires a promise to be
part of a bargain. The Restatement states that



> 
> 
> [a] performance or return promise is bargained for if it is sought by
> the promisor in exchange for his promise and is given by the promisee
> in exchange for that promise. (R2: SS71)
> 
> 
> 



Contracts, in other words, arise out of an exchange of promises where
each party's promise triggers the other's, in what Oliver
Wendell Holmes (1881 [1991: 293-294]) calls "reciprocal
conventional inducement". In exceptional circumstances, a
gratuitous promise may be enforced in the absence of consideration.
Certain promises (especially concerning contract modifications) made
among merchants are enforceable without consideration, as are promises
to make charitable subscriptions (R2 SS90(2); Uniform Commercial
Code ["UCC"] SS 2-209). More generally, the doctrine
of promissory estoppel enforces promises that are detrimentally relied
on when considerations of justice demand it (R2 SS90). But
promissory estoppel is in practice narrowly construed and rarely
invoked by courts (for a leading case applying the rule in the context
of pre-contractual bargaining, see *Hoffman v. Red Owl Stores,
Inc.* [1965], and for a survey of the law that shows
*Hoffman's* exceptional status, see Schwartz and Scott
[2007]).



The consideration doctrine presents a challenge for the
contract-as-promise theory because the rules of promissory morality do
not limit obligations in any analogous way. Other limits on contract
law's willingness to enforce promises--for instance,
doctrines relating to fraud and duress-- might track analogous
limits in the morality of promising. But there is no obvious reason to
suppose that a gratuitous promise--to collect a friend from the
airport, to give a child a coveted treat, or to keep a friend's
secret--cannot generate moral obligations. The challenge is
bolstered by the fact that the consideration requirement remains
entrenched in the common law of contracts despite repeated academic
criticism. Even civil law, which includes no formal analog to
consideration, nevertheless favors legal enforcement of exchange
promises in a number of ways.



A second doctrinal challenge to the theory resides in the law's
acceptance--and apparent encouragement--of "efficient
breach". As noted above, the standard remedy for breach of
contract, expectation damages, vindicates contractual rights through
substitutionary relief: it provides disappointed promisees with a
money award equal to their value of performance. The remedy of
"specific performance"--a court injunction ordering
the promisor to do as she promised--would more directly enforce
the duty to perform. Yet specific performance is not the primary or
usual judicial remedy. Moreover, the expectation remedy--in fact
and perhaps also by design--encourages contractual promisors to
breach when the costs of performance (including the opportunity costs
of diverting performance to higher-valuing third parties) exceed the
value of the promisee's performance. If *S* promises to
sell a widget for $10 to *B*, who values the widget at $15, and
*C* offers to buy the same widget from *S* for $16, then
the expectation remedy gives *S* an incentive to sell to
*C*, pay *B* $5 in expectation damages, and pocket the
additional dollar. The breach is efficient insofar as the widget ends
up in the hands of the party that values it most, and this efficiency
is cited (both in legal theory and by courts) as a reason for denying
specific performance (*N. Ind. Pub. Serv. Co. v. Carbon County
Coal* (1986)). By contrast, morality gives promisors no equivalent
flexibility. This has dismayed some theorists who are attracted to
contract as promise (Friedmann 1989). Others deny that there is any
fundamental conflict, reinterpreting the expectation remedy in terms
of an implied promise in the alternative, which allows promisors the
choice of performing by trading a good for its price or by
transferring money equal to the promisee's value of trade
(Markovits & Schwartz 2011). Sophisticated parties have good
reason to make contractual promises in this way, as doing so maximizes
their gains from trade. But unsophisticated parties may think
contracts require simple performance and view the legal option of
substituting damages for performance as immoral.



Shiffrin and others take departures from promissory morality to be
reasons for law reform. However, given that theoretical work in this
area proceeds on the assumption that the normativity of contract law
is worth engaging with on its own terms, there is reason for desiring
a theory that is not too revisionary. While the contract-as-promise
theory is explanatorily powerful and morally appealing, its adequacy
in the final analysis turns on whether it can plausibly explain away
the tensions it perceives in contract law, a question that remains
very much unsettled.


### 1.2 The duty not to harm & the promisee's reliance interest



Broken promises typically impose tangible burdens on the promisee in
the form of costs (including opportunity costs) incurred in reliance
on a promise or in the form of disappointed expectations. If these
costs can be classified as harms, then promissory representations
implicate the duty not to harm. In other words,



> 
> 
> [i]f there is a general principle that one ought not cause harm to
> others, that might be enough to justify some sort of rule against
> [agreement-breaking]. (Craswell 1989: 499)
> 
> 
> 



On the harm-based view, contract law is analogous to tort law--an
instance of a broader class of regulations enforcing harm-based
obligations. More specifically, contract elaborates liability for
misrepresentation--including not just fraud but also negligent
misrepresentation--especially insofar as analogous doctrines in
the law of torts appear artificially cabined.



The leading contemporary proponent of the harm-based theory is T.M.
Scanlon, who argues that contract law imports the moral principles
governing harm-avoidance into law (Scanlon 1998: 295-327; 2001:
93-94). Scanlon's view begins with pre-promissory moral
principles that no one could "reasonably reject", which
forbid certain ways of manipulating others and, moreover, require
persons to exercise care in leading others to form expectations.
Scanlon explains the wrongfulness of lying and imposing misimpressions
based on these principles. He then defends a more specific principle
of promissory fidelity:



> 
> 
> *Principle of Fidelity:* If (1) *A* voluntarily and
> intentionally leads *B* to expect that *A* will do
> *X* (unless *B* consents to *A*'s not doing
> so); (2) *A* knows that *B* wants to be assured of this;
> (3) *A* acts with the aim of providing this assurance, and has
> good reason to believe that he or she has done so; (4) *B*
> knows that *A* has the intentions and beliefs just described;
> (5) *A* intends for *B* to know this, and knows that
> *B* does know it; (6) *B* knows that *A* has this
> knowledge and intent, then, in the absence of special justification,
> *A* must do *X* unless *B* consents to
> *X*'s not being done. (Scanlon 1998: 304)
> 
> 
> 



The principle of fidelity articulates a first-order duty to keep
one's promises, grounded not in the simple fact of promising, as
on the bare reasons view, but in the fact that promises give
assurances that lead to reasonable reliance and a risk of harm. The
principle calls for doing as one has promised and not just making up a
disappointed promisee's losses, but it does not prescribe any
specific legal enforcement scheme. Consequently, an important
challenge for the view is explaining contract law's standard
remedy for breach, which obliges the promisor to vindicate the
promisee's expectation and not merely reimburse her for costs
incurred through reliance.



Scanlon suggests that no one could reasonably reject a legal remedy
that protects the promisee's expectations given the substantial
benefits to promisees and the low costs to promisors (Scanlon 2001:
105-111). But the costs to promisors of a principle requiring
compensation for expectations may not be all that low. Scanlon
imagines that promisors can easily avoid the special remedial
obligations by qualifying their intentional representations with:
"of course, I'm not promising". But such a
disclaimer, in the context of a regime that enforces promises,
undermines the credibility of the communicated intention. A person who
wishes to credibly signal her intent to perform while hoping to avoid
liability for her promisee's expectations appears disempowered
by Scanlon's regime.



Even if a principle that enforces promissory expectations cannot
reasonably be rejected, this still does not fully explain why the law
favors expectations. Some alternative remedy might equally fall within
the bounds of moral principles no one could reasonably reject. For
instance, the law could compensate based on reliance damages,
returning parties to their pre-contractual state in the event of
breach. Of course, the practical difference between vindicating
expectations and reliance-based losses is not always substantial. Lon
Fuller and William Perdue (1936) discuss cases where the two remedial
schemes converge, as when markets are thick. Where a promisee's
reliance on her promisor includes forsaking an identically attractive
offer, then the promisee's reliance interest arguably equals her
valuation of performance--that is, her contractual expectation.
Moreover, a number of legal rules cabin the expectation remedy by
imposing requirements of foreseeability (see, e.g., *Hadley v.
Baxendale* (1854)) and mitigating one's losses (R2:
SS350); and the law sometimes opts for reliance damages where
expectation is hard to measure (see, e.g., *Sullivan v.
O'Connor* (1972)). Still, reliance and expectation are not
always congruent, and the law's clear preference for the latter
requires an explanation.



A deeper problem is that Scanlon's defense of a regime that
enforces contractual expectations does not fully vindicate the law,
since it presupposes moral constraints that have no legal analogue.
Scanlon (2001: 105) suggests that enforcing a promisee's
expectation is appropriate only if the compensatory burden is not
"excessive" and only if the promisor had "adequate
opportunity" to avoid it based on an "adequate
understanding" of their situation at the time of promising. But
the law does not qualify the promisor's duty in these ways. A
promisor might have every intention to comply with a promise and yet
later find that, due to events she reasonably did not foresee, the
cost of her performance has risen dramatically or the value to her of
the other side's promise has fallen. It is hardly obvious that
promise-breaking in such cases violates the duty not to harm (could
the promisee reasonably expect the promisor to keep her promise in
this scenario?) or that it would be fair to make the promise-breaker
liable for the promisee's full expectation (did the promisor
have a reasonable opportunity ex ante to avoid the burden?). While the
law excuses breach if the unexpected costs of performance are
extraordinary (under the doctrines of "impossibility" and
"impracticability", see R2: SS261) or if the decrease
in the value of the bargain is similarly substantial (see
"frustration of purpose", R2: SS269), these excuses
are only available in exceptional circumstances (a leading case on
impracticability, *Alcoa v. Essex* (1980), involved unexpected
costs greater than $50 million). Historically, the common law's
*pacta sunt servanda* ("agreements must be kept")
principle used to be enforced quite unforgivingly (see *Paradine v.
Jane* (1647)); and while courts now recognize a broader category
of excuses for non-performance, the law's remedial demands are
not so clearly consistent with Scanlon's moral framework.



Finally, the harm-based view conceives of promissory duties as arising
only when the promisee *reasonably* relied or formed
*reasonable* expectations. This invites the question of what
might ground the reasonableness of reliance or expectations. The
answer cannot be that the promisor is obligated by her promise and it
is reasonable for the promisee to expect the promisor to honor her
obligations. As an account of promissory obligation, this argument
travels a (very short) circle. The theoretical problem, moreover, is
directly captured in law, given the contrast between contract and the
misrepresentation torts. These torts include, among their elements,
that defendants must have failed to exercise reasonable care in making
false statements and, additionally, require plaintiffs to have
justifiably relied on defendants' false statements (Restatement
(Second) of Torts SS552). Moreover, tort law expressly adds that a
party asserting liability for misrepresentations must have relied
specifically on the representations' being true, rather than
just "upon the expectation that the maker [of the false
statement] will be held liable in damages for its falsity"
(SS548). Contract takes the opposite approach. As Learned Hand
observed in discussing warranties:



> 
> 
> [A warranty is] an assurance by one party to a contract of the
> existence of a fact upon which the other party may rely. It is
> intended precisely to relieve the promisee of any duty to ascertain
> the fact for himself; it amounts to a promise to indemnify the
> promisee for any loss if the fact warranted proves untrue, for
> obviously the promisor cannot control what is already in the past.
> (*Metropolitan Coal Co. v. Howard* 1946)
> 
> 
> 



In other words, a kind of bootstrapping--where the law generates
expectations of enforcement that it regards as a reason for
enforcement--is of the essence in contract.



A more detailed look at doctrine compounds the explanatory challenge.
For example, the law does not allow contracting parties to escape
liability by providing advance warning of breach (on
"anticipatory repudiation", see *Hochster v. De La
Tour* (1853)). Contractual obligations are imposed notwithstanding
a promisor's attempt to negate their promissory intent and the
promisee's reasonable reliance immediately after an apparent act
of promising (see *Lucy v. Zehmer* (1954)). More generally, the
harm-based view struggles to explain why the law imposes liability
even if the promisee incurs no reliance costs or when the promisor is
known to be unreliable. In *CBS Inc. v. Ziff-Davis Publishing
Co.* (1990), the seller of a business warranted certain claims
regarding the business' profitability. The buyer, after
independent investigation, confessed that he didn't think the
warranted representations were true. The court ruled that the
buyer's lack of belief in and reliance on the truth of the
warranted information did not relieve the seller of its obligations
under the warranty. Such rulings are *prima facie* puzzling on
the harm-based view.


### 1.3 Enabling mutually beneficial exchange



There is room to question whether the law (especially in a liberal
state) should be in the business of enforcing moral duties associated
with promising. The economic approach to contract law de-emphasizes
contract's promissory roots and instead locates the law's
justification in general welfare: the rules of contract law enable
socially productive reliance on promises and mutually beneficial
exchange. This approach is more prominent among academic lawyers than
among philosophers, and is widely regarded, at least in the United
States, as the leading interdisciplinary approach to contract law.



The economic analysis of contract begins, in effect, with Hume's
observation that



> 
> 
> experience has taught us, that human affairs wou'd be conducted
> much more for mutual advantage, were there certain symbols or signs
> instituted, by which we might give each other security of our conduct
> in any particular incident. (*A Treatise of Human Nature*, bk.
> 3, pt. II, sec. v [Of the Obligation of Promises], emphasis
> removed)
> 
> 
> 



When parties exchange promises as part of a bargain, they usually
stand to gain from mutual performance, but in the absence of a
commitment mechanism, each has an incentive to defect; and, since the
parties can foresee the defections, they might fail to invest in and
or enter into mutually beneficial bargains. The law prevents
self-interest from getting in the way of mutual advantage by
enabling



> 
> 
> individuals to bind themselves to a future course of conduct, to make
> it easier for others to arrange their lives in reliance on [a]
> promise. (Craswell 1989: 496; see generally Goetz & Scott 1980;
> cf. Atiyah 1979)
> 
> 
> 



This power-conferring conception of contract law is generally
understood as having normative import: contracts should be enforced
just insofar as doing so (by increasing confidence in the promises
that they contain) establishes optimal incentives for reliance and
maximizes the joint surplus produced through contractual coordination
(see, e.g., Schwartz & Scott 2003: 541). A striking upshot is that
nothing in the intrinsic character of contract law favors
promise-based or chosen obligation; instead, everything depends on
contingent facts about which legal forms coordinate mutual reliance in
the most "efficient" or welfare maximizing way.



Most lawyer-economists adopt an overtly revisionary stance towards
particular legal rules. Some argue that the law should be more
solicitous of promissory reliance in the absence of
consideration--especially reliance on pre-contractual
representations--than orthodox contract doctrine allows (see,
e.g., Bebchuk & Ben-Shahar 2001: 427; Ben-Shahar 2004; Craswell
1996; Johnston 1999; Katz 1996). In addition, and independently, the
economic approach rejects orthodox contract law's categorical
preference for expectation-based remedies. Such remedies may or may
not support optimal reliance; but in either case, the promise-based
idea of securing the promisee's expectations "will not
have played any role in the analysis leading up to [the]
conclusion" about which remedy is optimal (Craswell 2000:
107).



Although no longer seen as a primarily descriptive theory, the
economic approach appears to rationalize established doctrines that
competing views struggle to explain. The approach seems tailormade to
explain the law's encouragement of "efficient
breach" (discussed earlier, in
 SS1.1).
 Though even here there are puzzles. It remains unclear why contract
law is unwilling to promote efficiency through orders of specific
performance (Ayres & Klass 2017). After all, it is likely costly
to deal with an unwilling counterparty forced to perform, so promisees
will usually seek specific performance only when expectation damages
are genuinely undercompensatory or hard to calculate (Schwartz 1979).
At the very least, an efficient contract law should allow parties, ex
ante, to contract for the specific performance remedy or even for
supra-compensatory "penalties" that assure performance by
requiring damages upon breach that exceed the promisee's
expectation interest (see discussion in Edlin 1996; Edlin &
Schwartz 2003; Shavell 1980). But, in fact, the law does not condone
such agreements, even between sophisticated parties (R2: SS356;
see, e.g., *Lake River v. Carborundum* (1985)). A possible
explanation is that penalty clauses enable inefficient collusion by
established firms to keep new entrants out of markets.



The view that contract law, in its positive expression, promotes
efficient investment and exchange is hard to maintain in the face of
doctrinal challenges (see, e.g., Posner 2003). "This is Not a
Legally Enforceable Agreement" clauses used by parties to
disclaim their intent for an agreement to be legally enforceable are
not always enforced. Similarly, efforts by parties to opt out of legal
duties in the pre-contractual bargaining phase, including duties
related to disclosure of information, are often deemed legally
ineffective (*V.S.H. v. Texaco* (1985)). In all such cases, the
law's reluctance to cater to parties' preferences is not
straightforwardly explainable in power-conferring or general welfarist
terms. For an exploration of the degree to which the law's
mandatory constraints can be explained from the standpoint of
efficiency, see Zamir and Ayres (2020).



Another explanatory puzzle is broader and focuses not on specific
doctrines but rather on contract law's generic structure. The
economic approach is free to focus on efficiency and to disregard both
distributive fairness and freedom only insofar as it ignores the
inequities and vulnerabilities that figure in the lives of natural
persons. The most sophisticated economists recognize this and limit
the domain of their arguments to contracts among firms owned by
diversified shareholders (see, e.g., Schwartz & Scott 2003). This
focus on firms suits the efficiency standard: firms are artificial
entities, so that concerns about freedom and autonomy are irrelevant
to regulating their behavior. Moreover, the diversified holdings of
the natural persons who own the firms cause legal rules to have no
distributive effects across owners since the owners hold shares in
firms that are benefited as well as those that are burdened by every
legal rule. The firms that the economic approach focuses on are,
therefore, mere instrumentalities of shareholders who, insofar as they
own (or could own) diversified portfolios, are all more or less
identically situated with respect to every transaction that contract
law might regulate. This suggests that the economic approach abandons
a basic presupposition from which the study of contract law as the law
of agreements ordinarily begins. Contracts, intuitively understood,
involve coordination among multiple parties with distinct interests.
But there is a sense in which the transactions modelled by economic
theory ultimately involve only one such party: the diversified
shareholder who stands behind the firms on both sides of every
contract. This is of course an idealized model, and actual firms will
often have differentiated owners. Nevertheless, the model casts doubt
on whether transactions among firms should be understood, in the end,
to be agreements at all.



Finally, the economic view's normative assumptions have been
subject to criticism. Dworkin (1975: 1061) argues that judges should
decide bilateral disputes based on the parties' established
rights and considerations of interpersonal fairness, while leaving the
crafting of rules based on general welfare to "[t]he political
system of representative democracy". The economic approach seems
to ignore these limits to judicial authority. A different normative
critique (discussed more broadly within the entry on the
 philosophy of economics)
 targets the definition of welfare that animates work in this area.
Economists tend to equate the parties' welfare with preference
satisfaction, while inferring the strength of preferences based on a
willingness to pay. This approach biases measurements of efficiency in
favor of the rich given that the willingness to pay is sensitive to
background endowments (Liscow 2018). In the context of contractual
exchange, an approach that aims to maximize preference satisfaction is
at least more or less constrained by the Pareto criterion (an outcome
counts as a Pareto improvement only if it is preferred by at least one
person and not dispreferred by anyone), because both parties to every
contract must agree before it becomes enforceable. But even here, the
preference-satisfaction/welfare equivalence remains vulnerable to
critique for being based on an impoverished account of the social good
(Radin 1987; Murphy 2014; Mullen 2016).


### 1.4 The normativity of the contract relation



Tort law concerns obligations among strangers. But contract law
concerns obligations among parties who have a special relationship to
each other, including the relationship constructed by the contract
itself. Raz (1977: 228) writing about promises, has suggested that
bare reasons for keeping promises "can only be justified if the
creation of [the] special relationships between people [that even bare
promises involve] is held to be valuable." However, Raz declines
"to argue that the special relationships the desirability of
which would validate [bare promissory obligations] are indeed
desirable."




Some contract theorists embrace Raz's formal observation and
seek to ground contract law in one or another substantive conception
of the value of the special relationships that exist among contracting
parties.



One version of this approach emphasizes that contracts generally (some
theorists claim always) arise inside already existing commercial and
even social relationships. The "theory of relational
contracting" seeks the basis for enforcing contractual promises
in the norms that govern the background relationships. Legal
sociologists working in this vein have emphasized that contracting,
especially in commercial contexts, relies on the parties'
antecedent commitments to integrity or "common honesty and
decency" (Macaulay 1963). Others emphasize social norms
involving reciprocity and respect, especially within close-knit
contracting communities (Bernstein 1992). Still others approach
contract law through a theory of exchange relations according to which
every contract is "necessarily partially" embedded in a
thick context of extra-legal relations, from which it draws its legal
authority and force (Macneil 1980).



Another set of theories emphasizes the formal structure of the legal
relation of contract itself, even apart from any commercial or social
relationships within which it arises (Markovits 2004; Bensen 2019).
The doctrines governing offer and acceptance require contractual
promisors to form (and to communicate) intentions that refer to their
promisees. The parties to contracts, that is, intend to pursue ends
that do not merely coincide but rather, to borrow a formulation from
David Hume, "have a reference to" each other (*A
Treatise of Human Nature*, L.A. III, 2, ii.). Moreover, each
promisor intends not simply to do things but to be bound to do things,
entrenching her deference to the promisee, intending to perform unless
released. Her obligation endures at his option, so that she gives him
power over her normative situation. Contracts, that is, establish the
transaction as a normative unit.



A contractual promisor's intentions, moreover, run not just to
her own interest in the joint contractual project, or even to her
promisee's interest in this project (as she understands it), but
rather to his perspective on the project, as this is the perspective
from which he will decide whether to insist on her performance or to
release her. In this way, the promisor recognizes her promisee as an
authority over her, with respect to the promised contractual
performance. She treats as a final end not just the joint activities
described by her contracts but also his person--his will (which
may insist on or relieve the duty to perform). Borrowing from Kant,
one might even say that a contract constitutes "an act of the
united choice of two persons" (*The Metaphysics of
Morals* 6:271) so that offers and acceptances are
"represented not as following upon one another but ... as
proceeding from a single *common* will" (6:273). Every
contract, on this view, establishes a shared perspective over the
contemplated performance.



Contractual obligations, according to such theories, are grounded in
the value of a shared perspective. On one version, this value lies in
the recognition immanent in the perspective, as promisors and
promisees each treat the other as an independent person, imbued with
the special normative status that asserting contractual authority
involves. This approach treats the duty of good faith in performance,
which the common law makes mandatory in every contract (UCC:
SS1-304; R2: SS205), as contract law's core doctrine,
because it requires parties to show fidelity to the shared perspective
of the contract relation when they administer their contracts
(Markovits 2014). On another version, the value of the contract
relation lies in the transfer of rights, completed at the moment of
contract formation. This approach treats the consideration doctrine,
which other theories regard as poorly justified and marginal to
contract law, as contract's central, organizing principle.
Consideration ensures that every contract is indeed constituted as a
transaction involving an exchange of rights (Benson 2019).



Accounts of contract that emphasize the normativity of the contract
relation face a shared challenge, although it expresses itself
differently for different versions of the view. The challenge is to
explain why the motives parties adopt in the shadow of legal
enforcement do not undermine the value of the special relationship,
whose desirability grounds contractual obligation on the relational
model. Theorists who embed the contract relation inside pre-existing
social and moral relationships must explain why the self-interested
motives associated with contractual compliance--"greed and
fear" as G. A. Cohen (2009: 40-44) puts it--do not
"crowd out" the desirable attitudes and motives out of
which the enveloping pre-legal relationships are built. This concern
has been much discussed--both the empirical reality of crowding
out (see, e.g., Deci, Koestner, & Ryan 1999; Gneezy and Rustichini
2000) and its normative significance for valued social relationships
(Atiq 2014). Theorists who understand contract as a free-standing
relation can avoid this challenge and might even embrace the crowding
out of socially thicker motives as a feature of the contract relation
rather than a bug (Markovits 2011). But the general problem remains in
place of explaining how an arm's-length relation among
self-interested parties might establish a morally desirable form of
solidarity. This challenge becomes especially pressing in light of the
fact that most contracts have organizations as a party (Leib 2015).
Organizations lack the properties of natural persons out of which the
relational theories build their accounts of the normativity of the
contract relation. Whereas contracts among organizations are the
natural domain for economic theories (see
 SS1.3),
 they are difficult for relational theories to compass.


### 1.5 Pluralism



The criteria for measuring a contract theory's success remain
vaguely defined, which is to be expected in an interpretive
enterprise. We want our theory to fit and to explain contract law
doctrines that are themselves sometimes contested. In addition, we
want the law to be understood as worthy of our moral approval, with
all the complexities and controversies that this involves. The
competing theories of contract strike different balances between
considerations of fit and justification and are based on competing
views about what the law is and what it should be. Moreover, the
differences among the theories--especially with respect to
justification--involve fundamental disagreements about value,
which makes compromise elusive. Whether any balance can be sensibly
struck between, say, the value of promissory integrity and that of
maximizing the joint surplus from contractual exchange remains
unclear.



The "pluralist" finds in this stalemate reasons to
question whether contract law is animated by one evaluative goal or
master principle, rather than a plurality of independent and perhaps
even incommensurable evaluative aims. Pluralism is more often
presupposed in the literature than directly defended, and what defense
there is usually takes the form of a critique of monistic views (see,
e.g., Hillman 1998). The critique is qualified, however, since the
monistic views are portrayed as offering genuine even if incomplete
insights into contract law, contributing to the taxonomic project of
mapping the values that undergird it (Hillman 1998; Klass 2008;
Kreitner 2012). For pluralism to be more than a negative thesis,
pluralists have considerable work to do in explaining contract
law's plural commitments, ideally offering more than a grab-bag
list of values to be promoted (Lucy 2007).



An important question facing the pluralist is whether there are
reasons for contract law's pluralism. The answer might seem
obvious, as if it were lawyerly commonsense. The law of contracts has
developed over the course of several centuries, with many diverse
juridical personalities disagreeing on how best to resolve contract
disputes. Some of the law's guiding principles have survived
both this competitive process and changing normative fashions in the
broader culture; others have been modified. The expectancy remedy and
*pacta sunt servanda* principles may be relics of a bygone
age's commitment to bare promissory duty. But efficient breach
and related doctrines have evolved to prevent promissory virtue from
getting in the way of social welfare, especially in economies marked
by a high-frequency spot contracts among parties with no relationship
outside of the contracts at issue. These tensions within contract law
are, as one commentator puts it, "historical and political
accidents" (Alces 2008).



But there are also other explanatory possibilities. Contract
law's distinctive pluralism may reflect an indeterminacy in the
realm of non-legal value. The promotion of promissory and
collaborative virtue, or general welfare, or careful promising to
avoid monetary harm, may be understood as falling largely within the
realm of the (institutional) supererogatory rather than the realm of
duty or basic justice. And if there is genuine indeterminacy regarding
how these incompossible goods are to be integrated by a regime that
aspires to do what is best (rather than exclusively what is
obligatory), then the character of contract law's pluralism
might be explained in terms of judges "settling" a
genuinely indeterminate moral question regarding the optimal
institutional choice (Atiq 2018: 78, 88-97). Contract law is
thus seen not as the incoherent end result of judges disagreeing on
questions of morality and the social good, but as a distinctly
juridical solution to a genuine evaluative dilemma: quasi-legislative
stipulation by judges of the precise mix of goods to be
institutionally promoted. Law's usefulness in this regard,
providing closure on problems of value pluralism, has been explored
more generally in legal and political philosophy (see, e.g., Radbruch
1932; Finnis 1980; Williams 1985; Waldron 1996, Berlin 2002).



Even in this case, the central challenge facing the various strains of
pluralism remains in place: that of explaining how law integrates its
several and often competing normative commitments. To what extent are
decisions informed by some "covering value", in Ruth
Chang's (2004) terminology, or synthesizing principles? A recent
proposal suggests an organizing principle based on a typology of
contracts and contracting parties (Leib 2005). Wealth maximization may
be appropriate in the enforcement of contracts between firms, for
example, whereas promissory virtue becomes a more significant object
of concern in contractual disputes between natural persons (see also
C. Riley 2000). Along similar lines, Dagan and Heller (2017) suggest
that distinct contract-types implicate distinct values, and that the
organizing principle that determines which normative structure applies
is the choice principle--the parties' freedom to choose the
rules that govern their exchange relations. Such proposals sit
uncomfortably with existing law, which does not explicitly distinguish
the application of its basic doctrines in this way, even if it
should.


## 2. Philosophical Themes in the Law of Contracts



The second part of this entry explores questions in the philosophy of
language (on meaning and interpretation), philosophy of action (the
metaphysics of intention), and moral and political philosophy (freedom
and distributive justice) as they arise in contract law.
 SS2.1
 discusses work that brings tools from the philosophy of language to
bear on questions of contract interpretation.
 SS2.2
 examines the concept of freedom in contract through the lens of
established doctrine and philosophical work on autonomy.
 SS2.3
 explores how the pairing of orthodox contract theory with modern
doctrine generates a puzzle about the nature of contractual intent.
Finally,
 SS2.4
 considers questions of distributive justice raised by private
exchange.


### 2.1 Language, meaning, and interpretation



The law of contracts includes rules that map the parties' speech
acts onto legal effects. What the rules are that relate speech to
legal obligation and what they ought to be are questions for legal and
moral theory. But the conventional answers may be clarified using
resources from the philosophy of language (Farnsworth 1967; Rosen
2011).



We begin with rules specifying the legally relevant feature of the
parties' speech. What a person intends to mean by their words
can come apart from the actual meaning (the semantic content) of the
words. In general, contract law is said to privilege
"objective" over intended (or, as lawyers sometimes say:
"subjective") meaning as the basis for the parties'
legal obligations, at least where the intended meaning is not evident
from context:



> 
> 
> A contract has, strictly speaking, nothing to do with the personal, or
> individual, intent of the parties. ... If ... it were proved
> by twenty bishops that either party, when he used the words, intended
> something else than the usual meaning which the law imposes upon them,
> he would still be held, unless there were some mutual mistake or
> something else of the sort. (*Hotchkiss v. National City Bank*
> 1911)
> 
> 
> 



This preference for objective meaning, moreover, reaches the
interpretation of the speech acts through which contracts are entered
into, such as offers and acceptances (R2: SS24). Proponents of the
so-called "objective theory of contracts" regularly invoke
the "usual", "objective",
"reasonable", or "plain" meaning as
distinguished from the meaning that the parties "attached"
to their words (R2: SS201). Since talk of meaning is often
ambiguous, we must be cautious in interpreting such locutions. The
gloss that's sometimes given in law is that objective meaning
concerns what a reasonable person in the position of the addressee
would have inferred was meant based on the available evidence.



A related set of legal rules specify the core contractual text to be
interpreted and what evidence determines its meaning. The "parol
evidence rule" ("PER") establishes a preference for
writings over prior or contemporaneous oral agreements (UCC:
SS2-202). The rule, in its traditional statement, entails that
where a writing exists, oral agreements (inferable from testimony)
that are "extrinsic" to the "four corners of the
document" do not become part of the contract. Some versions of
the PER forbid the use of extrinsic evidence to "introduce an
ambiguity" into a writing whose terms are otherwise clear and
unambiguous. In addition, once the contours of a contractual text are
set, principles of contract interpretation favor (to varying degrees
in different jurisdictions) giving words meanings that are familiar to
judges rather than meanings that are idiosyncratic to the parties. The
interaction between the PER and the principles of interpretation
entails a complication that runs through the legal practice of
extracting meaning--namely that contracts themselves (especially
written contracts) often seek to set their own boundaries and regulate
their own interpretation, and the law both permits and resists such
efforts.



"Textualism" in contract law can be defined as the view
that (a) contractual obligations stem from the objective meaning of
the parties' speech acts, (b) writings trump oral communication,
and (c) a text's meaning must be inferred from a restricted
evidence-base. "Contextualists," by contrast, favor
considering prior and contemporaneous oral agreements, which might
help interpret, add to, or even vary the terms of a writing. There are
good reasons in favor of either textualist or contextualist approaches
to fixing meaning, relating to the costs of drafting in the shadow of
various interpretive regimes, the costs of litigating meaning, and the
temptations that parties face to make opportunistic claims about what
their contracts require. But textualists and contextualists
sometimes--and much less plausibly--cast their positions as
required by basic and very general features of language.



Textualists--for example, Alex Kozinski, formerly a judge of the
United States Court of Appeals (Ninth Circuit)--worry that
contextualism:



> 
> 
> chips away at the foundation of our legal system. *By giving
> credence to the idea that words are inadequate to express
> concepts*, [contextualism] undermines the basic principle that
> language provides a meaningful constraint on public and private
> conduct. (*Trident Center v. Connecticut General Life Ins. Co.*
> 1988)
> 
> 
> 



Contextualists, for their part, sometimes seem to reject widely shared
assumptions about language. Kozinski's opinion criticized a
leading contextualist opinion by Roger Traynor, writing as Chief
Justice of the Supreme Court of California. Traynor held that courts
should consider all extrinsic, contextual evidence to determine
whether written terms are ambiguous, while defending the holding based
on doubts about the "inherent meaning of words":



> 
> 
> If words had absolute and constant references, it might be possible to
> discover the contractual intention in the words themselves and in the
> manner in which they were arranged. Words, however, do not have
> absolute and constant references. A word is a symbol of thought but
> has no arbitrary fixed meaning like a symbol of algebra or chemistry.
> (*Pacific Gas & Electric Co. v. G.W. Thomas Drayage &
> Rigging Co.* 1968)
> 
> 
> 



Traynor followed an influential tradition in legal scholarship
skeptical not just of the parol evidence rule, but of the very
possibility that the impersonal semantic content of the parties'
speech acts might come apart from the contextually salient intended
meaning (see, e.g., Wigmore 1923: 378).



From a philosophical perspective, these general arguments paint too
quickly and with too broad a brush. On the one hand, practical
considerations that support looking to broader context when
interpreting writings plainly do not undermine anything so general as
the idea that words can convey shared meaning. On the other hand, it
would equally be surprising if embracing contextualism meant having to
deny the platitude that speakers of language can be mistaken in ways
that allow public (or even legal) meaning to come apart in
contextually manifest ways from intended meaning. Contextualist
skepticism about impersonal semantic content is surely separable from
the practical question of whether restricting the evidence base for
discerning meaning best serves the various goals of contract law,
including fairness to the parties and minimizing burdens on courts
(Rosen 2011).



Gideon Rosen suggests an alternative conceptual framework for the
debate between textualists and contextualists, one that deemphasizes
the parties' semantic intentions. Following Grice (1957), we can
distinguish the parties' semantic intentions in relation to
their speech acts (intentions to mean this or that by one's
words) from their pragmatic and distinctly legal intentions (the
intent to cause legal effects via one's speech acts, like the
creation of a judicially enforceable promise). The parties'
legal intentions--which seem to matter, ultimately--can come
apart from their semantic intentions. *In re Soper's
Estate* (1935) offers an illustration. In that case, the deceased
designated his "wife" as the beneficiary of his estate.
However, Soper was legally married to person 1, faked his own death,
and then "married" person 2. We can set aside what
"wife" objectively means in this context. We can also
stipulate that Soper's legal intention was to leave his estate
to person 2. Suppose Soper's semantic intention was to refer to
2 under the description *my wife in the legal sense* on the
erroneous assumption that his prior marriage to 1 was not a legal
impediment. Clearly, the semantic intention to refer to 2 as his
legally recognized wife would have been irrelevant to what Soper was
trying to accomplish legally by writing his will. We can, of course,
construct alternative scenarios where the semantic intention
*is* relevant to Soper's legal intent. Indeed, contract
law's interest in semantic intentions is explained by the fact
that, in general, what we intend to mean by our words bears on what we
are trying to accomplish legally. But *In re Soper's
Estate* illustrates that the connection is contingent--the
alignment that usually exists between the legal effects that we intend
to produce and the descriptions under which we intend to produce them
is far from guaranteed.



Accordingly, the debate between textualists and contextualists might
be fruitfully recast in terms of: (a) whether the parties'
speech acts should be mined for impersonal semantic content or the
parties' legal intentions, and (b) whether the court should rely
on a narrow or broad evidence base to infer the legally relevant facts
about speech (Rosen 2011, 163). Rosen's framework is not
intended to apply to situations where the parties have conflicting
legal intentions or cases where the contract is silent on the
parties' responsibilities. Separate legal rules and
considerations--those concerning misunderstanding (R2: SS201)
and gap-filling (R2: SS204)--bear on such cases.



*In re Soper's Estate* illustrates a more general
phenomenon of philosophical interest: natural language as a source of
contract disputes (Farnsworth 1967). Work in this area aims to
characterize and distinguish the ways in which the parties'
linguistic choices can interfere with contractual coordination. Famous
contract disputes have involved homonymy (two ships bear the name
"Peerless" and the parties do not intend to refer to the
same ship: *Raffles v. Wichelhaus* (1864)), semantic ambiguity
(the word "chicken" in the trade has a broader and
narrower meaning: *Frigaliment Importing v B.N.S* (1960)),
syntactic ambiguity (an insurance policy covers any "disease of
organs of the body not common to both sexes": *Business
Men's Assur. Ass'n v. R* (1927)), pragmatic or
"latent" ambiguity (*In re Soper's Estate*,
discussed above); vagueness (parties agree that a "materially
adverse change" to the financial health of a business qualifies
the buyer's obligations: *In re Carter's Claim*
(1957)) and under-specification (parties agree to the sale of
"one of the seller's warehouses"). For a general
discussion of how to distinguish these and related phenomena, see the
entry on
 ambiguity.


### 2.2 Freedom and autonomy



Contract law is based on the model (or idealization) of
"voluntary exchange ... between autonomous
individuals" (Radin 2007: 196). Contracts are enforced on the
assumption that parties possess the capacities necessary for informed
and voluntary choice (R2: SS15), while fraud, duress, and various
forms of pressure in bargaining represent grounds for recission (R2:
SSSS164, 175, 177). A preliminary question is why the law
should be so concerned with freedom and autonomy in contractual
exchange. As previously discussed, the rearrangement of private
property might be justified on grounds of efficiency or general
welfare (see
 SS1.3).
 The law's guiding principle could be hypothetical or reasonable
consent--what parties would or should consent to--rather
than actual consent. The importance of actual consent seems clear
enough where exchange impinges on domains over which persons retain
special sovereignty, including their own body and mind (Mill 1859;
Hill 1991; Enoch 2017). But not every contractual exchange impinges on
bodily or mental integrity, and the importance of actual consent to
contracts at large is therefore not obvious.



Voluntariness might be important to contracts for a number of reasons.
A law of involuntary or forced exchange would risk people's
welfare, not just their autonomy. The parties' consent better
tracks exchange efficiency than a court's judgment. Apart from
welfare concerns, if contractual obligation is grounded in promissory
morality (see
 SS1.1),
 then promissory principles constrain the law of contracts, including
those that condition an agent's responsibility on a promise
having been made freely (Hurd 1996). The choice condition avoids
unfairly holding individuals to duties that they lacked a reasonable
opportunity to avoid incurring (cf. Scanlon 1998, Watson 1996).



Since voluntariness in contract likely serves several distinct
normative functions, its analysis presents a challenge. What powers
must an agent exercise over her contractual affairs for her
obligations to count as voluntarily undertaken? The law deems agents
incapable of contracting if they lack either (1) the ability to
understand the nature of a transaction and be responsive to reasons
for and against agreeing to it (see R2: SS15 and Buckareff and
Kasper-Buckareff 2014; on reasons-responsiveness as a general
criterion for moral responsibility, see Fischer and Ravizza 1998), or
(2) the ability to exercise a degree of control over their choices.
Bix (2010) suggests that the common law follows Aristotle in treating
an agent's knowledge and capacity to respond to her reasons, and
not just her capacity to act on desires she identifies with, as
constitutive of her freedom to contract. In addition to general
incapacity, the common law recognizes specific threats to contractual
freedom, including lack of material information due to fraud or
non-disclosure, intoxication, duress, and, to a lesser extent,
cognitive biases when preyed upon within a relationship of trust (R2:
SSSS 16, 161-163, 173-175). The precise content of
these rules is controversial. For instance, there is no legal
requirement that parties disclose all relevant information in the
generic commercial transaction (F. Miller & Wertheimer 2010), and
the line separating permissible from impermissible information
asymmetries is deeply contested (Kronman 1978; Craswell 2006).



The concept of duress is similarly fraught. The law distinguishes
"physical duress", which bypasses the coercee's
rational control over her actions, from duress via "wrongful
threats" which operates through the will of the coercee (R2:
SSSS 174-5; cf. Nozick 1969). A threat is considered wrongful
when the threatened consequence leaves the coercee with "no
reasonable alternatives" to compliance. The law does not give
detailed guidance on the baseline of "reasonable
alternatives" against which the wrongfulness of a threat might
be measured. The question of the baseline has attracted significant
commentary in the philosophical literature on coercion. Nozick (1969:
446) offers a characterization in terms of the "normal or
natural or expected course of events". Others have analyzed the
baseline in explicitly normative terms, as a set of options that
persons ought to have as a matter of right (Wertheimer 1987; cf.
Berman 2002). While the paradigmatic threat ("your money or your
life") makes the coercee worse off relative to her baseline
regardless of compliance, threats in commercial exchange are often
more subtle. An offeror might threaten to worsen the offeree's
situation if she refuses an offer, even if its acceptance would be
baseline-improving. To illustrate, if workers refuse to work under the
terms of an existing contract unless the employer consents to a
modification, the employer may be under duress even if the proposed
modification is mutually beneficial.



A precise account of when an agent lacks "reasonable
alternatives" might help distinguish wrongful threats from
permissible offers, given that offers, like threats, aim to influence
behavior, and might be experienced by the offeree as leaving her no
option but to accept. Several theorists have argued that
baseline-improving offers can be coercive. On David Zimmerman's
(1981) view, an offer is coercive if its acceptance locks the offeree
into a life situation that prevents her from seeking better
alternatives than what the offeror proposes. Joan McGregor (1988)
suggests shifting focus from baseline improvement to whether the
offeror exercises power over the offeree within a relationship of
dependence. On McGregor's analysis, an offeror exercises power
when she has control over a considerable harm that might fall on the
offeree (see also O'Neill 1991; Pettit 1996). While the analysis
may not quite fit the law's concept of duress, it is arguably
implicit in the common law's unconscionability doctrine, which
polices one-sided contracts between parties with unequal bargaining
power. For a more detailed discussion of the distinction between
offers and threats, see the entry on
 coercion.



In addition to threats and exploitative offers, agents may be subject
to influences in the bargaining process that impair their ability to
decide rationally or based on their considered and robust desires (on
conceptions of freedom that identify some but not all of the
agent's desires with her will, see, e.g., Frankfurt 1973 [1988],
Yaffe 2007). A seller might take advantage of a buyer's
innumeracy or cognitive biases in eliciting her consent. While the law
recognizes a category of "undue influence" as grounds for
recission, the doctrine's application, in addition to being
undertheorized, is usually limited to cases involving a special
relationship of trust. It is widely acknowledged, however, that
rationality failures can be exploited within exchange relationships,
and the potential for exploitation is often the basis for regulatory
intervention. A comprehensive analysis of freedom in contract should
therefore clarify what forms of persuasion count as instances of
wrongful control, a question that accounts of duress and uninformed
consent do not necessarily address.


### 2.3 Intentionality



On the standard picture, contractual obligations are grounded in the
parties' promissory intentions, or in such intentions as might
reasonably be inferred from the parties' speech acts. The
standard picture needs a philosophy of action if modern doctrine is to
be convincingly justified. The demands of mass contracting mean that
contracts are often entered into without bespoke drafting or indeed
any dickering at all. The law finds contractual obligations in such
thoughtless acts as selecting "I agree" on a software
license form without reading its terms (Rakoff 1983; Barnett 2002;
Radin 2014). Form-drafters usually have reason to know that such
actions are thoughtless and, also, that the average consumer is
generally not in the position of being able to bargain for better
terms. Indeed, form-drafters often arrange their contractual practices
to make bespoke bargaining impossible, for example by having their
forms presented electronically or by employees who are not empowered
to modify terms. The reasonableness of imputing promissory intent in
such circumstances seems questionable (Radin 2007; 2014).



The puzzle is magnified by the pervasiveness of form contracting in
modern markets and by the details of contract law doctrine. For
example, the law's treatment of standard forms as agreements is
not so easily dismissed as a "convenient fiction"
justified by the general need to enforce standard forms given the many
important functions they serve, from allowing large organizations to
solve agency problems to saving the consumer costs associated with
bargaining over low probability events (Rakoff 1983: 1220-1245).
Anglo-American contract law has long recognized a category of
"as if" or "quasi-contracts" (see, e.g.,
*Baily v. West* (1969)) whose enforcement is justified on
exceptional, non-promissory grounds. That is, the law acknowledges
cases where promissory intent may be lacking but duties of a
contractual form are imposed anyway. In a paradigm case, justification
is said to reside in hypothetical consent: an unconscious patient who
receives life-saving treatment from a physician without previously
consenting owes remunerative duties on a quasi-contractual basis
insofar as the patient would have consented if she could have. The law
does not subsume standard forms under the category of quasi-contracts.
On the contrary, the law enforces standard forms as bona fide
agreements.



A natural thought is that the basis for contractual obligation may be
found in a vague promissory intention. Most promises leave room for
further specification while still being sufficiently specific to
produce reasonable reliance. Sam promises to help Susan move homes but
without specifying whether he intends to labor personally or pay a
mover. Sam incurs a general duty owed to Susan that can be variously
satisfied. Modern contract law, moreover, is quite comfortable with
filling in gaps in incomplete contracts (for example, imputing a
market price where no price is mentioned: UCC: SS 2-204(3)) and
rendering vague terms precise (for example, fixing the payment meant
by an employer's promise of "reasonable recognition"
for inventions made by an employee, see *Corthell v. Summit Thread
Co.* (1933)). A consumer's intention in agreeing to a form
contract may be some underspecified form of compliance with its terms,
which the law can render precise as it usually does.



The problem with this approach is that agents are usually able to
precisely state the contents of a vague promise when invited to do so,
whereas the average consumer, having never read a standard form, is
hardly in the same position. More generally, even vague promissory
intentions must satisfy minimal criteria for being an intention. On
the simplest analysis of prospective intention, to intend an action is
to believe that one will perform it and to have an appropriate guiding
desire (Audi 1973, 395; cf. Harman 1976; Davis 1984). That consumers
form beliefs about all their contractually contemplated future actions
when they agree to a form contract seems questionable. On an
alternative picture, intentions are a distinctive mental state (not
reducible to beliefs or desires) with a unique functional role of
guiding and controlling the agent's behavior as well as her
reasoning (Bratman 1987: 20; see, more generally, the entry on
 intention).
 Whether the average consumer forms any such future-directed, action-
or reasoning-guiding mental state when she agrees to a standard form
is similarly doubtful.



Barnett (2002) suggests that the puzzle is best addressed by shifting
from a promissory theory of contracts to an adjacent consent-based
theory (Barnett 1986). While the concepts of consent and promise fall
in the same normative family (Hurd 1996), the criteria for consent may
be less demanding. Nevertheless, the view confronts parallel worries,
since what was consented-to remains opaque. Barnett suggests that a
consumer's consent is limited to those terms that are not
radically unexpected (637), but the basis for such empirical
assumptions about consumer intent remains unclear. It is doubtful that
the average consumer considers the question of what, if anything, she
is consenting to when she mindlessly clicks "I agree"
(Radin 2007; 2014; Kar & Radin 2019). Ultimately, the problem is
not even due to standard forms including standard(or non-bespoke)
terms or the terms being unread by the consumer. The problem stems
directly from the fact that the consumer's actions in virtue of
which the law finds an intention to be bound appear
thoughtless--that is, lacking in intentionality.



The point of the discussion is not to critique the orthodox view of
contracts as promissory (or chosen) obligation (for general
criticisms, see
 SS1.1),
 but to suggest that the standard picture needs an account of
prospective intention. Not just any view of what an intention is fits
both the standard picture and modern legal practice. It may be that an
agent's intention, in the relevant contractual sense, is
revealed not by her articulable beliefs or action-guiding attitudes in
the moment, but her unconscious dispositions. Given that most
consumers comply with standard forms without contesting their
validity, this general fact about consumer behavior might make it
reasonable to impute a disposition to be bound. On the other hand,
behavioral research suggests that people "are more likely to
comply with contracts they participated in negotiating" (Eigen
2012: 67). At the same time, a consumer's reasons for complying
in subsequent disputes may be entirely disconnected from her original
intentions. The view risks conflating the fact that a person's
compliance is predictable ex ante with the fact that she intends to
comply. If these and other challenges can be overcome, however, then a
dispositional theory of contractual intention may offer a better fit
with orthodox contract theory and modern practice than the available
alternatives.


### 2.4 Distributive fairness and the ethics of surplus sharing



Contract law raises questions of distributive fairness. Should the
design of legal doctrine be sensitive to its distributive effects?
Should parties consider distributive fairness in fixing the contents
of particular agreements? The individual and institutional questions
are of course related. Interpersonal obligations arising out of
contract's internal normative structure might serve as a basis
for institutional design.



Beginning with legal doctrine, we can distinguish rules that seem more
concerned with procedural aspects of justice, especially freedom and
autonomy in the lead up to agreement, than justice in the final
distribution of benefits and burdens. Any number of
doctrines--fraud, duress, and undue influence, for
example--protect weaker parties from being deceived, coerced, or
manipulated into contractual obligations (see
 SS2.2).
 Moreover, the duty of good faith in performance, one of the few
mandatory duties that the law imposes on every contract (UCC
SS1-304; R2: SS205), prevents one party from exploiting her
counterparty's strategic vulnerabilities (often incurred on
account of the contract itself) to "recapture opportunities
forgone at formation" (Burton 1980: 387). This approach to good
faith is procedural insofar as it makes the contract--the
allocation of opportunities the parties opted into --the measure
of what good faith requires.



However, a few contract law doctrines address distributive concerns
more directly. For a time, it looked as if the doctrine of
"unconscionability" might inscribe substantive limits on
contractual inequality into consumer law, at least with respect to
low-income consumers (UCC: SS2-302). The doctrine of
unconscionability has two components: "procedural
unconscionability" arises when one side exploits inequalities of
bargaining sophistication or power to its advantage; and
"substantive unconscionability" arises when the terms
struck unreasonably, and extremely, favor one side. Traditionally,
both elements must be separately demonstrated to establish
unconscionability, but for a brief period, it looked as if substantive
unconscionability, standing alone, might allow a consumer to avoid an
onerous contractual obligation (see, e.g., *Jones v. Star Credit
Corp.*, 1969). This line of doctrine was quickly narrowed (see,
e.g., *Patterson v. Walker-Thomas Furniture Co., Inc.*, 1971).
Today, unconscionability requires (to varying degrees in different
jurisdictions) a procedural element, so that a contract's
substantive injustice is not, without more, sufficient to render it
unenforceable. Moreover, on the conventional interpretation, the
procedural element requires some sort of bargaining abuse so that it
is not enough that one contracting party is less economically
privileged and therefore more economically vulnerable. Other doctrines
that subject contractual terms to distributive scrutiny similarly
emphasize procedural and transactional aspects of justice. The
doctrine of *contra proferentum*, for example, calls for
contracts to be interpreted against their drafters. And any number of
provisions in the UCC authorize courts to fill contractual gaps,
interpret ambiguous terms, or regulate renegotiation, with courts
often exercising their discretion in ways that favor unsophisticated
(and often poorer) parties (Rakoff 2016). For this reason, although
the application of doctrines like unconscionability might be driven by
considerations of distributive justice, the law does not make
distributive justice a freestanding criterion for the enforceability
of contracts. An argument might be made that the law embodies an
Aristotelian conception of *commutative* justice (Gordley
1991), so that contractual exchange must deploy a "just
price," which allows neither party to enrich itself at the
expense of the other; but an analogous claim that the law exemplifies
a general concern for social and income inequality would be hard to
maintain.



Several theorists have favored broadening the egalitarian doctrines of
contract law. On one proposal, forms of advantage-taking in
contractual exchange through non-disclosure of information should be
tolerated only to the extent that permissive rules confer long-term
benefits on those who are most vulnerable (Kronman 1980). The proposal
draws support from a prioritarian principle of weighted beneficence,
according to which benefits to the worse off have greater moral
weight. Along similar lines, Aditi Bagchi (2014) argues that ambiguous
terms in contracts should be interpreted in ways that promote
distributive justice by benefiting the economically worse off. The law
of contracts thus becomes a tool for improving the unequal background
conditions in which exchange occurs, conditions that undermine the
validity and authenticity of people's choices, and, relatedly,
the moral basis for enforcing contracts in the first place (Ackerman
1983; Kennedy 1982).



Contract law egalitarianism draws support from an extensive literature
in moral and political philosophy that has questioned the legitimacy
of exchange relations in unequal societies. John Rawls' seminal
work has been especially influential. Rawls (2005: 266-267)
observes that the free market allows everyone to gain through private
exchange, but it also allows those who are already more advantaged to
capture as much of the contractual surplus as they are able to, so
that "the invisible hand guides things in the wrong direction
... maintaining unjustified inequalities and restrictions on fair
opportunity."




Contract and property law, together with institutions of
tax-and-transfer, arguably fall within the "basic
structure" of society--that is, the category of
institutions that so pervasively influence people's lives as to
demand special justification (Murphy 1998: 260-261). For Rawls,
the basic structure's justification depends on what parties
would rationally agree to ignorant of various aspects of their
situation, including their economic circumstances. Rawlsian
"maximin principles" prioritize the interests of those who
are worse off. While a full analysis of Rawls' work and its
influence on modern contract theory is beyond the scope of this entry,
readers can see related entries (on
 distributive justice
 and the
 original position)
 for more detail.



Rawlsians are hardly alone in questioning the legitimacy of private
exchange in circumstances of inequality. Marx (*Das Kapital*,
3:339-40) famously questions the alleged "natural
justice" of private exchange and the juristic treatment of
economic transactions "as willful acts of the parties
concerned", viewing exchange relations in capitalist societies
as invariably exploitative (see discussion in Arneson 1981: 205; cf.
Cohen 1995). Exploitation raises questions of meaningful consent and
coercion, some of which were discussed earlier (see
 SS2.2).
 But implicit in Marx's concept of exploitation (assuming the
view to be less than fully skeptical of considerations of justice) is
a distinct moral notion: the failure of private exchange to ensure
parties receive as much as they deserve based on their productive
contributions and sacrifices (cf. Cohen 1995: 116-117; on moral
desert, see below).



Contract law egalitarianism at the institutional level confronts two
standard criticisms. First, it is not obvious that judges have the
authority or competence to promote distributive justice. A
tax-and-benefit scheme may be a more effective means of promoting the
interests of the economically worse off than private law, though
whether this is true remains an open empirical question (Kaplow &
Shavell 1994; Lucy 2007: 352-6; Liscow 2021 [Other Internet
Resources]). Second, contract disputes are private affairs, and people
deserve protection from being singled out to bear the burdens
associated with the collective's moral responsibilities. Thomas
Nagel (1991: ch9) describes a division of moral labor between, on the
one hand, institutional actors responsible for the basic legal
structure, and, on the other, ordinary citizens acting in their
private capacity. In general, persons may lead better lives if freed
from the obligation to manage their exchange relations
altruistically. The point seems consistent, however, with courts being
obliged to enforce negative duties--for instance, a duty not to
take advantage of the collective's failure to secure
distributive justice (Murphy 1998: 266; Bagchi 2014). The common
law's unconscionability doctrine appears tailor-made to police
this kind of predation by the economically privileged of the
disadvantaged.



We turn from the institutional-level question to the question of what
contracting parties individually owe one another. Contracts generate
surplus from cooperation--each side typically stands to benefit
through exchange. How that surplus ought to be divided is not
necessarily settled by assuming that the parties transact from a place
of equality. Robert Nozick's (1974) famous discussion of
"justice in transfer" provides a convenient starting point
for exploring the ethics of surplus sharing. Nozick suggests that
inequalities arising out of voluntary transactions do not give rise to
a question of justice, given fair background conditions. On
Nozick's "voluntarist" view, whatever sharing scheme
is voluntarily agreed to (setting aside stealing, fraud, etc.) is
just, or, alternatively, no question of justice is raised by a
division the parties consented to (for a more detailed statement, see
Nozick 1974: 149-182). There are other more qualified strains of
voluntarism. A "sufficientarian" might insist that the
consented-to division must satisfy a minimal baseline. Sterba (1986:
8) articulates a "Needs and Agreement Principle" under
which the results of voluntary agreement and private appropriation are
morally justified only insofar as each person is guaranteed the goods
necessary to meet the normal costs of satisfying her basic needs.
Sufficientarian constraints might entail, for example, that those
involved in the provision of essential goods or services--basic
medicine or education--owe more robust duties to those with whom
they contract.



Moving further away from pure voluntarism, a prominent approach
distinguishes between deserved and undeserved shares of cooperative
surplus. Nozick is sometimes criticized for assuming that persons are
entitled to that portion of the market price for their goods and
services characterizable as "scarcity rent" (B. Fried
1995: 230). Rent is defined as a gain that exceeds what is necessary
to incentivize cooperative exchange. Excess gains in market exchange
are often attributable to natural scarcity, including scarcity of
natural talents. Whether persons deserve such windfalls flowing from
brute luck in the birth lottery remains a deeply contested moral
question. Some find a desert-basis in effort and other forms of
personal sacrifice, including delayed gratification (as in investment
contracts). On this view, parties are owed at least as much of the
surplus from a cooperative scheme as would constitute fair
compensation for their sacrifices (Reiman 1983; Sadurski 1985; Milne
1986). Others finds a desert-basis in productive contribution. Parties
to contractual exchange deserve fair remuneration for their marginal
product (D. Miller 1976; Miller 1999; J. Riley 1989). Marginal product
is defined as a factor's distinctive contribution to raising the
value of goods and services, holding other factors constant. The
central moral intuition, here, is that people ought to receive
benefits from exchange in proportion to how much they improve the
wellbeing of others (Lamont 1994). The productive contribution theory
is sometimes motivated on general consequentialist grounds (rather
than notions of moral desert), with rents explained as the premium
necessary for incentivizing parties to put their talents to productive
and wellbeing-maximizing use (Arnold 1987).



Both the effort and productive contribution theories rely on concepts
that invite further specification. Consider the concept of marginal
product. What is produced by one's efforts depends on the
productivity of the tools and raw materials one has at one's
disposal. The state is a contributing participant, also, in every
cooperative exchange (B. Fried 1995). Given that many people make
interdependent contributions to social product, the link between any
individual's labor and output seems too attenuated to ground
anything more determinate than the claim that people deserve
*something* based on what they produce (Scanlon 2018: ch8). And
it is hard to see how so general a normative claim could bear the
weight of justifying any precise proposal for surplus division.



Gauthier (1986: 140-141, 152-153) suggests that
cooperative surplus might be split according to the ratio of the
parties' "individual relative benefit from
cooperation". Each party's relative benefit from exchange
is measured by their next best option. If *A* and *B*
generate $10 of cooperative surplus, and *A* could have earned
$3 acting independently of *B*, while *B* could have
earned $4, then the maximum *A* can claim of the surplus is $6
consistent with inducing *B*'s willing cooperation, and
the maximum *B* can claim is $7 for a parallel reason. When the
$10 surplus is split based on a 6:7 ratio, each party receives such
benefits as she would expect apart from cooperation and, in addition,
receives a share of the surplus proportionate to her potential for
benefiting from the exchange. Gauthier defends the proposal as a
solution to a bargaining problem confronting self-interested rational
agents, but it is morally contestable. It remains unclear why a party
should receive more just because they had a better alternative, since
the availability of an attractive alternative may be a function of
brute luck. Moreover, Gauthier's principle does not guarantee
that parties receive a share commensurate to sacrifice or productive
contribution (Van Parijs 1996).



The proposals considered so far invoke considerations of
pre-institutional morality and/or rationality. But the ethics of
surplus sharing might instead be traced to established customs.
Macneil (1986) suggests that markets give rise to complex norms of
"gift-giving" in commercial exchange. These gift-giving
norms encourage agents to refrain from claiming as much of the surplus
as possible and have an important role to play in maintaining social
bonds, especially in contexts where constant haggling undermines trust
and creates impediments to contracting. For example, sellers of
antiques will offer discounts to those who reveal their enthusiastic
interest in purchasing an item. By rewarding disclosures against
self-interest, the sellers promote solidarity and cooperation in the
market for antiques. Macneil observes that norms of gift-giving are
more likely to emerge where the cooperative surplus is large and
repeat interaction generates high interdependence.



A question facing the social solidarity view is why market
participants should feel obliged to comply with customary norms.
Custom is sometimes portrayed "as the embodiment of what parties
in the relevant community actually, not fictitiously, consent to when
they manifest their intention to be legally bound" (Barnett
1992: 1192).




On this view, the parties' expectations become the grounds for
complying with the relevant surplus sharing norms, although
expectations, even ones based on longstanding customs, are not always
reasonable or fair. Another possibility is that the reasons for
compliance may be grounded in general, consequentialist considerations
concerning the importance of reinforcing socially beneficial customs.
A third is that compliance produces additional surplus by lowering
transaction costs.



In the final analysis, a broad range of distributive considerations
arguably ought to shape bargaining behavior, and the above discussion
is not intended to be exhaustive. As should be apparent from the lack
of convergence among theorists, the moral question of justice in
transfer that is at the heart of contract remains far from
settled.