#19857 - Debates Enforcing Performance - Contract Law

How Far Should Contractual Remedies Enforce Performance?

The primary remedy is damages. The orthodox view says this aims to compensate loss. Where there is no loss, damages will be nominal. Interestingly, even where there is gain, nominal damages are still awarded, which perhaps undermines in part the orthodox view. There is a ‘duty’ on the promisee to mitigate loses, although this is unenforceable but not inconsequential. Courts only award specific performance (SP) when regular damages would be ‘inadequate’. Although note Millet LJ in Co-operative Insurance CA, dissenting, arguing the true test is one of ‘appropriateness of relief’, and that adequacy of damages is only one factor in assessing this (this isn’t the current position in law, but an interesting theoretical point).

If you view contract law as existing to obtain performance and price, it is a grave error that courts relatively rarely award SP. This view would say use SP primarily with remedies tailored to deter breach, like exemplary damages and disgorging the profits of the breach. Law currently doesn’t seem to care about performance – it seems there is no right to performance.

Economic analysis suggests sometimes breaches have a net positive impact – efficient breach theory deriving from Holmes. This is at odds with people who believe contracts are morally binding promises.

Rights and Remedies

Key:
Contract Enforcers
Expectation Deniers, including Efficient Breach etc.

Lionel Smith argues contract law must take contractual rights seriously, and do so by enforcing contracts. Charles Fried thinks insofar as contracts are grounded in promises, we should assess damages by reference to the expectation. The expectation was performance, and parties have a right to performance.

In response, Craswell points out courts default to certain damages, and do so without substantial reference to the remedy preferred by the parties. Therefore, the remedy does not concern itself with the expectation of the parties in this sense. Equally, the fact terms are implied by law into contracts suggests contract law does not sanctify expectation. Corbin believes there is no right to performance – writers like Smith and Fried have not explained why there should be. Kreitner says much the same thing, that most writers assume contracts should be enforced, when the extent to which they should be is precisely the issue.

Lionel Smith points to property law – the only relevant difference, he argues, between this and general contract law is that property rights bind the world, whereas contractual rights are mostly personal. He argues, following Friedmann, that just as property can’t be taken without the owner’s permission, contractual rights must be performed rather than ‘breached with payment’. This is true even if the ‘borrower’ values the property much more than the owner – there is no ‘efficient theft’ theory so there shouldn’t be an ‘efficient breach’ one.

Possible responses:

1. Breach of contract is not a criminal offence. Even the most extreme moralists do not advocate its criminalisation.

2. It’s misleading to suggest all property rights receive this very high level of protection in private law. SP is only awarded when the court decides, not by right.

As Craswell points out, defining the right does not automatically define the remedy.

Friedmann accepts this, but argues the right and remedy are not completely divorced. The existence of a right tells us enough about the remedy to protect it.

Atiyah has an unorthodox theory which prioritises reliance above all else. Relied-upon promises deserve more protection than purely executory agreements. Performance remedies prioritise the latter, which should be rejected. People should be able to change their minds about performance if the promise has not been relied on. This applies to partially carried-out contracts too. He wanted detrimental reliance to be compensated above performance remedies. This could be dismissed by saying there is a right to performance, but Friedmann has to prove this, not assume it. Atiyah therefore presents a theory incompatible with Friedmann’s ideas.

Charlie Webb directly takes on Friedmann by denying any relationship between a right and a remedy. He argues it’s crude to define obligations purely through sanctions, citing Hart. As such, unless the law forces us to do something, performance is not truly mandatory.

This can be countered by pointing out that courts state non-performance is wrongful by calling it a ‘breach’. There are sometimes good reasons not to compel performance, like hardship or dirty hands in equity.

Webb notes there are other reasons not to order SP – administrative costs on the courts, and heavy restrictions on the liberty of the person ordered. The absence of SP does not mean courts don’t think people should perform their contracts. Just because they don’t enforce employment contracts doesn’t mean the court thinks people shouldn’t turn up for work. It seems Webb later backs down and says there is a connection between rights and remedies, but that the remedy for SP is at too high a cost. He does accept, though, that the law might promote breach by not doing more to ensure it isn’t breached.

But would this not mean Webb should regret any non-issuance of SP? Is it really unreasonable to only pay attention to law where it uses money to forcibly compel compliance? Holmes’s bad man thinks not.

Holmes and Contractual Rights

The madman himself provocatively said the duty to keep a contract at common law is only a prediction you must pay damages if you fail. There is no right to performance. SP is rightly a secondary remedy. Promisors either undertake performance initially, or damages at their choosing. Holmes generally thinks contracts are risk-allocation devices. You can legally promise it will rain tomorrow. What this really is, is you undertaking the risk of it not happening and paying damages if it doesn’t. Sort of like you insuring something.

If true, how does frustration fit in when it’s never impossible to pay damages? Pollock asserted a man ordering a coat from his tailor is hardly betting with his tailor the coat will not be made. Buckland said ‘one does not buy a right to damages, one buys a horse’. Oliver LJ in George Mitchell v Finney Lock Seeds agrees the purpose of a contract is performance – not to grant an option to pay damages. Friedmann thinks the same, saying performance is usually the sole ground to make a contract. Bernstein conducted empirical research and found commercial weavers want delivery of the cotton on which their business depends, not compensation in its place.

Holmes accepted his approach would offend those who thought law was moral. His theory explains why SP is the primary remedy in Civilian systems. Posner argues this explains why in Civilian systems, fault is usually needed for breach liability. In common law, Lord Edmund-Davies points out we don’t care why D breached – it’s no defence to say I did my best (Raineri v Miles). On Holmes’s view, D is insuring against the risk of non-performance. As long as he pays damages, he hasn’t done anything ‘wrong’.

Posner argues this is wrong – when courts order SP on pain of punishment, there is clearly fault involved. (this can be taken to support either side. You can spin Holmes as not only being for the primacy of damages, but against SP altogether. Therefore, the courts illegitimately introduce an element of fault when using SP by holding the threat of contempt of court over D’s head. Or, Holmes’s theory cannot explain the current system whilst courts still use SP).

There is the argument that Holmes’s theory is at odds with commercial expectations. Markovits and Schwartz think commercial contracts should be interpreted as either an obligation to perform, or an obligation to pay damages. They argue paying damages is not a breach of contract at all, but an exercise of a legitimate choice. Scott and Triantis characterise it as the cost of exercising the option not to perform. Markovits and Schwartz think the two options model is preferable to SP. If Promisor knows SP might be used if they don’t perform, they will charge more. There is no flexibility to pay damages when it becomes uneconomical to perform. Rational Promisee would therefore prefer expectation damages as contracts cost less.

Even though Holmes accepted his theory was amoral, Shavell offers a reason why it might not be. If contractors could foresee all future events and describe what should happen in every situation, they would allow non-performance when it became uneconomic. Law’s permissive attitude to allowing damages tracks what parties would have agreed if they could foresee all outcomes. Shavell concludes there is no immorality to this. Markovits and Schwartz say it’s only immoral in some situations, like family or personal relationships. Likewise, Baron and Wilkinson-Ryan say social condemnation for breach of contract is overgeneralised. This condemnation is being read into commercial situations where it need not be. Paying ‘damages’ instead of attending a birthday party is not usually socially acceptable, but damages are an appropriate way of dealing with commercial failures to deliver. Wilkinson-Ryan has found including a liquidated damages clause in a contract might correct this – the agreed sum is the agreed price of non-performance. In commercial contexts, breaches are rarely immoral. Damages instead of performance is desirable when it would lower the parties’ costs – efficient breach theory. Cunnington concedes where interest in performance is...