Performance, Punishment and the Nature of Contractual Obligation
| DOI | http://doi.org/10.1111/1468-2230.00085 |
| Date | 01 May 1997 |
| Published date | 01 May 1997 |
Performance, Punishment and the Nature of Contractual
Obligation
Stephen A. Smith*
Introduction
According to the theory of efficient breach, the reason the common law does not
order specific performance presumptively for breach of contract,
1
nor punish
deliberate breach,
2
is that sometimes it is economically efficient for contracts to
be broken.
3
By limiting itself to awarding damages, the law allows — indeed
encourages — contracting parties to breach whenever the cost of performance is
greater than the value of performance. The theory of efficient breach has been
subject to a variety of criticisms. Some critics, including some economists, argue
that the rules regarding specific performance and punishing breach are not in fact
efficient.
4
Other critics argue that the notion of efficient breach is inconsistent
with other features of the law, such as the awarding of nominal damages, the tort
of inducing breach of contract or an executor’s duty to perform contracts made by
the deceased.
5
Yet other critics emphasise the inconsistency between the theory
of efficient breach and judicial statements about the ‘wrongfulness’ of breach or
judicial statements to the effect that ‘the purpose of a contract is performance and
The Modern Law Review Limited 1997 (MLR 60:3, May). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA.360
*St Anne’s College, Oxford.
I would like to thank Alan Brudner, Daniel Friedmann, Nicholas McBride, David Stevens and the
participants in legal theory workshops at McGill University, York University and the Universities of British
Columbia, Hull and Southampton for their comments on earlier versions of this article.
1Robinson vHarman (1848) 1 Exch 850, 855; Restatement (2d) Contracts, s 359. On the exceptions to
this rule, see 373–374 below, and on the increasing willingness of common law courts to order
specific performance, see: Linzer, ‘On the Amorality of Contract Remedies — Efficiency, Equity and
the Second Restatement’ (1981) 110 Columbia L Rev 110, 126; Farnsworth, Contracts (Boston: Little
Brown, 1990) 163, 168. In civilian jurisdictions, specific performance is the presumptive remedy for
breach of contract, although in practice it is awarded about as frequently as it is awarded in common
law jurisdictions: Zwiegart and Kotz, Introduction to Comparative Law (Oxford: Oxford University
Press, 2nd ed, 1992) 504–522.
2Addis vGramophone Co Ltd [1909] AC 488; Perera vVandiyar [1953] 1 WLR 672; Vorvis v
Insurance Corp of British Columbia [1989] 1 SCR 1085; Restatement (2d) Contracts, s 355 and ch 16,
introductory note. See also generally Treitel, ‘Contract and Crime’ in Crime, Proof and Punishment:
Essays in Memory of Rupert Cross (London: Butterworths, 1981) 83–84; Farnsworth, n 1 above, 189–
195; Sullivan, ‘Punitive Damages in the Law of Contract: The Reality and the Illusion of Legal
Change’ (1976) 61 Minnesota L Rev 207, 223; Pennington, ‘Punitive Damages for Breach of
Contract: A Core Sample from the Decisions of the Last Ten Years’ (1989) 42 Arkansas L Rev 31,
34. On exceptions to the bar against punishing breach of contract, see Sullivan, ibid 220–240 and
375–376 below.
3 Birmingham, ‘Breach of Contract, Damages, Measures and Economic Efficiency’ (1970) 24 Rutgers
L Rev 273; Posner, Economic Analysis of Law (Boston: Little Brown, 4th ed, 1992) 117–126.
4 Schwartz, ‘The Case for Specific Performance’ (1979) 14 JLS 299; Macneil, ‘Efficient Breach of
Contract: Circles in the Sky’ (1982) 68 Virginia L Rev 947; Friedmann, ‘The Efficient Breach
Fallacy’ (1989) 18 JLS 1; Linzer, n 1 above.
5 See eg Friedmann, n 4 above, 18–21; Finnis, Natural Law and Natural Rights (Oxford: Clarendon
Press, 1980) 323–324; McBride, ‘A Case for Awarding Punitive Damages in Response to Deliberate
Breach of Contract’ (1995) Anglo-American L Rev 369, 384–386. I discuss these rules in n 65 below.
not the grant of an option to pay damages.’
6
Finally, it is argued that efficient
breach is morally indefensible and for this reason a poor interpretation of the
law.
7
Despite these objections, the theory of efficient breach continues to exert a
considerable influence on contract scholarship, and not only amongst economists.
8
The main reason for this influence, it is suggested, is that whatever its defects the
theory appears to offer the only plausible explanation of the rules regarding
specific performance and punishing breach. The most important ‘non-economic’
theories of contract hold that contractual obligation is based, in general terms, on
the moral obligation to keep one’s word.
9
On such theories — let us call them
‘rights-based’ theories
10
— the rules regarding specific performance and punishing
breach appear hard to justify. If contract law is based on the moral obligation to
keep one’s word, it would seem to follow that the presumptive remedy for
breaching such an obligation should be an order to perform the contract rather than
an award for damages. The natural way to make good a failure to do that which one
has an obligation to do is to perform the obligatory action.
11
As for deliberate
breach, the law, like morality, normally differentiates between deliberate and non-
deliberate wrongs.
12
The former, if serious enough, are punished — either through
Angullia vEstate and Trust Agencies (1927) Ltd [1938] AC 628, 635; Lagerloef Trading Co v
American Products Co 291 F 2d 947, 956 (1923). On the importance of an interpretation of the law
being consistent with the language of legal reasoning, see Weinrib, The Idea of Private Law
(Cambridge, Mass: Harvard University Press, 1995) chs 1, 2.
7 See eg Friedmann, n 4 above; Dworkin, Law’s Empire (London: Fontana Press, 1986) chs 1–5.
Dworkin’s particular targets in Law’s Empire are economic interpretations of tort law, but most of his
criticisms apply equally to economic interpretations of contract law. On the importance of morality in
assessing an interpretation of the law, see Dworkin, ibid chs 1–5; Weinrib, n 6 above, chs 1, 2.
8 See eg Farnsworth, ‘Legal Remedies for Breach of Contract’ (1970) 70 Columbia L Rev 1145, 1216;
Atiyah, An Introduction to the Law of Contract (Oxford: Clarendon Press, 5th ed, 1995) 428–431;
Waddams, The Law of Damages (Aurora: Canada Law Book Company, 3rd ed, 1993) para 11.250;
Eisenberg, ‘The Principle of Hadley vBaxendale’ (1992) 80 California L Rev 563. After setting out
the theory of efficient breach, the authors of the introductory note to ch 16 of the Restatement (2d)
Contracts note that ‘the main thrust of the preceding economic analysis lends some support to
traditional contract doctrine in this area.’
9 Most other ‘non-economic’ theories of contract fall into two general groups. One group includes
theories that see contract law as a tool for promoting goods other than wealth maximisation: see eg
Coleman, Risks and Wrongs (Cambridge: Cambridge University Press, 1992). Because such theories
are distinguished from economic theories only by their view of the good that contract law promotes,
they can and do generally rely on arguments similar to the economists’ notion of efficient breach to
explain the rules on specific performance and punishing breach. The second group includes theories
that view contract law as a species of tort law, protecting the reliance interest rather than the value of
a promise: see eg Atiyah, The Rise and Fall of Freedom of Contract (Oxford: Clarendon Press, 1979)
1–7. Reliance-based theories are consistent with the law’s refusal to award specific performance
(since they view contract as based not on an obligation to perform, but on an obligation not to harm),
but like rights-based theories they have difficulty explaining why contractual breaches are not
punished.
10 Such theories are labelled ‘rights-based’ because they hold that promisees have a moral right to the
performance of a contract.
11 Thus, in the introductory note to ch 16 of the Restatement (2d) Contracts, the authors state that the
law’s focus on the pecuniary aspects of breach ‘fails to take account of notions of sanctity of contract
and the resulting moral obligation to honor one’s promises.’
12 The line between deliberate (or ‘intentional’) and non-deliberate (or ‘unintentional’) wrongdoing is a
fine one, but nothing that follows turns upon exactly where the line is drawn, nor upon the status and
definition of reckless wrongdoing. The question of what should count as a legitimate excuse, or as a
legitimate justification in cases of deliberate breach, is also difficult, but, again, nothing in what
follows turns upon the answer.
May 1997] Performance, Punishment and Contractual Obligation
The Modern Law Review Limited 1997 361
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