Contract as a transfer of ownership.

• Author: Benson, Peter

All agree that contracts are, and must be, voluntary transactions, in this way differing from transactions that come under the law of tort or unjust enrichment. Unless an agreement is voluntary on both sides, it cannot be binding and so cannot be a contract at all. Voluntary interaction is the essential basis of obligation in contract. Understanding the voluntary character of contract would therefore seem crucial to clarifying its moral basis as well as its distinctive place within private law. But what makes an agreement voluntary?

Most would root the voluntariness of contract in the fact that it arises through the parties' consent. Contract is essentially consensual and in virtue of this it is voluntary. So, for example, Samuel Pufendorf begins his classic discussion On the Consent Required in Promises and Pacts with the proposition, which he presents as self-evident, that

no more pertinent reason can be advanced, whereby a man can be prevented from complaining hereafter of having to carry such a burden [of the necessity of doing something] than that he agreed to it of his own accord, and sought on his own judgement what he had full power to refuse. (1) The question is what, if any, conception of consent can function as the essential basis of contractual obligation. I have put the question this way because what we are seeking is a unified and coherent moral basis for contract. It is the central question that I address.

The legal point of view itself supposes that a certain sort of consent is pertinent to contract law. We begin with this, because our aim is to elucidate and to justify a conception of consent that is at least implicit in the widely recognized principles of contract law and so part of our public reason.

Now the sort of consent that is supposed by contract law is one that is necessary and sufficient for contract formation and therefore for the establishment of a relation of right and duty between the parties at the moment of agreement. The relation of right and duty arises through the parties' mutual expressions of assent, prior to and independent of the moment of performance. From a legal point of view, no new rights or duties arise between the parties after formation, whether by performance or by breach. The contractual rights and duties between the parties are completely specified and determined at formation. Performance adds nothing new but is just the fulfillment of the rights and duties established at contract formation. More precisely, performance respects those rights whereas breach injures them. The character and shape of these rights is reflected in the fact that they are specified only as between the parties, not against others who are strangers to the contract, and that their breach is remedied through damages or specific performance, both of which aim to put the plaintiff in the position he or she would have been in had the defendant performed as promised. The law supposes that these remedies are necessary and sufficient to enforce, by way of compensation, the rights and duties that are brought into existence by the parties' consents at contract formation. All this seems relatively clear and uncontroversial. To see that it is not, I turn to the celebrated essay by Fuller and Perdue, The Reliance Interest in Contract Damages. (2)

1. THE FULLER AND PERDUE CHALLENGE

   In their article, Fuller and Perdue begin with the long-established legal principle that the normal remedy for breach of contract is either expectation damages or specific performance and that in giving such remedy, the law aims to put the plaintiff in the position he or she would have been in had the contract been performed. (3) The law takes this "expectation" principle to be a principle of compensation and, as such, to be a just and ruling principle. (4) This is precisely what Fuller and Perdue challenge. They write that contract remedies give a plaintiff "something he never had." (5) "This," they point out, "seems on the face of things a queer kind of 'compensation."' (6) In giving such remedies, the law does not "heal a disturbed status quo" but instead brings into being "a new situation" and, in doing so, the law passes "from the realm of corrective justice to that of distributive justice." (7)

   Their challenge supposes, then, the generally accepted idea of compensation in private law and urges that the central and distinctive remedies of contract law do not fit with this idea, contrary to the way the law presents them. What is this idea of compensation?

   Briefly, it supposes, at step one, an initial baseline that represents a legally protected interest which the plaintiff has exclusive as against the defendant, prior to the defendant's wrong. The plaintiff must have something as a matter of exclusive right which the defendant is not permitted to injure. Absent this interest, any impact which the defendant's conduct may have on the plaintiffs well-being will be no more than damnum absque injuria. Supposing now, at step two, the defendant does something that is incompatible with the plaintiffs protected interest--the law will attempt by way of remedy, at step three, to reinstate the plaintiff in the position he or she would have been had the defendant respected his right. Damages are given, not to increase the plaintiffs well-being which has been diminished, but to cancel the wrong by repairing the loss that results from it. So far as money damages can do, the plaintiff is put into the position he or she would have been had there been no wrong. This position is the initial baseline. It is only if the rationalization of the remedy begins and ends with this baseline of protected interest that it can count as compensatory. In the particular case of contract remedies, if expectation damages and specific performance are to qualify as compensatory, it must be possible to view them as reinstating plaintiffs in something which is their protected interest and which they already have prior to breach. But this is exactly what Fuller and Perdue deny.

   Fuller and Perdue then go on to consider a number of possible non-compensatory justifications for the expectation rule and conclude that the most plausible basis is a rationale that views these remedies as curing and preventing a plaintiffs reliance losses as well as facilitating general reliance on business agreements. (8) In this Essay, I do not wish to discuss their suggested rationale. (9) Instead, I want to make more explicit their reason for holding that the expectation remedy, whether damages or specific performance, cannot be understood as compensation. This will enable us to see more clearly how contract formation must be conceived if, contra Fuller and Perdue, the legal point of view is to be plausible and further, what kind of consent might be the necessary and sufficient basis of contractual obligation.

   The premise for their conclusion, although implicit, seems clear. Fuller and Perdue presuppose a conception of promising in which the making of a promise does not, in and of itself, give the promisee anything that, as a matter of rights and prior to performance, can count as a protected interest as against the promisor. The assumption here is that it is only if and when performance takes place that the promisee acquires anything that qualifies as a legally protected interest. Thus a breach of contract cannot, strictly speaking, count as an injury that interferes with, or otherwise deprives the promisee of, something he acquires at contract formation. (10) Nothing is acquired at contract formation. At the start, certainly the promisor may have a property right in, say, the horse that he or she agrees to sell to the promisee. The promisor's protected interest in the horse ends or is limited only when he or she delivers it into the promisee's possession, whereupon it is now the promisee who has the property right in it as against (in principle) anyone else. What Fuller and Perdue deny is that the promise as such gives the promisee any legal entitlement whatsoever. There is no specifically contractual entitlement.

   On this view, property and promises are radically distinguished. Only property intrinsically and necessarily entails the idea of exclusive rights as against others. Property, but not promise, expresses a right of ownership in the large sense of having something of one's own from which one is entitled by rights to exclude others. If, according to Fuller and Perdue, certain promises should be enforced, it is not because they are understood as conferring ownership or creating a relation of exclusive right as between the parties, but simply and solely because enforcement is desirable on the basis of policy considerations. They deny that promises, as such, have juridical significance. (11)

   This view of promises is in sharp contrast with the legal standpoint. The law presents the kind of rights conferred by enforceable promises (rights in personam), no less than proprietary rights in rem, as being exclusive as against another (the promisor) with respect to something in which the promisee can have a legally protected interest. Contract rights are clearly viewed as involving ownership, understood in the large sense. Moreover, this protected interest is directly established in and by the parties' mutually related expressions of assent. The source of right here is the parties' transaction itself. The legal principles governing the requisite assents--the doctrines of offer and acceptance as well as consideration--do not single out enforceable promises on the basis of their substantive content, purposes, or economic significance. To the contrary, the principles of formation are content-neutral and indifferent to such considerations. A promise of something in return for another's refraining from an activity he or she is legally permitted to do, as in the famous case of Hamer v. Sidway, (12) has the same legal standing and significance as the most sophisticated and...