Contract Theory.

• Author: Oman, Nathan
• Position: Brief Article - Book Review

CONTRACT THEORY. By Stephen A. Smith. New York: Oxford University Press. 2004. Pp. xxvi, 450. $35.

1. INTRODUCTION

   It is a cliche of contemporary legal scholarship that, in the last few decades, the study of law has witnessed a vast proliferation of competing theoretical approaches. The old faith in the careful honing of doctrinal concepts and the essential usefulness of legal analysis has given way to a cacophony of competing theoretical sects. (1) Economists, moral philosophers, sociologists, historians, and others have stepped forward to offer the insights of this or that discipline as a new and superior path to legal enlightenment. Perhaps nowhere has this cliche been truer than in the realm of contracts scholarship, where, for a generation, the competing disciplinary approaches have been energetically proselytizing for their chosen theories. Hence, modern legal scholarship abounds with economic, philosophical, and sociological theories of contract law.

   Most contracts scholars take one of two basic approaches. On one side stand those who, while acknowledging the usefulness of the new theoretical tools, remain unconverted to any of them. With lawyerly pragmatism, they remain skeptical of unifying theoretical enterprises. Human experience and the law are too complex for academic reductionism, they argue, and "a good gray compromise" of competing principles and policies (2) is the best that we can hope for. On the other side are those who declare that "theory works." (3) The problem with pragmatism, they assert, is that ultimately it fails to provide either illumination or concrete conclusions. We are left with little more than a series of ad hoc ipse dixits lacking coherence or justification. In contrast, rigorous theory of one sort or another offers the promise of real understanding. Obviously, both portraits are overdrawn, and individual scholars fall at different points along the spectrum between them. Nevertheless, the tension between pragmatism and theory explicitly or implicitly pervades much of contemporary contracts scholarship.

   Into this discussion comes Contract Theory by Stephen A. Smith. (4) Published as part of Oxford University Press's Clarendon Law Series, Smith's book, despite its aggressively boring title, is a fascinating and important contribution to the current debates. Part textbook and part original analysis, Smith surveys most of the prominent contemporary theories of contract law and ultimately offers a detailed argument in favor of a unified theory built around the moral force of promising. (5) Smith is a legal philosopher by training, and he has a philosopher's faith in theory. Hence, Contract Theory squarely challenges the pragmatic approach to contract law. Smith admits that "[i]n the end ... because there is little consensus as to the best theory of contract, studying contract theory mainly entails learning about competing theories" (p. viii). Nevertheless, he clearly believes one may hope for greater unity and precision than "a good gray compromise," and one of Contract Theory's contributions is Smith's sustained discussion and defense of a set of criteria for winnowing out defective theories.

   Ultimately, however, Smith's laudable desire for theoretical rigor ignores the possibility the pragmatic approach to contract law suggests: a principled reconciliation of competing approaches. Smith argues for an essentially unified theory. He seeks to defend his promissory approach by arguing for the wholesale rejection of competing alternatives, most notably reliance and efficiency theories. The "good gray compromise" school of thought, however, acknowledges that such outright dismissals are problematic. Most people have powerful intuitions that autonomy, efficiency, and corrective justice should all play important roles in our understanding of contract law. "Theory works" partisans rightly respond that such intuitions, by themselves, fail to provide us any way to coherently integrate those competing values. Smith's work graphically illustrates this quandary. His quest for theoretical unity leads him to make a series of problematic arguments dismissing efficiency theories. Indeed, in his drive to ground contract law in a single normative principle, he comes to the startling conclusion that many of what we think of as the core rules of the subject--such as those governing breach and damages--are not actually part of contract law at all. The difficulties Smith faces suggest that, rather than trying to unite all of contract law under a single normative principle, theorists should turn their attention toward providing a principled way of integrating competing approaches to contract in a single theory. As an example, I will present my strategy for reconciling the values of autonomy and efficiency into a single theory, while neither dismissing one approach nor falling into the trap of making ad hoc choices between them.

   This Review proceeds as follows. I begin, in Part II by placing Smith's book in the context of the contemporary scholarly literature on contracts and detailing some of its main contributions. Next, in Part III, I turn to Smith's attempt to offer a theoretically unified view of contract law, outlining the arguments he uses to establish this unity and explaining why they are ultimately unpersuasive. Finally, in Part IV, I suggest that, in place of theoretical unity, contracts theorists should turn their attention to the possibility of a "principled pluralism" and put forward a set of arguments suggesting how this might be accomplished.

2. CONTRACT THEORY AND THE PRESENT SITUATION

   The past three decades have seen a succession of ambitious books on the theory of contract law. Patrick Atiyah's magisterial The Rise and Fall of Freedom of Contract told a story of common law judges who labored, in vain, to construct a theory of contract law organized solely around the idea of party autonomy. (6) Grant Gilmore told a pithier, American version of this same tale in The Death of Contract, where he suggested that contract's days were numbered and it would soon subside into tort, which Gilmore insisted was the residual form of civil liability. (7) In response to these attacks, Charles Fried penned Contract as Promise, which insisted that a consistent theory of contract based on party autonomy is possible and provides the best interpretation of legal doctrine. (8) More recently, Michael Trebilcock has written The Limits of Freedom of Contract, which surveyed a variety of problems in contract law and brought to bear the insights of twenty years of industrious law and economics scholarship. (9)

   Smith's work is the latest volume in this conversation. Unlike the others, Smith sets out to provide a more or less comprehensive survey of contract theory. He is mainly successful, although his performance is not without faults. His treatment of economic theories is ultimately unpersuasive. In addition, there are some rather unaccountable absences in the book. For instance, Smith pays virtually no attention to the work of James Gordley and others seeking to articulate a neo-Aristotelian theory of contract. (10) Still, a student or scholar looking for a compendium of recent work on the philosophy of contract law is not likely to find a more detailed overview than Contract Theory. It is, however, much more than a mere summary of contemporary contract scholarship. It also offers a spirited defense of a much maligned theory in American jurisprudence: contract as promise.

   Promissory theories of contract have not been popular in American scholarship. Under the influence first of Lon Fuller (11) and later of Grant Gilmore, (12) many American scholars have found reliance to be a more attractive basis than promise for explaining and justifying contract law. The promissory theory has been associated with the discredited "classical" view of contract, and for many scholars there is something suspiciously Willistonian about it. On this view, it is a theoretical mirage from which Corbin and section ninety of the Restatement have delivered legal thought. It is not without its partisans, most prominently Charles Fried. (13) Yet Fried's theory has gained few followers and even theorists that share the libertarian sensibilities behind Contract as Promise have criticized it. (14) Smith, on the other hand, concludes that a promissory theory provides the best account of contract law. He thus offers a useful restatement and deepening of the argument in favor of contract as promise.

   According to Smith, the most telling normative objection to promissory theories rests on the harm principle. Famously formulated by John Stuart Mill, the harm principle states that in a liberal society, the machinery of the state can be legitimately used to prevent harm to others but should not be used to enforce moral obligations whose violation do not result in harm. (15) Most promissory theories conceptualize promise breaking as an immoral act. The harm principle, however, suggests that the immorality of promise breaking is not a sufficient reason to mandate government enforcement of that promise. Smith's solution to this problem is what he calls an intrinsic view of promising (p. 74). Promises, he asserts, are intrinsically valuable because they create a special relationship between the promisor and the promisee. Promise breaking harms this special relationship by taking something intrinsically valuable to the promisee (the promise) and destroying it. (16) The advantage of such a view is that it transforms contract law from a species of mere morality enforcement into the forestalling of harm to another. Thus the harm principle is neatly sidestepped and can actually be invoked as a reason for enforcing promises.

   Much of Contract Theory is taken up with a detailed application of various theories to different doctrinal areas. (17) He admits there are some areas where promissory theories offer only an incomplete and, in some sense...