The promise principle and contract interpretation.

• Author: Kostritsky, Juliet P.
• Position: 'Contract as Promise' at 30: The Future of Contract Theory

The promise principle and its roots in a certain type of morality of individual obligation, which play the central role in Charles Fried's vision of contract law, have importantly contributed to rescuing contract law from absorption into tort law and from the imposition of externally imposed standards that are collective in origin. The principle makes a mammoth contribution to alerting us to the tyranny of interference with individual self-determination. However, this Essay questions whether a promise-centered system, derived from a moral philosophy of promising (without an observable and testable foundation in reality) and geared to internal individual obligation and duty, can provide the basis on which the public law can decide the hard cases in contract law. First, the promise-sufficient principle will not help when the promises are incomplete. Second, this Essay hypothesizes that there is an evolutionary trend toward efficient social contracts (or institutions of any kind). Therefore, if different communities at different times, using the latitude that our cultural genetic makeup allows, choose to veer away from that trend, they will suffer by comparison with communities that do not. It is as if they are competing. In understanding what contract law should look like normatively, we must move beyond the purported internally reflective, a priori processes of individual will and understand, through casual and formal empirics and comparisons among economies, the background of how parties' externally expressed natural impulses act to coordinate on social problems in the games of life. The law should look to how parties act to coordinate through exchange and produce improving welfare when they construct contracts and the rules of contractual enforcement. In that way, contract law will develop around, and not in a manner at odds with, naturalistic sources for normative principles; ones that are consonant with the parties' own expressions.

1. INTRODUCTION

   For Charles Fried, the promise principle unifies the law of contract and provides its moral foundation. (1) According to Fried, the promise principle promotes freedom and autonomy because it ties contractual obligation to "self-imposed" commitments. (2) By enforcing promises, contract law advances individual freedom. (3) I will explore why Fried is drawn to the promise and self-imposed obligation as the central organizing elements of contract law, what Fried means by morality, and the connection between individual freedom, morality, and contract law. I will explore these connections by tracing the origins of freedom, autonomy, and morality back to Kant and other philosophical antecedents.

   Fried wants to theorize contract as involving a purely individual morality of promise-making and promise-keeping, which are values in themselves because they promote autonomy. They are self-binding through exercises of will.4 Fried does not want this master autonomy purpose cluttered with considerations of mere utility or efficiency, on the one hand, or distributive justice or fairness, on the other.

   I will then argue that because morality and the promise principle are oriented toward individual, "self-created" obligation, they should not guide positive laws. (5) A focus on individually assumed obligations by itself would not explain why contractual institutions that enforce these promises are valuable by "foster[ing] trust," nor provide solutions to difficult contracts issues. (6)

   This Essay argues: (1) that it is not clear why the legal system should care about enforcing exercises of individual will if doing so doesn't serve the important social purpose of welfare improvement; and (2) the reason a good deal of contract law exists is to solve problems that do not involve figuring out what parties actually promised, but implying terms or interpreting unclear terms in ways that will promote efficient results. (7)

   This Essay suggests that the source for using a goal to maximize surplus (welfare) and to promote efficiency should not be based on normative principles that float freely and are formulated on an a priori basis, nor should the source be an ultimacy that is externally mandated. (8) instead, this Essay suggests that we derive the normative principles for contracts by looking to neuroscience to see how parties reach agreements or settle on social conventions. These are naturalistic sources for normative principles. In each case, parties, because of the way that their brains are wired, settle on practices or agreements that are efficient equilibria to solve whatever problem needs solving. (9) Courts should not formulate rules that depart too much from the social contract that parties use to "coordinate their efforts" because the effort would be doomed. (10)

   Thus, contracts, promises, and the world of exchange and promising are not just creations of the free will of the parties, but are social institutions created and collectively maintained by the law. (11) Contract law exists not just to enforce individual will, but to support what Durkheim called the "noncontractual foundations of contract law" (12) that are not worked out individually but that subsist in the background as evolving conventions and norms that form the infrastructure to support promises (much as roads permit travel). Individual acts of will do not create this system so we cannot understand the system simply by understanding an individual will. When parties contract, they are free riding or piggybacking on this system of transaction-cost reducing legal rules, norms, and conventions. The system naturally incorporates utilitarian criteria because it is structured to make all participants better off. (13) The idea is that the law would start with observing how parties in society solve the game of life and solve the problems that they encounter and what conventions are survivable. They would then treat the facts of the case as a game of life and settle on a solution that would survive. Under Professor Binmore's theory, conventions to survive must be an equilibrium and efficient. Among multiple efficient equilibria, fairness norms would then help to select an equilibrium that parties consider to be fair. From among efficient equilibrium possibilities, parties will choose an outcome considered to be fair. (14) instead of starting with morality, we should start with people, what their goals are, and what the institution of contract law is in reality. (15) Fried limits contract to the promise principle and relentlessly rejects the relevance of "considerations of self-interest" and separates contract law from norms, social conventions, fairness, efficiency, utilitarian concerns, exchange, and the goals of the parties entering a contract. (16) He thus arbitrarily excludes the naturalistic origins of exchange and contracting. Without a realistic understanding of man's proclivities and those origins, including the human characteristics of "contractual man" (17) and without an understanding of the parties' goals in entering transactions and of society's goal--to promote trust and improve welfare as they are expressed in observable data of how parties bargain and what outcomes they would reach when "a general bargaining problem [is] stripped down to its essentials" (18)--we cannot craft rules which will work in reality, nor can we know what contracts are feasible or understand why we have the contract rules and conventions that we do. (19)

   Knowledge of the parties' goals, together with an understanding of the impediments that parties face in achieving their goals (20) through explicit contracting, will permit a recognition of when legal intervention might improve welfare. (21) Such understanding must be part of any analysis of contract law and its doctrines. Without it, we cannot know what contracts rules will best facilitate exchange between real people, nor can we understand why certain contracts doctrines have survived (objective theory of assent) and others have not (subjective theory of assent). (22)

   In fact, without an understanding of bargaining impediments and the parties' goals of maximizing gains from trade while minimizing the transaction costs of exchange, it would be difficult to know why contract law would ever need to go beyond the promise principle or the explicit agreement in order to set default rules, (23) to supply remedies not agreed upon expressly, (24) or to interpret terms in a contract using contextualized evidence in order to achieve the parties' autonomous goals. With a rich understanding of parties and their challenges, the questions become: What are the rules we have in contract law? Why do we have those rules? How do they best facilitate exchange while lowering costs for parties? in deciding on the parameters of a framework to resolve such questions, we should look at the framework instrumentally, in terms of welfare effects and efficiency considerations. (25) Where there are competing stable and efficient practices, a fairness norm may emerge to resolve cases. (26) If these rules were not efficient and stable, they would not have survived; inefficient or unstable rules or practices will be rejected, and a court should not adopt them even if it serves some otherwise compelling goal, such as distributive justice.

   The idea that contract law can remain isolated (27) from an understanding of human nature, relying solely on the parties' consent or on the explicit exchange, is shared by both law and economics scholars such as Professors Alan Schwartz and Robert Scott, and by autonomy scholars like Professor Charles Fried. (28) In their view, once you move beyond the central core of consent or party sovereignty, you are either outside of the world of true contract, (29) or you are unwisely sacrificing the efficiency goals of the parties by importing other outside interests (such as fairness) and undermining the efficient contract reached by the parties. (30)

   However, since the promise...