Social Contract, Free Ride. Anthony de Jasay

with cases on their merits.

      3. The legal doctrine which avowedly treats each case on its merits is guided by the requirement of upholding one of a number of other fairness principles, each more private than Hart’s general anti-free-riding, public-goods type of fairness. Contracts must be enforced if, but only to the extent that, default by the promisor gives him an unfair advantage or constitutes unfair treatment of the promisee. This is the case in two kinds of circumstances.

      Under the circumstances of what I propose to call first-degree default, the unfairness is “benefit-based.” To be complete, the relevant fairness principle must posit a theory of consideration. The formal requirement that “a bargain must have two sides,” that there is no due performance without consideration, and neither party stands to get something for nothing, is an insufficient test of fairness. It must be shown, in addition, that in terms of the theory the consideration was adequate, that it provided full justification of the performance called for under the contract. It is unfair to the promisee to receive unrequited benefit from him by defaulting. Yet the promisor’s obligation goes no further than the “real” benefits conferred by the consideration—whatever else the contract may say. Whether the consideration is a fair match for the performance is a matter of separate judgment on merits and not an analytic consequence of the agreement of the parties to the terms of the contract. The terms are enforceable if they were fair, equal, and not contrary to public policy. It is obvious enough that in becoming subject to judgments of this nature contract enforcement ceases to be a relatively straightforward, invariant practice of rule-application. It passes into the realm of judicial discretion and becomes in fact a motive force in the expansion of this realm.

      Under the circumstances of second-degree default, the “benefits-based” doctrine of fairness might well point to unenforceability, for if no consideration changed hands there was no unrequited benefit. However, an unconsummated, wholly “forward” contract can nevertheless give rise to unfairness under the “reliance-based” doctrine of fairness if one party has effectively discounted in advance the anticipated performance of the other party and suffered actual demonstrable damage as a result of the latter’s default. Once again, by the recourse to fairness, a field is opened up to judgments of merits and to the application of discretion. It is perfectly possible to hold that discretion offers a greater likelihood of attaining just judgments than do blind rules; it is not unreasonable to believe the contrary. Our concern is not to weigh such beliefs against one another but to deduce, if we can, the influence of alternative doctrines and practices of contract-enforcement upon the social structure.

How Contract Breeds Command

      Modern legal theory takes the view that if pure Formalism in contract law ever existed (which is doubtful, for if common law leaned to Formalism it was always and everywhere checked in its leanings by the competing royal justice in Equity and by the natural-law doctrines of the Church), it is gone for good and cannot be brought back due to its own inherent weaknesses, which, now that we know better, we could not tolerate. Those who call for indiscriminating enforcement of formally valid contracts betray their incomprehension of what good law should be like and could do. “To a lawyer acquainted with the difference between expectation, reliance and restitution damages,”⁹ the very meaning of redress for default in a wholly executory forward contract can be puzzling. Where neither party has performed and neither has suffered from reliance on the other’s expected performance, where is the basis for prescribing a remedy?

      To a layman observing what changes in legal doctrine do to the way society functions, this sort of argument merits little patience. Lawyers, modern or ancient, have never been long at a loss to specify remedies in civil law when it suited them to do so, however problematical the basis for it may have been. A more effective reason cited by certain authors for being at a loss to find a basis to repair default in forward contracts is their intrinsic bias. This type of contract, being a device for risk-redistribution, favors the shrewd, the strong, the clever at predicting the future—hence its enforcement would be anti-egalitarian.¹⁰

      Once again, the point with which my argument takes issue is not how justice is best served. It is perhaps pertinent to say all the same that if the equal distribution of income, wealth, or anything else that is both desirable and transferable is to be the set objective, there must be more direct ways of achieving it than by indifference to the observance of contracts that are thought to favor the rich—however laudable a by-product of modern contract law it may be to make them poorer. Regardless of this by-product, however, how should we assess the doctrine on the merits of its main bias? It may be unjust to a class of contract parties who fail to get the performance that was agreed to be due to them. With this aspect we are not concerned. It may also little by little distort, if not undermine, the institution of contract, the manner in which it helps promote social co-operation. In particular, contract law and its application are bound to affect the “dynamics” of the balance between contract and command. This is very much our concern here.

      Why is the contract-command balance what it is at any time? At least for Western civilizations, there has for long been a pat answer. The origins very likely go back to the dissolution of the polis, the Aegean city-state which introduced the clear division of human affairs into a private and a public sphere. It comes to us directly from Roman law, under which there is a manifest frontier, contract belonging to civil, and command to public life and public law. However, to escape the evident danger of circularity, such an answer needs definitions of private and public life which are themselves independent of the manner, contractual or coercive, in which social co-operation is cemented. Otherwise we would be asserting that the proper place of command is in public affairs, and public affairs are those ruled by command.

      Whatever else it may be, it is at least not circular to say that the place of contract is in those situations of co-operation which do not require anything stronger for commitment to a common endeavor than the attraction of the surplus expected to be produced and divided. Command comes into its own when this expectation alone is insufficient to call forth the required conduct; when the way the surplus would naturally fall ("the incentive structure” or “payoff structure") or the bargaining problem involved in dividing it differently is such that the threat of coercion is needed. Though these definitions are far from watertight, they are at least independent and do not coincide with the conventional private-public division. There is non-coerced, voluntary co-operation now and then in certain affairs that are indisputably public, and uncontracted-for subordination to command is not altogether unknown in private ones. None the less, the imputation of “private” to “contract,” “public” to “command” has the ring of “simple truths” and is worth pursuing.

      Some important types of contracts, as we have seen, are by their structure not self-enforcing. Enforcement in turn is not sui generis public or sui generis private. It can be one or the other and sometimes one may supplement the other. The reasons why one or the other predominates are difficult to state concisely at the best of times, and especially so without a prior base of public goods theory. Some work in that direction will be presented in Part Two of this book. Meanwhile, we may at least note the following. There are two influences arising from the practice of contracting (one primary, the other secondary), tending to make the relative sphere of command grow.

      1. The primary influence is the competitive advantage of contract-enforcement by the sovereign political authority over self-help, bought help, or the agency of other non-sovereign institutions.

      (a) Appeal. Once a state exists, there are cost-benefit type incentives for the losing party in any action in private non-sovereign enforcement not to submit to his loss. He may have much to gain if he takes his case in appeal to the state, which may choose to assume jurisdiction and, if it does, can override non-sovereign instances. There are incentives for the state to assume jurisdiction. A given non-zero probability that the sovereign will on appeal override the non-sovereign in a random case would engender a given volume of appeals; the greater the probability, the better it pays to appeal. The process can feed on itself and have a debilitating effect on the lower instances. The decline of self-help, communal, ecclesiastical, and professional (peer) jurisdiction and enforcement is not altogether unrelated to