The Equitable Dimension of Contract

Abstract

Contract theory has long been preoccupied with the common law. Contracts is taught in the first year of law school along with the other “common law subjects.” The rise of the modern view of contracts as involving mutually dependent undertakings—as opposed to the earlier independent covenants model—was carried out by the common law courts. Contracts are usually enforced with damages, the classic common law remedy. From proto-realists like Holmes, through the realists and their successors in law and economics, theorists have emphasized the law and downplayed the special role of equity, as developed over the centuries by Chancery and building on a tradition of thought going back at least to Aristotle. Equity is treated either with disdain as useless moralizing or with impatience as a mere proto-version of freewheeling contextualized inquiry that the law courts should be engaging in without artificial constraints of a separate “equity.” Whether they have been anti-moralists, formalists, realists, or consequentialists, commentators have been quite unified in their preference for contract law over equity. This orientation to the common law, narrowly conceived, is even true of Charles Fried’s landmark book Contract as Promise, which did much to bring a moral approach to contracts back into the spotlight. In this Essay I will argue that Fried conceded too much to the conventional exclusive focus on the common law, but that once we recapture an older tradition of equity, the central role of morality in contracts comes more clearly into view. Equity is the missing dimension from contract theory. This older tradition uses equity as a structured safety valve to deal with the opportunism arising from the simple structures of the common law. At the same time, equity as a safety valve can be justified on both deontological and consequentialist approaches to contract law. Thus, the Kantian and utilitarian views of contract can converge at the descriptive level. If so, then the disagreement between promise theorists like Fried and legal economists is a foundational rather than a descriptive one.