Perform or pay? (Holmes versus Finnis: review of XI.5)

In our previous post, we explored Finnis’s formulation of legal and moral duties. For Finnis, laws generate two distinct types of duties: legal obligations and moral ones. But what is the content of these duties, and what is their ultimate source? Finnis will explore these key questions in the remainder of Chapter XI of NLNR (i.e. subsections XI.5 through XI.9). First, Finnis poses the following fundamental question in subsection five: What legal duties does contract law impose on persons who make legally-binding promises?

As Prof Finnis correctly points out (p. 321), “There is the controversy amongst lawyers about the legal obligation created by a contract: [a] Is it to perform what was undertaken, or [b] is it no more than an obligation to pay compensatory damages to the other party in the event of one’s non-performance?” The latter view can be traced back to the great Oliver Wendell Holmes. For Holmes, “the duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it,—and nothing else.” On this Holmesian view, when you make a legally-binding promise to another person, your legal duty is to “perform or pay.” Simply put, the law gives you a choice: the law allows you to choose between keeping your promise or paying money damages to the other person if you decide not to keep your promise.

Some legal scholars, however, like Finnis himself and Seana Shiffrin, disagree with this Holmesian or “perform or pay” conception of one’s legal duties under the common law of contracts. For Finnis (and for Shiffrin too), the act of breaching a contract is not just an immoral act; it is an unlawful act. Therefore, the proper remedy for a breach of contract should not be limited to the mere payment of money damages; the proper remedy should be full on specific performance (p. 324): “allegiance to the legal system as a whole requires … that one perform what one undertook; offering or being willing to pay damages, or paying damages when assessed, does not suffice.” Let’s call Finnis’s hardcore view of contract duties the “specific performance” conception of legally-binding promises.

Now, how do we choose or decide between these two competing conceptions of contract law? In short, which theory–the Holmesian view or the hardcore one–is more likely to be true? Is this just an aesthetic question, or is there some reliable way of testing the truth values of either contract theory? For his part, Finnis selectively cites a handful of English cases in support of his hardcore view (see the sundry cases cited by Finnis on pp. 323-324), though his is a distorted picture of the common law. In reality, judges rarely order the remedy of specific performance in cases involving broken contracts. (As an aside, without getting bogged down in the details of the common law, I should add that the common law is far more complex and sophisticated than Finnis and most legal philosophers give it credit for. By way of example, see the image below, summarizing the law of contract remedies.)

But Finnis provides an additional reason against the Holmesian view. According to Finnis (p. 324), “contracts are upheld by the law for the sake of the common good, which is positively enhanced (i) by the co-ordination of action, and solution of co-ordination problems …, and (ii) by the continued existence of a social practice which actively encourages such fully co-ordinated performance and discourages non-performance.” In other words, the law enforces certain promises in order to promote human cooperation and facilitate the solution of collective action problems. Stated this way, it is now easy to spot the fundamental flaw in Finnis’s analysis. If the level of social cooperation is going to be our yardstick or criterion of theory choice in this domain (and, by the way, we think that this is a good yardstick), it is an empirical question whether the Holmesian view (“perform or pay”) or the hardcore/Finnian “specific performance” view of contracts does a better job of promoting social cooperation. In fact, it is quite possible that the hardcore or Finnian view of contract liability might actually dissuade or discourage persons and business firms from entering into contracts, for fear that a judge might indeed order specific performance in the event of breach instead of the more practical remedy of money damages.

Whether the hardcore view of contract liability is correct or not–and as a matter of law, it is not, except in some special cases–, Professor Finnis explores another deep and fascinating question in subsections six and seven of Chapter XI of NLNR: what moral duties does the law generate? We will proceed to XI.6 and XI.7 on Monday.

Related image

Image credit: homermac64

About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
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