The Failure of Economic Interpretations ofthe Law of Contract Damages

I. IntroductionThe law of contracts is a complex but remarkably stable field. To be sure, new factual situations provide novel challenges for old doctrines, and the interstitial development of the law continues.1 Still, there is widespread agreement about the doctrinal shape of modern contract law.2 What we lack is a widely accepted interpretation of that law. We have historical narratives of how the law developed and innumerable suggestions for how it should be reformed.3 What this work does not offer is an interpretation of current contract law as embodying a coherent set of normative choices. Indeed, much of the scholarly discussion of contract law implicitly or explicitly assumes that any such interpretation is impossible and that the law we have represents, at best, a collection of essentially random and disconnected choices resulting from a series of historical accidents.4 One of the central questions facing students of contract law is whether this theoretically pessimistic view of the law is correct, or whether it is possible to understand it as a coherent normative system.One of the most promising contenders for the role of a unified theory of contract law is economics. On this view, contract law as we have it represents a choice to promote efficiency, and the particular rules we find in contract doctrine are best seen as creating economically optimal incentives for contracting parties.6 The dominant alternative is that contract law is about advancing the liberal ideal of personal autonomy by giving legal effect to the private decisions of contracting parties.7 The apparent success of economics as a methodology comes from the fact that, unlike autonomy, it seems to provide concepts that generate conclusions that are fine-grained enough to account for contract law doctrine.8 The duty to keep one's promises may be a normatively attractive ideal, but it lacks the conceptual power to specify most of the rules of contract law.9Notwithstanding this sunny assessment of economic theories of contract, criticism remains very much alive. Partisans of autonomy theories have stubbornly insisted that efficiency is such a morally bankrupt ideal that economic theories of contract must be rejected, while others have attacked efficiency theories on economic grounds.10 Navigating a route through these competing claims is one of the central tasks for the philosophy of contract law. Some have suggested that rather than seeking a jurisprudential silver bullet that will allow us to reject either autonomy or efficiency once and for all, philosophers of contract law should turn their energies to a theory that provides a principled accommodation of both approaches in a single vision of contract law.11 This Article is part of that project. It has a simple thesis: Economic accounts of the current doctrine governing contract damages have failed, and the nature of that failure places limits on the role of economics in an integrated theory of contract law.Economic theories of contract law are offered as-among other things-an explanation of contract doctrine as we have it.12 They purport to show to us the underlying normative logic of the law. When it comes to contract damages, however, the economic explanation ultimately falls short of success because it cannot account for the bilateralism of contractual liability, which then renders the dominant economic interpretation of damages fundamentally contradictory. Generally speaking, the remedy in contract law involves a transfer from a breaching party to an aggrieved party. The sum paid by the wayward promisor is exactly equal to the sum paid to the disappointed promisee.13 For example, if Jack enters into a contract to fetch water for Jill in return for a fee and Jack then fails to deliver the water as promised, the law of contracts allows Jill to sue Jack for the value of his failed performance. If Jill is successful, the law will require Jack to deliver Jill money. The sum that he pays and she receives will be identical. …