The Bargain Theory of Contracts and the Reliance Principle Introduction | Kessler, Gilmore & Kronman | September 05, 2012


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by Kessler, Gilmore & Kronman

The consideration doctrine, regarded by many as the centerpiece of contract law, has produced a vast literature and intense controversy. Its origins are still shrouded in mystery, [87] and its functions, of which there are many, [88] are ill-defined. Because the history of the doctrine has many layers, those who have attempted to study it from the perspective of their own age have often been misled into taking a narrower view of its meaning than the historical record would warrant.


The best way to approach the problem is to begin with the most basic feature of consideration doctrine: the notion of reciprocity that underlies the classical theory of contract as bargain. The notions of exchange, bargain, and reciprocity have had a long association with consideration. Reciprocity was "a principle of contemporary morality, 'part of the common stock of ideas of medieval Europe,'" [89] and it would have been extraordinary if a paid-for promise was not held binding. [90] The intuitive appeal of the bargain idea was not lost on the judges and lawyers of the fourteenth and fifteenth centuries, a fact that may help to explain the ease with which executory bilateral contracts came to be recognized. [91]


But the idea of a reciprocal bargain was not the only one that lay behind the emerging doctrine of consideration. A second principle, associated with "promises and statements, rather than bargains," emphasized the element of reliance and asserted that "if a man make a promise or a statement, and another relies on the promise or statement, the other is liable for the loss." [92]


The two principles of bargain and reliance were often confused and the relation between them remained unclear until the sixteenth century, when an uneasy alliance was established by the definition of consideration as either a benefit to the promisor or a detriment to the promisee. [93] After this, the main task was to determine which benefits and detriments would in fact constitute a valid consideration, and the common law system of adjudication made it inevitable that this process of definition was carried out in a more or less ad hoc fashion. [94]


Holmes, recognizing that the doctrine of consideration, in its historically evolved form, lacked logic and consistency, sought to give it greater rigor by emphasizing the element of bargain, In his well-known discussion of the problem, Holmes narrowed the meaning of the bargain idea by insisting that promise and consideration must each purport to be the motive for the other. [95] The Holmes formula can be interpreted to mean, in the words of Professor Dawson, that both parties must agree "that each was induced to promise or to act by the promise or the act of the other." On this view, the doctrine of consideration requires that the parties "agree not only on what was to be exchanged, but also on why; this would mean that the way - the inducement - for each must be disclosed and agreed to by the other.” [96]


Holmes' rather stringent interpretation of the consideration doctrine was rejected by both Restatements, which define consideration in broader terms. [97]  Even under this broader approach, however, a question remained as to whether the principle of detrimental reliance could be completely absorbed by the bargain theory. If a court is confronted with a claim for damages based on A's reliance on B's promise, can B defend on the grounds that his promise was in no way motivated by a desire that A take the particular action he took (that A's reliance was in no sense the “price” of B’s promise)?


It is one thing to say that courts will grant relief for detrimental reliance on a promise. It is something quite different to say that the only kind of reliance for which relief will be granted is reliance that in one way or another has been bargained for by the promisor. Bargained-for consideration may be a sufficient cause for enforcing a promise. It is not a necessary one. This insight has found expression in §90 of both Restatements; under §90, promises not bargained for but reasonably relied upon are enforceable without assent or consideration. [98] Section 90 of the Restatement First stated that


A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.


In the Restatement Second, the language of §90 was changed as follows:


A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. [99]


The reasons for the change are explained in the Reporter’s Notes.  Though Corbin objected to it, [100] the term used to describe a cause of action under §90 is “promissory estoppel.” The end result of this development is that the law of contractual liability is today a two-track system, one track resting on the notion of bargain and the other on the “vaguely delictual” [101] idea that an act of reasonable reliance can create liability for a subsequent loss.


The history of consideration doctrine has in large part been determined by the effort to reconcile individual responsibility with protection of the expectations raised by reposing trust and confidence in the words of the promisor. The bargain theory proved insufficiently flexible to achieve such a reconciliation, and the doctrine of promissory estoppel helped to keep the system open by accommodating a new (and more generous) attitude towards reliance that began to take shape in the late nineteenth century. In the words of Atiyah:


In a period of greater stability, greater regularity of law, and greater predictability of behaviour of the courts and of businessmen, reliance became more natural and more justifiable, The concept was in a sense pulling itself up by its own bootstraps. As people grew to rely on others so they grew to think it justifiable to do so; and as they found it more justifiable to do so, they expected the law to protect them when their confidence turned out to have been misplaced. [102]


Since there is a fundamental difference between the ideas underlying the bargain theory of consideration, on the one hand, and the doctrine of promissory estoppel, on the other, a problem arises as to how to distinguish these two kinds of liability (a problem that is compounded by calling them both "contractual"). Innumerable attempts to draw the line have left the issue still in doubt and as a result, both branches of liability have come under attack, the former for its narrowness of focus, the latter for its expansiveness and the potential it creates for exuberant social engineering. This is illustrated by the tendency in some jurisdictions to be satisfied with an implied promise (rather than an express promise) based on surrounding circumstances and to extend the protection given to reasonable expectations. [103]


Small wonder that a reform movement has set in. The first serious attack on the doctrine was contained in a famous article by Lord Wright entitled, "Ought the Doctrine of Consideration to be Abolished from the Common Law?" [104] In his words: "a scientific or logical theory of contract would . . . take as the test of contractual intention the answer to the overriding question whether there was a deliberate and serious intention free from illegality, immorality, mistake, fraud, or duress to make a binding contract." In this view, consideration ceases to be a condition of the contract and becomes merely a piece of evidence.


The Sixth Interim Report of the English Law Revision Commission (1937) attempted to follow a middle course. "In very many cases the doctrine of consideration is a mere technicality which is irreconcilable either with business expedience or common sense." Nevertheless, the Commission regarded as unwise the recommendation to abolish the doctrine "root and branch. . . . It is so deeply imbedded in our law that any measure which now proposed to do away with it altogether would almost certainly arouse suspicion and hostility." Consequently, the Report limited its suggestions for reform to certain areas where application of the doctrine caused hardship and inconvenience (12 et. seq.) [105]


In this country the reform movement also took a less radical approach, [106] seeking primarily to eliminate the historical excrescences with which the doctrine of consideration had become overburdened. Modification and discharge, for example, were taken out from under the domination of consideration doctrine. Firm offers received similar treatment and an expansion in our notions of duress and unconscionability helped to take pressure off the doctrine of consideration in other areas as well.


A question remains whether, stripped of these unnatural growths, the consideration doctrine is still needed. [107] The defenders of the doctrine point out that in addition to its evidentiary role, it has a cautionary function (serving to guard the promisor against ill-considered action), a deterrent function (discouraging transactions of doubtful utility), and finally, a channeling function (helping to distinguish one particular type of transaction from other types and from tentative or exploratory expressions of intent). [108] No legal system, they emphasize, has seen fit to enforce all promises indiscriminately without some safeguard for the promisor. To be sure, the civil law has no consideration doctrine. (The doctrine of causa, whatever its early connection with consideration, is not its equivalent). But the absence of a consideration requirement in civilian systems does not entail unqualified enforcement of all informal gratuitous promises. In German law, for example, a gratuitous promise has to be made in a most solemn form to be enforceable (Civil Code §518).


Still the bargain theory, pruned of its outgrowths, has an important precautionary function. We cannot simply say that a bilateral contract becomes binding by offer and acceptance whether or not there is consideration; a gift promise, for example, cannot be turned into a bilateral contract merely by the offeree's promise to accept.  


It can even be doubted whether it makes good sense to make a gift promise binding if couched in the form of a simulated bargain. [109]


In these and other ways, the influence of the bargain idea can still be felt. It is an old idea and one firmly rooted in our moral intuitions. Suitably trimmed, and balanced by the reliance principle, it is likely to remain an enduring feature of our law of contracts. [110]


This introduction would be incomplete if it failed to note the close connection between the principles of bargain and reliance and the system of remedies available for their protection. A most challenging study of the interrelationship has recently been undertaken by Eisenberg, The Bargain Principle and Its Limits, 95 Harv. L. Rev. 741 (1982). Part of the conclusion of his article is worth quoting:


The proposition that promises made as part of a bargain ought to be enforced is relatively straightforward; the real question is to what extent.


The traditional answer to this question is embodied in the paradigmatic bargain principle, namely, that damages for the unexcused breach of a bargain promise should invariably be measured by the value that the promised performance would have had to the plaintiff, regardless of the value for which the defendant's promise was exchanged.


This principle, which in the typical case is supported by considerations of both fairness and efficiency, finds its fullest justification in the exemplary case of a half-completed bargain made in a perfectly competitive market. Bargains made in other kinds of markets are not intrinsically suspect. Nevertheless, that a market is less than perfectly competitive does set the stage for transactions in which the bargain principle loses much or all of its force, because it is supported by neither fairness nor efficiency. For example, a market that involves a monopoly sets the stage for the exploitation of distress; a market in which transactions are complex and differentiated rather than simple and homogeneous sets the stage for the exploitation of transactional incapacity; a market in which actors do not simply take a price established by a general market and are susceptible to transient economic irrationality sets the stage for unfair persuasion; a market that involves imperfect price-information sets the stage for the exploitation of price-ignorance.


Until recently, courts have tended either to apply the bargain principle to cases raising such problems, despite the difficulties this application presents, or to deal with these difficulties in covert and unsystematic ways. Over the past thirty years, however, a new paradigmatic principle - unconscionability - has emerged. This principle explains and justifies the limits that should be placed upon the bargain principle on the basis of the quality of a bargain.


95 Harv. L. Rev. at 798-799.


[87] Simpson, Historical Introduction at 8-9; Simpson, ch. 4 (with further literature); Baker, Introduction at 285-290; J. L. Barton, The Early History of Consideration, 85 L.Q. Rev. 372 (1969).


[88] 1A Corbin §204, at 489 (1963): the doctrine of consideration is many doctrines.  Corbin’s thesis (Recent Developments in the Law of Contracts, 50 Harv. L. Rev. 449, 454 (1937)) -- that the courts determine whether a sound and sufficient reason exist for the enforcement of the promise and “cheerfully” call the reason found a “sufficient consideration” -- is no longer as heretical as it was when his article first appeared.  See, e.g., P. Atiyah, Consideration in Contract: A Fundamental Restatement 11 (1971).


[89] Baker, Introduction at 294.


[90] Simpson at 326.  The remarks of Milsom at 311 help round out the picture:


… [I]f the promise was enforceable because of some overall morality in the circumstances, that may still have been the residue of the almost proprietary notion the quid pro quo, to the extent that the idea of the common law of contracts has its ultimate basis in bargain rather than in promise may reflect history.


See also the second edition at 357-358.


[91] See Strangeborough v. Warner, discussed supra p. 38, and its discussion in Simpson at 461.


[92] Baker, Introduction at 296-297.


[93] “Every consideration that doth charge the defendant in an assumpsit must be to the detriment of the defendant or charge to the plaintiff, and no case can be put out of this rule.”  Stone v. Wythipol, Cro. Eliz. 126, 1 Leon. 113, Owen 94 (1588).  The narrow approach laid down by Lord Coke was not shared by Barton Manwood, who, in arguing his own case in Manwood v. Burston, 2 Leon. 3 (1587), broadened the scope of consideration:


There are three manner of considerations upon which an assumpsit may be grounded: 1. a debt of precedent; 2. where he to whom such a promise is made is damnified by doing any thing or spends his return at the instance of the promiser, although no benefit cometh to the promiser, as I agree with a surgeon to cure a poor man (who is a stranger unto me) of a sore, who doth it accordingly, he shall have an action; 3. or there is a present consideration.


On the conflicting interpretation of the passage, see 8 Holdsworth, History of English Law 7; Fifoot at 40.


[94] “The life of the law has not been logic; it has been experience.” O. W. Holmes, The Common Law 5 (M. Howe ed. 1963). To paraphrase Simpson, the bargain theory of consideration would have been adopted had the sixteenth-century lawyers been consistent.  Simpson at 432-433.


[95] Holmes, supra note 94, at 293-294.


[96] J. P. Dawson, Gifts and Promises 203-204 (1980). Holmes’ formula, whatever its interpretation, is one of many expressions of the individualistic spirit animating his great book. For a challenging criticism of the Holmesian approach, see G. Gilmore, The Death of Contract 18 (1974).


[97] Sections 75 and 71, respectively; see Corbin, supra note 88, at 453.


[98] It makes good sense that the Restatement does not treat §90 in the chapter on consideration.  Corbin, Recent Developments in the Law of Contracts, 50 Harv. L. Rev. 449, 453-457 (1957).  The contrary thesis, advanced in preceding editions of this casebook, has been abandoned.


[99] At common law, prior to the nineteenth century, all promises were, in a manner of speaking, enforced only to the extent required by justice.  Juries at the time had wide discretion in awarding damages and could tailor relief according to the requirements of justice in each particular case. Today, liability under §90 may in many cases be a weaker form of liability than the protection afforded the promisee’s expectancy in a regular contract action, an idea already expressed in 2 F. Hutcheson, System of Morals 5-6, as quoted in P. Stein, Legal Evolution (1980).  We owe this reference to Professor Jan Vetter, University of California, Berkeley.


[100] 1A Corbin §204 (1963).  For the distinction between promissory and equitable estoppel (misrepresentation of fact relied upon by the other party), see Mazer v. Jackson Ins. Agency, 340 So. 2d 770 (Ala. 1976).


[101] Atiyah at 185-186.  The “weakness of the reasonable expectation principle” is emphasized by Baker, From Sanctity of Contract to Reasonable Expectation?, 32 Current Legal Problems 17, 25 et seq. (1979); see further Knapp, Reliance in the Revised Restatement: The Proliferation of Promissory Estoppel, 81 Colum. L. Rev. 52 (1980); Feinman, Promissory Estoppel and Judicial Method, 97 Harv. L. Rev. 678 (1984).


[102] Atiyah at 186-189.


[103] The controversial and conflicting case law is discussed in Feinman, Promissory Estoppel and Judicial Method, 97 Harv. L. Rev. 678 (1984).


[104] 49 Harv. L. Rev. 1225 (1936)


[105] For a summary of the report and a criticism, see G. H. Treitel, The Law of Contracts 104-106 (5th ed. 1979).


[106] In 1937, a statute abolishing the consideration doctrine was passed by the New York legislature, but vetoed by Governor Lehman “upon urgent representation from bench, bar and business organizations that the great commercial fabric of the Empire State was unprepared for so radical a change without opportunity for study and discussion.” Thompson, Some Current and Political Impacts on the Law of Contracts, 26 Cornell L.Q. 4 n.7 (1940).


[107] Some of these reforms have not taken place throughout the country, but the tendency to abolish the excrescences is unmistakable.  For an admirable discussion of the problems, see Patterson, An Apology for Consideration, 58 Colum. L. Rev. 929 (1955). Dawson, supra note 96, at ch. IV.


[108] Fuller, Consideration and Form, 41 Colum. L. Rev. 799 (1941); Restatement Second §72, Comments a-d.


[109] Restatement Second §71, Illus. 5; E. Farnsworth, Contracts 66 et seq. (1982).


[110] Note, 39 N.Y.U. L. Rev. 816, 829 et seq. (1964); Comment, 37 U. Chi. L. Rev. 559, 572 et seq. (1970).


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June 02, 2014 The Bargain Theory of Contracts and the Reliance Principle Introduction The Bargain Theory of Contracts and the Reliance Principle Introduction

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