Article | Contract Law
The Case Against Equity in American Contract Law
 

by Jody P. Kraus* & Robert E. Scott†

 

Vol. 93, No.6 (February 2021)
93 S. Cal. L. Rev. 1323 (2020)

Keywords: Contract Law, Equity, Ex Post Perspective

Abtract

The American common law of contracts appears to direct courts to decide contract disputes by considering two opposing points of view: the ex ante perspective of the parties’ intent at the time of formation, and the ex post perspective of justice and fairness to the parties at the time of adjudication. Despite the black letter authority for both perspectives, the ex post perspective cannot withstand scrutiny. Contract doctrines taking the ex post perspective—such as the penalty, just compensation, and forfeiture doctrines—were created by equity in the early common law to police against abuses of the then prevalent penal bond. However, when the industrial revolution pushed courts to accommodate fully executory agreements, and parties abandoned the use of penal bonds, the exclusively ex ante focus of the new contract law that emerged rendered the ex post doctrines obsolete. While initially intended to do justice between the parties, if used today these doctrines perversely and unjustly deny parties contractual rights that were bargained for in a free and fair agreement. Yet judges continue to recognize the ex post doctrines, even as they struggle to reconcile them with respect for the parties’ intent. Although infrequently applied, the ex post doctrines are far from dead letter. The penumbra of uncertainty they cast over contract adjudication continues to undermine contracting parties’ personal sovereignty. The only case for continuing to recognize these equitable interventions, therefore, must turn on whether they serve a new valid purpose. We consider and reject the possible purposes of paternalism and anti-opportunism suggested by contemporary pluralist scholars. In our view, the criteria governing theories of legal interpretation support the interpretation of contract law as exclusively serving personal sovereignty rather than any pluralist interpretation. Under its best interpretation, contract law has no place for the ex post perspective.

 

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*. Patricia D. & R. Paul Yetter Professor of Law and Professor of Philosophy, Columbia Law School, and Co-Director, Center for Law and Philosophy, Columbia Law School.

†. Alfred McCormack Professor of Law and Director, Center for Contract and Economic Organization, Columbia Law School. We are grateful for comments on earlier drafts of this Article from Charles Fried, Michael Gilbert, Mitu Gulati, Hanoch Dagan, Ethan Leib, Paul Mahoney, Alan Schwartz, George Triantis, David Waddilove and participants at faculty workshops at Columbia Law School and the University of Virginia Law School and the 2019 North American Workshop on Private Law Theory VII, University of Western Ontario.