Earlier versions of this paper were presented at the Contract and Commercial subject section at the SLS Conference at the University of Southampton (2010), a Staff Seminar at the School of Law, University of Warwick (2010), the Oxford Jurisprudence Discussion Group (2012) and the Legal Theory Workshop at the School of Law, University of Edinburgh (2012). Thank you to the participants at all of these sessions for invaluable feedback. I would like to thank in particular for their comments: Thomas Adam, Hugh Beale, Richard Bronaugh, Octavio Ferraz, Christopher Hinchcliffe, Peter Jaffey, Larissa Katz, George Letsas, Paul Raffield, Victor Tadros, Emmanuel Voyiakis, and Charlie Webb. The usual caveat applies.

1. Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd, [1915] AC 79 at 86-87 (HL)Google ScholarPubMed [Dunlop]. See also Uniform Commercial Code, § 2-718 (1), and the Restatement (Second) of Contracts, § 356 (1).

2. The promise theory is not, despite appearances, actually that new. It is the intellectual descendent of the older will theory of contract.

3. Fried, Charles, Contract as Promise (Cambridge: Harvard University Press, 1981) at 1 Google Scholar [Fried, Contract].

4. Fried says that the promise theory is “… implicit in the assertion that contract offers a distinct and compelling ground of obligation.” ibid at 6.

5. Fried, C, “The Convergence of Contract and Promise” online: (2007) 120: 1 Harv L Rev F 1 at 9 http://www.harvardlawreview.org/issues/120/january07/forum_457.php Google Scholar [Fried, “Convergence”]. Jody Kraus, another promise theorist, takes an even stronger line: “Correspondence accounts of the relationship between contract and promise hold either that contract law is justified to the extent it enforces a corresponding moral responsibility for a promise or unjustified to the extent it undermines promissory morality by refusing to enforce a corresponding moral responsibility for a promise”. Kraus, Jody, “The Correspondence of Contract and Promise” (2009) 109 Colum L Rev 1603 at 1603Google Scholar [Kraus, “Correspondence”]. See also, Shiffrin, Seana V, “Is a Contract a Promise?” in Marmor, Andrei, ed, The Routledge Companion to Philosophy of Law (New York: Routledge, 2012) 241 at 241Google Scholar [Shiffrin, “Promise?”], who says that the thought behind promise theory “is that if contracts have, at their foundations, the same moral relations that we describe as promises in our everyday social relations, that fact might provide the seedlings both of a justification for contract law and of a guide to the principles it should follow.”

6. Shiffrin, Seana V, “The Divergence of Contract and Promise” (2007) 120 Harv L Rev 708 at 726Google Scholar [Shiffrin, “Divergence”]. Shiffrin cites as other examples of divergence the fact that expectation damages rather than specific performance is the primary remedy for breach of contract and the remoteness and mitigation doctrines (at 722-27). All of these doctrines seem out of keeping with promissory morality because they shift the burden of breach away from the defendant and on to the innocent promisee.

7. Birmingham, Robert L, “Breach of Contract, Damage Measures, and Economic Efficiency” (1969-1970) 24 Rutgers L Rev 273 at 284Google Scholar; Fenton, James P, “Liquidated Damages as Prima Facie Evidence” (1975) 51 Ind LJ 189 at 191-92Google Scholar.

8. The example, which I have varied slightly, is borrowed from Burrows, A: Remedies for Torts and Breach of Contract, 3rd ed (Oxford: Oxford University Press, 2004) at 450 Google Scholar [Burrows, Remedies]. Not every efficiency theorist agrees that penalty clauses are inefficient. See Goetz, Charles J & Scott, Robert E, “Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach” (1977) 77 Colum L Rev 554 CrossRefGoogle Scholar and the application of this analysis by JudgePosner, Richard in Lake River Corp v Carborundum Co, 769 F 2d 1284 at 1288-89 (7th Cir 1985)Google Scholar. However, for the purposes of this article, I put these disagreements aside.

9. Dworkin, R, Taking Rights Seriously (London: Duckworth, 1977) at 92 Google Scholar [Dworkin, Rights Seriously].

10. Shiffrin, “Promise?”, supra note 5 at 243. Promissory obligations would however still make sense if the claim were that promises may be defeated by large gains in social utility or economic efficiency. This is because they would continue to carry special weight against considerations relating to the pursuit of collective goals. The weight of these collective considerations would have to cross a high threshold before they could outweigh the rights and duties generated by promising. See Dworkin, Rights Seriously, supra note 9 at 92; Coleman, Jules L, “Tort Law and the Demands of Corrective Justice” (1992) 67: 2 Ind LJ 349 at 361-62Google Scholar; and Nagel, Thomas, “Personal Rights and Public Space” (1995) 24: 2 Phil & Pub Affairs 83 at 88-89CrossRefGoogle Scholar. However, this is not the kind of argument that the efficiency theorist makes to justify the penalties rule. The claim is that even small gains in efficiency require breach of promissory obligations.

11. Shiffrin, “Divergence”, supra note 6 at 726-27, 731-32.

12. Shiffrin, “Promise?”, supra note 5 at 249.

13. Eisenberg, Melvin A, “The Limits of Cognition and the Limits of Contract” (1995) 47: 2 Stan L Rev 211 at 227-28CrossRefGoogle Scholar. Cf Chen-Wishart, Mindy, “Controlling the Power to Agree Damages” in Birks, Peter, ed, Wrongs and Remedies in the Twenty-First Century (Oxford: Oxford University Press, 1996) 271 at 290Google Scholar: “Agreed damages clauses may be thought to contain high risks of cognitive error since they involve contingent future obligations which are often difficult to assess and, where accurately assessed are frequently not given their proper weight. There is a psychological tendency to discount far off possibilities, coupled with an over-optimism that the contingency will not eventuate.” [Chen-Wishart, “Power to Agree Damages”]; and Beale, H, Remedies for Breach of Contract (London: Sweet & Maxwell, 1980) at 59 Google Scholar; Smith, SA, Contract Theory (Oxford: Oxford University Press, 2004) at 308.Google Scholar

14. The example which I have varied slightly is borrowed from Halsbury, Lord: Clydebank Engineering and Shipbuilding Co, Ltd and Others v Don Jose Ramos Yzquierdo Y Castaneda and Others, [1905] AC 6 at 10Google Scholar (HL).

15. Some support for this analysis may be found in obiter dicta of LordWoolf, in Philips Hong Kong Ltd v Attorney General of Hong Kong, (1993) 61 BLR 41 at 58Google Scholar(PC), suggesting that the penalties rule might not apply in the commercial context.

16. I borrow this distinction from Shiffrin, who makes it in relation to the claim that the legal enforcement of promises generally (not just penalty clauses) corrupts promising. “Promise?”, supra note 5 at 252.

17. Ibid. See Smith, Stephen A, “Performance, Punishment and the Nature of Contractual Obligation” (1997) 60: 3 Mod L Rev 360 at 367-69CrossRefGoogle Scholar [Smith, “Nature of Contractual Obligation”].

18. Again I owe a debt to Shiffrin. This time I borrow her distinction between “clouding out” and “crowding out” which tracks her distinction between expressive and empirical versions of the argument that promises should not be legally enforced. “Promise?”, supra note 5 at 252-53.

19. Stephen Smith seems to make this empirical argument in the context of a discussion about whether punitive damages should be awarded by contract law. “Nature of Contractual Obligation”, supra note 17 at 372. Cf Markovits, Daniel, “Contract and Collaboration” (2004) 113: 7 Yale LJ 1417 at 1509CrossRefGoogle Scholar who argues that punitive damages may also encourage the promisee to welcome breach and take steps to bring it about. This too would undermine the development of certain forms of respectful recognition between the promisor and the promisee, because the promisee would have an incentive to reject the promisor’s efforts to establish a bond with the promisee by performing his promissory obligations.

21. Ibid.

22. Ibid at 253-54.

23. Smith, who seems to defend the empirical version of the No legally enforceable promise view to explain why punitive damages are not awarded for breach of contract, acknowledges this defect in the theory. “Nature of Contractual Obligation”, supra note 17 at 371. See also Kimel, D, From Promise to Contract: Towards a Liberal Theory of Contract (Oxford: Hart, 2003) at 98 Google Scholar [Kimel, Promise to Contract]. Smith does try to avoid this unattractive conclusion by saying that alongside the ‘intangible’ bond-creating (promissory) function that contract serves, contract also has a ‘tangible’ function which is to ensure that the promisee receives what he contracted for. Smith argues that although the intangible harm caused by breach cannot be remedied, the tangible harm can through the award of expectation damages, and therefore this remedy should be awarded (at 371). However, this argument for expectation damages is deeply problematic because it involves putting the pursuit of the tangible function of contract ahead of the intangible function. As I have argued, the award of any remedy undermines the bond-creating function of contract. Smith makes a case for expectation damages by claiming that contract serves another function alongside its promissory function, but then this brings into question his own assertion that ‘[c]ontracts are, first of all, promises’ (at 369) [emphasis added]. If that is truly the case, it is unclear why Smith is happy to undermine the promissory function of contract for its more concrete function of securing exchange.

24. Kraus, “Correspondence”, supra note 5 at 1635, n 63, and 1643. Charles Fried seems to take a similar line: “Contract as Promise Thirty Years On” (2012) XLV (3) Suffolk U L Rev 961 at 969-70, 973.

25. Kagan, S, The Limits of Morality (Oxford: Oxford University Press, 1989) at 17.Google Scholar On the pro tanto nature of promissory obligations see Bronaugh, Richard, “A Secret Paradox of the Common Law” (1983) 2(2) Law & Phil 193 at 224-26CrossRefGoogle Scholar [Bronaugh, “Paradox”]; and Bronaugh, Richard, “Promises” in Becker, LC & Becker, CB, eds, Encyclopedia of Ethics, 2nd ed (New York and London: Routledge, 2001) 1386 at 1389Google Scholar.

26. Shiffrin, “Divergence”, supra note 6 at 733. See also Fried, “Convergence”, supra note 5 at 4.

27. Shiffrin, “Divergence”, supra note 6 at 734.

28. Ibid.

29. Balfour v Balfour, [1919] 2 KB 571 (CA).

30. Fried claims that Shiffrin makes this mistake at least in the context of her critique of contract. Fried, “Convergence”, supra note 5 at 7: “[Shiffrin] rightly sees promising as a moral and not just an economic institution, but she fails to take into account that promising is not all there is to morality—something I suspect in different contexts she understands perfectly well.” Recently, Fried admits that he may be partly responsible for this tendency because he forged too tight a connection between contract and promise in his earlier work: Fried, Charles, ‘The Ambitions of Contract as Promise Thirty Years On’ (2012), online: http://www.ucl.ac.uk/laws/jurisprudence/docs/2013/charles_fried_paper.pdf Google Scholar.

31. There are other ways to conceive the relationship between contract and promise which would not necessarily lead one to accommodate, repudiate and contextualise. For example, one could argue that promise is a necessary feature of contract.

32. For an in depth discussion of the kinds of mistake made by promise theory because of its claim that the promise principle plays a special justificatory role in contract, see Letsas, George & Saprai, Prince, “Contract Law Without Foundations” [unpublished]Google Scholar [Letsas & Saprai, “Without Foundations”].

33. Dworkin, Rights Seriously, supra note 9 at 77.

34. British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd, [1912] AC 673 at 689Google ScholarPubMed (HL); Kaines (UK) Ltd v Österreichische Warenhandelsgesellschaft Austrowaren GmbH, [1993] 2 Lloyd’s Rep 1 (CA)Google ScholarPubMed (failure to obtain substitute); The Solholt, [1983] 1 Lloyd’s Rep 605 (CA)Google Scholar (failure to renegotiate).

35. Shiffrin, “Divergence”, supra note 6 at 725.

36. Fried, “Convergence”, supra note 5 at 8.

37. Ibid at 7-8.

38. See Royal Bank of Scotland Plc v Etridge, (No 2) [2002] 2 AC 773 at 794-97 (HL)Google Scholar; Peel, Edwin, Treitel on the Law of Contract, 13th ed (London: Sweet & Maxwell, 2011) at 459 Google Scholar; Restatement (Second) of Contracts, § 177.

39. See for example Allcard v Skinner, (1887) LR 36 Ch D 145 (CA)Google Scholar, and Credit Lyonnais Bank Nederland NV v Burch, [1977] 1 All ER 144 (CA)Google Scholar.

40. Principles, Dworkin says, state reasons that argue “in one direction”, but that does not mean that they “necessitate a particular decision.” Rights Seriously, supra note 9 at 26. They may be outweighed by conflicting principles.

41. Raz, J, Practical Reason and Norms (Oxford: Oxford University Press, 1975) at 202-03Google Scholar; Dworkin, Rights Seriously, supra note 9 at 35, 77; Gardner, J, Offences and Defences: Selected Essays in the Philosophy of Criminal Law (Oxford: Oxford University Press, 2007) at 81.CrossRefGoogle Scholar

42. For a detailed defence of this claim, see Letsas & Saprai, “Without Foundations”, supra note 32.

43. Shiffrin, “Divergence”, supra note 6 at 726-27, 729.

44. Ibid at 729.

45. There may also be, Shiffrin argues, a corresponding social interest in the courts “exercising authoritative and exclusive judgment over the significance of and reactions to breaches of law.” This may be a specifically legal reason for why penalty clauses are not enforced, which reinforces the moral position. Ibid at 734.

46. Ibid at 726.

47. Kraus argues that Shiffrin confates these two concerns. “Correspondence”, supra note 5 at 1630 n 53.

48. Shiffrin herself makes and acknowledges this point, “Divergence”, supra note 6 at 726.

49. Raz, Joseph, “Personal Practical Conficts” in Baumann, Peter & Betzler, Monika, eds, Practical Conficts: New Philosophical Essays (Cambridge: Cambridge University Press, 2004) at 172-96, 189, 191CrossRefGoogle Scholar [Raz, “Practical Conficts”].

50. Ibid at 172, 189-90; Gardner, John, “What is Tort Law For? Part 1: The Place of Corrective Justice” (2011) 30 Law & Phil 1 at 28-29CrossRefGoogle Scholar [Gardner, “Tort Law”].

51. Raz, “Practical Conficts”, supra note 49 at 191; Kimel, Promise to Contract, supra note 23 at 102; Gardner, “Tort Law”, supra note 50 at 44-45. The kinds of reasons that the courts rely on to deny specific performance, including the difficulty and costs of supervision, and preventing the defendant from being treated op Pressively, were set out in the leading case of Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd, [1998] AC 1 [HL].

52. Strictly speaking, where the reason for the award of expectation damages is the existence of countervailing considerations, it is not the compensation principle itself but rather its interaction with other principles relating to moral concerns about slavery, exploitation, altruism, the rule of law, etc., which require the payment of expectation damages.

53. One could argue that there is no conflict here because you cannot promise to do that which you already have a moral obligation to do, for example, pay compensation. Richard Bronaugh discusses this problem in the context of whether there is consideration for a promise to a third party to perform an existing contractual obligation owed to the second party. Bronaugh, “Paradox”, supra note 25. Bronaugh claims that consideration does exist, because the promise to the third party entails a change in (non-legal) normative position. It is beyond the scope of this paper to discuss this debate in any depth. Instead, I will assume for the sake of argument that there is no power to make such a promise. If that is the case, one could argue that you cannot promise to pay a sum for breach when there exists already a pre-existing obligation to pay compensation. However, this conclusion is fallacious for three reasons. First, the promise to pay the sum is made before there is any duty to pay compensation. There is no pre-existing duty to pay compensation. Second, the content of the promise to pay the sum and the content of the obligation to pay compensation are very likely to differ; the promise does not replicate the compensatory duty. Finally, the argument appears to be over-inclusive, there does not seem to be anything intuitively problematic about a liquidated damages clause, and yet according to this argument such clauses do not create a duty.

54. Dworkin, Rights Seriously, supra note 9 at 35, 77.

55. See text to supra note 1.

56. The position in US law is not as strict. According to the Uniform Commercial Code, § 2-718 (1), the reasonableness of agreed damages clauses should be assessed “ in light of the anticipated or actual harm caused by the breach” [emphasis added].

57. Dunlop, supra note 1 at 86-87, 101. There is some uncertainty over whether the loss that must be envisaged by the parties is the actual or the legally recoverable loss. See Burrows, Remedies, supra note 8 at 446-47.

58. Burrows, Remedies, supra note 8 at 449. Kemble v Farren, (1829) 6 Bing 141 at 148: “In many cases, such an agreement fixes that which is almost impossible to be accurately ascertained; and in all cases, it saves the expense and difficulty of bringing witnesses to that point.”

59. Export Credits Guarantee Department v Universal Oil Products Co, [1983] 1 WLR 399 Google Scholar (HL).

60. See Euro London Appointments Ltd v Claessens International Ltd, [2006] EWCA Civ 385 (CA)Google ScholarPubMed. See also Alder v Moore, [1961] 2 QB 57 (CA)Google Scholar. In a recent case, Andrews v Australia and New Zealand Banking Group Ltd, [2012] HCA 30 Google ScholarPubMed, the Australian High Court decided that the penalties rule might apply in cases where there is no breach of contract. This was justified on the basis of the rule’s equitable origins in regulating the enforcement of bonds where breach of duty was not required to activate the application of a penalty. The Court however stated that the rule would not apply to cases where the parties had agreed to an option to pay more for receiving further benefits under the contract. It called these ‘alternative stipulations’ following Pomeroy. Pomeroy, JN, A Treatise on Equity Jurisprudence, 5th ed (San Francisco and New York: Bancroft-Whitney and Lawyers Cooperative 1941) vol 2 § 437 Google Scholar. This seems to preserve the distinction between what I call breach-avoiding clauses and penalty clauses. The decision may not therefore be as dramatic a change in the law as it at first might appear. Thank you to Katy Barnett for alerting me to the case and for her analysis of the decision. E-mail correspondence on the Obligations Discussion Group (http://www.ucc.ie/law/odg/home.htm) 10 September 2012.

61. Chen-Wishart, “Power to Agree Damages”, supra note 13 at 271, 285.

62. This is not to say that the concerns about this aspect of the penalties rule are entirely misplaced. They may reflect the existence of other reasons for why the courts should be wary of these clauses, such as the protection of reasonable expectations, inequality of bargaining power and the prevention of exploitation.

63. Howe v Smith, (1884) 27 Ch D 89 Google Scholar; Linggi Plantations Ltd v Jagatheesan, [1972] 1 MLJ 89 (PC)Google Scholar.

64. Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd, [1993] AC 573 at 578 (PC)Google Scholar.

65. Stockloser v Johnson, [1954] 1 QB 476 at 490 (CA)Google Scholar.

66. The Law Commission reached the same conclusion after concluding that there was no rational way to distinguish between these two types of clauses: Law Commission, Penalty Clauses and Forfeitures (No 61, 1975) at para [59]Google Scholar.

67. Harris, Donald, Campbell, David & Halson, Roger, Remedies in Contract & Tort, 2nd ed (Cambridge: Cambridge University Press, 2005) at 147.Google Scholar

68. Fried, Contract, supra note 3 at 13-14.

69. Smith, SA, Atiyah’s Introduction to the Law of Contract, 6th ed, (Oxford: Oxford University Press, 2005) at 149.Google Scholar

70. Unfair Contract Terms Act (UCTA) (UK), 1997, c 50, s 3; s 11; sch 2.

71. Unfair Terms in Consumer Contracts Regulations (UTCCR) (UK), 1999, s 5(2).

72. Ibid, s 5(1). Sch 2 indicates the kinds of terms that the UTCCR seeks to control.

73. Illustrated by the fact that the UTCCR includes penalty clauses as part of its list of indicatively unfair terms. Supra note 71 at Sch 2 (g).

74. See Beatson, Jack, Burrows, Andrew & Cartwright, John, Anson’s Law of Contract, 29th ed (Oxford: Oxford University Press, 2010) at 205.CrossRefGoogle Scholar Citing St Albans City & DC v International Computers Ltd, [1995] FSR 686, aff’d [1996] 4 All ER 481 (CA)Google Scholar; Balmoral Group Ltd v Borealis (UK) Ltd, [2006] EWHC 1900 (Comm), [2006] 2 Lloyd’s Rep 629 at paras 412 and 424Google ScholarPubMed.

75. UCTA, supra note 70 at s 11(4) directs the courts to take account of these factors in assessing the reasonableness of limitation clauses. They have also been taken into account by the courts in relation to exclusion clauses. See for example Smith v Eric S Bush, [1990] 1 AC 831 at 858-59 (HL)Google ScholarPubMed [Smith].

76. The argument depends, of course, on the promisee in these cases being able to better bear the risk. Otherwise the promisee would be unwilling to exchange for fear of the application of the exemption clause. This explains why the courts, in determining reasonableness, assess which of the two parties would be the best risk bearer. See Smith, supra note 75 at 858-59.

77. Thank you to Les Green for the phrase and for alerting me to this issue.