I. ANALYSIS OF THE STATEMENT
a. The Theory of Contracts
A key characteristic of a “civil society” is autonomous economic organization and transactions.”(Keith, 19947) The belief that giving individuals the freedom to maximize their own wealth results in the maximization of society’s wealth is a cornerstone of capitalist philosophy. As the noted economist Keynes stated in his defense of capitalism during the depression of the 1930s, the allocative efficiencies and experimental creativity achieved through autonomous economic organization and transactions are “powerful instruments to better the future.”(Keynes, 1936) Moreover, the rule of law is a predicate for achieving autonomous economic organization and transactions. (Thornburgh, 1995) The rule of law has two basic principles. First is that people should be ruled by the law and obey it, and secondly, the law should be such that people will be able to be guided by it. (Segall, 1994) Hence, the rule of law assures that individuals know what the law is so they can maximize their own welfare within its confines. It also assures that individuals can pursue this wealth-maximizing autonomy without interference from either other individuals or the state. By assuring that the law is applied equally to all, is binding on the state, and prevents arbitrary actions by the state, the rule of law provides the freedom for the members of a “civil society” to order their own economic affairs. (Michael, 1988)
There is a strong relationship between the rule of law and Western contract law. In the West, it is believed that the objective and predictable enforcement of contracts is desirable because it maximizes the welfare of the parties involved, thus promoting the welfare of society as a whole. (Farnsworth, 1990) Individuals enter into contracts because they believe that an exchange will make them each better off. Where contracts are enforced in an objective and predictable manner, individuals are better able to determine which transactions will be wealth-maximizing and are able to shift the risk of uncertain events in economically efficient ways. On the other hand, where contractual enforcement is subject to changing state policy wealth-maximizing transfers may be voided by the state or never attempted due to the risk of contractual non-enforcement. Further, the resolution of contractual disputes by a legal system that is an impartial mediator of interests is beneficial for society because it establishes rules to resolve future disputes and “encourages socially desirable behavior by future bargainers.”(Scott and Leslie, 1993)
At the center of contract theory is the role of default roles. Contracts are necessarily incomplete and therefore a court or legislature must fill gaps. Recent scholarship has recommended that a lawmaker charged with this task look beyond the individual parties to a contract. This scholarship suggests that a default role can be designed to induce an equilibrium at which parties of one type accept the default role while parties of another type, to whom the role is costly, opt for an alternative contract term and thus reveal their type. When such a role works as intended, the revealed information permits efficient contractual arrangements and enhances social welfare. Explained this way, as an abstraction, the analysis seems simple and sound. The devil, though, is in the details. A default rule might fail at separation for reasons that have so far escaped scholars. The analysis of default rules thus requires amendment. Moreover, where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have
been in the contemplation of both parties, at the time they made the
contract, as the probable result of the breach of it.
Recently, this venerable rule has taken on a new aspect. A party who will suffer exceptional damages from breach need only communicate her situation in advance and gain assent to allowance so that the damages are unmistakably “in the contemplation of both parties” at the time of contract. The economic question, then, is not whether a damages limitation is inherently sensible but whether a rational rule would impose the burden of contracting for exceptional damages on those who wish to avoid the limitation. Abundant contract scholarship supplies an explanation of why one might answer this question with a yes. (Bebchuk & Shavell, 1991) The idea is that the party who bears special risks from breach should identify those risks so that the party with whom she contracts is on notice to take the proper precautions wherever necessary. The alternative, broad insurance for all unless such insurance is disclaimed, would waste contracting costs for disclaimer in the ordinary case or, absent disclaimer, would yield inefficient precautions taken to avoid indiscernible risks. A penalty default is a rule intended to encourage opt-out by a party with private information that she will disclose when contracting for an alternative to the rule. A party who will suffer exceptional loss from breach is denied damages for such loss if her contract is silent. She can avoid the default rule by proposing that the contract include insurance against exceptional loss. With this proposal, she identifies herself as someone at risk of such loss and permits her counterpart to take, and charge for, efficient precaution. Furthermore, the literature on incomplete contracts diverges from the law-and-economics literature, though they overlap in many ways. The theory of incomplete contracts was motivated primarily by descriptive curiosity about the nature of private contracting, not about contract law. As a result, contract law is usually treated in an exceptionally simple manner, as a system that specifically enforces contractual terms when the underlying behavior can be verified by courts. (Ayres and Gertner, 1989) This assumption enables scholars to focus on the parties’ choice of contractual form. By contrast, law and economics generally assumes that parties choose simple contracts-contracts with a fixed price and quantity and sometimes a liquidated damages clause, and focuses on the effect of different legal rules on contractual behavior.
b. Misrepresentation and Breach of Contract in the Context of English Law
In the context of the English law, the notion of a contract is characterized as an agreement where an individual accede to attend another who commence to compensate the former with wages and establishes between them exclusive sense of duties of the kind theoretically known as obligations, duties which as a minimum in the first instance can be imposed only by and against the factions to the transaction.
Nevertheless, there will always be hindrances and imperfections in transactions. Contracts might become incomplete due to several reasons, which in turn could be perverted or unintentional. Several legal actions that may be undertaken in the occurrence of an uncompleted contract include the concept of breach of contract and misrepresentation. The former is characterized as the failure with the lack of lawful justification to perform any promise which forms the whole or part of a contract. This basically states that one party refuses to explicitly and totally refuse to perform the agreement. The latter, on the other hand, is described as an erroneous or fabricated representation that which if acknowledged, directs the mind to an apprehension of a circumstance other and dissimilar from that which exists. Simply speaking, the thrust of misrepresentation is to deceive and to mislead from the inception of an agreement.
In most cases, reparation will be of such amount as to place an aggrieved party, inasmuch as funds could comply, in the same situation as if the contract had been completed although it is still subjected to the rule that damages are not to be prearranged for casualties of an exceptional category. In a number of cases, the reparations permitted by law are simply nominal. To illustrate, for an unsuccessful payment of a liabilities at the period decided upon, nothing further than the quantity of the debt itself could be retrieved. Conversely, in the instance of breach of promise of marriage, reparation that may go beyond the financial loss, are prearranged as a compensation for indignant feelings. A contract occasionally provides that a particular figure shall be remunerated on breach, and regulations have been positioned for deciding whether such a sum is to be reckoned as a punishment. The verdict will turn barely to a minor degree on the issue whether the manifestation of ‘penalty’ or ‘liquidated damages’ has been utilized in the agreement. Destructive duties stated in a contract may as well be obligatory through an injunction, another of the court preventing the responsibility of an undertaking. In certain circumstances, a positive obligation may be imposed by order for particular performance, a solution which is approximately limited to agreements for the sale or conveyance of interests in land, and for the turning over of other property which is so inimitable or degree that damages would be an insufficient resolve. The court has a prerogative in yielding an injunction and an instruction for specific performance and in carrying out the discretion will have take into account all the conditions of the case, and especially to the demeanor of the party appealing for it. Nonconformity with an injunction of either kind will be sanctioned by incarceration. (Geldart, 1995)
On the other hand, the misinterpretation theory reaches this conclusion by interpreting all promises as representations about the promisor’s future conduct. A person who promises to give a friend a ride has made a definite statement about what will happen in the future. If she then fails to come through with the ride, her failure makes this statement about the future a false one, thereby violating the obligation to tell the truth (in addition to causing harm). By contrast, a person who says that she will probably give her friend a ride, but who reserves the right to change her mind, has made a much weaker probabilistic statement about the future. That person’s failure to perform would not make her previous statement false, and therefore would not violate the obligation to tell the truth, even though it might cause the same amount of harm to her friend. According to the misinterpretation theory, this is why a person who promises to give her friend a ride has a stronger reason to do so than does a person who has merely said that she is likely to give her friend a ride, without actually promising.
Admittedly, the obligation to tell the truth appears here in what may be an unfamiliar guise. The obligation has some elements of strict liability, for it is no defense to say that at the time of promising the speaker thought that her statement would come true. In addition, the obligation to tell the truth is perhaps more usually thought of as an obligation limiting what one is allowed to say, by obliging people not to say anything that is false. Under this theory, though, the obligation limits what speakers can do, by forbidding people from doing anything that will make their prior statements turn out to be false. Rather than requiring people to conform their statements to reality, the misinterpretation theory of promising requires people to act in such a way that reality will conform to their prior statements. (Fogelin, 1983)
A misrepresentation made by one person to another with the purpose and effect of inducing him to enter into a contract with the former, will entitle the latter to avoid the contract, if it is a misrepresentation as to some material fact. A declaration of opinion is not and does not befit a misrepresentation for the reason that the opinion ended up to be erroneous or the purpose is not accomplished.
In the instance where a representation is not purely false, yet is recognized to be so to the individual who renders it, or is made it heedlessly devoid of concentration whether it is true or false, it is identified as fraud or deceit. For the rationale of giving a right to averting of the contract, it establishes diminutive variance whether a misrepresentation is innocuous or deceitful, save that it will be harder to resist the inference that a fraudulent misrepresentation was made for the purpose of inducing the contract. And when a verdict has been achieved, especially when the transaction has been accomplished by conveyance dissimilar outcomes will be given to an innocent and a fraudulent misrepresentation. The former will not have the right to be set aside while the latter will. Generally, there is no obligation compelling a party to any intended contract to make a disclosure to the other of material facts which might affect his judgment. (Geldart, 1995)
c. Possible Reasons Why Misrepresentation is Frequently Pursued than Breach of Contract
This part of the essay shall be discussing and analyzing the fundamental reason why litigators are prevalently pursuing for misrepresentation as compared to breach of contract. The attributes of the two legal actions are already discussed in the previous part of this paper. In the context of English law, prosecuting for misrepresentation is less complex compared to breach of contract. The two differs primarily on the calculation of damages, the possibility of rescission and the burden of proof. These are the factors why litigators prefer misrepresentation. In a breach of contract, damages are paid based on the position of the plaintiff after the contract has been performed. This is beneficial for the plaintiff considering the fact that he will be able to acquire the profit he deserves had there been no breach in the agreement. On the other hand, misrepresentation will only have reparation for the invested resources of the plaintiff. In this case, when a verdict of misrepresentation is given, the plaintiff will be able to acquire what had been lost due to a misrepresentation. The effect will be similar to the fact that the plaintiff had never entered into a contract. Therefore, a greater availability of rescission is present on misrepresentation rather than that of breach of contract. Although there is an absolute possibility that the rescission of the contract is accessible, reparations for the plaintiff is not taken for granted. (Geldart, 1995)
A significantly appealing quality of misrepresentation suits is the burden of proof. In the suit of breach of contract, the plaintiff has the burden of proof whether a violation of the agreed covenant among parties has transpired. On the other hand, a misrepresentation suit provides the burden of proof to the accused party. Consequently, if the defendant is not able to emancipate his evidential burden and acquire the justification of reasonable belief, the claimant should come off in its claim and salvage those losses which he can demonstrate were instigated by the misrepresentation. Thus, it may be easier to prove a misrepresentation claim than a breach of contract. For that reason, the misrepresentation is asserted as a contingency plan to the contractual accusation. (Geldart, 1995)
References:
Farnsworth, E. A. (1990) Contracts. Aspen. 2nd Ed.
Fogelin, Richard. (1983) Price on Promising: A Limited Defense”, 21 J. HIST. PHIL.289; Hanfling, supra note 12, at 24-25.
Geldart, W. (1995) Introduction to English Law. Oxford University. Oxford, England
Keith, R. (1994) China’s Struggle For The Rule of Law. St. Martin’s Press, New York.
Keynes, J. (1936) The General Theory of Employment, Interest And Money. Harcourt, Brace.
Michael, F. (1988) Law: A Tool of Power, In Yuan-li et al., Human Rights In The People’s Republic of China. Boulder, Co. Westview Press.
Scott, R. & Leslie, D. (1993) Contract Law And Theory. Sage. 2d Ed.
Segall, E. (1994) Justice Scalia, Critical Legal Studies, and the Rule of Law, Geo. Wash. L. Rev. Vol. 991.
Thornburgh, R. (1995) The Soviet Union and the Rule of Law. Foreign Affairs. Vol. 13, No. 14.
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