Over the course of my professional career, "Law and Economics" has grown from being one theoretical approach to law among many to one so dominant that many of its postulates have become virtually unquestioned premises in legal analysis. The Law and Economics school of thought is wide-ranging, but might fairly be described the way Wikipedia puts it: Law and Economics is an “approach tolegal theorythat applies methods ofeconomicsto law. It includes the use of economic concepts to explain the effects of laws, to assess which legal rules areeconomically efficient, and to predict which legal rules will bepromulgated.”
One of the most influential premises of Law and Economics is that contractual promises are enforced purely because they maximize the society-wide allocation of resources. This view also presumes there is no moral value to a contractual promise over and above the economic value its performance would have provided. Legendarily, Oliver Wendell Holmes expressed this purely pecuniary approach to contract law has long been the approach of the common law when he wrote in the late 19th Century that “the duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it, and nothing else.” In other words, the thinking goes, if someone who has made a contractual promise can make out better by breaking the promise, paying damages for breach, and entering another deal, that result is not merely tolerable — it is desirable. Such a breach of contract is called an “efficient breach” because it theoretically results in an increase in overall resources: the party injured by the breach supposedly receives everything he was supposed to get under breached contract, the breaching party is getting something better than he would have under the contract he chose to breach, and the new party with whom the breaching party contracts is getting a deal he would not otherwise have gotten. Thus, more value exists after the breach than before.
The Law and Economics viewis by no means the only current theory about why we enforce contractual promises(and the interpretation Law and Economics devotees put on Holmes’ statementis disputed by weighty authority). As a contracts professor and litigator, though, my experience is that the idea that the contract promise has no moral value over and above its economic value is a very, very influential one. It is a view, too, that is of a piece with the rise over the last thirty years to virtual unquestioned dogma that unregulated free markets always produce the highest social good.
One problem, though, is that unregulated free markets entrench the power of the wealthiest. So a wealthy party bound by a promise (the “promisor”) can as a practical matter force a change in the promise on a less affluent person to whom the promised was made (the “promisee”). The disparity in economic power the theory of efficient breach does not account for is on display in the power corporations hold to renegotiate employment contracts. Since an employee can only recover for breach whatever damages are available to him through a lawsuit (which poses risks and costs money), the threat of being limited to that legal remedy is powerful. Thus,as the New York Times pointed out last April,
Contracts everywhere are under assault.The depth of the recession and the use of taxpayer dollars to bail out companies have made it politically acceptable for overseers to tinker with employment agreements.
But, as David Skeel, a law professor from the University of Pennsylvania quoted in the article points out,
We run roughshod over some contracts and not over others. . . . Right now, employment contracts seem to be the type of contract that is viewed as eminently rewritable.
So, are contractual promises “sacred” in some way, or are they only worth whatever the parties to them can extract given their relative power (much of which is accounted for by wealth and political influence)? I don’t think there's any single answer to this question, but one should not lose sight of the fact that something considered sacred in some situations is not considered sacred in others.