An historical analysis of the allocation of the risk of failure of performance in contracts

Abstract

This dissertation traces historically the common law's attempts to allocate the risks of performance in contracts. Particular attention is paid to the use of dependency as a device for ordering performance and to attempts to relieve against forfeiture upon breach. Before a 14th century plaintiff could sue on a promise, he had to undertake the risk of performing first or produce a sealed writing which would be strictly construed, with no possibility of parol modification. These requirements dominated the allocation of the risks of performance in the early common law. When they were combined with the repressive system of pleadings aimed at transforming what were essentially questions of fact into questions of law, there were few opportunities for any constructive allocation of risk by the royal courts. But this restrictive approach, rather than being the product of a retarded economy, was the direct result of procedural and substantive law changes made in response to difficulties of proof which accompanied the centralization of the common law: modes of proof effective in the local communities failed in the anonymous enviroment of London and under difficulties of transport to Westminster. The tremendous increase in the popularity of conditional bonds was in turn a response by conveyancers to the resulting inadequacies of the common law, and with this came the problem of forfeiture. It was not until the new action of assumpsit that the common law was to be released from the mould of half-executed credit transactions and the requirement of formal proof. With the availability of reciprocal remedies in assumpsit came the enforcement of parol, executory contracts, no longer was it necessary for plaintiffs to show prior performance. The constant complaint of forfeiture on conditional bonds added support to the move away from dependency, with eventually even express conditions yielding to crys of hardship. But the difficulties of proof which followed in the wake of the new action of assumpsit, combined with the dislike of the multiplicity of law suits, made independency an unsuitable replacement. To add to this, the 18th century growth in industrialization and the wave of speculative mania which accompanied the new found wealth from the colonies, placed increasing pressure on the courts to actively participate in the allocation of risk. The first move came with the implementation of concurrency in exchange contracts, which ensured that neither party could receive benefit without paying for it. This was followed by a rule of dependency in labour contracts; not content with demanding long hours in return for low wages, employers insisted upon protection against the risk of default by requiring servants to perform their duties before receiving wages. Once settled, this rule was expanded, however, to all lump sum contracts. While dependency served the purposes of the new economic order, it brought into focus the earlier problem of forfeiture upon breach. If the party who was to perform first failed to complete he could recover nothing, the duty of reciprocal performance never arose. It was this problem which was subsequently to demand all the energies of the common law. Attention was first focussed on the unjust enrichment which resulted whenever benefit was conferred before payment. The solution to this problem, reached at the turn of the 19th century, involved determining whether the defendant had received the substantial part of the promised performance. But subsequent judges were openly critical of this kind of wait and see approach, preferring instead to concentrate exclusively on the expectancy interst at the time of formation of the contract. It was this approach which was to give rise to the condition/warranty analysis used in modern law. The classification of terms, combined with the shift in focus off performance, allowed rules of interpretation to develop, i.e. rules which specified certain terms as "conditions" and others as "warranties". While this standardization helped facilitate the court's handling of the tremendous growth in litigation, and allowed the full use of contract as a device for planning transactions, it was to produce a rigidification of legal principle: once a term was established as a condition it was seized upon by courts as a precedent. When the requirement of strict performance of conditions was added to this, a new risk of forfeiture arose. The classification of terms was not suited, however, to lump sum contracts where traditionally performance was treated as an entire condition precedent to payment. Here, in an attempt to relieve against forfeiture, the courts revived the old rule of substantial performance. The development of the law was accordingly split, with on the one hand the condition/warranty classification, and on the other hand the doctrine of substantial performance which was applied to lump sum contracts. Only recently has any further attempt been made to solve the problem of forfeiture, with the recognition of a hybrid category of contract term, the legal affect of which depends upon the nature of the event to which breach gives rise. This combines aspects of both the classification of terms and substantial performance. Obedience to time honoured distinctions has prevented realization, however, of the full potential of this approach.