Contract Law's Morality and Punitive Debt Enforcement

Abstract

This article uses punitive enforcement of personal debt to critically examine contemporary moral theories of contract. Charles Fried and Peter Benson take the position contract law appropriately embodies the morality of commercial exchange. This has unacceptable implications for enforcement of personal debt because it licenses creditors to demand and enforce as harsh terms as the market allows and treats debtor protection laws (like bankruptcy law) as problematic social interventions in the natural order of contract law and the marketplace.

 Critical and reconstructive theories do better. Seana Shiffrin’s warning contract law and the morality it embodies could weaken norms of interpersonal morality is spot on with respect to punitive debt enforcement. It would be tragic if the morality of contract law weakened a long-standing interpersonal norm requiring a creditor to be lenient when a debtor is unable to pay for reasons beyond their control.

Liberal contract theory does even better. It demands lawmakers do an autonomy accounting in deciding how to regulate debt enforcement and put a thumb on the scale in economic analysis in favor of reducing pain suffered by debtors who default or who pay in distress. The thumb’s weight depends on whether inflicting pain increases access to credit or to reduces the cost of credit because of the different stakes for people’s autonomy.

Liberal contract also would replace the morality of commercial exchange with a norm demanding people treat each other as substantive equals in contractual interactions. This norm would have profound implications for punitive debt enforcement. The required changes in creditor behavior are so great that it casts doubt on whether this is a cognizable legal norm currently.

But this is not a reason to dismiss the norm of relational justice as a pipe dream. The morality of contract law is to, some extent, a social construct, like contract law itself. If contract law can be reconstructed along genuinely liberal lines, then there will be a robust set of rules tempering the power of creditors to punish people who default that will be understood as aspects of a general requirement that people treat each other as substantive equals. Broadening contract theory to include debtor protection laws and linking the leniency norm to the norm of relational justice, are small steps in this direction.

Keywords: Contract law, Contract theory, Creditor and Debtor