As is well known, Holmes’s theory of liability rested on two interlocking principles. First, the primary purpose of the law is to ‘induce external conformity to rule’, [The Common Law, (M. DeW. Howe edn., 1963), p. 42.] and second, personal moral blameworthiness is not generally an ingredient of liability. [Ibid., pp. 42-3.] I turn first to consider how Holmes applied these central principles to the case of contract. Naturally enough we find many of the same themes as in his theories of liability in the criminal law and in tort. There is, for a start, Holmes’s hostility to the role of morals, expressed in extraordinarily vehement language in ‘The Path of the Law’. [Holmes complained that his own way of looking at the law of contracts ‘stinks to the nostrils of those who think it advantageous to get as much ethics into the law as they can.’ 10 Harv. L. Rev. 457, at p. 462 (1897).] Morality helps put the cart before the horse and makes people think that it is morally wrong to break a contract, and that there is a duty to perform a contract. Not so, says Holmes. The duty to perform a contract is imaginary, and the right to the other party’s performance is even more imaginary. A contracting party has a choice—to perform or to pay damages for not performing. To enter into a contract is not to assume any duty to perform, and is thus analogous to committing a tort. Holmes thus presents his marvellous apothegm: committing a contract is more or less the same thing as committing a tort, except that in the former case liability is conditional on non-performance. [See Pollock-Holmes Letters (ed. M. DeW. Howe, 1941, published in America under the title, Holmes-Pollock Letters), vol. i, at p. 177, vol. ii, at pp. 199-200, 233.] A contract is, in effect, a way of allocating a risk, the risk of non-performance or non-occurrence of an event. [The Common Law, pp. 324-6.] This, in Holmes’s words, frees the subject from the ‘superfluous theory that contract is a qualified subjection of one will to another, a kind of limited slavery’. [Ibid., p. 235.] Many of us today would share Holmes’s satisfaction at the dissolution of that quasi-metaphysical nonsense in his cynical acid. Holmes’s theory of the nature of contractual liability also leads to the conclusion that damages should be limited to those that can reasonably be regarded as part of the risks assumed by the defendant. So punitive damages can be ruled out, the contract-breaker’s motives become immaterial, and perhaps, more generally, damages should be kept on the low side.
Lastly, Holmes’s thoughts on contract focus on the external standards of liability and the unimportance of actual internal intention. Mistake, fraud, and the like affect the validity of contract not by reason of a deficiency in the will of the contracting parties, or a failure of assent, but for other, more external reasons. [Ibid., pp. 245-6, 253.] Such external reasons might include the fact that ‘there is no second party, or the two parties say different things, or essential terms seemingly consistent are really inconsistent as used’. [Ibid., p. 246.] Holmes even made the remarkable assertion that the ‘true ground’ of decision in the famous case of Raffles v. Wichelhaus, [(1864) 2 H. and C. 906.] involving the steamship Peerless, was ‘not that each party meant a different thing . . . but that each said a different thing’. [The Common Law, p. 242.] As Grant Gilmore said, this was, ‘even for Holmes an extraordinary tour de force’. [The Death of Contract (1974), p. 41.]
—P.S. Atiyah, Essays on Contract, Oxford University Press, 1986, pp. 57-58