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awkward and overly direct in the demand that we always have to be upfront and explicit about the precise nature of the commitment we take. In the spontaneous flow of social interaction there is an important place for subtle understandings and intentional ambiguity, and occasional misunderstandings is a worthwhile price to pay for that. Our ability to initiate LPA-based relationships surely exemplifies the way in which ‘the power to make binding promises, as well as to forge a variety of other related forms of commitment, is an integral part of the ability to engage in special relationships in a morally good way under conditions of equal respect’.18

3. Legal Enforcement

In this section I argue that people often assume LPA obligations during the course of negotiating for contract, and that the state is justified in enforcing these obligations on parties who refuse to abide by them. In Section 4 I will argue that contrary to the language of promise in which it is cast, the job of PE is to enforce these LPA obligations. As a general framework for the discussion I assume the liberal ‘harm principle’ as interpreted by Joseph Raz. The harm principle stipulates that the coercive power of the state can only be used to prevent people from causing harm. But according to Raz, the state is also under a duty to help citizens lead an autonomous life. For that purpose, the state should promote autonomy-enhancing practices and create valuable opportunities for the citizens. One important way of achieving this purpose is to outlaw actions which undermine worthwhile practices even when it is impossible to identify harm to any particular person.19 Thus, when a valuable practice is likely to come under too much strain if the moral obligations on which it is based are disregarded, the state is entitled to coerce people to oblige in order to protect the said practice.

In light of that, I want to show that the legal enforcement of LPA obligations is justified for two reasons: as a protection of an important autonomy-enhancing social practice, and as preventing harm to individuals. Although the first justification may seem more tenuous, I will argue in Section 4 that it is crucial for understanding the unusual operation of the legal device that enforces LPAs in the context of transactions in property, namely, PE. And as this first line of reasoning is under-explored it will be the main focus of this section. More specifically, I want to show that the state is correct in compelling people to abide by LPA obligations which they assumed in the course of negotiating an agreement to transfer property rights.20

18Shiffrin 2008, 285. Note that like any relationship of trust, LPA can have an intrinsic value over and above the projects that are facilitated by it (see Kimel 2003, 28–9).

19Raz 1986, 412–19. Put in that way, the harm principle is wider than Mill’s classical rendition in an important way: the definition of harm is here extended to include the ‘impairment of institutional practices that are in the public interest’ (Feinberg 1973, 33, my emphasis). In his classical formulation, J. S. Mill talks only about ‘harm to others’ (Mill 1993, ch. 1 para. 9).

20In the text, I examine the enforcement of LPA obligation in the context of commercial relationship because of the general context of the chapter, i.e. proprietary estoppel. Parallel problems

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3.1. Encouraging pre-contractual Investment

Our starting point would be the observation that ‘there are economic gains from negotiating contracts over an extended period of time’.21 The respective duties of the parties at this preliminary but crucial stage, in which they take the necessary time to shape their future relationship, have been the subject of intensive debate. One such controversy revolves around the fact that ‘in most exchanges, the parties have opportunities to make investments that can make the bargain more valuable, and such investments are cheaper and more valuable when made in advance [i.e. before an agreement is signed]’.22 A classic case is one in which R, who is negotiating an agreement to procure a neighbouring piece of land from O, can make investments that will help him utilize the larger space in more efficient way. For example, R may purchase the advanced machinery for which he requires the extra space, train his workers to handle it, and secure customers’ reservations for the new product. All this will enable R to start production much sooner after completion, and the early stream of cash will not only benefit R, but also highly increase O’s chances of being paid a good price on time. The surplus from the deal can be significantly increased.23 R’s expenditure can also take the form of inaction, as when R forgoes business opportunities that compete with his contemplated relationship with O (e.g. to purchase an alternative lot from R’s other neighbour).24 Choices of that kind made in anticipation of a contract have a key role in building up R’s commitment to the deal. Both R and O stand to gain from them.25

These and many other examples lead to the pretty uncontroversial conclusion that it is a ‘social goal at this stage . . . to induce surplus-maximising investment’.26 But the question what should the law do, if anything at all, to promote this admirable goal is highly contentious. You could think that if and when pre-contractual investment is likely to increase the surplus from the deal the parties will go on to make it without any intervention from the outside; the common good in the form of efficient precontractual investments will be taken care of by the free market. But this is not so. There is a serious obstacle on the way to ideal investment decisions at this stage of the

on the domestic setting are often approached with a different, albeit related, legal tool: the Common Intention Constructive Trust. The current tendency is to view PE and CICT as running in close but different streams (for a helpful comparison between them see Dixon 2008, 372–4). In the commercial setting ‘P.E. has usually been considered a more reliable and certain instrument for remedying unconscionable conduct than the rather fluid concept of the constructive trust’ (Etherton 2009, 125).

21Katz 1996, 1267.

22Katz 1996, 1267; on the ‘beneficial aspect of reliance’, see Goetz and Scott 1980, 1267–70.

23For many more examples of efficient pre-contractual investment see Craswell 1996, 490–1; Katz 1996, 1254–6, 1267–8. For example from English cases on PE, see my discussion in Section 4.1.

24Another common situation is one in which O is bidding for a contract for which he needs to employ a sub-contractor—R. For sophisticated products and services R will oftentimes have to make an investment in research and maybe production before the results of the bid are known. This can be highly relevant for property development joint ventures, see the facts of Cobbe v Yeoman’s Row Management Ltd 2008 and discussion n. 52.

25There could also be a problem of ‘over-investment’ here: see discussion of the ‘reasonableness’ condition in PE in text to n. 51.

26Ben-Shahar 2004, 1848.

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relationship, which the specialists nickname the ‘holdup’ trap: a party who has an opportunity to invest will face the following dilemma—if the deal is eventually aborted he will have to bear the costs all by himself, and if the negotiations proceed, the other party can exploit his relative weakness as the one who is more deeply invested in the prospective deal, make extra demands, and draw all the surplus benefit from the investment to herself.27 Obviously, unless the potential investor can somehow be assured that he will enjoy at least part of any surplus created by the investment, and that he will not have to bear its costs all on his own, he will not invest. Thus, if we just leave the parties to their own devices, many opportunities will be lost.

How can the potential investor be reassured? One way is for R to ask, or for O to offer, that they enter a preliminary contract about the question of who will bear the costs of the pre-contractual investment. When the parties explicitly agree on this question, this contract should govern their relationship in regards to the matter. But for reasons I shall discuss in Section 3.2, the solution of a collateral contract is unfeasible in many situations in which such potential surplus-maximizing investment can be thwarted by the ‘holdup’ problem. The law must therefore provide a default arrangement for the numerous instances in which parties who enter contractual negotiations fail to reach a private arrangement which allocates their respective responsibility for pre-contractual investment. The default rule must take into account the need for clarity in the arrangements between the parties, as well as the need to facilitate efficient pre-contractual investments.28 In the absence of an explicit invitation to invest by the other party (backed by a promise to cover the expenses over it in case she withdraws from the negotiations for no fault of R’s), what will often trigger the investment is a representation of O that a contract is around the corner. Relying on this representation, the other party may spend money or forgo opportunities that he would otherwise take.

Here is an example: a farmer who applied for a mortgage to purchase a field did not hear from the bank for a long time. As the season for planting approached fast, he asked the bank what to do. Their answer was ‘you go ahead and farm the property’.29 How should the law treat reliance on such representations? From an economic point of view, it has been shown by Bebchuk and Ben-Shahar that ‘A rule that assigns liability to any party who retracts from a preliminary representation he has made during the negotiations, for the reliance expenses incurred by the other party after the representation, [will ensure that] the other party will make the optimal reliance investment during the pre-contractual stage.’30 This optimal outcome is a result of the way in which this rule shields the investing party from the ‘holdup’ problem: the representor will hesitate to make demands that aim at

27 Craswell 1996, 492.

28 Bebchuk and Ben-Shahar 2001, 427. Craswell 1996, 485–6.

29Facts of Bixler v First National Bank of Oregon 1980, in Craswell 1996, 534.

30Bebchuk and Ben-Shahar 2001, 447. Or as Goetz and Scott put it: ‘legal rules that encourage self-protective adaptation by the [representee, i.e. encourage him to wait for a concrete offer] achieve desired reductions in detrimental reliance, only at the cost of concomitant reductions in beneficial reliance’ (Goetz and Scott 1980, 1271).

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seizing an unfair share of the surplus generated by the investment lest the negotiations break down and she will have to bear the costs of R’s reliance. Other writers who approach this issue from an economic efficiency perspective concur with this suggestion.31 It has also been shown that the benefits of the investment-friendly environment that such a rule creates are so great that they can overcome any ‘chilling’ effect that the liability might have on one’s willingness to enter negotiations, or make representations.32

Moving beyond considerations of efficiency, a rule which ascribes responsibility for the result of a pre-contractual representation better reflects ‘the different “tones” of the “understandings” and commitments that the parties wish to express throughout the negotiations’.33 A bipolar position according to which the parties are either within the contractual realm—where the parties have to make their representations good, or fall outside this realm—where only marginal tort-like norms govern the failed relationship is unfaithful to the natural evolution of the relationship between the parties. As Ben-Shahar observes, when the parties move along the path towards an agreement, they typically go through different stages of ‘intermediate species of liability’.34 This same reflection led Lon Fuller to call for the introduction of nuanced ‘scale of enforceability’ in contracts, i.e. a continuum of remedies that tackle the other party’s wish to withdraw which spans from restitution through covering reliance expenses and up to the award of the expectation value.35

Unfortunately, Ben-Shahar’s own solution to this normative gap between what the parties commit to in the pre-contractual stage, and the minimal legal duties that govern their relationship does not reflect properly the idea that the measure of the liability should mirror the deepening commitment.36 But his discussion does bring to the fore the fact that commitment to a joint project and responsibility for one’s representations come in stages. The fully-fledged commitment to the deal, in the form of a promise to go ahead with it, is embodied in the contract itself. But before we get to this final phase, a negotiating party will often come under lesser obligation to take responsibility over the effect which her representations had over the other party. She will, in other words, come under a duty to either warn the other party that any pre-contractual investments that he makes on the basis of these representations will be his own risk, or bear the costs of any (reasonable) reliance which her representation(s) to him induced.

Such gradual build-up of trust which is accompanied, and propped up, by intensifying levels of commitment is particularly important in the context of

31Goetz and Scott 1980, 1287; Craswell 1960, 487–97, 531–6.

32As shown by Bebchuk and Ben-Shahar in section VI of their paper (2001); see also Ben-Shahar 2004, 17 and 31.

33 Ben-Shahar 2004, 1830.

34 Ben-Shahar 2004, 1871.

35Letter from Lon L. Fuller to Karl Llewellyn cited in Ben-Shahar 2004, 1831.

36Ben-Shahar (2004) suggests that a party to fairly advanced negotiations should be able to enforce the negotiated-for contract in terms to which the other party agreed to, which, presumably, would be the most favourite terms for that party. The remedy therefore remains the same: O has to make her representation good, only the content of the representation changes as the parties get closer to seal the deal (see Markovits 2004, 1918).

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transactions in property rights. For here, a sealed commitment would mean that O has to part with a highly valuable asset that cannot be replaced by purchasing an identical item in the market. The last stage of a contractual duty is therefore final in a particularly rigorous sense. For that reason, we can expect owners to be especially keen on going through a prolonged period of discussions in which the various aspects of the deal are carefully considered. In this extended period of negotiations many opportunities for surplus-enhancing investments may arise. When the parties are not in a position to reach a collateral contract on who will bear the costs of these investments, R will hesitate to rely on the future contract unless he can be reassured that O will not exploit his position to extract extra benefits for herself. The unique nature of the subject matter in these transactions render R even more vulnerable to the holdup trap, as O knows that R cannot find an exactly similar commodity anywhere else.

Without pre-contractual investment the final deal may well be less lucrative for both parties, or fail completely if an over-careful R chooses to take whatever alternatives he can find. O would therefore want to encourage R to invest while she takes the necessary time to fully make up her mind whether she is willing to transfer her property right to him. It is therefore in the interest of both O and R if she can assume an informal obligation to take responsibility over the reliance which her representations to R induced.37 Like the examples we looked at in the first section of this chapter, this is another context where the ability to assume LPA obligations is highly valuable for the representor, as means of inviting trust and cooperation before taking full responsibility to make her representation good. However, the fact that O has a moral obligation to compensate R if she retracts from her representation would hardly ever be enough to reassure R that no holdup trap awaits him if he relies on it. Given the scale of the investment that can be expected when it comes to the purchase of property rights, it is improbable that R will count on O’s moral integrity, or rely on unofficial sanctions, such as harm to her reputation to motivate her sufficiently to fulfil her obligation.

If the required investment is substantial, R will probably only go ahead with it if he can rest assured that a recalcitrant O will be coerced by the state to comply with her obligations. And the state in this case would be justified in enforcing on O her moral duties not only in order to prevent harm to R but also as means to encourage efficient pre-contractual investments.38 For the state, recall, is under a duty to promote autonomy-enhancing practices, and to do that, it can and should employ the law to preserve the environment in which these practices thrive.39 As we saw, many efficient pre-contractual investments will only go ahead if people abide by

37For more examples of the way in which the representor can benefit from a pre-contractual reliance on her representation, and hence from a rule that encourages R to make them, see Craswell 1996, 495.

38For a justification of legal enforcement of promises along the same lines see Raz 1982, 934–7. Even those who reject Raz’s account of the source of obligation to keep promises can agree with him that the state has a good reason to enforce promises because of their special value to relationships, see Pratt 2007,

567.Raz himself would probably endorse the extension of his argument to LPA relationship as he says there that ‘whatever reason there is for the law to protect promising practice requires it to protect the wider practice of undertaking to protect voluntary obligations of any kind’ (Raz 1982, 936).

39It is an interesting question whether legal enforcement of the moral obligation which stands at its basis can indeed influence the practice. I do not have the space to discuss this issue, but see Raz’s positive answer to this question (Raz 1982, 934), and Avery Katz’s argument that if the rules encourage