Introduction: Contract as a Principle of Order copy | rgauthier.jd15 | August 21, 2012

H2O Introduction: Contract as a Principle of Order copy

by rgauthier.jd15



Contract as a Principle of Order[*]


There are, according to Hume, three fundamental laws of nature which are necessary for the preservation of society:


[T]hat of stability of possession, of its transference by consent and of the performance of promises. . . . [T]hough it is possible for men to maintain a small uncultivated society without government, it is impossible that they should maintain a society of any kind without justice, and subservience to those fundamental laws. . . .[1]


Most of us take contract for granted. Together with family and property, contract is one of the basic institutions of our social fabric. Price bargains, wage bargains, and rent bargains, to use the classification of Commons, belong to our daily experience. Indeed, contract is a principle of order of such universal usefulness that even a socialist economy cannot dispense with it.[2]             


A profitable approach to the law of contract, and perhaps to law in general, is to view legal doctrine, rules, principles, and standards as reflecting the value system of the culture in which the legal system is embedded.[3] In our modern society, a tension exists between those values favoring individual freedom and those favoring social control.[4] Whatever the merits of the claim that a society without tension is conceivable (and desirable),[5] in our society we encounter every day the tension between individual freedom and social control in debates over government regulation of the economy, abortion, use of marijuana and laetrile, sexual practices between consenting adults, gun control, the rights of criminal defendants, busing, affirmative action, and the teaching of evolution. The list is virtually endless. Small wonder, then, that modern contract law reproduces this same tension within itself, drawing much of its drama and vitality from our divided commitment to individual freedom and social control.


The law of contracts comprises many different doctrinal elements and encompasses exchange relationships of limitless variety. If these relationships were arranged along a continuum, we would find at one end transactions based on free bargain and genuine agreement, or at least on promises voluntarily given. Here, the dominant theme is respect for the autonomy of the parties and noninterference in the arrangements they have made for themselves, provided all the ground rules laid down to insure the smooth working of the system have been observed. Social control is at a minimum. As we proceed along the continuum, the freedom of the parties increasingly is limited by a system of judicial and legislative control designed to protect the community interest. And finally, at the opposite end of the scale, we find the so-called compulsory and adhesive contracts, the first type entered into under an enforceable duty to serve the public and the second unilaterally dictated by the stronger to the weaker party in need of goods or services. In recent years, there has undoubtedly been a shift all along this vast continuum in the direction of greater social control, a phenomenon reflecting the socialization of modern law in general.[6] But the idea of private autonomy remains influential in wide areas of contract law and even where it is no longer dominant, its appeal can still be heard, albeit often only as a distant echo. To better understand the main tenets of modern contract law, and its distinctive tendencies, it will be helpful to recall the outlines of what has been called the "classical" theory of contractual obligation. Classical contract theory starts from the belief that the individual is the best judge of his own welfare and of the means of securing it,[7] and is inspired by the hope that given a "suitable system of general rules and institutions there will arise spontaneous relationships also deserving the term 'order' but which are self-sustaining and within the limits prescribed by the rules need no detailed and specific regulation."[8] To achieve such order, according to the proponents of the classical theory, all that is required besides a system of general rules is "a free market guaranteeing and guiding the division of labor through a system of incentives it provides to the interest of the individual producers."[9] Within this framework, contract provides the legal machinery required by an economic system that relies on free exchange rather than tradition, custom, or command.[10]


The triumph of capitalism during the eighteenth and nineteenth centuries, with its spectacular increase in the productivity of labor, was possible only because of a constant refinement of the division of labor. This development in turn presupposed that enterprisers could depend on a continuous flow of goods and services exchanged in a free market. And to be able to exploit the factors of production in the most efficient way, enterprisers had (and still have) to be able to bargain for goods and services to be delivered in the future and to rely on promises for future delivery. Thus, it became one of the main functions of our law of contracts to keep this flow running smoothly, making certain that bargains would be kept and that legitimate expectations created by contractual promises would be honored. "The foundation of contract," in the language of Adam Smith, "is the reasonable expectation, which the person who promises raises in the person to whom he binds himself; of which the satisfaction may be extorted by force.”[11] In this sense, contract liability is promissory liability. In an industrial and commercial society, whose wealth, as Pound said, is largely made up of promises, the interest of society as a whole demands protection of the interest of the individual promisee.


Contract, to be useful to the business enterpriser within the setting of a free-enterprise economy, must be a tool of almost unlimited pliability. To accomplish this end, the legal system has to reduce the ceremony necessary to vouch for the deliberate nature of a contractual transaction to the indispensable minimum; it has to give freedom of contract as to form. Furthermore, since the law must keep pace with the constant widening of the market without being able to anticipate the content of an infinite number of transactions into which members of the community may need to enter, parties must be given freedom as to the content of their contractual arrangements as well. Contract, then, in the sense of a system of free contract, enhances the mobility of factors of production in the interest of the enterpriser who wishes to utilize them in the most efficient way and to be able to experiment rationally with new methods of satisfying wants. For that matter, such a system is required by every member of the community who seeks to achieve rationality of conduct in the adaptation of means to ends, and who does not want to adhere passively to the compulsory uniformity of behavior imposed by tradition and custom. Thus, its emergence has greatly increased the area and the potentialities of rational conduct.[12]


Within the framework of a free-enterprise system the essential prerequisite of contractual liability is volition, that is, consent freely given, and not coercion or status.[13] Contract, in this view, is the "meeting place of the ideas of agreement and obligation.”[14] As a matter of historical fact the rise of free and informal contract within western civilization reflected the erosion of a status-organized society; contract became, at an ever-increasing rate, a tool of change and of growing self-determination and self-assertion. Self-determination during the nineteenth century was regarded as the goal towards which society progressed; the movement of progressive societies, in the words of Sir Henry Maine, is a movement from status to contract, Ancient Law, infra p. 19. "It is through contract that man attains freedom. Although it appears to be the subordination of one man's will to another, the former gains more than he loses."[15] Contract, in this view, is the principle of order par excellence and the only legitimate means of social integration in a free society. Translated into legal language this means that in a progressive society all law is ultimately based on contract.[16] And since contract as a social phenomenon is the result of a "coincidence of free choices" on the part of the members of the community, merging their egoistical and altruistic tendencies, a contractual society safeguards its own stability. Contract is an instrument of peace in society. It reconciles freedom with order, particularly since, as we have been told, with increasing rationality man becomes less rather than more egoistic (see Marshall, supra note 9).


The high hopes with regard to the potentialities inherent in the contractual mechanism found admirable expression in Henry Sidgwick's Elements of Politics 82 (1879):


In a summary view of the civil order of society, as constituted in accordance with the individualistic ideal, performance of contract presents itself as the chief positive element, protection of life and property being the chief negative element. Withdraw contract - suppose that no one can count upon the fulfillment of any engagement - and the members of a human community are atoms that cannot effectively combine; the complex cooperation and division of employments that are the essential characteristics of modern industry cannot be introduced among such beings. Suppose contracts freely made and effectively sanctioned, and the most elaborate social organization becomes possible, at least in a society of such human beings as the individualistic theory contemplates - gifted with mature rea­son, and governed by enlightened self-interest. Of such beings it is prima facie plausible to say that, when once their respective relations to the surrounding material world have been determined so as to prevent mutual encroachment and secure to each the fruits of his industry, the remainder of their positive mutual rights and obligations ought to depend entirely on that coincidence of their free choices, which we call contract. Thoroughgoing individualists would even include the rights corresponding to governmental services, and the obligations to render services to Government, which we shall have to consider later: only in this latter case the contract is tacit.


Thus, a system of free contract did not recommend itself solely for reasons of sheer expediency and utilitarianism; it was deeply rooted in the moral sentiments of the period in which it found strongest expression. The dominant current of belief inspiring nineteenth-century industrial society - an open society of "removable inequalities," to use Burke's phrase - was the deep-felt conviction that individual and cooperative action should be left unrestrained in family, church, and market, and that such a system of laissez-faire would protect the freedom and dignity of the individual and secure the greatest possible measure of social justice.[17] The representatives of this school of thought were firmly convinced, to state it somewhat roughly, of the existence of a natural law according to which, at least in the long run, the individual serving his own interest was also serving the interest of the community.[18] Profits, under this system, could be earned only by supplying desired commodities and freedom of competition would prevent profits from rising unduly. The play of the market, if left to itself, would therefore maximize net satisfactions and establish the ideal conditions for the distribution of wealth. Justice within this context has a very definite meaning.[19] It means freedom of property and of contract, of profit making and of trade. A social system based on freedom of enterprise and competition sees to it that the private autonomy of contracting parties is kept within bounds and works for the benefit of society as a whole.


It is hardly surprising that contract played a significant role in the evolution for that matter, of free in enterprise western continental capitalism in England,[20] and for that matter, in western continental Europe.[21] In America, the law of contracts underwent an extraordinary process of expansion and refinement in the first three-quarters of the nineteenth century.[22] During this formative period, when the country was still, for the most part, an elemental and unexplored vastness, the "hands-off" attitude of classical contract law facilitated what J. W. Hurst has called a "release of creative human energy."[23] With the constant widening of the market, exchange transactions became more numerous and complex, and the principle of freedom of contract established itself as a paramount postulate of public policy.[24] Though the expression itself did not acquire wide currency until later,[25] its underlying philosophy was already implicit in the case law of the early nineteenth century (if not before), and its influence was felt in every branch of our developing law of contracts. The idea of freedom of contract found expression, for example, in the general opposition to compulsory contracts of every sort (infra p. 55), in the rise and short-lived triumph of the will theory of obligation (infra p. 114), in the rejection of older, equitable approaches to the problems of consideration and contract damages (infra p. 558), in the rule of caveat emptor (infra pp. 7 and 9) and, finally, in the nearly universal acceptance of the axiom that courts do not make contracts for the parties (infra p. 141). 


Of course, it was often said that fraud, misrepresentation, and duress must be ruled out by the courts in the exercise of their function of making sure that the "rules of the game" are adhered to. But these categories were narrowly defined (at least by the nineteenth-century common law)[26] due to the strong belief in the policing force of the market. It was taken for granted that oppressive bargains could be avoided by careful shopping around. Contracting parties were expected to look out for their own interest and their own protection. "Let the bargainer beware" was (and to some extent still is) the ordinary rule of contract.[27] It is not the function of courts to strike down improvident bargains. Courts have only to interpret contracts made by the parties. They do not make them. Within this framework contract justice is commutative and not distributive justice. [28] This attitude is in keeping with liberal social and moral philosophy according to which it pertains to the dignity of man to lead his own life as a reasonable person and to accept responsibility for his own mistakes. If the diligent is not to be deprived of the fruits of his own superior skill and knowledge acquired by legitimate means, the law cannot afford to go to the "romantic length of giving indemnity against the consequences of indolence and folly, or a careless indifference to the ordinary and accessible means of information."[29] Sir George Jessel, one of the great defenders of freedom of contract remarked,


[I]f there is one thing more than another which public policy requires, it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of Justice.[30]


These pronouncements, however, are representative only of the main current of thought that shaped our law of contracts in its formative period. Anglo-American law never became the perfect mirror image of free enterprise capitalism, but always retained a measure of independence from the underlying market relations it was helping to rationalize, a characteristic that neo-Marxist writers describe as its "relative autonomy."[31]  Interestingly, however, the independence or autonomy of contract law did not significantly impede the evolution of the free enterprise system, which seems, for the most part, to have developed in accordance with an inner law or logic of its own.[32] To be sure, in this country, the legal profession (in alliance with commercial and industrial interests) succeeded in removing many anti-commercial doctrines that had survived as irrational vestiges from the colonial period.[33] But even where they identified themselves with more traditional and conservative views, lawyers and judges could do little to slow the expansion of the market and its anti-fraternal ethic, though they did succeed in establishing a few important counterweights to the principle of contractual autonomy and in this way helped to establish a balance between the claims of freedom and order.[34]


Pound is entirely correct when he states that "there has never been in our law any such freedom [of contract] as they [i.e., the advocates of doctrinaire liberalism] postulate."[35] Thus, common law courts have never hesitated to deny enforcement, for reasons of public policy, to contracts contemplating a crime, a tort, or an immoral act. Nor have they hesitated, to take another example, to strike down contracts in restraint of trade.[36] Furthermore, courts became increasingly aware of the presuppositions underlying the doctrine of caveat emptor, and began around the middle of the last century to enlarge the responsibility of the seller for the quality of his goods in favor of the buyer who does not trade face to face with his neighbor for merchandise there to be seen. So-called implied warranties were added to express warranties to make sure that goods bought were of fair merchantable quality, or fit for the buyer's purpose provided he had relied on the seller's judgment for the determination of quality.[37]


Turning to equity, this branch of law has for centuries given relief against contractual penalties and forfeitures. For example, equity granted the mortgagor a right to redeem his property, even if he had failed to so stipulate, and did not permit him to bargain away in advance his "equity of redemption.” [38] Equity also interfered with contracts in order to protect the interests of weak, necessitous, and unfortunate persons.[39] These doctrines were too firmly established to be dislodged by the spirit of laissez-faire.[40]


In the eighteenth century, there was a tendency, at least in this country, toward a more equitable conception of contractual obligation, a conception that emphasized, among other things, a substantive theory of consideration which allowed courts to scrutinize the fairness of a bargain by using an objective theory of commodity value. This view of the matter was, as we know, short-lived, and a subjective theory of value soon emerged to replace it (infra p. 558). As a result, the consideration doctrine was forced to pay tribute to the great principle of freedom of contract and the adequacy of the quid pro quo was (in theory at least) left to free bargaining (Ch. 5 infra). But courts quickly came to realize the usefulness of the consideration requirement as an instrument of social control, and in the subsequent elaboration of this requirement many of the equitable ideas that had been so widely accepted in the previous century enjoyed a second (if somewhat disguised) existence. Throughout the nineteenth century, the doctrine of consideration was used to implement and enlarge notions of public policy that a judicial commitment to the philosophy of laissez-faire[41] made impossible to promote more directly.


The tendency to control contractual freedom received support from growing movements of protest and reform which, toward the end of the nineteenth century, began everywhere to share political and social power and to influence the formation of social policy. These movements gained strength during the great depressions of the late nineteenth century, fueled by the vigorous public reaction against railroad amalgamations and the pioneer trusts, child labor, unregulated working conditions, social insecurity, and other evils of contemporary industrial society. Experience in dealing with these problems strengthened doubts as to the universal validity of the belief in the success of unregulated individualism. Society, in granting freedom of contract, does not guarantee that all members of the community will be able to utilize it to the same extent. The use that can actually be made of contract depends on the system governing the distribution of property: to the extent that the law sanctions an unequal distribution of property, freedom of contract inevitably becomes a one-sided "privilege. Society, by guaranteeing that it will not interfere with the exercise of power by contract, enables the enterpriser to legislate by contract in a substantially authoritarian manner without using the appearance of authoritarian forms. According to a theory that has gained wide popular appeal, many an industrial empire has strengthened its power by employing contract as a weapon of industrial warfare.[42]


Only slowly did American courts recognize the dangers inherent in the inequality of bargaining power. Convinced of the justice of the system of property,[43] upon which the justice of freedom of contract rests, they believed that the existence of large industrial empires served the interest of society as a whole. Only the fittest deserved to survive, and the failure of many enterprises to survive the competitive struggle simply indicated that their services did not sufficiently benefit society as a whole. Antitrust Jaws, designed to promote freedom of competition, were in some famous cases interpreted in ways favorable to the power of industrial combinations. State statutes attempting to protect the weaker contracting party against abuses of freedom of contract by fixing minimum wages and maximum hours in employment and by attempting to outlaw discrimination against union members by means of yellow dog contracts did not fare any better at the hands of American courts. The climate of opinion prevailing at the end of the last century and well into this one is strikingly illustrated by the celebrated cases of Lochner v. New York, 198 U.S. 45 (1904), Adair v. United States, 208 U.S. 161 (1907), and Coppage v. Kansas, 236 U.S. 1 (1914). Declaring such statutes unconstitutional under the due process clause of the fourteenth amendment, these decisions elevated liberty of contract to the status of a fundamental property right. Pitney, J., speaking for the majority of the court in Coppage v. Kansas, which declared an anti-yellow dog statute unconstitutional, formulated the then-prevailing philosophy of Social Darwinism.


. . . No doubt, wherever the right of private property exists, there must and will be inequalities of fortune; and thus it naturally happens that parties negotiating about a contract are not equally unhampered by circumstances. This applies to all contracts, and not merely to that between employer and employee. Indeed a little reflection will show that wherever the right of private property and the right of free contract co-exist, each party when contracting is inevitably more or less influenced by the question whether he has much property, or little, or none; for the contract is made to the very end that each may gain something that he needs or desires more urgently than that which he proposes to give in exchange. And, since it is self-evident that, unless all things are held in common, some persons must have more property than others, it is from the nature of things impossible to uphold freedom of contract and the right of private property without at the same time recognizing as legitimate those inequalities of fortune that are the necessary result of the exercise of those rights. But the Fourteenth Amendment, in declaring that a State shall not "deprive any person of life, liberty or property without due process of law," gives to each of these an equal sanction; it recognizes "liberty" and "property" as co-existent human rights, and debars the States from any unwarranted interference with either.[44]


It is significant that the opposing viewpoint had already found expression ten years earlier in the dissenting  opinion of Mr. Justice Holmes in Lochner v. New York. (The majority had declared unconstitutional a New York statute imposing maximum hours for work in bakeries.) In the words of Mr. Justice Holmes:


The case is decided upon an economic theory which a large part of the country does not entertain. If it were a question whether I agreed with that theory, I should desire to study it further and long before making up my mind. But I do not conceive that to be my duty, because I strongly believe that my agreement or disagreement has nothing to do with the right of a majority to embody their opinions in law. It is settled by various decisions of this court that state constitutions and state laws may regulate life in many ways which we as legislators might think as injudicious or if you like as tyrannical as this, and which equally with this interfere with the liberty to contract. Sunday laws and usury laws are ancient examples. A more modern one is the prohibition of lotteries. The liberty of the citizen to do as he likes so long as he does not interfere with the liberty of others to do the same, which has been a shibboleth for some well-known writers, is interfered with by school laws, by the Post Office, by every state or municipal institution which takes his money for purposes thought desirable, whether Spencer's he likes it or not.  The Fourteenth Amendment does not enact Mr. Herbert Spencer’s Social Statics.[45]


It was several decades before the spirit of Holmes' Lochner dissent, with its recognition that freedom must sometimes be limited in the interest of its own preservation, began to have an appreciable influence on the Jaw of contracts. As Aaron Director observed,


There may once have been substantial merit in the notion that the free-market system would steadily gain in strength if only it were freed of widespread state interference. By 1934 it became evident that a combination of a hands-off policy, which permitted the proliferation of monopoly power, and promiscuous political interference, which strengthened such power, threatened "disintegration and collapse" of the economic organization. And only the "wisest measures by the state" could restore and maintain a free-market system.[46]


Very gradually the conviction took hold that political democracy is not sufficient by itself to secure the meaningful liberty men rightly desire. To overcome the deep sense of frustration felt by many, and to establish the material conditions needed to give existing legal freedoms something more than paper worth, political democracy (many argued) had to be supplemented by economic and social democracy.[47] In the course of this debate, the rhetoric of freedom of contract was drowned out by the rhetoric of freedom from contract, and equality of opportunity.[48] 


Social control of contractual association, which began as a countercurrent in the early days of laissez-faire libertarianism, has finally swelled into a main current of thought. One consequence of this development has been the breakdown of the classical conception of contract law as a unitary body of legal doctrine and the emergence (typically through legislative enactment) of whole branches of specialized law, and even specialized tribunals, associated with particular contracts. Labor law now regulates a substantial number of contracts between employer and employee.[49] Securities law regulates the purchase and sale of corporate securities. Public utilities must make contracts with persons in their service areas on terms set by a governmental body.[50] Special consumer legislation abounds, many insurance contracts are standardized by statute in whole or in part,[51] and government contracts, which play an increasingly important role in our economy, have peculiar characteristics of their own.[52] It has been said that special law has increased to such an extent that the general law of contract now covers only a small portion of the actual contracts made.[53] And even within this restricted field, the law is said to have little practical effect, since businessmen are inclined to view contracts as flexible commitments and to avoid litigation whenever possible.[54]


Today, therefore, the individual member of the community continuously finds himself involved in contractual relations, the contents of which are predetermined for him by statute, public authority, or group action.[55] The terms and conditions under which he obtains his supply of electricity and gas will in all likelihood be regulated by a public utility commission. So will his fare, should he use a public conveyance going to work. The rent he will have to pay may be fixed by governmental authority. The price of his food will depend partly on the government's farm support program and not solely on the interplay of supply and demand in a free market. Many of the goods he uses in daily consumption will have prices that reflect suggested list prices.[56] The wages he earns, or must pay, may also have been fixed for him beforehand. And if he is a businessman, he must take care not to violate the antitrust laws which, during the last half century, have grown steadily in importance, transforming the business environment.


This picture of our world has led many to the conclusion that the idea of contract has undergone a dramatic change. Some view contract as an anachronistic concept, anticipating its merger with the general law of obligations,[57] or argue that Maine's famous formula has to be qualified if not reversed.[58] Closely connected with this criticism is the idea that more attention should be given to the difference between discrete (transactional) exchanges and continuing relations, since many of the terms of the latter type of transaction must be left open for further negotiation.[59] It has also been suggested that the modern law of contracts can be more meaningfully explained in terms of a tripartite distinction between benefit-based, detriment-based, and promise-based obligations.[60] Most challenging is the controversial suggestion to merge law with economics.[61] No less challenging are the ideas developed by the Critical Legal Studies movement (infra p. 64). 


These observations doubtless have some validity. Today, few judges (and fewer legislatures) feel enthusiasm, or even respect, for the elegant simplicities of the classical law of contracts. On the contrary, the carefully delimited classical defenses of mistake, fraud, and duress - the only defenses allowable in a strict libertarian regime - seem continually on the verge of further expansion and have recently been supplemented by a revitalized, and potentially far-reaching concept of unconscionabilty.[62] Social policy arguments are frequently advanced to strike down obnoxious clauses. Caveat emptor is a mere shadow of its former self. The rules of the contracting game have been softened, and bargainers are expected to act in good faith toward one another.[63] The old model of arm's length dealing is in retreat, along with the notion that a contractual relation is one of'1imited commitment."[64] In their place, the confidential relation - the relation of fiduciary trust - has emerged or is emerging as the new model for both bargaining and contract performance in a large number of cases.[65]


Despite all this, however, the classical theory of contract reflects a set of values that continue to enjoy wide acceptance in our society. Most special legislation leaves considerable freedom to the parties to arrange their affairs as they wish. Labor law, for example, while imposing a duty to bargain in good faith, does not require that the parties come to terms.[66] Disclosure statutes, such as those found in the consumer field, may require that the provisions of the contract be set out clearly, but mandate very few terms. The federal government in recent years has shown a marked reluctance to impose mandatory wage and price controls, even in times of high inflation. Faith in market forces, or perhaps a lack of faith in governmental controls, is widespread and growing. Despite paternalistic arguments for directly regulating the consuming habits of the poor, consumer legislation has not gone so far.[67] Self-reliance, it would seem, is still a valued concept in late twentieth-century America, and even those who argue that we are turning back to status after a brief flirtation with contract recognize that the roles that define a person's rights and responsibilities are not ascribed to one at birth, but are assumed more or less freely, and just as freely given up. Finally, the planning element of contract, so important in the field of business, has in recent years become increasingly important in the domain of interpersonal relations, such as marriage and cohabitation, where traditionally the contractual freedom of the individual was restricted or nonexistent,[68] As freedom of contract wanes in one area, it waxes in another, and the overall result is a world that may well be more free than its nineteenth-century counterpart (though it is certainly free in different ways).


Any society that sees value in individual autonomy must have a strong commitment to contract and to contract values. For thpse who trunk contract is dead, Selznick provides the following balanced view of the role of contract in contemporary society.


The idea of contract is not wholly suited to modern experience; it does not help the law to grasp the realities of an administered society. Voluntarism is eroded when standardized "contracts of adhesion" leave little or no room for negotiation and when "private governments" largely determine the conditions of participation in economic life. The contract model presumes a world of independent, roughly equal actors who enter relationships of limited duration and limited commitment. A world of large-scale organizations, with their clients and constituencies, is forced into that mold only at the cost of significant distortion.


Nevertheless, contract remains a pervasive and powerful instrument of facilitative law. Its premises have sometimes required reconstruction to account for stubborn realities, as when a new type of "collective" contract was evolved to make sense of labor relations. But the appeal of contract as a general idea has not yet waned significantly. In part this is so because contract, being firmly embedded in common-law experience, casts a benign light of legitimacy over rules and relationships elaborated in its name and applied to new contexts. Furthermore, the law of contracts since the nineteenth century has embodied values of freedom, equality, self-government, and legal competence. Contract preserves the integrity of the parties and upholds the principle of authority founded in consent.[69] 




[*] Compare L. Fuller, The Principles of Order, in The Problems of Jurisprudence 693 (1949).


[1] 2 D. Hume, A Treatise on Human Nature, Book III: of Morals, ch. 6, at 293, 306 (T. H. Greene & T. H. Grose eds. 1890). Although Hume's Treatise contains an elaborate analysis of the nature of promises and a refutation of the contractarian theory of Hobbes and Locke, a general theory of contract is missing. There are, however, many references to contract as an institution. In another passage of his Treatise (at 258), Hume explains what he means by "fundamental laws of human nature": "Tho' the rules of justice be artificial, they are not arbitrary. Nor is the expression improper to call them Laws of Nature; if by natural we understand what is common to any species, or even if we confine it to mean what is inseparable from the species."


[2] For the role of contract in a socialist society, see K. Grzybowski, Soviet Legal Institutions 85 (l967); H. Berman, Justice in the U.S.S.R. 108, 114-117, and passim. (rev. ed. 1963); W. Friedmann, Legal Theory 377-378 (5th ed. 1967); Berman, Commercial Contracts in Soviet Law, 35 Calif. L. Rev. 191 (1947); Grossfeld, Money Sanctions for Breach of Contract in a Communist Economy, 72 Yale L.J. 1326 (1963); Markevitz, Civil Law in East Germany - Its Development and Relation to Soviet History and Ideology, 78 Yale L.J. 1,20 (1968); Loeber, Plan and Contract Performance in Soviet Law, 1964 U. Ill. L.F. 128; Hsias, The Role of Economic Contract in Communist China, 53 Calif. L. Rev. 1029 (1965).


[3] The distinction between rules, principles, and standards is discussed in R. Dworkin, Taking Rights Seriously, 22-28, 71-80 (1979); 1 F. A. Hayek, Law, Legislation, and Liberty 115 et seq. (1973).  See also T. Parson’s discussion of the role of residual categories in his Structure of Social Action, 16 et seq. (1949).


[4] This conflict is reflected in the two main theories of contractual liability.  One, the will theory, emphasizes the autonomy of the individual.  The other, the objective theory, bases contractual liability on the social consequences of promise-making, or, as Hume put it, on the fact that “[p]romises are human inventions founded on the necessity and interests of society.”  Hume, supra note 1, at 287.  The former view has found powerful support in Kantian ethics, which in recent years has experience renewed interest if not a philosophical revival, e.g., J. Rawls, A theory of Justice (1971).  See further W. Sandell, Liberalism and the Limits of Justice (1982); 1 F. A. Hayek, Law, Legislation and Liberty (1973); M. Gregor, Laws of Freedom (1962). 


Kennedy, Form, and Substance in Private Law Adjudication, 89 Harv. L. Rev. 1685 (1976), has pointed out that the conflict between individual freedom and social control is played out even in the choice of forms of legal regulation, specifically in the choice between narrowly defined rule and  broad-based standards. 


[5] The possibility and desirability of a social system without tension is discussed in S. Freud, Civilization and Its Discontents (1946) and in his correspondence with Einsteain written in 1932, Why War?, 22 The Complete Psychoanalytical Works of Sigmund Freud 203 (Standard ed. 1964).  Kant’s emphasis on the creative force of “ungesellige Geselligkeit” is still valid.  Idee zu einer allgemeinen Geshichte in Weltbürgerhcher Absicht, 7(1) Sämtliche. Werke 321 (K. Rosenkrantz & F. Schubert eds. 1838); so is the saying attributed to a pre-Socratic philosopher: "Strife is the father of all things."


[6] 3 R. Pound, Jurisprudence 429 et seq. (1959).


[7] F. Knight, Freedom and Reform 54 (1946):


[A]ccording to the liberal view, a greater total achieyement of ends, actually desired and pursued, and in that sense a greater realization of "good" will result from a general application of the principle of freedom with the limitation of mutual consent, than from the application of any other general rule. (Emphasis added.)


[8] Lord Robbins, Political Economy Past and Present 5-9 (1976).


[9] T. Sowell, Classical Economics Reconsidered, ch. 1 (1974). Adam Smith, Wealth of Nations 13 (Cannan ed. 1937):


This division of labor, from which so many advantages are derived, is not originally the effect of any human wisdom which foresees and intends the general opulence to which it gives occasion. 11 is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility: the propensity to truck, barter and exchange one thing for another.


On Adam Smith, see Viner, Adam Smith and Laissez-faire, 33 J. Pol. Economy 198, 208, 214 et seq., Coase, The Wealth of Nations, 15 Economic Inquiry 309 (1977); see further, A. Marshall, Principles of Economics, ch. 8 (8th ed. 1920); see also P. Stein, Legal Evolution 29 et seq. (J980). On early economic theory in this country, see the symposium in the supplement issue to the J. Econ. His!. 1943; 1 W. Grampp, Economic Liberalism: The Beginnings 48-97 (1965); P. Stein, Adam Smith's Jurisprudence, 64 Cornell L.Q. 621 (1964)


[10] Llewellyn, What Price Contract? - An Essay in Perspective, 40 Yale L.J. 704, 717 (1931). It goes without saying that there is a cost to using the "price [contract] mechanism." At a certain point, therefore, it may become advantageous to supersede the contract mechanism "by forming an organization [a firm] and allowing some authority (an "entrepreneur") to direct the resources .... " Coase, The Nature of the Firm, 4 Economica (N.S.) 385,392 (1937).


[11] Lectures on Justice, Police, Revenue and Arms 7 (Cannan ed. 1896).


[12] For a discussion of the significance of rationality for modern capitalism, see p. 8, note 31 infra.  


[13] Freedom of contract thus means that, subject to narrow limits, the law, in the field of contracts, has delegated legislation to the contracting parties. As far as the parties are concerned, the law of contracts is of their own making; society merely lends its machinery of enforcement to the party injured by the breach. To be sure, society, in order to accommodate the members of the business community, has placed at their disposal a great variety of typical transactions whose consequences are regulated in advance; it has thus "supplied the shortsightedness of individuals, by doing for them what they would have done for themselves, if their imagination had anticipated the march of nature." J. Bentham, A General View of a Complete Code of Laws, in 3 Works 191 (J. Bowring ed. 1843). Bentham's statement does not do justice to the significance of statutory provisions. They often reflect existing patterns of behavior. But these statutory provisions come into operation only in the absence of an agreement to the contrary.


[14] W. Watt, The Theory of Contract in Its Social Light 2 (1897).


[15] W. G. Miller, Lectures in the Philosophy of Law 216 (1884).


[16] See 1 Parsons, The Law of Contracts 3 (1855). For the Marxist critique of this aspect of “bourgeois” law, its commodity exchange conception, see Pashukanis, The General Theory of Law and Marxism, reprinted in 5 Twentieth Century Legal Philosophy Series (Soviet Legal Philosophy) 111-225 (1951).


[17] S. Fine, Laissez-Faire and the General Welfare State, A Study of Conflict in American Thought, 1865-1901 (1982).


[18] Adam Smith, Wealth of Nations 423 (Cannan ed. 1937): “By pursuing his own interest the individual member of society promotes that of the society more effectively than when he really intends to promote it." For a more guarded expression of this Idea, see F. Knight, Freedom and Reform 45, 54 (1947).


[19] Hamilton, Competition in 2 Encyc. Soc. Sci. 141, 142 (1930).


[20] See Atiyah.


[21] The discussion that follows will be confined to American law and literature.


[22] G. Gilmore, The Ages of American Law (1977).


[23] Law and the Conditions of Freedom in the Nineteenth Century United States 6 (1956). For English law, see Atiyah, ch. 13. See also Gilmore, supra note 22, at 1-41 (1977); Horwitz at 145, 154-155, reviewed by Genovese, 91 Harv. L. Rev. 727 (1978).


[24] 2 M. Weber, Economy and Society 889-892, 668-681 (G. Roth & C. Wittich eds. 1978). For the origins of freedom of contract in England in tenms of the administrative structure of the court system, see Francis, The Structure of Judicial Administration and the Development of Contract Law in Seventeenth Century England, 83 Colum. L. Rev. 35, 134, 135 (1983).


[25] Printing and Numerical Registering Co. v. Sampson, 19 L.R.-Eq. 462, 465 (1875). The philosophy powerfully expressed in the opinion had a retarding influence on the evolution of the doctrine of public policy. On Sir George Jessel, see 16 W. Holdsworth, A History of English Law 121 (1966). The opinion is quoted in Diamond Match Co. v. Raber, 106 N.Y. 473, 482 (1887).


[26] Dawson, Economic Duress - An Essay in Perspective, 45 Mich. L. Rev. 253 (1947).


[27] In sales law, the principle found its most striking expression in the maxim of caveat emptor (let the purchaser take care of its own interests): the seller is not liable even for a latent defect, unless the buyer has requested an express warranty. I Parsons on Contracts 461 (3d ed. 1857); 12 Williston §1497 (1970); Seixas v. Wood, 2 Cai. R. 48 (N. Y. 1804); see, however, 2 J. Kent, Commentaries 479 (2d ed. 1832); Smith v. Hughes, 6 L.R.-Q.B. 597, 607 (1871).


[28] F. A. Hayek, Constitution of Liberty 232, 464 (1960).


[29] 2 J. Kent, Commentaries *485 (O. W. Holmes 12th ed. 1873); Bolden, Voluntary Assumption of Risk. 20 Harv. L. Rev. 14,22 (1906):


While the common law makes no pretense of being a social reformer and does not profess to reduce all persons to an absolutely equal position by eliminating all natural advantages. but rather, recognizing society as it is, considers social inequalities as the natural inevitable tactical advantages of those lucky enough to possess them, it does prohibit their misuse while permitting their use within fair limits.


[30] See note 25 supra. "Freely and voluntarily" should not he underemphasized.


[31] See, e.g., Tushnet, A Marxist Interpretation of American Law. I Marxist Perspectives, Spring 1978. Neo-Marxists often refer in this connection to Max Weber's discussion of the role played by civil and common law in  the evolution of capitalism. In describing the formal qualities of law, Max Weber has this to say about the differences between contemporary civil and Anglo-American law:


The differences between continental and common law methods of legal thought have been produced mostly by factors which are respectively connected with the internal structure and the modes of existence of the legal profession as well as by factors related to differences in political development. The economic elements, however have been determinative only in connection with these elements. What we are concerned with here is the fact that, once everything is said and done about these differences in historical developments, modern capitalism prospers equally and manifests essentially identical economic traits under legal systems containing rules and institutions which considerably differ from each other at least from the judicial point of view.


See Weber supra note 24, at 889. For an interpretation of Weber's sociology of law. sec A. Kronman, Max Weber (1983); Trubek, Max Weber and the Rise of Capitalism, 1972 Wis. L. Rev. 129; for the "symbiotic" relationship between law and economy, see Francis, supra note 24, at 131-136.


[32] Although the common law never achieved the formal rationality ascribed by Max Weber to the legal system of continental western Europe, it achieved a high degree of predictability as the result of built-in "steadying forces," brilliantly described by Karl Llewellyn in The Common Law Tradition 17 et seq. (1960), and by F. A. Hayek in 1 Law, Legislation and Liberty US et seq. (1973). Although Professor Hayek apparently was unfamiliar with Llewellyn's analysis, his ideas run strikingly parallel to those of Llewellyn and to Levin Goldschmidt's conviction that situational logic is ultimately guiding in all decisions (cited by Llewellyn at 122).


[33] On the evolution of our own legal system, see L: Friedman, Contract Law in America, a Social and Economic Case Study (1965); 2 P. Miller, The Life of the Mind in America from the Revolution to the Civil War. The Legal Mentality (1969); Cilmore, supra note 22; Horwitz. For the role of the judge, see further E. Levi, Introduction to Legal Reasoning (1948).


[34] Genovese, supra note 23, at 727, 729 (1978).


[35] Pound, Liberty of Contract, 18 Yale L.J. 454, 482 (1909). Even Sir Ceorge Jessel's famous formula leaves a wide berth for different, and perhaps restrictive, interpretations.


[36] Williston, Freedom of Contract, 6 Cornell L.Q. 365, 373 (1921); pp. 93-96 infra.


[37] K. Llewellyn, Cases and Materials on the Law of Sales, 268 et seq. (1930).


[38] On this development, see G. Gilmore, Security Interests in Personal Property §43.2 (1965).


[39] Pound, supra note 35, at 482; United States v. Bethlehem Steel, 315 U.S. 289, 312


(1942), infra p. 576; on the attitude of English courts of equity in the eighteenth century, see Atiyah.


[40] Williston, Freedom of Contract, 6 Cornell L.Q. 365, 373 (1921). On the decline of equity, see Stone, The Decline of Equity, 5 Colum. L. Rev, 20 (1905); Hanbury, The Field of Modern Equity, 45 L.Q. Rev. 12 (1920); see, however, Baker at 79-82, 89-99.


[41] See p. 558 infra.


[42] As always when dealing with opinion, the student should be alert to the possibility that the countercurrent supporting social control by state action draws its psychological strength from attitudes and convictions that may not have accurately reflected the objective facts of economic and social life. See Sharp, The Limits of Law, 61 Ethics 270, 276-279 (1951); Promises, Mistake and Reciprocity, 19 U. Chi. L. Rev. 286, 294-296 (1952).


[43] The following excerpt from a lecture of the late President Hadley of Yale, delivered at the University of Berlin in 1908, contains a provocative formulation of the significance of the system of property. Discussing "The Constitutional Position of Property in America," he said:


When it is said, as it commonly is, that the fundamental division of powers in the modern State is into legislative, executive and judicial, the student of American institutions may fairly note an exception. The fundamental division of powers in the Constitution of the United States is between voters on the one hand and property owners on the other. The forces of democracy on one side, divided between the executive and the legislature, are set over against the forces of property on the other side, with the judiciary as arbiter between them: the Constitution itself not only forbidding the legislature and executive to trench upon the rights of property, but compelling the judiciary to define and uphold those rights in a manner provided by the Constitution itself.

This theory of American politics has not often been stated. But it has been universally acted upon. One reason why it has not been more frequently stated is that it has been acted upon so universally that no American of earlier generations ever thought it necessary to state it. 11 has had the most fundamental and far-reaching effects upon the policy of the country. To mention but one thing among many, it has allowed the experiment of universal suffrage to be tried under conditions essentially different from those which led to its ruin in Athens or in Rome. The voter was omnipotent - within a limited area. He could make what laws he pleased, as long as those laws did not trench upon property right. He could elect what officers he pleased, as long as those officers did not try to do certain duties confided by the Constitution to the property holders. Democracy was complete as Jar as it went. but constitutionally it was bound to stop short of social democracy. I will not go so far as to say that the set of limitations on the political power of the majority in favor of the political power of the property owner has been a necessary element in the success of universal suffrage in the United States. I will say unhesitatingly that it has been a decisive factor in determining the political character of the nation and the actual development of its industries and institutions.


64 Independent 837 (1908).


[44] 236 U.S. 1, 17 (1914). As late as 1936 a New York act fixing a minimum wage for women was held invalid in Morehead v. New York ex rel. Tipaldo, 298 U.S. 587 (1936). The whole doctrine was abandoned a year later. West Coast Hotel v. Parrish, 300 U.S. 379 (1937). Consult also Phelps Dodge Corp. v. NLRB, 313 U.S. 177 (1941). An attempt on the part of labor unions to have anti-closed-shop statutes declared invalid because they interfered with freedom of contract was unsuccessful. Lincoln Federal Labor Union v. Northwestern Iron Metal Co., 335 U.S. 525 (1949).


[45] 198 U.S. 45,75 (1904). Consult also Muller v. Oregon, 208 U.S. 412 (1908), and the dissenting opinions in Morehead v. New York ex rel. Tipaldo, 298 U.S. 587 (1936).


[46] Aaron Director's Prefatory Note to H. Simons, Economic Policy for a Free Society vi (1948). A school of thought, influenced by both Simons and Director, has emerged in recent years that advocates the testing of contract doctrines in terms of economic efficiency and wealth maximization. See R. Posner, Economic Analysis of Law (2d ed. 1977); A. Kronman & R. Posner, The Economics of Contract Law (1979). The views of Simons and the Chicago School are not identical.


[47] This is taken from Kessler, Natural Law, Justice and Democracy – Some Reflections about  Law and Justice, 19 Tul. L. Rev. 32, 59·60 (1944). On the changing meaning of democracy, see C. B. Macpherson, The Life and Times of Liberal Democracy (l977). See also Kronman, Contract Law and Distributive Justice, 89 Yale L.J. 472 (1980).


[48] The phrase "freedom from contract" is taken from Patterson, An Apology for Consideration, 58 Colum. L. Rev. 929, 949 (1958). See also W. Friedmann, Law in a Changing Society 90 et seq. (1959).


[49] On American labor law see further Summers, Collective Agreements and the Law of Contracts, 78 Yale L.J. 525 (1968); p. 16 infra.


[50] Restatement of Torts §763. For a discussion of the economic issues, see J. Bain, Industrial Organization 542 (1959).


[51] On consumer legislation, see Ch. 4, §2; on insurance, see Ch. 4, §3.


[52] Government contracts are based on forms provided in advance, which are submitted to contractors for competitive bidding; typically, they contain stringent clauses to protect the government against unjust claims, clauses that may not stand up under judicial scrutiny in litigation. In the adjustment of claims, administrative boards often have the final say on questions of fact.  The government has a higher duty than the ordinary party to a contract to disclose facts affecting the decision of the other party.  Finally, government contracts are subject to renegotiation to prevent undue profits.  This note is conspicuously indebted to Patterson, The Interpretation and Construction of Contracts, 64 Colum. L. Rev. 833, 862 (1964); see further, Government Contracts, 29 Law and Contemp. Prob. 1-646 (1964); F. Kessler & M. Sharp, Contracts: Cases and Materials 274-276 (1953); Ch.11, §4.


[53] L Friedman, Contract Law in America 20-24 (1965).


[54] Macaulay, Non-Contractual Relations in Business: A Preliminary Study, 28 Am. Soc. Rev. 55 (1963); Macaulay, The Use and Non-Use of Contracts in the Manufacturing Industry, 9 Practical Lawyer, No. 7, 13-27 (1963).


It should not be overlooked that the law of contract is always in the background, and doubtless businessmen act on many occasions with this in mind.  The decision to sue will depend on many factors, including: whether the goods are “stock goods” or to be manufactured; whether the non-breaching party has suffered damages; whether the non-breaking party expects future dealings with the breaching party; in the case of relations between a large enterprise and a small supplier or distributor, whether the large enterprise feels that permitting the supplier or distributer to breach with impunity will encourage its suppliers or distributes to rebel in a like manner.  


[55] Eastwood & Wortley, Administrative Law and Teaching of the Law of Contracts, 1938 J. Soc. Public Teachers of Law 23, 29; P. Atiyah, An Introduction to the Law of Contract, Ch. 1 (3d ed. 1981); W. Anson, Principles of the Law of Contracts 3-4 (Guest 25th ed. 1979),


[56] Price fixing agreements would be illegal per se under Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), Continental T.V. Inc. v. GTE Sylvania, 433 U.S. 36 (1977), Monsanto Co. v. Spray-Rite Service Corp., 104 S. Ct. 1464, 79 L Ed. 2d 775 (1984). See also pp. 59 et seq. infra.


[57] G. Gilmore, The Death of Contract (1974).


[58] Rehbinder, Status, Contract, and Welfare State, 23 Stan. L Rev. 941 (1971); Hunter, An Essay on Contract and Status: Race, Marriage and the Meretricious Spouse, 64 Va. L. Rev. 1039 (1978).


[59] Macneil, The Many Futures of Contracts, 47 S. Cal. L. Rev. 691 {l974); Goetz & Scott, Principles of Relational Contracts, 67 Va. L. Rev. 1089 (1981).


[60] Atiyah at 5.


[61] See Posner, Some Uses and Abuses of Economics in Law, 16 U. Chi. L. Rev. 281 (1979), and the Comment by Michelman, id. at 307; see further Leff, Economic Analysis of Law: Some Realism about Nominalism, 64 Va. L. Rev. 451 (1974).


[62] See p. 561 infra.


[63] Kessler & Fine, Culpa in Contrahendo, Bargaining in Good Faith and Freedom of Contract: A Comparative Study, 77 Harv. L. Rev. 401 (1964).


[64] The phrase is taken from Selznick, The Ethos of American Law, included in The Americans: 1976, at 221 (I. Kristol & P. Weaver eds. 1976).


[65] See Ch. 3, §4 infra.


[66] Cox, The Duty to Bargain in Good Faith, 71 Harv. L. Rev. HOI (l958); Duvin, The Duty to Bargain: Law in Search of Policy, 64 Colum. L. Rev. 248 (1964); Fleming, The Obligation to Bargain in Good Faith, 47 Va. L. Rev. 988 (1961); Wellington, Freedom of Contract and the Collective Bargaining Agreement, 1l2 U. Pa. L. Rev. 467 (1964); H. Wellington, Labor and the Legal Process 49-125 (1968); Summers, Collective Agreements and the Law of Contracts, 78 Yale L.J. 525 (1969); Weiler, Striking a New Balance: Freedom of Contract and the Prospects for Union Representation, 98Harv. L. Rev. 311 (l984); see further Note, infra p. 63.


[67] See 15 U.S.C.A. SS1691 et seq. (West 1982).


[68] See Hunter, supra note 58.


[69] Selznick, supra note 64, at 221. The persistence of contract values in our society is reinforced by the emergence of the school of thought that stresses the economic efficiency of classical contract doctrines and thereby the wisdom of laissez-faire economics. See Hayek, supra note 32.


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