Учебный год 22-23 / Binding Promises - The Late 20th-Century Reformation of Contract Law

BINDING PROMISES

Introduction

THE COURTS of England began the making of modern contract law in the late eighteenth century. It was then that commerce and industry, stimulated by new forms of long-distance transportation, began the expansion that brought England into the industrial age. The courts of England and the United States had completed the law of what we now call “classical contract” by the beginning of the twentieth century. Contract law remained in its classical state until late in the twentieth century, when the courts of the United States began the reforms that are the subject of this book.

Classical contract had three distinguishing characteristics: nearly unlimited freedom of contract, nearly unlimited contracting power, and a clear separation from tort. Freedom of contract is the freedom to choose the contents of a contract. For example, a law that requires employers to maintain safe working conditions limits freedom of contract by preventing employers from contracting with their employees to accept unsafe working conditions. Contracting power is the power to make contracts. For example, the Statute of Frauds limits contracting power by preventing people from making contracts without writing and signing them. Tort is the category of laws that hold people liable for their harmful conduct. For example, tort laws require careless drivers to compensate their victims. These characteristics enabled people to make the contracts they chose, practically without limitation as to kind or extent.

Classical contract rested on two premises: that people can serve their private interests by contracts, and that contracts can serve the public interest well enough to enable governments to limit their functions to law enforcement and national defense. Although these premises were unrealistic even under the relatively simple societal conditions of the nineteenth century, they had some plausibility then, but certain social and economic developments eventually made their unrealisticness obvious. The developments decreased consumers’ bargaining powers and made people more dependent on products produced by others. The courts responded by making laws that increased consumers’ bargaining powers and placed public responsibilities on producers. These are the reforms that are the subject of this book.

Most of the reforms still do not have generally accepted definitions or names. I have gathered them into four groups, which I call “reasonable expectations,” “relational torts,” “bad faith breach,” and “remedies reform.” “Reasonable expectations” is a restriction on contracting power. It limits the power to make a contract to agreements the maker can reason-

ably expect the other party to understand. Relational torts are the new laws that impose duties sounding in tort in certain kinds of contractual relationships, for example, duties that insurers owe to insureds or that residential real estate developers owe to purchasers of new homes. (That a law “sounds in” a certain legal category means simply that it falls into that category.) Lawyers and judges have been using the term “bad faith breach” to describe a variety of loosely defined wrongs committed in contractual situations since the 1960s. I will try to discover the principles that are common to the condemnations of these wrongs and to give the concept of bad faith breach a definition that expresses the substance of this reform. The emergence of the bad faith breach doctrine brought with it some damages entitlements seldom seen before in contracts cases. By now they have taken on a life of their own and so warrant separate treatment. These new damages entitlements constitute the remedies reform.

Reasonable expectations increases the consumer’s bargaining power, relational torts impose public responsibilities on producers, and bad faith breach and the remedies reform do both. The new laws have also eliminated the three distinctive characteristics of classical contract. Reasonable expectations limits contracting power. Relational torts and bad faith breach, which most courts define as a tort, limit freedom of contract and blur the distinction between contract and tort. The remedies reforms also limit freedom of contract, because the laws that provide the new remedies generally prohibit producers from contractually eliminating them.

By 1995 a majority of jurisdictions recognized reasonable expectations in some form, thirty-seven jurisdictions recognized some form of bad faith breach, and all jurisdictions recognized some relational torts and had adopted some of the remedies reforms. A Rand Corporation survey showed that a majority of the contract cases litigated to judgment in California in 1986 involved a relational tort and about a third involved a bad faith breach.1 Despite this widespread acceptance in practice, scholars have largely ignored the new laws. The Restatement (Second) of Contracts, published in 1981, mentions none of them. The Restatement (Second) of Torts, published in 1965, says nothing about the relational torts or bad faith breach. Contracts and torts casebooks give the new laws almost equally short shrift.

Some scholars have underestimated the new laws’ importance because they think of them not as affecting the body of contract law but as “consumer laws.” “Consumer laws” apply only to individuals and give them some additional protection when the amount at stake would not warrant hiring a lawyer and engaging in litigation. In fact, however, the new laws extend their protections to businesses and individuals without distinction, and they are not limited to situations where the amounts at stake are small.

These scholars also fail to realize that businesses need the protections of the new laws just as much as do individuals.

The other reasons for the lack of scholarly attention are specific to particular reforms. Relational torts fall into a crack between scholarly disciplines. Contract scholars ignore them because they are torts. Torts scholars ignore them because they arise only in contractual situations. Commercial legal digests categorize them neither as contracts nor as torts, but according to the industries to which they relate: insurance or construction law, for example. The widespread ignorance of the new restrictions on contracting power results mostly from intellectual conservatism. The concept of contracting power is itself new, and the idea of limiting it is foreign to the traditional notions of how people make contracts. Consequently, it almost seems that the more learned contract scholars are, the more resistant they are to understanding the new laws that limit contracting power. On the other hand, when I introduce these laws to my students, their usual reaction is to wonder why contract law did not include something so sensible long ago.

In an effort to overcome this widespread ignorance, I have included a good deal of description and explanation in this book, but my purposes are nevertheless primarily analytical and normative. Chapter 1 describes the characteristics of classical contract that when combined with certain social and economic developments of the present century increased producers’ bargaining power relative to that of consumers. Chapter 2 describes these social and economic developments. Both these chapters are as much analytical as descriptive, however. I believe I am the first to claim that nearly unlimited contracting power was a characteristic of classical contract, so of course I must support this claim by analysis. I must also demonstrate that the characteristics of classical contract did indeed combine with the social and economic developments I identify to increase producers’ bargaining power relative to that of consumers. Chapters 3 through 5 describe the new laws that seek to protect consumers against abuses of bargaining power and to give producers public responsibilities. Again, I must analyze the new laws in order to determine whether they succeed in providing these protections and responsibilities and how we might improve them if they fall short. Chapter 6 takes up Article 2 of the Uniform Commercial Code. Finally, Chapter 7 presents an overview of the reforms and their relationships to one another and analyzes two recent lines of decision by the U.S. Supreme Court that place certain constitutional constraints on contract law.

Pennsylvania became the first state to enact the Uniform Commercial Code (U.C.C.) in 1953; as of 1995, every state and the District of Columbia had enacted it. Each of its nine articles except the first codifies an area of

commercial law. (The first consists of general provisions for the other eight.) Article 2 codifies the law of sales of goods and certain parts of the law of contracts if the contracts concern sales of goods. “Goods” are tangible, movable things. For example, automobiles are goods, but telephone service is not, because it is not tangible, and real estate is not, because it is not movable. The law of sales of goods differed widely among the states, scholars and lawyers considered much of it to be bad law, and it was not well integrated with the law of contract, before legislatures enacted the U.C.C. Article 2 was designed to correct these deficiencies, and it generally did. However, for reasons they never disclosed, the drafters also included numerous provisions in the article that have nothing to do with sales of goods but just state laws of contract. Some of these provisions restate contract law as it existed when the article was drafted in the 1940s and 1950s, some were apparently attempts to restate the old law but do so incorrectly, and some overtly change the old law, but the result in all cases is that we now have two laws of contract and only occasionally any justification for the differences.

Moreover, the differences are sure to widen, because different institutions make the laws. Only the state legislatures that enacted it can change Article 2, whereas the courts can, and almost exclusively do, change the common law of contract. The difficulty of amending the article greatly aggravates the problem. We do not want to amend it if the amendment would destroy its uniformity among the states, because this would defeat one of the purposes for which it was enacted. Therefore, no state should amend it unless all states will enact the same amendment, but it is nearly impossible to obtain such universal agreement if the amendment is controversial, and almost any important amendment will be controversial. State legislatures have not enacted a single important amendment to Article 2, although most of them enacted it more than twenty-five years ago. We also need to amend Article 2 for reasons other than its differences from the common law. Many of its provisions are simply bad laws. Either they were bad to begin with, or conditions or perceptions have changed since they were drafted. In particular, some of its provisions prevent the new laws the courts have created from applying to contracts the article covers, because if a statute conflicts with a common law (i.e., a law made by a court), the statute triumphs. (This rule expresses the constitutional superiority of the legislature over the judiciary as a lawmaker in a democracy.)

Karl N. Llewellyn, the principal architect of Article 2, foresaw the difficulty of amending it and tried to compensate by making it especially amenable to judicial construction, but his efforts proved to be only partly successful. Llewellyn also once proposed to provide the authority in Article 2

for the courts to treat it as though it were a body of their own past decisions; they could “overrule” it and make new law if they believed that changed conditions or perceptions justified it. I will propose that state legislatures now enact a version of this old proposal. The only way we can hope to eliminate the many arbitrary and positively harmful differences between the U.C.C. law and the common laws of contract is to place the responsibility for making them in a single institution. That institution should be the courts, as it was before Article 2 was enacted. I make two comparisons to support this proposal, both of which, I think, demonstrate the superiority of judicial lawmaking to legislation for contract law. I compare the reforms the courts have made with Article 2, and I compare the process by which courts make common law with the process by which scholars drafted and legislatures enacted Article 2. I give a brief history of the latter process in order to make the second comparison.

Finally, I use the comparisons to support my argument that judges should begin taking a more active role in reforming the reforms. Many judges seem to believe that if there are problems with the new laws, it is up to the legislatures to solve them. The judges who believe this must have forgotten, or perhaps never knew, that it was they or their predecessors who made the new laws in the first place. The comparisons should also help to convince these judges that they would do a much better job of reforming the new laws than state legislatures would. I make these comparisons and the arguments based on them in Chapters 6 and 7.

In addition to describing, analyzing, and critiquing the new laws, I sometimes do the same for the judicial decisions that created them. The reader who is not a lawyer or legal scholar may wonder why I believed this to be necessary. A judicial decision that makes a law is the law it makes; any statement of such a law that I or anyone else may offer can never be more than an interpretation of the decision or decisions that made it. There will usually be a consensus on an interpretation when a common law has become established, but some of the laws I will treat have not yet reached this point in their development. For such laws, therefore, I have no choice but to state some representative decisions and give my interpretations of them and my reasons for coming to those interpretations.

Moreover, interpreting the decisions often discloses the purposes the courts intended the new laws to serve, and it is always necessary for determining why the courts made the laws they did rather than others which could have served the same purposes. A lawmaker’s purposes are generally greatly underdeterminative. There are countless ways a court might design a law to prevent producers from abusing their bargaining powers, for example. Therefore, one has not given a complete explanation of why the courts made the laws they did if all one says is that they wanted to prevent produc-

ers from abusing their bargaining powers. Descriptions and analyses of the decisions that made the laws often help to complete the explanations. The courts made these particular new laws rather than others that might also have prevented producers from abusing their bargaining power because, at least in the judges’ opinions, these laws were the most consistent with the principles and precedents to which they believed the laws should or must conform.

1

Classical Contract

THE REFORMS that are the subject of this book are reforms of the contract law we inherited, which has come to be called classical contract. Classical contract is largely a product of the industrial revolution. The courts of England began creating it almost as soon as the industrial revolution began, which was late in the eighteenth century. One needs to understand classical contract and the forces that shaped it in order to understand the reforms of it and the forces that shaped them. The courts of the United States began the reforms late in the present century.

Freedom of Contract and the Common Callings

People in modern times use contracts chiefly to set the terms of trade, but trade was not common in the Western world until the late eighteenth century. Before that, the law set the terms of what trade existed. A court would even set the price if a person objected to what a tradesman tried to charge him. The terms the law set were known as “the duties of the common callings.” A “calling” was a trade. “Common” meant the trade served the public.

No special skill was required for a service to be calling. “Laborer,” for example, which meant someone who provided service of no particular skill, was a calling. The only requirement was that the services be offered to the public. Domestic servants and others employed for long periods by a single employer, or people still bound by the old feudal obligations, were practically the only ones whose callings were not regarded as “common.”1

The duties of the common callings were inconsistent with economic competition, which became important in England and North America in the latter part of the eighteenth century. Two economic developments encouraged it. New labor-saving machinery and methods of dividing labor into small, repetitive steps greatly reduced the costs of manufacturing, and new means of transportation (canals and railroads) greatly reduced the costs of shipping things over long distances. Manufacturers of similar goods then came into competition with one another, because they could make their goods inexpensively in large volumes and sell them at low prices over long distances.

Competition requires that buyers and sellers be free to set prices and other terms of sale by agreement. However, it does not require that buyers and sellers make contracts. Contracts are promises, but if goods are sold “as is,” for cash, neither buyers nor sellers make any promises. Nevertheless, contracts became useful when sellers shipped their goods over long distances, because buyers wanted assurances that the goods would be as promised, and sellers wanted assurances that they would be paid what the buyers had promised them when the goods were delivered. Contracts are always useful for buying and selling services, because sellers of services require time to perform them. Sales of services therefore put both buyers and sellers in the same need of assurances as do sales of goods that are shipped over long distances.

A law of contract already existed in the eighteenth century, but it was rudimentary. Contracting was time-consuming, and legal technicalities made the outcome of contract litigation uncertain. Moreover, the duties of the common callings made it illegal for buyers and sellers to set prices or other terms of sale any different from those the duties already set for the goods or services. Courts therefore had to both create a simpler and more reliable law of contract and abolish or at least limit the duties of the common callings. The courts of England and the United States accomplished both tasks remarkably quickly. They had substantially abolished the duties of the common callings and constructed a largely new law of contract by the end of the century. That law of contract, now often called “classical contract,” still comprises the basis of contract law in the Englishspeaking world.

The Anglo-American law of contract has always been largely common law, which, of course, means that courts rather than legislatures make it. The general conception of the common law in the nineteenth century was that judges “found” it rather than made it. They “found” it in customs, practices, and principles of morality and proper conduct. The chief sources of the new law of contract were the theory of economic competition and liberalism. Adam Smith set forth the theory of economic competition in

An Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776. Liberalism was a political philosophy that emerged in the late seventeenth and early eighteenth centuries from the writings of many authors in Europe and the United States. Both the economic theory and liberalism emphasized the value of freedom. The Wealth of Nations explained that people had to be free to set prices and other terms of sale in order for economic competition to provide its benefits. Liberalism conceived of freedom as freedom from laws and other forms of state coercion, and it offered reasons for believing that increasing such freedom would increase the well-being of humanity and promote moral and political progress.

The chief principle the courts distilled from these sources was freedom of contract. Freedom of contract had two aspects: “freedom from” and “freedom to.” People were to be free from the duties of the common callings and other duties imposed by law and free to make contracts of whatever kind they chose. Freedom of contract required a sharp distinction between the laws of tort and contract. Generally speaking, tort law consists of the duties people owe one another simply by virtue of being members of the same society. Tort law obligates a person not to injure another or to damage the other’s property, for example. Freedom of contract, on the other hand, dictates that people be free from obligations except as they agree to assume them. Moreover, if people contract, they can disclaim obligations the law would otherwise impose and create new or different ones. Freedom of contract not only substantially eliminated the duties of the common callings; it also limited or reversed the development of tort law, especially in the United States.2

There were fewer avowed changes in the law than one might suppose. Many of the old decisions were simply ignored. That was possible because the only people with legal standing to complain were the sellers who continued to make their goods or provide their services by hand, and they eventually died out. The new methods of manufacture and transportation benefited everyone else. When a court did have to confront one of the old decisions, it could distinguish it on the ground that the seller in the case had agreed to sell at a lower price. By such reasoning the courts were able to reduce most of the duties of the common callings to the status of customs and practices, which buyers and sellers could legitimately agree to change.

Economic competition and liberalism contributed to both aspects of freedom of contract. Economic competition required that buyers and sellers be free from the duties of the common calling and free to set prices and other terms of their choosing. Liberalism advocated that government confine itself to the three tasks of maintaining domestic order, providing for the national defense, and protecting property. Tort laws, the duties of the common callings, and other laws that would displace those which people could make by contract did not serve any of these tasks. Government therefore should protect people from such laws by abolishing or limiting them. The contribution of liberalism to the “freedom to” aspect was to enlist the power of government to protect the making and enforcing of contracts. Contracts were property, and one of the tasks of government was to protect property.

Two more ideas current in the nineteenth century bore similarities to freedom of contract, but whether they contributed more to freedom of contract than it contributed to them is problematic. One was the economic doctrine of laissez-faire, or “let be.” Government was to leave business