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

affairs entirely in private hands. The other was social Darwinism, which took the findings of Charles Darwin’s The Origins of Species about plant and animal evolution and used them as recommendations for contemporary social policy. Government should refrain from helping the losers in the “race of life,” because to help them would diminish the quality of the “breed of man” by promoting the survival of the least fit. The similarities of these ideas to certain aspects of freedom of contract are obvious.

Philosophies of the “will,” which were influential in the nineteenth century, probably also contributed to freedom of contract and certainly influenced the form that classical contract took in its beginnings. These philosophies made the “will” the ground of all existence. “Will” in this sense was not just the wills of individual human beings; rather, human beings were of unique metaphysical importance because they possessed wills to a greater degree than did other species. Idealism, a version current towards the end of the century, went so far as to see the will of each person as constituting all being. Nothing existed except as each person him or herself willed it. (Idealism had some difficulty in explaining why people commonly willed the same things, including other people, into existence.) The will as these philosophies conceived of it was free by definition, because if anything controlled it, that thing would be the ground of the will’s existence, rather than vice versa as the theory maintained. The leading theory of contract until the close of the nineteenth century was the “will theory.” A contract was said to be a combination of wills: a consensus ad idem, or more plainly, a “meeting of the minds.”

Freedom of Contract at Its Zenith

The American common law of contract was practically indistinguishable from the English common law of contract until late in the nineteenth century. An early English case that increased freedom of contract in both countries was Winterbottom v. Wright,3 which the Court of Exchequer handed down in 1842. The court held that the maker of a carriage wheel was not liable to anyone who was injured as a result of a defect except the person to whom the maker had sold it. All others lacked “privity of contract.” The court expressed concern that liability would otherwise extend too far: “even passersby” might be entitled to compensation for their injuries. Although the court did not explicitly state a connection with freedom of contract, the decision implicitly held that a manufacturer owed no duties to anyone except the persons with whom he contracted.

The reaction to a similar situation today would likely be precisely the opposite. One would think that passersby especially should be entitled to compensation for their injuries, because unlike purchasers, they had no

opportunity to protect themselves by contract. What other than blind adherence to the dictates of freedom of contract made the Court of Exchequer so concerned to limit the manufacturer’s liability is difficult even to guess, but it may have been the thought that the purchaser of a product should be liable for any injuries it inflicted instead. For he could discover any defects in it by inspection. For the relatively simple products of the time, this may have been a reasonable assumption. Purchasers who failed to inspect the product or chose to use it anyway ought to be exclusively responsible for any adverse consequences to passersby or others, just as they would be if they themselves had made the product. In any event, American courts universally followed Winterbottom. Lack of privity of contract remained a defense against a seller’s liability for product defects in the United States until the New York Court of Appeals abolished the defense in 1916, in MacPherson v. Buick Motor Company.4 Other American jurisdictions soon followed MacPherson.5

In 1861, the English historian Henry Maine described the change “from status to contract” as the direction of progress characteristic of societies throughout history, noting the change in English law from the duties of the common callings to freedom of contract in particular.6 In 1875, Sir George Jessel, Master of the Rolls, declared in Printing Company v. Sampson:7

[I]f there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice.8

American judges frequently quoted Jessel in their own opinions.9

The twentieth-century American legal historian Patrick S. Atiyah places the zenith of freedom of contract in England at 1871. That was when Parliament first limited the freedom of contract of employers by enacting legislation to govern the employment relationship. Until then, freedom of contract in England and the United States were essentially the same. However, instead of beginning a decline in 1871, freedom of contract in the United States continued to increase. It eventually reached heights never even approached in England. American courts did not decisively repudiate freedom of contract until they began making the new laws that are the subject of this book late in the present century.

Freedom of contract reached its zenith in the United States in the socalled Lochner era, when courts constitutionalized it. The era lasted from about 1890 to 1920. It takes its name from a 1905 decision of the U.S. Supreme Court, Lochner v. New York,10 that invalidated a New York State statute limiting the hours bakery employees could work to ten hours a day and sixty hours a week. The first words of the Court’s opinion on the subject were:

The [New York] statute necessarily interferes with the right of contract between the employer and employés, concerning the number of hours in which the latter may labor in the bakery of the employer. The general right to make a contract in relation to his business is part of the liberty of the individual protected by the Fourteenth Amendment of the Federal Constitution.11

However, the Supreme Court addressed the freedom of contract issues at greater length in Coppage v. Kansas,12 a decision it handed down in 1915. A Kansas statute made it a misdemeanor punishable by a fine or up to thirty days in jail for an employer or its agent to condition employment on an employee’s signing a contract not to be a member of a labor union. Such contracts were popularly known as yellow dog contracts. During the summer of 1911, Coppage, a supervisor for the St. Louis & San Francisco Railway Company, fired an employee for refusing to resign his union membership and enter into a yellow dog contract. The State of Kansas convicted Coppage under the statute, and the Kansas Supreme Court affirmed the conviction. The U.S. Supreme Court reversed the conviction on the precedent of Lochner, among others.

The Kansas Supreme Court said it was “a fact of general knowledge, that employés, as a rule, are not financially able to be as independent in making contracts for the sale of their labor as are employers in making a contract of purchase thereof.”13 These words were presumably a reference to an argument first put forward by Adam Smith, who wrote that employees lack bargaining power relative to employers because of the advantages that owners of capital inherently possess over those who might want to sell their services to them. An owner of capital does not have to keep his capital fully employed on a short-term basis. He does not lose much if he keeps it in a bank, drawing interest, or even just keeps it in a safe for a few weeks. Workers, on the other hand, generally must remain gainfully employed, because they need steady incomes in order to support themselves and their families. An owner of capital is therefore generally able to outlast a worker in bargaining over terms of employment. The only limit on the employer’s power in this respect is full employment, which requires him to offer higher wages in order to attract workers away from other employers.14

The U.S. Supreme Court’s answer to the argument of the Kansas Supreme Court (and Adam Smith) was as follows:

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 un-hampered by circumstances. This applies to all contracts, and not merely to that between employer and employé. 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.15

Although the Supreme Court’s logic was murky at best, its meaning was clear: freedom of contract was a fundamental principle of constitutional economics, with which legislatures were not to interfere. This remained the general tenor of American constitutional law until the Great Depression of the 1930s, when the Court repudiated its Lochner-era decisions by handing down a number of decisions upholding regulatory legislation.

Courts continued to apply freedom of contract in their common law decisions until late in the twentieth century. They used it primarily as a rationale for preventing either party from impeaching a written contract by introducing evidence of additional or conflicting oral agreements, practices, or understandings. Thus, freedom of contract contributed to the evolution of the parol evidence rule, which lasted in its stricter forms until the 1960s in most jurisdictions and as of 1995 still exists in every jurisdiction in one form or another.16 Written contracts of employment received especially strong protection. A rule evolved that oral contracts for permanent employment, employment for life, or the like were terminable at the will of either party as a matter of law. In effect, an employee could not enforce an employer’s promise of tenure unless he got the promise in writing. Although the rule was neutral on its face, it favored employers in practice. No reported decision used the rule to allow an employee to quit early despite an oral contract binding him for an extended period.

The employment rule existed in some states in a stronger version, which permitted an employee to enforce even a written contract of permanent employment only if he could prove that he had given a separate consideration for the promise of permanent employment. For example, the employee could enforce the promise by showing that he had accepted a lower wage in exchange for it or had left another job at the employer’s request, in which he had rights of tenure. The employment rule still exists in most jurisdictions in one form or another, although it is doubtful that the highest courts of many states would hesitate to overrule it if an employee were to challenge it.17

Economic theory also lends some support to the employment rule, holding that competition could not work effectively in the labor market if employers were not free to fire their employees as current business conditions required. Another justification offered, which also shows a connection with freedom of contract, is that the rule reflects reality. In this view, employment for life is too good to be true; an employee who claims an employer promised it is engaged in wishful thinking or trying to defraud the employer.18 Given the generally depressed economic conditions of the late nineteenth and early twentieth centuries, this may well have been a sincere justification.

The American Rule

The chief heritage of freedom of contract is an attitude, which has lasted to this day: a court should enforce a contract as it stands, absent a compelling reason not to do so. The attitude is largely one of freedom to contract. It was generally only the freedom from aspect of freedom of contract that disappeared when the Supreme Court repudiated the Lochner line of decisions. However, these generalities are subject to a very important exception: the American Rule.

The American Rule is unique to the United States. The rule is that the winning party in a civil action does not recover his costs of litigation from the loser. The origins of the rule go back to the seventeenth century, when attorneys in England and North America worked for the court, at least in principle, no matter whom they represented. The court paid them at the end of a case out of the costs it taxed against one or both of the parties. It was the losing party that normally bore the burden of the costs. In England, the court set the amounts, whereas in the American colonies the colonial legislatures set them. Possibly out of a dislike for lawyers, who were seen as representatives of the royal government, the legislatures generally set low amounts and rarely reviewed them for adequacy, despite currency depreciations and other changed circumstances. As a result, the amounts had become nominal by the end of the eighteenth century. Clients resorted to giving their lawyers “gifts” in order to get good representation.

Lawyers in the United States eventually won the right to obtain their fees by contract, but this meant they obtained them only from their clients. However, a winning party could still reasonably expect to recover what he had contracted to pay his lawyer as part of the damages from the losing party until the latter part of the nineteenth century. That ended when courts decided that a losing party was not liable for the lawyers’ fees of the win-

ner.19 Typical of the law on lawyers’ fees that resulted from this development is Section 1021 of the California Code of Civil Procedure, which has survived without relevant change since its 1872 enactment:

Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties; but parties to actions or proceedings are entitled to their costs, as hereinafter provided.20

In most states, however, the American Rule is common law rather than a statute. Section 1021 was enacted shortly after California became a state as part of a code intended to incorporate the common law as it then existed. Only some of the decisions granting lawyers the right to obtain their fees by contract21 or eliminating lawyers’ fees from damages awards22 expressly invoke notions of freedom of contract, but the influence of freedom of contract is implicit anyway. The decisions granting lawyers the right to obtain their fees by contract manifest the “freedom to” aspect. The decisions eliminating lawyers’ fees from damages awards manifest the “freedom from” aspect. The dates of the decisions are also indicative. They were all in the mid to late nineteenth century, when freedom of contract was most influential. The only exception to the American Rule that courts have always recognized also shows the influence of freedom of contract: the winner can recover his attorneys’ fees from the loser if the litigation arose out of a contract that so provided.23

The American Rule bears a remarkable similarity to the rule of Winterbottom, the most extreme expression of freedom of contract in this country except for the Lochner-era constitutional decisions. Both deny any liability except that which rests on contract, despite the fact that both deal with situations in which most of the people who would benefit from the liability have no opportunity to provide for it by contract. Courts carried freedom of contract beyond its legitimate boundaries in both instances.

Troubles with the Will Theory

The will may have been an attractive basis for a metaphysics of being, but it proved to be an unsatisfactory basis for contract. It undermined the binding character of a contract, which is a contract’s most salient characteristic. If a contract consists of the concurrence of the parties’ wills, how can it continue to exist if one of the parties withdraws his will from it? Another difficulty is determining if the wills of two people indeed had met. If one of them later claims he did not have the requisite will, on what basis can a judge or jury conclude he is lying? Only the person himself knows what he

thinks. One can observe both difficulties in two nineteenth-century decisions that are still famous.

One is Adams v. Lindsell,24 an 1818 King’s Bench decision. The defendants mailed an offer to sell some wool to the plaintiffs, asking for an acceptance “in course of post.” The defendants misaddressed their offer, and it arrived late. Not realizing this, the plaintiffs mailed back their acceptance in what they thought was the course of post. Not having received an acceptance in what they thought was the course of post, the defendants sold the wool to someone else. The plaintiffs brought suit, claiming their acceptance was timely. The trial court found for the defendants on the ground that the wills of the parties had never met. By the time the plaintiffs’ wills had been communicated to the defendants, the defendants’ wills had changed to contracting with someone else.

The King’s Bench reversed. It said that the trial court’s reasoning would lead to an infinite regress. According to the trial court, the parties’ wills cannot meet unless the offeror receives the offeree’s acceptance while the offeror is still inclined to make the contract. If this were true, the parties’ wills also could not meet unless the offeree received the offeror’s notice that it had received the offeree’s acceptance while the offeror was still inclined to make the contract, while the offeree was still inclined to make the contract—and so on, ad infinitum. In order to avoid the infinite regress, the King’s Bench held:

The defendants must be considered in law as making, during every instant of the time their letter was traveling, the same identical offer to the plaintiffs, and then the contract is completed by the acceptance of it by the latter. Then as to the delay in notifying the acceptance, that arises entirely from the mistake of the defendants, and it therefore must be taken as against them that the plaintiffs’ answer was received in course of post.25

One might call this the radio satellite theory of making a contract. The King’s Bench was a century and a half ahead of its time in understanding how traveling objects can send and receive communication signals. Adams is still the law, although few now accept the rationalization the court offered for it. An offeree accepts an offer sent by mail (or by other means of communication requiring time) as soon as he dispatches his acceptance, assuming that the dispatch is timely, properly addressed, and so on. Some sixty years after Adams, Lord Justice Theisger, sitting in the Court of Exchequer, suggested that the rule could be more logically rested on an assumption that the post office was the agent of the offeror, because the offeror was the first of the parties to chose to use it. When the offeree delivered his acceptance to the post, therefore, it was as if he had delivered it “into the hands of a messenger sent by the offeror himself as his agent to deliver the offer and receive the acceptance.”26

Lord Theisger’s suggestion does not work, however. An agent is a person to whom a principal has given authority to affect the principal’s legal relationships. The usual authority of an agent is to make the principal’s contracts. A person has to consent to another person’s making his contracts for him just as he has to consent to the contracts he makes himself. The law can no more declare an agency relationship to exist without the consents of the parties to it than it could declare a contract to exist without the consents of the parties to it. The fact is that no workable rule can reconcile the will theory with contracts by correspondence, because nothing one person does without the other’s knowledge can make a contract if a contract must have both their simultaneous consents.

The other decision is Dickenson v. Dodds,27 handed down in 1876. The Court of Chancery had to decide whether an offer had terminated before the offeree could accept it. Dodds gave Dickenson a written offer stating the terms on which he would sell some real property, the offer reciting that it would remain open until 9 A.M. the following Friday. While still in the course of deciding whether to accept, Dickenson learned from a Mr. Berry “that Dodds had been offering or agreeing to sell the property to Thomas Allan.” Apparently in the mistaken belief that he lacked the power to revoke his offer, Dodds never tried to do so. Instead, he tried to avoid Dickenson until after the offer had expired by its terms. He was unsuccessful, however. Dickenson caught up with him Friday morning shortly before 9 A.M., just as Dodds was boarding a train to take him out of town. Dodds then told Dickenson that it was too late, for he had already sold the property to someone else, a fact of which Dickenson, of course, was already aware.

The court held for Dodds. It reasoned that the offer terminated with Dickenson’s receipt of Berry’s information. Once having received the information,

[Dickenson] . . . was perfectly well aware that Dodds had changed his mind, and that he had in fact agreed to sell the property to Allan. It is impossible, therefore, to say there was ever that existence of the same mind between the two parties which is essential in point of law to the making of an agreement.28

Whatever the merits of the decision, the will theory only confused the reaching of it. The parties would never have been “of the same mind” to make the contract even if Dickenson had not received Berry’s information. In order to prevent the making of a contract under the will theory, all Dodds logically had to do was to think that he no longer wanted to sell to Dickenson, which he necessarily must have the moment he decided to sell to Allan instead. If the law logically followed the will theory, offerors would never have to bother to revoke. Just changing their minds would be enough.

Like the rule of Adams, the rule of Dickenson has survived despite the demise of the will theory and the deficiencies in the court’s rationalization.

The rule of Dickenson has not survived as fully, however. The Restatement (First) of Contracts limited what it called “the rule of indirect revocation” to situations in which the offer was for the sale of property and the information the offeree received was that the offeror had actually sold, or contracted to sell, the property to someone else. Information merely to the effect that the offeror had changed his intentions was insufficient.29 The Restatement (Second) of Contracts altered the rule again, although this time in the opposite direction. Information an offeree receives now revokes the offer if the information is reliable and to the effect that the offeror has taken “definite action inconsistent with” an intention to enter into the proposed contract with the offeree. The official comment explains that the quoted words mean “unequivocally inconsistent with.”30

The Objective Theory and the Failure to

Require Evidence of Real Consent

American courts had replaced the will theory with the so-called objective theory by 1900 or 1910. The parties’ objective manifestations of mutual assent now compose the contract, and the law interprets their manifestations as a reasonable person under the circumstances would interpret them. How either of the parties actually intended or interpreted them is of no consequence. Although Oliver Wendell Holmes, Jr., reported courts already following the objective theory by 1881,31 Grant Gilmore showed in 1974 that this was not so.32 All Holmes actually demonstrated was that the objective theory could support some of the major contract holdings of the time. By 1911, however, Judge Learned Hand was able to say that even if “twenty bishops” were to testify that the parties had intended something different, the contract would still mean what it would to a reasonable person viewing the situation objectively.33

Not only did freedom of contract survive the death of the will theory, it was strengthened by it. The objective theory provides a sturdier foundation by avoiding the logical entanglements into which the will theory led. A contract is a law for the parties to it. The legitimacy of that law derives from their consent, which each of them manifested by making the contract or at least manifesting his assent to it. The will theory requires that this consent have been actual, and it seems to require that it be continuing, too. If the parties’ wills should cease to coincide, the contract, which consists of that coinciding, should logically disappear. The objective theory, on the other hand, requires only that the parties have manifested their consents, so it lends itself to the idea that a contract exists by itself once the parties have made it. A manifestation of consent by its nature is limited in time, that is, the time it takes the person to speak, write, or otherwise signify it. Once

made, therefore, a contract is a fact that does not depend on anything else to continue in existence.

A contract that exists independently of the parties’ actual consents can also logically have a meaning of its own, independent of either party’s actual intentions. This is exactly what the objective theory dictates. Finally, by directing us to look only at the outward manifestations of consent, the objective theory makes it easier to demonstrate consent by something entirely formal, such as a signature or a handshake. Indeed, the objective theory positively forbids any inquiry into what a person actually thought he was consenting to when he made the contract. The practical result was to allow people to make contracts without any meaningful consent. In principle, two people could make the Encyclopedia Britannica their contract just by signifying it was. Judges and commentators later sometimes referred to this aspect of contract law as “the duty to read.” A person who signifies that a writing is his contract does so at his own risk. He cannot renounce it later by saying that he did not read it, was not given an opportunity to read it, or did not understand its terms.34

No one in the nineteenth century seems to have questioned this aspect of the law. If someone had, someone else might have defended it on the ground that a person who signifies consent to a contract does so voluntarily: he could have chosen not to. This might have been a valid argument in the nineteenth century, but it has not been thereafter. Two developments have largely eliminated the alternatives to contracting blindly. People have become dependent on numerous kinds of commercial services and manufactured products, and the producers of these services and products offer them only with standard contracts. A person today who refused to contract unless he understood what he was committing himself to would deny himself most of the means of living in society.