3 THE RISE AND FALL OF FREEDOM OF CONTRACT


CHAPTER 3
THE RISE AND FALL OF FREEDOM OF CONTRACT




INTRODUCTION


The law of contract cannot be fully understood without reference to the history of ideas which underpin it. It will become apparent in the course of this book that this branch of the law has undergone several important transformations in the last few decades. Reading cases and statutes will lead to familiarisation with the detail of such changes, but it is unlikely to allow you to gain a full appreciation of how it was possible for them to come about and the wider political context which made transformation acceptable to influential stakeholders. In a book of this kind, it is almost impossible to do justice to the rich spectrum of ideas which have been reflected in debates between academics, politicians and the wider community of users of contract law. Instead, the aim of this chapter and the next is to sketch out some key ideas which have influenced the ways in which we look at contracts. Of particular relevance here is the question of the extent to which the state, in the guise of the legislature and the judiciary, should interfere with contracts made by consenting parties in order to redress imbalances of power between them.


Even the briefest perusal of the newspapers will demonstrate that the issues which lie at the heart of this debate reflect a much wider controversy about the role of the modern state. The issue remains a contentious one which has troubled successive governments and debate has become particularly intense since the setting up of the welfare state. The political imperatives of the Conservative party under Margaret Thatcher and their emphasis on the ‘rolling back of the state’, debate about the ‘third way’, the growth of the regulatory state and visions of socialism in post-communist states, all hinge on the same critical issue of what constitute the appropriate boundaries between public and private or individual autonomy and central regulation. When you come to argue your first case in front of the country’s premier Court of Appeal, a sound knowledge of the intricacies of former precedents and ‘black letter’ law will serve you well. But it is unlikely that your arguments will stimulate the judges you stand before unless you can provide justification for why the law should make a departure from what has gone before. The aim of the remainder of this chapter is to start you on a journey in which you reflect on these more abstract ideas about contractual relationships.




LEGAL AND OTHER VIEWS OF CONTRACT


The early legal history of contract is extensive, complex and not entirely free from controversy. Medieval law was primarily concerned with crime and land. From an early stage it recognised formal agreements which were written and ‘understood’ but slowly began to recognise claims arising out of informal, oral transactions as well. Of particular significance is the common law’s recognition by the sixteenth century of claims involving four key elements. These were: reliance by the claimant on an undertaking given by the defendant; faulty performance, or non-performance of the undertaking by the defendant; loss to the claimant; and compensation in the form of damages. Later, the language of the courts began to link the idea of undertaking with that of promise. At that time the moral force of, and duty to keep, promises was very strong.


Nevertheless, the law stopped short of declaring that all promises were binding. Starting from an inquiry into the reasons why a promise was given, the doctrine of consideration came to set limits to promissory liability. It eventually did so by requiring that some form of exchange took place. This allowed contracts to be distinguished from gifts or gratuitous promises made out of kindness rather than as part of a deal. The types of bargain recognised by the doctrine of consideration included the exchange of money for a service or the exchange of one possession for another. But it was also accepted that promises could be exchanged to form binding contracts as long as there was a connection between them. So if Ethelred offered to pay Edwina three cows for a stable of manure and she accepted, then it can be seen that their promises to give up the cows and transfer manure are related to each other and form a bargain. Edwina’s promise would only have been made if Ethelred had made his. Thus, even before the onset of the industrial and commercial revolutions, contract law had developed considerably. It contained basic, interconnecting concepts such as undertaking, promise, expectations, bargain in the sense of commercial exchange, reliance, loss and compensation.


By the nineteenth century, the concept of contract came to be discussed more broadly by philosophers, political scientists, economists and sociologists, and became an important topic of debate. Contract came to be seen as the key to wealth and happiness in the emerging market society.‘Freedom of contract’ became a prime ethical, political, economic and legal goal. Brownsword (2006) describes the model as involving freedom for everyone to make an agreement on whatever terms they chose to; and sanctity of contract or the expectation that the courts will enforce the terms that the parties have freely made. Justice was said to require that each individual be at liberty to make free use of their natural powers in bargains, exchanges and promises as long as they did not interfere with the rights of others. Not only were such ideas considered a laudable goal in their own right but were also seen as the key to the economic success of society. One of the most important aspects of this debate was that the individual was considered to be best placed to know what their needs were and should be allowed to make whatever contracts on whatever terms they thought appropriate.


Giving people the utmost liberty to contract was seen as both morally appropriate but as also having a clear economic rationale. Adam Smith’s work proved to be particularly influential in the context of discussions about the latter. In the Wealth of Nations, published in 1776, Smith analysed exchange in terms of people’s ‘natural propensity’ to ‘truck, barter and exchange’. In his view it was this inclination which naturally gave rise to contract, trade and the division of labour. His wide-ranging arguments sought to show how the individual’s self-interested pursuit of optimum gain and happiness was both regulated by, and harnessed to, the general good, by the economist’s law of demand and supply. His thesis was that by trading with others individuals not only got what they wanted but gave others what they desired. The magical ingredient converting individual acquisitiveness into universal good was labelled the ‘invisible hand’ by Smith. In his view, the individual neither intends to promote the public interest, nor knows how much they are promoting it. Instead, they intend only their own gain.


As a result of these theories, Smith advocated minimum regulation of the economy, and therefore of contracts, by the state. However, he did see it as a prime function of the law to uphold and enforce contracts made by freely consenting adults. He stressed that promises were not binding as a consequence of some inherent quality but rather because of the expectations they created in the market and which should not be disappointed. So, for instance, a builder might make a contract with a railway owner to build a row of houses for his employees close to the train station. Unable to do all the work himself, the builder enters into a contract of employment with a bricklayer and a carpenter. They in turn make contracts to buy bricks and timber. Unable to supply the carpenter instantly with the particular type of wood they need, the timber orders some from a forrester in Scotland. It very soon becomes clear that each contract is part of a network of commercial relationships which rely on each other. When the courts intervene to protect contracts, they lend a certain amount of certainty to an otherwise unpredictable market. In The Concept of Law (1961), Hart argued that



where altruism is not unlimited, a standing procedure providing for such self-binding operations is required in order to create a minimum form of confidence in the future behaviour of others, and to ensure the predictability necessary for cooperation.


A number of commentators have shown an interest in why the individual came to play such an important role in the philosophical works of this era. Maine (Cocks, 2004) attempted to explain the reasons for this shift in his work on the movement of progressive societies from status to contract. In this he distinguished two theoretical ‘ideal’ types of society. The first was essentially a pre-industrial society in which power and relationships were based on the status you ‘enjoyed’. These included kinship, marriage, neighbourhood and other close, continuing relationships. In such societies individuals were limited in what they could chose to do by the role they played. So, for instance, a tenant farmer might have unavoidable obligations to the local Lord imposed on him. The second type of society identified by Maine was one in which the individual becomes the central figure and their associations are predominantly motivated by reason and economic gain rather than association. Drawing on these ideas, Tönnies (2003) talked of a similar drift from social union to an essential ‘separation’ of individuals in an industrial society. For him, the latter was merely an artificial construction of an aggregate of human beings in which rationality and calculation were the lynchpins.


The proliferation of the rational, impersonal relationship in the economic models of the eighteenth and nineteenth century was also examined by Weber (1992) who also drew a distinction between what he called ‘status’ and ‘purposive’ contracts. The first ‘more primitive’ type involved the creation of continuing ‘total’ social and legal relationships, such as those between husband and wife, or landowner and serf. By way of contrast, the archetypal purposive contract was ‘the money contract’. In his terms this was specific, quantitatively delimited, qualityless, abstract, economically conditioned and usually achieved some specific, generally economic, performance or result. In his view, what distinguishes such contractual relationships from status relationships is the fact that the reciprocal rights and obligations are limited to those specified in the contract. The purposive market exchange contract created only a tenuous and temporary association while the exchange takes place. Because these impersonal associations were incapable of inspiring the high trust of the kind seen in status contracts, Weber (1992) argued that it was necessary to establish a legal machinery, which, while not raising levels of trust, did at least provide a greater required measure of economic certainty.




THE RELATIONSHIP BETWEEN THE COURTS AND THE MARKET


The perceived role of the courts in this scheme of things can be summed up by reference to the words of Sir George Jessel:



… if there is one thing which more than another public policy requires it is that [people] 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. Therefore you have this paramount public policy to consider – that you are not lightly to interfere with this freedom of contract.


It is significant that, in the early part of the nineteenth century, the judiciary shifted its thinking towards recognition of both executed and executory contracts. In contrast to the executed contract in which exchange is immediate, executory contracts involve the exchange of promises about future conduct. The importance of the courts’ recognition of executory contracts was that it allowed the business community to plan ahead. So, for example, if Sunil knows that he can rely on the courts to enforce Linda’s promise to pay him £20,000 for 500 mobile phones from last year’s stock, he can enter into negotiations with manufacturers of this year’s latest mobile phones to supply him with 200 phones for his showroom, confident that he will have funds to pay for the consignment. Moreover, now that the manufacturer has a firm order, it can enter into discussions with different suppliers about the purchase of parts. And so the contract chain goes on without any material object having yet changed hands. In this example, the parties are able to enjoy the confidence and predictability that Hart (1961) talks about. With clear recognition that promises bind future performance, contract showed obvious potential to aid complex planning and risk allocation.


Two further developments in contract law, following fuller recognition of the executory contract, must be mentioned. It has long been accepted by the judiciary that an action for breach of an executory contract can be brought if one of the promisors fails to do what they promised to do. In other words, a party liable on an executory contract is liable not for what they have done but for what they have not yet done. As Professor Atiyah’s (1979) has explained each contractor must be liable because of his intention, his will, his promise. At the same time, in the early nineteenth century, wide acceptance of the idea of liability based on promises allowed a general theory of contract law to emerge which distinguished it from other areas of law. Academics and judges began to use the idea of promise and freely given consent as the basis of contract law, and contract was no longer merely regarded as an adjunct of the law of property.


The vision of contractual relations which emerged at this time has come to be known as the ‘classical’ model and we shall use this shorthand throughout the book for the theory of obligations explained above. The approach was clearly designed to serve a free market or laissez-faire economy and to act as a framework within which the free play of competitive forces could operate. As we proceed to examine substantive elements of contract law in this book, we will time and again be reminded of the legacy of nineteenth-century thinking and its continuing impact on the law today. For this reason the key features of the ‘classical’ model as it emerged from around 1800 onwards are summarised in Box 3.1.