Contracts in the Real World: Stories of Popular Contracts and Why They Matter

Guest Author: By Lawrence A. Cunningham

Many people think that promises must be kept, come hell or high water. They say promises are sacred and suppose that judges force people to perform them—as if Portia might have ordered Antonio’s pound of flesh paid to Shylock in “The Merchant of Venice.” Many believe judges punish those who breach promises. Some think that a valid contract must be signed, sealed, and delivered—as in the title of Stevie Wonder’s popular song. Hourly workers think companies can only fire them for “just cause.” All these beliefs are mistaken.

These examples of mistaken beliefs reveal that a huge gap separates people’s beliefs about contracts from the reality of contracts. The gap entices visionaries to recommend changes to contract law. Moralists see in promise-making a higher order of behavior that is sacrosanct and prescribe that promises should be kept. Economists think promise-making can be measured solely in utilitarian terms. So they dictate choosing among alternative actions, such as performing a promise or breaching it, by comparing costs and benefits. Some on the political left suspect that contract law privileges the rich against the poor and the powerful over the weak. They urge a more egalitarian revision. Their foes on the political right declare that contract law is too paternalistic and yearn to oust normative law from the market altogether.

These positions are alluring. Approaching the world with a measuring device like a utility function, and hunting for the efficient solution, offers the satisfaction of a definite course of action. Taking a contextual approach to problems and appreciating the plight of others brings the satisfaction of empathy. Despite allure, the settled doctrines of contract law have long served our widely-accepted social and business goals. This body of ideas holds a sensible center against both extreme political positions and misguided populist intuitions.

            True, the substance of contract law expresses a political philosophy. In a capitalist society, contracts and contract law are essential. Where people are free to own and exchange property, contracts and contract law establish ownership and facilitate commerce. “Freedom of contract” describes an approach of deference to private autonomy and individualism. It means courts have a limited, though crucial role: to decide whether contractual liability exists and order appropriate remedies for breach. Freedom of contract can be a wonderful way to unleash creative energies and expand productive capacity and well-being. Yet this contractual freedom is neither unchecked nor unbridled. Government regulation provides some social control over individuals by curtailing licentious pursuits of self-interest. Governmental regulation aims to protect people from the unscrupulous who would take advantage of contract law’s freedom. “Freedom from contract” provides a way to limit such exploitation. This gives courts a broader role. They decide not only questions of liability and remedy, but police against objectionable bargains. While there can be conflicts between private autonomy and state regulation, in contract law, there is remarkable harmony between the two: you can bargain for anything you want—almost. But that does not stop people from advocating that contract law should move towards the extremes.

            Devotees of pure capitalism, on the right, campaign for uncompromising devotion to freedom of contract, and resist state regulation that limits individual autonomy or contractual possibilities in any way. Opponents of rampant capitalism, on the left, vigorously object to such rugged individualism, pushing for substantial social control, and stressing freedom from contract. They exhort judges to review bargains for fairness or impress standards of behavior on people even if they did not agree to accept them.

            Contract law in the United States reflects neither extreme. U.S. citizens may be conservative or liberal, Republican or Democrat, even libertarian or socialist. But the country, as a whole, is none of those things and neither is its contract law. The country’s practices are capitalist and democratic, capacious notions stressing both entrepreneurship and responsibility. The nation’s contract law gives enormous but not unlimited space for freedom of contract. Of course, contract law is dynamic, adapting as society and the economy change. And the philosophies of particular judges in individual cases affect their analysis and sometimes the resolution of a dispute. But contract law’s evolution and its application by particular judges has vacillated within stable, practical boundaries.

For example, at one end stands classical contract’s relative strictness, limiting the scope of contractual obligation, and this is accompanied by an equivalent strictness of enforcement: if a contract is hard to get into, it is also hard to get out of. People could be bound to contracts that were made based on mutually mistaken assumptions or even where performance became impossible. At the other end the ambit of contractual obligation is broader and so are grounds for excusing it, like mutual mistake about the terms of a trade, or impossibility of performance, such as a power outage in a rented banquet hall. Similarly, classical contract law venerated written records, limiting the scope of obligation to what was plainly meant within a document’s four corners. The realists were more willing to consider evidence supplementing these written expressions.

Unbounded is the range of subjects contracts involve, which is as large as life. Contract law addresses all exchange transactions and the universe of promises. Given such a sprawling enterprise, expect to find occasional tensions or contradictions between cases or within doctrines, or variation among states. Despite such findings, however, which tend to be clearest at microscopic levels of inspection, contract law shows a surprising degree of coherence across settings and geography.

            Many have tried to provide a grand theory of contract law, but it is unsurprising that contract law’s vastness defies tidy explanation using any single account. True, much of contract law is based on promises, but not all promises are recognized as legally binding; much of contract law probes whether people have consented to some exchange, but it is likewise true that not every consented deal is valid and liability can attach though consent is not obvious. It is particularly difficult to explain everything about contract law in terms of protecting people when they rely on others or determining which arrangements are the most economically efficient, though both reliance and efficiency are often relevant. If pressed, the best way to account for the vast run of contract law doctrine is pragmatism—a search for what is useful to facilitate exchange transactions people should be free to pursue.

            Famous books have been published that consciously demonstrate not contract law’s coherence, but its tensions, contradictions, and the dissolution of revered categories, including the venerable distinction between torts and contracts.  Other approaches include the “law in action” movement, which insists that, in contracting, business reality is more important than the law. Proponents joined critics of the “case method” to debunk the practice of learning contracts from common law opinions, saying that was akin to learning zoology by focusing on unicorns and dodos. Though influential, these tidings did not transform the field, which is still readily learned by the reading of opinions in individual cases and stitching them together into a tapestry of knowledge.

            The great majority of deals are made and completed without giving contracts or contract law the slightest thought. Only a tiny fraction trigger disputes of the kind these stories tell. Much as we breathe without thinking about the indispensability of oxygen, however, those invisible qualities of contract law enable doing deals without conscious thought of the subject. Keeping it that way means that people should know enough to discuss stories of contracts in the news intelligently, check those advocating extreme changes, and appreciate how principles germinated many generations ago remain vital to resolve ongoing challenges.

Bio: Lawrence Cunningham is the Henry St. George Tucker III Research Professor at George Washington University Law School and Director of GW’s Center for Law, Economics and Finance (C-LEAF) in New York. He is the author of numerous books including, The Essays of Warren Buffett and The AIG Story. His research appears in leading university journals, including those published by Columbia, Cornell, Harvard, Michigan, Vanderbilt and Virginia; op-eds have run in newspapers such as the New York Times and the Financial Times.

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