Contract

The idea of contract is significant throughout much of American history and retains considerable vitality today. A contract is a voluntary agreement between two or more persons to exchange goods or services, thereby creating legally enforceable rights and obligations. A contract is distinct from a gratuitous promise because the creation of a valid contract requires that the parties give consideration—a quid pro quo in money, goods, or services—in exchange for the anticipated benefits. Consent and reciprocity are at the heart of contracts. People enjoy wide latitude to enter contracts, and private agreements are generally deemed valid. There are, of course, some limits on the freedom of contract. For example, certain bargains, such as an agreement to commit murder, have been declared illegal by courts or legislators. Moreover, some persons, such as minors and mentally incompetent individuals, are deemed incapable of making binding agreements. Nonetheless, the freedom to enter contracts was crucial to the classical political economy espoused by economist-philosopher Adam Smith ( 1723–90 ).

THE EMERGENCE OF CONTRACTS

In eighteenth-century America a growing commitment to a market economy eclipsed the older mercantilist, statedirected regime as the prevailing paradigm in the political culture. Wage controls and price regulations steadily withered, replaced by market bargaining. The transformation of land law was especially dramatic. Medieval land law was characterized by fixed rules that left little space for voluntary transfers. By the eighteenth century, however, transfers of land, including leases, were governed by contracts. Indeed, the law of contracts embraced virtually all economic transactions. As the reach of contracts expanded, these documents assumed a vital role in society. As markets grew larger and more impersonal, bargains were increasingly governed by written agreements. American law generally left private parties free to promote their own interests through contracts. A cardinal principle of contract law was that the courts, absent unusual circumstances such as fraud or duress, were simply to enforce bargains made by private parties. Courts were not to review the substantive terms of contracts but to hold the parties to their agreement. Parties were expected to look out for their own interests and assess the wisdom of transactions. Hence courts did not inquire into the adequacy of consideration or rewrite contracts to impose terms different from those to which the parties had agreed. The underlying premise behind this classical understanding of contract was the concept of will. This theory held that contracts represented a meeting of the minds of the contracting parties. What counted was that independent individuals had settled on the terms of the bargain.

CONTRACTS AND INDIVIDUAL AUTONOMY

Aside from their economic significance, the individualistic dimensions of contracts had sweeping implications for the nature of the social order. The triumph of contract represented a move away from a fixed hierarchical system in which one's place was determined by birth and status, and toward a society in which relationships were governed by agreement between individuals. No longer were individuals compelled to occupy an assigned place in society. Instead, the social order rested on a degree of personal choice, without the constraint of status or governmental coercion. With the ability to make contracts, persons could attempt to alter and improve their position in society by seeking advantageous terms. In Ancient Law ( 1864 ) the English political economist Henry Sumner Maine ( 1822–88 ) articulated this view when he famously observed that “the movement of progressive societies has hitherto been a movement from Status to Contract.” Maine expressed a widely accepted and optimistic norm that identified contracts with personal freedom and social progress. Few Americans before 1900 doubted the accuracy of Maine's thesis.

The link between contract and personal freedom was reinforced by the movement to abolish slavery. The termination of human bondage seemingly affirmed the ascendance of contract over status. Congress saw the right to make agreements as crucial for former slaves to be able to participate in the market economy. Hence the Civil Rights Act of 1866 specifically listed the right “to make and enforce contracts” among the liberties guaranteed to freed persons. Similarly, in the mid-nineteenth century, states abolished the common law disabilities that prevented married women from making contracts. This step encouraged women's full participation in the market.

NINETEENTH-CENTURY ASCENDANCY OF CONTRACT

Contract was the dominant force in American law during the nineteenth century. The concept of contract, and the allied concept of individual rights, was seen as synonymous with social improvement. In Farrington v. Tennessee, 95 U.S. 679 ( 1877 ), the United States Supreme Court tellingly observed: “Contracts mark the progress of communities in civilization and prosperity…. They are the springs of business, trade, and commerce. Without them, society could not go on” (95 U.S. at 682). Accordingly, the law encouraged private initiative in market dealings and limited governmental interference with private bargains. In a sense, contracts amounted to the legal expression of free-market principles. The right to make agreements and take responsibility for them was seen as the essence of liberty.

The belief that the range of voluntary arrangements should be maximized affected public policy. In the late nineteenth century, both state and federal courts began to constitutionalize the common law notion of freedom of contract. Given the high standing of contracting in the polity, this development was not surprising. In Allgeyer v. Louisiana, 165 U.S. 578 ( 1897 ), the Supreme Court determined that liberty, as protected by the due process clause of the Fourteenth Amendment, encompassed the right to enter contacts. The Court treated liberty of contract as the baseline and required legislators to justify any restrictions on this right. In fact, the Supreme Court never treated contractual freedom as absolute and rarely invoked the liberty of contract doctrine to invalidate legislation. Nevertheless, the doctrine attested to the special place of contracts in the polity.

SEEDS OF DECLINE

Even as the role of contract in society reached its zenith, countervailing trends began to take hold. The perceived need to control the workings of the relatively unrestrained market economy had an impact on contractual arrangements. By the start of the twentieth century, both intellectual currents and practical considerations created a climate that partially undermined the classical understanding of contracts. Scholars associated with the Progressive movement took special aim at the freedom of contract doctrine, picturing it as a barrier to heightened regulation of the economy. In short order, they launched a broad attack on the law of contracts and questioned the theory of will. They rejected the view that contracts represented voluntary arrangements between knowledgeable persons of roughly equal bargaining power and posited instead that the more powerful party was frequently in a position to effectively dictate terms. In this light they treated contracts as coercive, not voluntary or liberating. As faith in the market economy withered, so did the high standing of contracts.




A businesswoman signing a contract.





A businesswoman signing a contract.
© ANTONIODIAZ/SHUTTERSTOCK.COM

As critics charged that the traditional understanding of contracts was flawed, both courts and legislators moved to protect those individuals perceived to be vulnerable in the market. Inevitably the sanctity of contract was modified. For example, in the early twentieth century, state legislators began to closely regulate the insurance industry, and in the process overhauled insurance contracts. Labor laws governed certain terms of employment, necessarily curtailing the room for bargaining between employer and employees. The Uniform Commercial Code (UCC), now enacted in every state, superseded the common law of contracts with respect to negotiable instruments, sales of goods, and warehouse receipts. The UCC also limited the freedom of contract by providing that courts should not enforce an “unconscionable” clause in a contract, a provision that opened the door to judicial supervision of the substance of bargains. The rise of consumer protection laws placed legal burdens on the sellers of goods and further eroded the scope of contracting. Such consumer legislation rested on the paternalistic premise that individuals must be protected against bad choices. These developments led American law professor Grant Gilmore ( 1910–82 ) in The Death of Contract ( 1974 ) to dramatically, if prematurely, proclaim that the regime of contract law had come to an end. Gilmore's thesis was highly controversial, but it captured a mindset prevalent in the academy.

This change in attitudes toward contracts was reflected in constitutional developments as well as private law. During the New Deal era of the 1930s, the constitutional status of contracts was sharply diminished. The Supreme Court virtually ceased to enforce the contract clause, which shielded agreements from state abridgment. Moreover, in West Coast Hotel v. Parrish, 300 U.S. 379 ( 1937 ), the Court repudiated the liberty of contract doctrine, thus allowing lawmakers broad latitude to regulate the making of contracts. The protection of contractual rights was assigned less value than the effectuation of public policy.

PERSISTENCE OF CONTRACTING

SEE ALSO Compact and Covenant ; Contract Clause ; Freedom of Contract ; Rule of Law ; Social Contract .

BIBLIOGRAPHY

Buckley, F. H. The Fall and Rise of Freedom of Contract. Durham, NC: Duke University Press, 1999.

Ely, James W., Jr. “Economic Liberties and the Original Meaning of the Constitution.” San Diego Law Review 45, no. 3 (2008): 673–708.

Friedman, Lawrence M. Contract Law in America: A Social and Economic Case Study. Madison: University of Wisconsin Press, 1965.

Friedman, Lawrence M. American Law in the 20th Century. New Haven, CT: Yale University Press, 2002.

Gilmore, Grant. The Death of Contract. Columbus: Ohio State University Press, 1974.

Horwitz, Morton J. The Transformation of American Law, 1870–1960: The Crisis of Legal Orthodoxy. New York: Oxford University Press, 1992.

Hurst, James Willard. Law and the Conditions of Freedom in the Nineteenth-Century United States. Madison: University of Wisconsin Press, 1956.

Keller, Morton. Regulating a New Economy: Public Policy and Economic Change in America, 1900–1933. Cambridge, MA: Harvard University Press, 1990.

Maine, Henry Sumner. Ancient Law. First American ed. 1864; repr., New Brunswick, NJ: Transaction, 2002.

Scheiber, Harry N., ed. The State and Freedom of Contract. Stanford, CA: Stanford University Press, 1998.

James W. Ely Jr.
Vanderbilt University