The Will Theory of Contract

Contract law was the most potent set of rules by which participants in the marketplace ordered their economic relationships. Before the Revolution, contract scarcely existed. Colonialists treated bargained-for agreements as an aspect of property law, and they used it to transfer title to goods rather than to guarantee future performance. They also followed a theory of "sound" or "just" price that required judges and juries to

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evaluate an agreement on the basis of its terms and consequences. The just-price theory of contract embodied standards of fairness and equality that offered protection against overreaching by social superiors against their inferiors.

The "will theory" of contract that emerged after the Revolution fitted with republican rhetoric about the popular basis of law and the privatization of economic decision making. It assumed, incorrectly, an important degree of social and economic equality. Modern contract law was "thus born staunchly proclaiming that all men are equal because all measures of inequality are illusory." ⁴⁷

The "will theory" of contract was a body of rules, not for transferring property (although it continued in many instances to play that role), but for enforcing agreements in a marketplace of fungible goods. What counted was that the wills, or minds, of two independent and free individuals had met and that they had settled between themselves on the terms of the bargain. The equitable character of their agreement was not for the courts to consider; judges had only to establish that the agreement had been made.

Judges, lawyers, and legal writers all participated in the transformation of the law of contract. No other area produced such a robust legal literature. Daniel Chipman, Nathan Dane, Joseph Story, and Guilian Verplanck published major treatises on the law of contract before the Civil War. The capstone of this literature appeared in 1844 when William Wetmore Story, the son of Justice Joseph Story, published A Treatise on the Law of Contracts. "Every contract," the younger Story wrote, "is founded upon the mutual agreement of the parties."⁴⁸

Three features of the new contract theory had important implications for the economy. First, it stressed the significance of expectation damages in the context of national markets. Expectation damages are based on what cash return the plaintiff anticipated if the bargain had been completed. So long as merchants dealt in specific goods, a suit for specific performance or full restitution of the amount entered into the bargain met business needs. But by the early nineteenth century, agreements turned increasingly on the realization of a future return, the value of which would be dictated by the marketplace.

Sands v. Taylor ( 1810), a New York Supreme Court case, was among the first to award expectation damages. A buyer, after accepting part of a shipment of wheat, refused to accept the rest. The seller, worrying that the remaining grain would rot, decided to sell it on the open market, doing so at a price lower than the original buyer had agreed to. The seller sued based on the difference between the original contract price and the price he had realized in the open market. Obviously, both parties had speculated on the future price of grain, and the buyer had backed out when he realized that he could get a better price on the open market.

A second economic implication was that an objective approach to contract theory made interpretation a matter of law rather than fact, sharpening the division of labor between judge and jury. Objectivity meant that judges ensured that agreements adhered to the usages of the marketplace rather than strictly considering equality of price. The question of whether a contract existed was for the judge and not the jury to decide. Furthermore, a judge was to instruct jurors about the range of possible damage awards based on his assessment of the value of the agreement in the marketplace.

Theory and practice never blended fully in antebellum contract law. The idea that judges objectively analyzed contracts was illusory, because they continued to examine

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the terms of the contract. They had ample opportunity to infuse their beliefs into the law. But the nature of judicial inquiry was different from that undertaken in the colonial era.

A third impact of the new contract theory on the economy was its revision of the doctrine of consideration. Consideration is that element in a contract that shows through the exchange of something of worth that a meeting of the minds has taken place. Under the sound-price doctrine of the eighteenth century, with its emphasis on the exchange of title to goods, consideration had to be adequate for the bargain to be made. In the nineteenth century, with the rise of an active futures market, goods themselves were not necessarily exchanged. The issue facing judges was not the value of the consideration (it could be a dollar), but whether it had actually been transmitted. If so, the judge (and hence the jury) had no reason to inquire further about the equality underlying the agreement. Courts were to leave the parties to themselves.

Date: 2015-01-29; view: 910