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Contract Law: Dead or Alive?

As with the law of property, so in the law of contract, what had been largely private matters in the nineteenth century became increasingly public concerns in the era after

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World War II. The social welfare state spewed forth a stream of statutes and administrative regulations that removed some contract matters (e.g., insurance and labor employment) from the free market altogether, while antitrust laws limited other traditional commercial activities. Courts increasingly framed public policy, expressed by interpreting statutes and regulation, rather than scrutinizing and enforcing "private agreements under rules and standards formulated in the judicial process." 31 The late- nineteenth-century faith in objectivity and formalism dwindled. For example, the long- standing doctrines of caveat emptor and consideration (that which is given or done for the promise or act of another) lost authority to new concerns about fairness and efficiency in the mass-consumption society. Yale Law School Professor Grant Gilmore, after surveying the legal landscape in 1974, proclaimed "The Death of Contract" through "what might be called the process of doctrinal disintegration."32

Contract law lost its nineteenth-century position as the organizing concept in U.S. law, but reports of its death were greatly exaggerated. The principle of contract (of mutually agreed-to and enforceable private bargains) continued to sustain important social and economic relationships, with lawmakers advancing new doctrines, most notably reliance and unconscionability.

Arthur Corbin, a Harvard Law School professor, more than any other person developed the equitable concept of reliance interest. Corbin authored a major treatise on contract law, but he also served as the assistant to Samuel Williston, another Harvard professor, in preparing the first Restatement of Contracts. Corbin successfully argued that judges had historically decided some contract cases based on reliance interest. This concept returned contract to the equitable principles of the colonial era, stressing as it did that once a person relied in good faith on the actions of another a binding agreement had been formed. Section 90 of the Restatement of Contracts (second) enshrined the reliance concept, and courts repeatedly invoked it, just as Corbin suspected that they would. For example, the Wisconsin Supreme Court, in Hoffman v. Red Owl Stores ( 1965), a milestone in the development of the reliance concept, found that the repeated promises made by the agents of the Red Owl Grocery Company to provide a franchise to Hoffman had established a reliance interest, even though a contract to that effect had never been signed.

Modern courts have also invoked the doctrine of unconscionability. It means that provisions of an agreement that take advantage of another person, even though they had been agreed to as part of the contract, are not to be considered binding. Section 3-302 of the Uniform Commercial Code (UCC) spelled out the doctrine of unconscionability. Karl Llewellyn, a realist, had supervised the preparation of the UCC under the auspices of the American Law Institute during the late 1940s. Because much of the law of contract was also commercial law, the UCC became an important distillation of contract law. Llewellyn completed his work around 1950, and state legislatures gradually adopted the UCC. Today, forty-nine states, plus the District of Columbia and the Virgin Islands, have enacted the UCC, and Louisiana, whose civil law had long ago anticipated many of the practices set out by the UCC, has adopted portions of it.



Public-interest lawyers used the unconscionability provisions in the UCC to frame consumer protection appeals, especially where the poor were involved. The leading case was Williams v. Walker-Thomas Furniture Company ( 1965), decided by Judge J. Skelly Wright, the same federal judge who contributed to the reform of landlord- tenant law. A Washington, D.C. furniture store had sold goods, including a stereo, to

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Mrs. Walker, a recipient of welfare. She signed a standardized installment sales contract employed by ghetto merchants who serviced what they considered to be poor credit risks. The contract included a "cross-collateral" clause, the effect of which was to "keep a balance due on every item purchased until the balance due on all items, whenever purchased, was liquidated." 33 This provision meant that as long as the purchaser drew on an installment account with Walker-Thomas, the furniture store could repossess all the goods purchased.

Judge Wright's opinion left little doubt that he considered the agreement unconscionable. "[T]he primary concern," he found, "must be with the terms of the contract considered in light of the circumstances existing when the contract was made."34 The case was returned to the lower court, and after a new trial Mrs. Walker was released from the terms of her contract. Subsequent litigation, almost all of it in state courts, refined Judge Wright's somewhat ambiguous phrasing. To prove unconscionability, an aggrieved party had to demonstrate that there was both lack of freedom of choice and unreasonable terms.

Legislatures also passed consumer legislation requiring the full disclosure of credit terms, interest payments, potential safety and health hazards, and limiting the methods by which unpaid goods could be repossessed. These statutes, as in property law, served not just the poor, but middle-class consumers as well.

Nowhere was the problem of adapting contract law to new social circumstances more evident in the 1980s than in human reproduction and family composition. Most states, for example, banned couples from paying for adopted children, but social attitudes outraced the law. In an adoption market that required a waiting period of up to seven years, desperate infertile couples turned to surrogate mothers, hiring women to be impregnated artificially by the sperm of the husband and then to carry the child. The celebrated case of Baby M in 1987, in which a surrogate mother refused to abide by the terms of her contract to surrender the newborn, underscored the complex problems raised by the practice. A New Jersey judge ordered the surrogate mother to surrender the infant to the contracting couple in fulfillment of the contract. This emphasis on traditional contract rules stirred great furor, given the lower socioeconomic status of the surrogate mother in comparison to the parents and the deep emotional bond between the surrogate and the infant. Several state legislators bestirred themselves, proposing intricate rules to govern such contracts, but as of 1987 only Arkansas had passed legislation, providing that the child of an unmarried surrogate mother belonged to the couple who had contracted for it.

Even in the more mundane areas of human activity, the law declared by the courts consisted of only the most visible of disputes involving contracts. The growing intervention of lawmakers into consumer contracts was paralleled by the decreasing use by business interests of courts to settle contract disputes. They turned to commercial arbitration and formalized dispute settlement procedures. This behavior can be attributed, in part, to some of the better-known consequences of the litigation explosion, including a growing lack of confidence in the courts, high litigation costs, and delays in reaching settlements. Equally important, however, were considerations of business morality favoring promise keeping and the need to maintain goodwill among businesses engaged in recurring transactions.

Despite the decline in doctrinal certainty and purity, contract remained an important legal category through which Americans continued to organize themselves. The

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scope and implementation of contract law changed in response to the demands of a legal culture that placed increasing weight on equitable solutions to disputes rather than strict adherence to the idea that private parties, left to themselves, could best maximize their interests.

 

Torts and Products Liability

Modern tort law and liability insurance developed hand-in-hand. Through premiums paid by many policyholders, insurance companies spread the costs of accidents while making a profit through the shrewd investment of premiums. Profit was the reward for undertaking the socially useful yet risky task of insuring against accidents and encouraging beneficial technologies.

Late- nineteenth-century employers first used liability insurance, purchasing it to protect themselves against lawsuits brought by employees on the job. When worker's compensation dried up this market in the early twentieth century, the underwriters extended their lines of coverage in many other directions, including to automobile operators. Liability insurance by the 1940s had made tort law "public law in disguise" that provided "a remedy . . . for the everyday hurts inflicted by the multitudinous activities of our society." 35

After World War II, tort law went through dramatic changes, especially in the areas of comparative negligence, no-fault automobile insurance, strict liability in the manufacture of consumer products, and medical malpractice. In each of these areas the emphasis in tort law shifted from the nineteenth-century concern with fault and blameworthiness to the contemporary stress on compensation of injured persons.

Comparative negligence, which first appeared in the mid- nineteenth century, did not receive widespread attention until the early twentieth century, when it won support in railroad cases as a modification of the harsh doctrine of contributory negligence. Comparative negligence apportioned fault among those persons involved in the accident and provided that recompense would be based on the extent of their responsibility. Between 1908 and 1941 Congress and nine states adopted some form of comparative negligence statutes, but the movement for its adoption slowed thereafter.

During the 1970s it attained new vitality as a way of stabilizing the rising costs of liability insurance. Personal-injury lawyers supported its adoption because it offered, in the face of rising demands by consumer groups for reform, an alternative that retained the negligence system against the even worse fate of no-fault insurance. By 1987 every state, through either legislative or judicial action, had adopted some form of comparative negligence, doing so in response to the growing costs of insurance and the rising demands of consumer groups.

No-fault automobile insurance, however, gained wide acceptance in the 1970s as the social demands placed on the tort system shifted from blameworthiness to compensation. In its pure form, no-fault insurance required that claims for personal injury (and sometimes property damage) were made against the claimant's own insurance company, regardless of who was at fault. With fault abolished, the costs and delays of out- of-court settlements or trials were eliminated. The debate over no-fault insurance extended back to the early twentieth century, but not until the 1960s did it receive sustained attention as a solution to the soaring costs of liability insurance and clogged court dockets. By midcentury, highway wrecks constituted up to 40 percent of the

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cases docketed in state appellate courts. Consumer activists such as Ralph Nader, and insurance underwriters anxious to better estimate costs, lined up against personal- injury lawyers.

Massachusetts in 1970 became the first state to enact a no-fault statute. Consumer activists in the state, responding to what were then the highest premiums in the nation for automobile insurance, successfully lobbied lawmakers, but the personal-injury bar did win concessions. The modified no-fault law provided that in cases of serious personal injuries and high medical costs, victims could still bring an action for damages against the other party and his insurance company. By 1987 more than one-half of the states had adopted some form of no-fault liability. These statutes reduced the numbers of cases involving automobile accidents, but their effect on the costs of insurance were hotly disputed. Even no-fault programs absorbed vast amounts of resources, primarily in marketing policies and settling claims.

The fault principle also waned in the area of products liability. Judge Benjamin N. Cardozo, of the New York Court of Appeals, in 1916 gave the initial impetus to the field with an innovative opinion in MacPherson v. Buick Motor Co. The case involved a wheel "made of defective wood," whose spokes "crumbled into fragments" and led to serious injury for MacPherson. 36 Under prevailing doctrine, MacPherson had no basis on which to bring suit against the automobile company because he lacked "privity of contract." This term meant that in order to bring suit a person had to have dealt directly with the manufacturer, and in this instance MacPherson had purchased the car from a dealer. Cardozo, however, relied on nineteenth-century cases involving obviously ultrahazardous activities (such as preparing medicines) to hold that privity of contract did not apply to dangerous manufactured items, a. category into which he placed automobiles. Manufacturers, according to Cardozo, had to know that a third- party consumer would use their product and that they therefore had an absolute duty to make it "carefully." 37 Cardozo's opinion, however, stopped short of holding manufacturers strictly liable without fault.

The courts only gradually embraced a strict liability theory in consumer transaction cases. As late as 1955, William Prosser, the twentieth century's most distinguished writer on tort law and a champion of products liability, concluded that "the majority of courts still refuse to find any strict liability without privity of contract."38 The New Jersey Supreme Court in 1960 decided the first important case, Henningsen v. Bloomfield Motors. The judges set aside the disclaimers of a warranty to find that a consumer could sue when the steering system went awry resulting in a crash. Four years later, the New York Court of Appeals held in Goldberg v. Kollsman Instrument Corp. ( 1963) that the beneficiary of a person killed in an airplane accident could proceed against the manufacturer of the defective altimeter that had caused the accident.

The most far-reaching opinion came in 1963 from the pen of Chief Justice Roger Traynor of the California Supreme Court, perhaps the most important judge and the most important court in the creation of products liability law. In Greenman v. Yuba Power Products ( 1963), Traynor found that a person injured by a defective power tool could sue the manufacturer in strict liability. His opinion summed up the circumstances that made this new area of tort law so changeable. The purpose of strict liability in consumer products cases, Traynor concluded, was "to insure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products

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on the market rather than by injured persons who are powerless to protect themselves."39

Prosser, the author of Restatement of Torts (second), enshrined this conception of strict liability in section 402A. "[P]ublic policy demands," this section proclaimed, that "the cost of injuries due to defective products be placed on those who market them; and, such injuries are properly treated as a cost of production and insurable risks by those in the best position to seek such protection." 40 Not all legal scholars in the 1980s agreed with this view. Richard Posner, for example, complained that products liability law was economically inefficient because it contributed to inflation, and was morally unacceptable because it failed the important social test of impartially fixing blame.

Rights-conscious consumers, a decline of deference to figures of authority, and social interdependency converged during the 1970s and 1980s to subject doctors, nurses, teachers, and lawyers to greater scrutiny. In the nineteenth century and well into the twentieth century, professional malpractice cases were rare. Between 1960 and 1964, for example, there were only 60 malpractice cases brought in Cook County, Illinois, which included Chicago. Between 1975 and 1979, however, there were 142, an increase of 137 percent.

In the mid- 1970s and again in the mid-1980s, the profits of the highly cyclical insurance business were buffeted by unfavorable interest rates in the money markets and claims that exceeded premiums. Insurance companies raised premiums, creating a sense of panic and forcing some physicians in especially sensitive areas, such as obstetrics and orthopedic surgery, to hike their fees and even withdraw from practice. Doctors engaged in elaborate and often needless testing to protect themselves from the dreaded day in court, and insurance companies retaliated by requiring that patients secure second and sometimes third opinions before undergoing certain procedures. The American Medical Association and the American Bar Association took sides, and their squabbling further contributed to the decline in public respect accorded the professions. Lawmakers responded with a grab bag of statutes that limited the contingent fees charged by lawyers, placed ceilings on awards and premiums, and established special medical-malpractice insurance pools among the carriers. These measures took the tort system further out of the realm of private control and reemphasized that its principal function was to provide compensation rather than to establish blameworthiness.

No other area of law contributed more to the concept of the law explosion. Before 1900, awards in accident cases were modest, and in the early twentieth century the largest award probably was no more than $750,000 in current dollars. 41 Since then, however, the average amount awarded in tort cases has climbed steadily, often with spectacular effect. For example, the Ford Motor Company in 1983, had to pay a judgment of $10 million as a result of an accident in which the brakes on a car it had manufactured failed, resulting in horrible burns to the driver. Such awards were the exception, but they nevertheless grabbed public attention and added to the sense of a legal system out of control.

 


Date: 2015-01-29; view: 563


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