Contracts Small and Contract Large: Contract Law through the Lens of Laissez-Faire

RICHARD A. EPSTEIN

I A Fallen Theory!

Laissez-faire capitalism, along with its associated doctrine of freedom of contract, had many stalwart defenders during the nineteenth century. But it has received a rocky reception from many legal and philosophical commentators in the twentieth century. Freedom of contract has often been pronounced "dead on arrival" as an organizing principle for complex contemporary societies. That principle has been said to be insensitive to differences in wealth, status, position, and power that make the exercise of contractual choice a myth for the weak and dispossessed. Within the legal literature, it has been attacked as ignoring the large concentrations of wealth that distort market processes and that trample down the rights of consumers and workers. Modern writers often rejoice in pointing out the intellectual narrowness and class bias of the leading judicial defenders of the principle, of whom Baron Bramwell was surely one.

This sustained attack on laissez-faire political theory has taken place on two levels. The most obvious level addresses grand themes of industrial capitalism and political discontent. These challenges to laissez-faire found their most vivid expression in several contexts: the role of assumption of risk in torts cases, the role of contract and combination in labor cases, antitrust cases, and the requirements of constitutional rates of return for public utilities and other regulated industries. But a second level of concern has also exerted a surprising influence, especially in legal circles. Here freedom of contract has been criticized not only for its social consequences but also, doctrinally and internally, for its unsatisfactory and confused conceptual foundations. Four of the most influential legal critiques of laissez-faire theories have bored at the system from within instead of assaulting it from without. I speak here of Friedrich Kessler's early critique of "Contracts of Adhesion"; Grant Gilmore's highly influential set of lectures, The Death of Contract-, Lawrence Friedman's Contract Law in America-, and Patrick Atiyah's massive study of contract theory, The Rise and Fall of Freedom of Contract.

In these writings the emphasis shifts from contract large to contracts small. Although these authors advert to the major social themes that surround the debate over laissez-faire, they focus on contract doctrines, such as the rules relating to offer and acceptance or consideration, which at first blush are the stuff of lawyer's law, and not the stuff of political controversy and intellectual unrest. They find that the nineteenth-century synthesis of contract law contains errors, confusions, and equivocations that undercut its intellectual vitality. In one sense, these writers have picked odd doctrinal targets for their work, but the influence of their writing calls for a more sustained examination of their position.

This essay therefore has two central objectives. The first of these is to show that the disputes found in classical contract law, and indeed today, operate for the most part at the fringes of any functioning legal system. No system has to be perfect to survive, and the perceived defects of the nineteenth-century legal regime can be fixed without any major changes to its overall structure. This essay's second objective dovetails with the first. It is to establish the internal coherence of the classical system in order to explain why it does withstand the doctrinal and political attacks launched against it.

This essay seeks to discharge these missions by using both a top-down and a bottom-up approach. The bottom-up approach is the worm's-eye view of contracts law that examines such issues as offer and acceptance, consideration, and conditions. The plural "contracts" is used to stress the diversity of doctrinal and technical issues that are incorporated into this overall mosaic. The top-down approach, contract large, uses the singular. It examines the social and intellectual linkages between contract law, writ large, and laissez-faire. The specific doctrines of contract law, which form the core of standard treatises and casebooks, do not bear any simple relationship to the principles of laissez-faire. Much of contract law is compatible with extensive systems of social regulation, both foolish and wise. Accordingly, the efforts of modern writers hostile to laissez-faire—Kessler, Gilmore, Friedman, and Atiyah—falsely posit an intimate connection between the formal doctrines of contract, derogated under the name of formalism, and the political philosophy of laissez-faire. But they cannot bring down laissez-faire by pointing out the perceived inadequacies and rigidities of the nineteenth-century doctrines of offer and acceptance, or consideration. Nor do the twentieth-century doctrinal developments in these areas presage the inevitable rejection of laissez-faire. Indeed, some developments, such as the explicit articulation of the principle of promissory estoppel, are more consistent with freedom of contract than with its rejection.

The received wisdom on this relationship is often otherwise. Friedrich Kessler's influential critique of the contract of adhesion dwelled at great length on the perceived mischief the rules of offer and acceptance generated in insurance contracts. Kessler deplored the outcome when individual insureds were denied coverage because their policies had not been approved by the home office. Yet he never once asked about the centrality of this issue to the overall scheme of insurance regulation or addressed the principled defenses of the earlier rules. Similarly, Grant Gilmore thought that the survival of the larger principle of laissez-faire stood or...