NYLS Journal of International and Comparative Law Volume 18 Number 2 Volume 18, Number 2, 1999 Article 1 1999 FROM "SANCTITY" TO "FAIRNESS": AN UNEASY TRANSITION IN THE LAW OF CONTRACTS? K.M. Sharma Follow this and additional works at: https://digitalcommons.nyls.edu/ journal_of_international_and_comparative_law Part of the Law Commons Recommended Citation Sharma, K.M. (1999) "FROM "SANCTITY" TO "FAIRNESS": AN UNEASY TRANSITION IN THE LAW OF CONTRACTS?," NYLS Journal of International and Comparative Law: Vol. 18 : No. 2 , Article 1. Available at: https://digitalcommons.nyls.edu/journal_of_international_and_comparative_law/vol18/iss2/ 1 This Article is brought to you for free and open access by DigitalCommons@NYLS. It has been accepted for inclusion in NYLS Journal of International and Comparative Law by an authorized editor of DigitalCommons@NYLS. FROM "SANCTITY" TO "FAIRNESS": AN UNEASY TRANSITION IN THE LAW OF CONTRACTS?' K.M. Sharma ** 1. THE CLASSICAL LAW OF CONTRACT AND THE PARADIGM OF "FREEDOM OF CONTRACT": AN INTRODUCTION The moral force behind contract as promise is autonomy: the parties are bound to their contract because they have chosen to be.I A. Sanctity of Contract: Pacta Sunt Servanda Although contract law is one of the basic and ineludable institutions of our society' (and its domain has been incredibly vast, complex, and * This Article, though not in the nature of a conventional book review, owes much for its inspiration-and exploration of relevant themes-to the excellent study of Dr. Nagla Nassar on the subject. See note 68, infra. ** B.A., M.A., LL.B., LL.M. (Rajasthan); LL.M., S.J.D. (Harvard); Faculty of Law, University of New South Wales, Sydney, Australia. 1. CHARLES FRIED, CONTRACT AS PROMISE: A THEORY OF CONTRACTUAL OBLIGATION 57 (1981). For Fried, the basis of contractual obligation rests, first, on the impermissibility of violating another's autonomy by abusing a trust one has invited by promising and, second, on the duty to respect the autonomy of the promisor by enforcing obligations one has voluntarily assumed. Id. at 14, 16-17. An early example of such a normative approach was provided by Lord Mansfield who, "with his flair for rationalisation," consistently espoused the notion of moral obligation as the test of enforceability of promises. SIR DAVID HUGHES PARRY, THE SANCTITY OF CONTRACTS IN ENGLISH LAW 9 (1959). 2. E. Allan Farnsworth, The Past of Promise: An HistoricalIntroduction to Contract, 69 COLUM. L. REV. 576, 578-82 (1969); Melvin Aron Eisenberg, The Bargain Principle and Its Limits, 95 HARv. L. REV. 741, 741 (1982) (the "institution of contract is central to our social and legal systems, both as reality and as metaphor"); Dietrich A. Loeber, Plan and Contract Performance in Soviet Law, in LAW IN THE SOVIET SOCIETY 128-29 96 N.Y.L. SCH. J. INT'L & CoMP. L. [Vol. 18 diverse3), in recent years, it has undergone some significant changes.4 At the heart of these manifold changes has been the much-vaunted sanctity of individual autonomy in contracting, an offshoot of the liberal notion of freedom of contract, which was the ideological backbone for the (Wayne R. LaFave ed., 1965) (the attempt by the Soviet Union to administer the economy without the institution of contract failed); 1 E. ALLAN FARNSWORTH & VIKTOR P. MOZOLIN, CONTRACT LAW IN THE USSR AND THE UNITED STATES: HISTORY AND GENERAL CONCEPT 53-54, 56-86 (1987) (the unsuccessful Soviet experience of functioning without contract is fully explained). 3. As an illustration, see GRANT GILMORE, THE DEATH OF CONTRACT 1 (Ronald K.L. Collins ed., 2d ed. 1995), which advanced the provocative view that "contract ...is dead" and created a storm of controversy and inspired a large volume of scholarship questioning the historical, analytical and philosophical bases of the rise and fall of classical contract law. For a sampling of these, see, e.g., Richard Danzig, The Death of Contract and the Life of the Profession: Observations on the Intellectual State of Legal Academia, 29 STAN. L. REV. 1125 (1977); Gary L. Milhollin, More on the Death of Contract, 24 CATH. U. L. REV. 29 (1974) (book review); Richard E. Speidel, An Essay on the Reported Death and Continued Vitality of Contract, 27 STAN. L. REV. 1161 (1975) (book review); James R. Gordley, Book Review, 89 HARV. L. REV. 452 (1975); Morton J.Horwitz, Book Review, 42 U. CHI. L. REV. 787 (1975); Arthur T. von Mehren, Book Review, 75 COLUM. L. REV. 1404 (1975); Anthony J.Waters, Book Review, 36 MD. L. REv. 270 (1976). But see Kerry L. Macintosh, Gilmore Spoke Too Soon: ContractRises from the Ashes of the Bad Faith Tort, 27 LoY. L.A. L. REV. 483 (1994) (discussing the decline of the cause of action for tortious breach of the implied covenant of "good faith and fair dealing" in contracts); Ellen A. Peters, Grant Gilmore and the Illusion of Certainty, 92 YALE L.J. 8 (1982) (speech given at the Yale Law School memorial service for Gilmore). The various contributions in Symposium, Reconsidering Grant Gilmore's The Death of Contract, 90 Nw. U. L. REV. 1 (1995), evinces that scholarly discussion continues apace and reveals the critical importance of the concept of contract in society. For further bibliographical references, see GILMORE, supra, at 167-69, added by the editor of the second edition, Professor Ronald K.L. Collins. 4. Contract law is rapidly changing. In particular, the enactment of the Uniform Commercial Code (U.C.C.) by forty-nine states in America, plus the District of Columbia, the Virgin Islands, and Louisiana (partly) has caused a major change of approach in some of the fundamental doctrines. Because much of the law of contract was also commercial law, the U.C.C. has become an important distillation of contract law. 1 JAMES J.WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE 5-6 (4th ed. 1995). As an example, the term "contract," is in essence defined by the U.C.C. as "the total legal obligation" created by a bargain. U.C.C. §§ 1-201(11), 1-201(3) (1997). Section 1- 201(11), read in conjunction with section 1-201 (3), has a somewhat different meaning than it has in transactions not governed by the Code, since the term "bargain" as used in legal parlance includes transactions in which no promise is made, such as the immediate sale of property without warranty in exchange for cash. See RESTATEMENT (SECOND) OF CONTRACTS § 3 reporter's note (1979). Moreover, U.C.C. § 2-106(1)(1997) specifically includes sale of goods within the term "contracts." 1999] FROM "SANCTITY" TO "FAIRNESS" development of the law of contract.' Enshrined in the Biblical injunction of motzeh sfassecha tishmor or "thou shall keep thy word, "6 and in the age-old Roman adage of pacta sunt servanda ex fide bona,7 the modern concept of "freedom of contract" maintains significant roots within the lexicon of contract law, and signifies that parties to an agreement have the right and power (autonomy) to construct their own bargains8 and insist upon their 5. A step-by-step evolution of the law of contracts is beyond the scope of this paper, except to note that as England evolved from a relatively primitive backwater to a commercial center with a capitalistic ethic, the law changed with it. See generally Frederick Pollock, Contracts in Early English Law, 6 HARV. L. REV. 389 (1893); A.W. B. SIMPSON, A HISTORY OF THE COMMON LAW OF CONTRACT: THE RISE OF THE ACTION OF ASSUMPSIT (1975); P.S. ATIYAH, THE RISE AND FALL OF FREEDOM OF CONTRACT (1979). 6. Numbers 30: 2 (King James). When a man makes an oath to obligate himself by a pledge, he must not break his word but must do everything he said he would. Id. Cf. Matthew 5: 33-37 (King James) and James 1:19-25 (King James). 7. "An abbreviated form of the rule stated in Justinian's Code 2, 3, 29 [is] an expression of the principle that undertakings and contracts must be observed and implemented." DAVID M. WALKER, THE OXFORD COMPANION TO LAW 912 (1980). For an English translation of Codex Justinianus (Code of Justinian) 2, 3, 29, see S.P. SCOTT, THE CIVIL LAW 173-74 (1932). For a historical overview, see Hans Wehberg, Pacta Sunt Servanda, 53 AM. J. INT'L L. 775 (1959); Richard Hyland, Pacta Sunt Servanda: A Meditation, 34 VA. J. INT'L L. 405 (1994). 8. Indeed, the ideology of "freedom of contract" became a rallying cry among philosophers and politicians during the eighteenth and nineteenth centuries. See Samuel Williston, Freedom of Contract, 6 CORNELL L.Q. 365, 373-74 (1921); P.S. ATIYAH, AN INTRODUCTION TO THE LAW OF CONTRACT 8 (5th ed. 1995). "[T]he shibboleths 'freedom of contract' and 'sanctity of contract' became the foundations on which the whole law of contract was built.... [Jiudges ...thought that it was just to enforce contractual duties strictly according to the letter." Id. Even today some theorists would strongly require courts to refrain from tampering with the terms of the parties' bargains. See, e.g., MILTON FRIEDMAN, CAPITALISM AND FREEDOM 13-14 (1982), but the modern views of freedom of contract recognize that the concept of "freedom" has limitations. W. DAVID SLAWSON, BINDING PROMISES: THE LATE 20TH-CENTURY REFORMATION OF CONTRACT LAW 15-16 (1996). The limitations in the form of certain rules of evidence (for example, the Statute of Frauds and parol evidence mechanism) or certain substantive rules of law (for example, contractual capacity and unconscionability) are, however, to be contrasted with limitations, the sole justification of which is the protection of the individual's own welfare.