Regulating Contracts, Strictly Speaking

In a new paper, I integrate two ambitions: defending a strict concept of contract regulation and highlighting its justifications and proper limitations. 

The concept of regulating contracts implies imposing an external constraint on contract law. In a liberal polity – one that respects people’s right to freedom of contract – regulating contract is legitimate only if justification for this proposed constraint is sufficiently weighty. It must be necessary and not overly burdensome.But to meet this threshold, the constraint must indeed be external to the idea of contract, that is, it must be external to what contract is, should be, and must do. Familiar constraints, such as anti-discrimination norms, need not meet this test because they are internal to contract. They do not regulate contract.

Against the Conventional

Consider the conventional understanding of contract regulations as the body of rules that restrict the scope of party commitments enforced by contract law or that prescribe specific requirements for their enforceability. On this familiar view, the content of a contractual obligation is a matter for the parties, not the law, so that freedom of contract is not about autonomy – it is not part of people’s (positive) right to self-determination – but is an aspect of people’s negative liberty. Therefore, any rule that goes beyond or against the parties’ intentions and expectations is an intervention that violates freedom of contract.Whenever the law adds, qualifies, or refuses to enforce any aspect of the parties’ voluntary agreements, it impinges upon the right to freedom of contract.

This view relies on a strictly voluntaristic conception of contract, under which the parties create all contractual norms, explicitly or implicitly. But this implies modern contract law thoroughly infringes on freedom of contract because so much of it is typified by a robust layer of mandatory and default rules that are not credibly rooted in the contracting parties’ wills or intentions. The problem is not with contract law, but with the strictly voluntaristic vision that is both conceptually misguided and normatively disagreeable. 

Once we discard the strictly voluntaristic conception, we must also renounce the concomitant idea that every addition to, qualification of, or refusal to enforce, any aspect of party agreements is deemed, by definition, external to contract. 

Liberal Contract Theory

To start afresh, I rely on liberal contract theory, a normative and conceptual framework for contract in a liberal polity. This is an ongoing project I’ve been developing with Michael Heller for almost a decade. The book we are writing now – Freedom of Contract – expands on our book, The Choice Theory of Contract (2017) (Cambridge, Amazon, SSRN), along with more than two dozen subsequent articles we’ve written together, separately, and with multiple co-authors. A current draft of Part 1 of the book – Liberal Contract Theory – is available on SSRN.

The starting point of liberal contract theory is that contract is rightly treated as a vital feature of liberal law because its core mission lies in its service to planning. Plans are essential for autonomy – for people’s most fundamental right to write and (at times) re-write the story of their lives. Having a set of plans arranged in a temporal sequence is key to carrying out higher-order projects, that is, to self-determination. Some plans are self-regarding, but it is hard to imagine human life without plans that involve others. The secure interpersonal commitments we call contracts dramatically augment the available repertoire of plans from which self-determining people can choose.

Thinking about contract in these terms implies that contract is best conceptualized, not as a transfer, exchange, or reassignment of rights, but rather as a voluntary undertaking of a joint plan. By ensuring the reliability of contractual promises for future performance, law enables people to join forces in service of their respective goals, purposes, and projects – both material and social. An enforceable agreement is the parties’ script for this co-operative endeavor. Contract law provides parties with the indispensable infrastructure that both facilitates this venture and ensures its integrity. 

This means that the social practice of contract is distinctive. Unlike social practices that serve collective values like efficiency or distributive justice, the intrinsic value of contract lies in its service to individual autonomy. This distinctive empowering function of contract, so crucial for people’s self-authorship, is the ultimate justification for recruiting law’s authority and coercive power to enforce contracts even before promisees have been harmed. The modest affirmative interpersonal obligations and burdens contract law imposes are legitimate given people’s right that others, with whom they interact, respect their self-determination.

These propositions suggest that commitment to people’s autonomy also serves as contract’s telos and thus guides both its animating principles and substantive doctrines. This means that, even absent any external public concerns, contract law cannot be strictly voluntaristic. It must enhance at all times autonomy. We identify the three primary principles – addressing range, limit, and floor – through which contract law meets this obligation:

(1) Law must proactively facilitate the availability and viability of multiple contract types in each sphere of human endeavor; 

(2) It must respect the autonomy of a party’s future self, that is, it must take seriously the ability to re-write the story of one’s life; and, 

(3) It must comply with the demands of relational justice to justify coercive state enforcement of any contract.

Thus, freedom of contract, correctly understood, is the right to tailor a joint plan within the boundaries sanctioned by an autonomy-based contract law. This means that freedom of contract is intrinsically bounded by liberal contract’s inner commitments to the autonomy of the parties’ future selves and to relational justice.

What Regulates Liberal Contract?

These conceptual reflections regarding the ins and the outs of liberal contract may sound wholly theoretical, but they are not. Quite the contrary: they entail quite practical implications because rules that only secure liberal contract’s boundaries and those that serve purposes extrinsic to contract invite different analyses and thus different legal treatment.

Liberal contract theory rejects enforcement of contracts that cross the boundaries noted above. Safeguarding just relationships between parties (including their agreements’ intended beneficiaries) and ensuring autonomy of parties’ future selves are not regulatory intervention in freedom of contract. Rather they are necessary means for securing contract’s integrity by vindicating its own internal animating principles. A genuinely liberal law should vigilantly ensure that only agreements that comply with these requirements can recruit its authority and coercive power.

Consider in this context rules limiting discriminatory practices of employers, landlords, or sellers. On the strictly voluntaristic view, these rules impinge freedom of contract and should thus be narrowly interpreted and applied, if they are valid at all. But properly conceptualized, these rules are best understood as advancing contract’s autonomy-based principles. They force contract law to live up to its implicit ideals. This is because rejecting would-be buyers or renters merely because of skin colour, for example, fails to respect them and thus violates liberal contract’s requirement of relational justice. Liberal contract law cannot authorize social relationships that defy the parties’ equal standing and autonomy. Thus, anti-discrimination norms are internal to contract, irrespective of the contingent coverage of statutory and regulatory anti-discrimination instruments. In other words, anti-discrimination norms are not an example of regulating contracts.

Contract never operates in a vacuum, however. At times, the parties’ joint plans may comply perfectly with contract’s internal boundaries, but may also detrimentally affect others’ legitimate interests, either particular others or the public as a whole. When legislators, regulators, or judges address these concerns, which are external to liberal contract, then they are indeed intervening in the parties’ practice of contract. In other words, in these cases they are, strictly speaking, regulating contracts. These, but only these, categories of cases are properly subject to a higher threshold for legitimate intervention.

Hanoch Dagan is Elizabeth J. Boalt Distinguished Professor of Law & Founding Director, Berkeley Center for Private Law Theory, University of California, Berkeley, School of Law. 

The author's paper can be found here.