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Individualism, liberalism and contract theory

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INDIVIDUALISM, LIBERALISM
AND CONTRACT THEORY
by Henri Pallard
8 copyright Henri Pallard 1993, 1987
A.
B.
C.
D.
E.
--F.
G.
H.
I.
Introduction
Soviet system
Capitalism, individualism and liberalism
Role of society
Freedom of individuals to choose their contractual obligations
Freedom of individuals to choose the price they will pay for the contractual obligations which
they have assumed
Reasonable expectations arising from contracts
Limitations on contractual freedom
Philosophical antecedents of liberalism and individualism in the law of contracts
A.
INTRODUCTION
was based on an entirely different theory;
according to this model the contract is the means
by which society distributes the various tasks that
it wants accomplished.
The legal theory of contractual obligations is
closely linked to the economic system that is in
place; thus there are many similarities in the
contract law of capitalistic societies. At the heart of
the capitalistic law of contracts, be it French,
German, English, American, Canadian, or Italian,
one finds the fundamental notion of consent to the
obligation; consent itself is understood in terms of
offer and acceptance. The contract's chief aim is to
protect and promote the expectations created by an
exchange of obligations which were freely
assumed. However, in the former Soviet legal
systems of Eastern Europe, the notions of consent,
analyzed in terms of offer and acceptance, did not
play the same leading role because contracts had a
different economic function. In the capitalistic
world, the theory of contracts is founded on notions
of liberalism and individualism; these ideas have
strongly influenced our rules regulating the
formation of contracts. We will be focusing on
these ideas and their importance in the
development of the law of contract, but first, in
order to better understand their significance, we
will look briefly at the former Soviet model, which
B.
SOVIET SYSTEM
In the Soviet Union, as befitted a directed
economy, centralized planning dominated the
production process. The senior levels of the party
and of the state approved an economic and social
development plan for the nation. The various
government departments then determined the role
of the various state owned companies in order to
carry out the plan.
It is important to understand that before the
parties have formed any contract, an administrative
planning act has determined the obligations of each
company in the implementation of the plan. Neither
the companies nor the individuals were free to
determine whether they could engage in other
fields of endeavour which could have been more
profitable. There were two types of administrative
planning acts: they could either be very detailed
and precise, determining the products, quantities,
1
prices, delivery dates and the parties to the
contract; on the other hand, the companies named
in the administrative planning could be left free to
decide on their own the details of the contract. In
this latter case, the apparatus of the state would
intervene to impose a contract only if the parties
themselves were unable to come to an agreement.
own devices. In seeking to further their own self
interest, they will serve the common interest. If an
individual undertakes something which s/he finds
very profitable, it is because s/he has fulfilled a
need of society that was until then unmet. The
satisfaction of this newly identified need leads to
an improvement in the welfare of the community.
If an activity is unprofitable, it is because society
does not think that its fulfillment is essential at a
price which would render the activity profitable;
the price sought in these circumstances is too high.
The individual must then redirect her or his
activities into a more profitable area, that is to say,
into an area that will satisfy a need of the society at
both a price that it will be willing to pay and a price
that will make it profitable for the individual to
undertake this activity. In both cases individual
freedom has led to the greater welfare of society.
Consequently, the best that society can do is to
allow the maximum amount of economic freedom
to the individual and then the production of goods
and services will automatically adapt itself to
society's needs.
The primary function of a contract in Soviet
law was to carry out the obligations that had been
imposed on the parties as a result of the economic
plan drawn up by the government. This is why the
idea of individual freedom, of autonomy of the
will, was not part of the intellectual infrastructure
of contract law in Soviet-type legal systems. The
Soviets preferred an ideology based on a theory of
central planning and on the idea of social welfare
being determined by the principal social
institutions and not by the free competition of
individuals.
C.
CAPITALISM,
INDIVIDUALISM,
AND
LIBERALISM
On the other hand, at the heart of the ideology
which shapes the law of contracts in capitalist
countries, including Canada, one finds the ideas of
individualism and liberalism which, when applied
to the economic system, lead to the theory of
economic individualism. According to this
ideology, people, because of their human nature
and individuality, are free and have the right to
organize their lives in a manner that best suits them.
The main responsibility of government and the law
is to protect and promote the interests of
individuals. Government must intervene as little as
possible in the affairs of its citizens, but more
specifically, it must not involve itself in those
matters which are closely associated with the
economy.
An invisible hand guarantees the market
equilibrium, that is to say, it guides the operation
of markets in such a way that the price of an object
will be fixed by offer and demand. This invisible
hand transforms an individual benefit into an
improvement of the social welfare. Society's
productive activities organize themselves in such a
way that individuals produce in a roughly sufficient
quantity and at an acceptable price those goods and
services that other individuals want. One's personal
interest is thought to be a sufficiently active
principle to allow the means of production to adapt
themselves to social needs as well as to allow for a
fair distribution of goods. Individuals involved in
the exchange will not accept the exchange unless,
from their own subjective points of view, they
think that the goods exchanged have the same
utilitarian value. The same object may have a
different utilitarian value for two different
individuals. The price that different individuals
will be prepared to pay for this object will vary
from person to person. No one can determine what
the utilitarian value of an object will be for another
person. The effects which result from this
Pursuant to this theory of economic
individualism, individuals have the capacity to do
what they find the most profitable in a given
situation, and this contributes to the happiness of
society as a whole and leads to its improvement.
Individual members of a society are most
productive and useful when they are left to their
2
conscious and interested activity of individuals
leads to the greatest good for the greatest number
(society) because all individuals are free to pursue
their personal interests and to carry out their
personal projects without any social obstacles.
must be freely assumed; obligations cannot be
imposed upon individuals who have not accepted
them. The freedom of the will to accept or to refuse
an obligation is what characterizes contract law. In
other spheres of law, such as criminal law, the state
imposes obligations upon individuals; they must
abstain from doing certain things; if not, the state
will punish them. Tort law is another area where
law imposes obligations on an individual. We are
all under a duty of care to act in such a way that we
do not harm others by our negligence. However,
outside of those areas that are prescribed by law,
people are free to lead their lives as they see fit; one
cannot demand that others do or perform certain
acts, that is impose obligations upon them, unless
they have freely consented to this obligation. And
the law of contracts is this sphere of law which
regulates the formation and enforcement of those
obligations that have been freely assumed by
individuals.
Accordingly, there is a necessary link
between the mass of individual interests and the
collective interests, and it is the responsibility of
public authorities not to distort the result of the free
play of individual economic activity. Government
intervention in the economic sphere must be kept
to a strict minimum and then only to guarantee the
liberty of exchange and the security of one's own
goods.
D.
ROLE OF SOCIETY
According to the individualist's conception of
the world, society is not an entity which differs
from or is superior to the individuals which form it;
society is nothing other than the collection of these
individuals into a whole. Consequently the goal of
social institutions must be the happiness of
individuals (and not of society) and they can only
accomplish this insofar as they promote the release
of the creative energies of individuals. The
responsibility of society and of government is to
bring about those conditions which promote the
development of the capacities and initiative of
individuals because only individuals can determine
what will make them happy. Politics must aim to
develop private initiative while assuring itself that
the responsibilities and functions of the state are
kept to a strict minimum. Ultimately the state must
limit its active role to helping individuals develop
themselves by guaranteeing those liberties that
allow them to express themselves. Individualism
and liberalism thus give to the capitalist legal
system that certain minimum content that it needs
in order to be intellectually coherent.
E.
Since individuals are free to pursue those
activities which they feel will maximize their
welfare, they may assume those obligations which
they think will allow them to better their condition.
Individuals are free to order their lives as they so
choose. As free beings they choose those
obligations which will bind them. The law of
contracts assumes that because the parties to a
contract are free, they freely take on their
contractual obligations. In order for a party to
freely assume an obligation, this party must agree
to be bound by this obligation; that is to say, the
offeree must accept the obligation. Conversely, the
offeree cannot accept an offer that the offeror has
not communicated. Let us consider an example.
John offers to sell his car to Bill for $500.
John tells Bill that if Bill does not refuse this offer
within 48 hours, he will assume that Bill has agreed
to take the car and pay him $500. Given the
principle of autonomy of will, otherwise known as
individual freedom, John cannot force Bill to
accept and pay for the car unless Bill has
previously agreed to pay for it if he did not refuse
the offer within 48 hours. But in one case as in the
other the directing principle remains the same: the
party upon whom we wish to impose an obligation
FREEDOM OF INDIVIDUALS TO CHOOSE
THEIR CONTRACTUAL OBLIGATIONS
Legal individualism takes the idea of
individual freedom and applies it to the field of law.
In the contractual scheme of things, all obligations
3
must have agreed to be bound by the obligation. It
follows that a third party, Norman, cannot accept
Bill's offer and purchase the car for $500. This offer
was made to Bill; the only obligation that John has
chosen to assume is to sell his car to Bill if Bill
agrees to buy it. Norman cannot oblige John to sell
him his car. Human freedom presupposes that one
is bound only by those obligations to which one has
freely agreed. Conversely, we cannot impose
obligations on those who have not agreed to them.
receives $500 but he loses the car. The loss of the
car represents a disadvantage; this loss is suffered
by the seller. It is consideration which justifies his
$500 gain in the eyes of the law. The same holds
true for the buyer; he must be able to justify his
gain, being the car, by a loss, that is the $500 which
constitutes his consideration. The seller could not
justify his gain had he not lost his car. He could
argue that his $500 were a gift and that no
consideration was necessary, in which case we
would no longer call on the law of contracts but on
the law of gifts to settle the matter.
This notion of freedom is at the heart of the
theory of consent in contact law. The offeror must
have agreed to be bound by his or her offer and the
offeree must also have agreed to be bound by the
offer. The idea of freedom is justified in economic
liberalism because individuals are the best judges
of what will allow them to better their situations. In
choosing those obligations which they will assume,
they opt for those which will be the most profitable
to them in a given situation. In pursuing their
personal interests, they grow as individuals; they
also enhance the welfare of society because,
theoretically, both parties are better off after a
contract has been performed. The first party wants
the advantage that s/he receives from the contract
and for which s/he pays by assuming an obligation
in the contract; this obligation that s/he has
assumed is found useful or desirable by the other
party to the contract who has given the first party
the advantage that s/he receives from the contract.
F.
When someone seeks to establish that a
contract exists, the court will ask whether both
parties made such a promise. If in effect one party
did not make such a promise, the court will refuse
to implement the alleged contract, that is to order
the contract carried out. However, if the court can
establish that there was consideration, an exchange
of promises, then the contract will be enforced. On
the other hand, the court will not go so far as to
question the fairness of the consideration, it must
merely have some value in the eyes of the law.
Thus, a peppercorn, although of little value,
constitutes sufficient consideration and renders a
promise to give or do something in return for the
peppercorn enforceable. If the intended recipient of
the peppercorn expected more by way of
consideration, s/he should have refused to conclude
the deal. Courts are not meant to protect individuals
from their own ignorance.
FREEDOM OF INDIVIDUALS TO CHOOSE THE
Once the parties have agreed to be bound by
the contract, neither party may alter it without the
consent of the other party. The law presupposes
that the parties, both of whom are free, have
willingly concluded a deal. They must therefore
comply with it. The court will not attempt to
determine whether the parties concluded a fair deal,
that is a deal which is profitable to both parties. The
court assumes that the parties are in a much better
position to determine whether the deal is in their
best interests. The court will not overturn an
agreement freely agreed upon by the parties if it
seems to favour one of them. The parties may or
may not accept the proposed exchange; however,
once both parties have agreed on the exchange,
PRICE THEY WILL PAY FOR THE
CONTRACTUAL OBLIGATIONS WHICH THEY
HAVE ASSUMED
In order to have a contract, each party must
promise to do something (provide a service), give
something (real property, goods, money), assume
an obligation from the other party, or abstain from
doing something (eg promise not to sue). The
party's promise to do, give etc. is called
consideration. This consideration always involves
something which will profit the second party in
some way when the contract is fully executed, and
thus each party will both gain and lose something.
For instance, when selling a car for $500, the seller
4
they have freely assumed their responsibilities and
must comply with them. The offeror could have
chosen not to assume the obligation; the offeree has
agreed to pay the price set by the offeror so that the
offeror will assume the obligation which s/he has
sold to the offeree by the contract. Since the
individuals in question are free and know what may
enhance their situation, they determine the
utilitarian value related to the obligation which
they are assuming. Only they are allowed to
establish a price which they are willing to pay for
the benefit to be conferred in return. Both parties
freely assume the responsibility of paying the fixed
price. If the deal proves to be less profitable than
one of the parties expected, the party in question
must still carry out the assumed obligation because
s/he has created an expectation on which the other
party could reasonably rely.
G.
REASONABLE
EXPECTATIONS
FROM CONTRACTS
exchange. By linking exchanges to concepts such
as individual freedom, the legal system takes on a
certain doctrinal coherence. This allows
individuals who are making a deal within a
capitalistic system to make plans without fear of
being oppressed by legal rules which they could not
have foreseen before they entered into the contract.
H.
LIMITATIONS ON CONTRACTUAL FREEDOM
It is important to recognize that contractual
freedom is not as vast as the theory on which it is
based would suggest. The theory of contract law
has been forced to yield ground to everyday life.
According to the theory of contractual freedom, the
contracting parties are in the same position; they
are equal. No party has an advantage over the other
since human beings are born free and equal.
However, in reality, such equality does not exist.
For example, it would be difficult to maintain that
a mother with two children, whose only income is
her monthly welfare benefit, is in the same position
as an important merchant from whom she must buy
her daily necessities. It is just as difficult to claim
that a fisherman who has not finished primary
school is in a position equal to that of a stockbroker
when it is time to negotiate the purchase and sale
of goods. In the two above-mentioned cases, one
should not be surprised if the broker or the
merchant have made a very profitable contract. The
courts have recognized this inequality between the
parties and in some cases, have shown a certain
willingness to dissolve contracts to which the
parties had supposedly freely consented. However,
in cases where the court has hesitated, the legislator
has had to intervene to reestablish a certain equality
in dealings between merchants and consumers.
Laws thus limit the merchants' freedom to impose
certain obligations on consumers.
ARISING
Thus, by organizing exchanges in a society,
the law of contracts also aims to protect and
promote the reasonable hopes and expectations
which arise from a contract. When two parties form
a contract, they try to promote their interests. They
mean to transfer their resources or goods for
something they perceive to be more advantageous,
and the law aims to protect this expectation by
having the party at fault pay damages equivalent to
the loss, that is the unfulfilled expectation of the
innocent party. Let us reconsider the car which
John offered to sell Bill for $500. If John was to
refuse to sell once Bill had accepted his offer, Bill
could buy another similar car at a price fixed by the
free market and hold John responsible for the
damages which he incurred. If Bill paid $600 for a
similar car, he lost $100; so to protect his
expectation which is reasonably based on the
contract to take possession of a car for the sum of
$500, he may recover the $100 in damages.
Therefore, the law of contracts seems to recognize
contracts as a social institution and as a means of
exchange. The law ensures the involved parties will
receive what they have been promised by
guaranteeing a stable and reliable contract. The law
thus encourages the use of a contract as a means of
The theory of contract law also requires that
only promises voluntarily assumed in return for
other promises can be enforced, and thus that only
the actual parties to a contract can be required to
comply with it. This is referred to as privity of
contract. According to this theory, a buyer who
purchased a product from a retailer and not from
the manufacturer could not take legal action against
5
the manufacturer for breach of a product warranty
since there was no privity of contract between the
buyer and the manufacturer; s/he could only sue the
retailer with whom the contract had been made.
Since the warranties were not normally part of the
contract, the retailer usually was not liable either.
The retailer had to take legal action against the
wholesaler, and the wholesaler against the
manufacturer. The manufacturer was thus shielded
in part from any legal proceedings taken by
consumers for defective merchandise. As products
and economic life became more complex, this was
recognized by all as being illogical. Therefore the
common law came to recognize that when such
manufacturers warranties were made there was
virtually an implied contract between the buyer and
the manufacturer on which the buyer could sue.
Rights under tort law were also expanded to permit
consumers who were injured by defective products
to sue the manufacturer. More recently there is a
trend to provide for the liability of the manufacturer
in provincial consumer protection legislation, but
only a limited number of provinces have done this
and Ontario is not yet among them.
I.
PHILOSOPHICAL
ANTECEDENTS
OF
INDIVIDUALISM AND LIBERALISM IN THE
LAW OF CONTRACTS
We can retrace the origins of the contractual
obligation theory in the writings of two important
philosophers, John Locke (1632-1704) and JeanJacques Rousseau (1712-1778). The concept of
social contract which they developed to explain the
origin of society has itself served as the ideological
basis for the exchange theory which constitutes the
infrastructure of the law of contracts as we know it.
Locke and Rousseau explained the origin of social
obligations by calling on the notion of social
contract. To them, the social contract is the result
of a pact between two persons of equal standing, a
product of human will, which results in the
formation of society and its government. It is this
original pact which justifies the social obligations
of people.
Society and its form of government must
therefore be based on an agreement of free and
independent wills rather than on coercion and
force. From this standpoint, society is an artificial
construction and not a natural result of human
existence. Human beings, because they are free and
masters of their environment, can model this
environment in such a way that it will satisfy their
needs and desires. Closely related to the idea that
society is a human creation is the idea that people
must freely consent to the type of society which
will govern them from now on. Thus the social
contract is the expression of a voluntary agreement.
Other consumer protection laws have given
the consumer the right to dissolve a contract after
having accepted the offer. This occurs, for instance,
when contracts are made at one's place of residence
in the course of door-to-door sales. Among others,
the law imposes on the seller the obligation to give
a written contract to the buyer. From that moment,
the buyer is given a certain amount of time (2 to 4
days) during which he may repudiate the contract;
consequently he is no longer bound by his previous
acceptance of the offer. This law aims to
discourage tactics which force the consumer to
consent to the contract to rid himself of an
annoying salesman.
We notice the appearance of concepts such as
individual freedom and self-determination which
will play a major role in our law of contracts. The
element of consent was itself related to the notion
of individuals who benefit from certain types of
freedoms which cannot be taken away from them.
The social contract would guarantee these
freedoms and the state could not violate them.
Thus, the social contract theory supported
arguments which ennobled the individual and
sought to limit the powers of the government. The
theory of the state of nature in which all people are
free and equal, a state which preceded the social
6
contract, supported the same arguments. The social
contract theory stressed that the economic activity
of individuals and the basic rules governing
individual relations do not depend upon the state.
The state's role is not to control the economy but
rather to ensure conditions in which a selfgoverning economy may function. The
government plays a supplementary role; its only
aim is to guarantee individual freedom which
originates from the pre-societal stage and which
therefore exists independently of the government.
educated, is not privileged due to this ideology. We
must also question to what degree such a concept
of contractual obligation can render justice in an
economic world much more complex than the one
from which it stems.
Whatever the answers we give to these
questions, we must remember that individualism
and liberalism reflect only one vision of society and
that our system of contractual obligations is but one
type of social organization among many others. We
must not imagine that it is the only type or that it is
the best one. It has its strong points as well as its
weak points. If it can ensure economic freedom, a
competitive and efficient free market, it seems to
be at the expense of society, as a distinct entity
independent of the individual. Other contemporary
societies, in Africa, Asia and South America,
including the Soviet Union as described above,
have refused to follow the path of liberalism and
individualism and accordingly can be seen as
following social experiments different from ours. It
is this multiplicity and diversity of approaches to
human existence which make our world prosper.
Thus, we perceive in the social contract
theory the same notion of individual freedom
which plays such an important role in the theory
which governs contractual obligations in our
contemporary capitalistic world. In the two cases,
the contract is the result of an agreement freely
established between individuals seeking their own
best interests. The individual precedes society.
Society exists for the benefit of individuals and not
vice versa; its function is to see to it that the
conditions are such that individuals will be able to
enjoy their freedom to the fullest without constraint
from society. But we should ask ourselves if a
particular social class, more favoured and better
7
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