The Death of Contract Law

I Introduction

Thirty years ago, Grant Gilmore predicted the death of contract.¹ He saw the expansion of legal liability for relied-upon promises as evidence that contract was being swallowed up by tort and would soon disappear as an independent, coherent body of law. Gilmore interpreted this trend as the repudiation of the classical bargain theory of contract, a theory that emphasized the central role of the law in enforcing and interpreting bargained-for promises. In Gilmore's view, the bargain theory owed more to the imagination of Oliver Wendell Holmes than to the case law, but in any event, by 1972 the boundaries of the classical, consideration-based model had clearly been breached, a new expansive version of contract law was emerging, and, for Gilmore, the triumph of reliance over bargain was an entirely salutary development.

If anything, the trend that Gilmore identified has accelerated. After the adoption of the Uniform Commercial Code ( UCC), the last half of the twentieth century witnessed a dramatic expansion in the domain of contract law. Courts deployed creative and expansive strategies to find promissory liability that would not have been recognized under the classical model. But despite the accuracy of Gilmore's empirical observations, his prediction that the bargain theory of contract was dying could not have been more inaccurate. Indeed, almost from the moment his book was published, contract theorists of various persuasions set out to demonstrate the vitality and coherence of the bargain paradigm. Legal philosophers argued that the state's role in enforcing bargains is both explained and justified by moral theories grounded in notions of autonomy.² Law and economics scholars proposed the efficiency criterion (in one form or another) as the basis for the bargain theory.³ Equally important is the fact that contract theory became one of the most significant fields in modern economics. Three Nobel prizes have been awarded largely for work in contract theory, even though the field is less than thirty years old.⁴

While Gilmore was wrong in predicting that the bargain theory was dying, his instinct that something was amiss was quite prescient. But it is contract law rather than contract itself that is in severe peril. My project is to trace the causes of the decline in contract law and suggest some possible cures for what may otherwise prove to be a fatal disease. My claim, in brief, is that contract law is dying from hubris, from the belief that more contract law is always better than less. A significant effect of this expansion of liability has been a measurable increase in the costs of enforcing contracts. Ignored in this development is the fact that contract law regulates a consensual activity. This means that the parties to contractual agreements have a choice between legally enforceable contracts regulated by the state and other alternatives. The peril that public contract law faces is that many contracting parties have chosen to exit the public system of legal enforcement in favour of less costly alternatives over which they have more control. The result is that the law of contract is suffering from stagnation and, even more embarrassingly, from irrelevance. I conclude that contract law can be revived, but only if courts and legislators come to see that, in fact, less contract law is better than more.

My argument has three parts. I begin by tracing the expansion of the new contract law and the resulting move from bright line rules to vague standards and contextual interpretation. Second, I describe the exodus of contracting parties in response to these developments. Third, and finally, I justify returning to a parsimonious contract law by proposing self-enforcement as the preferable alternative to legal enforcement for many of those promises that fall outside the boundaries of the classical model.

II The imperialism of contract law

A Classical Contract Law and the Problem of Fit

Contrary to Gilmore's contention, the bargain theory of contract did...