Contract as Assumption

Essays on a Theme

Brian Coote, Rick Bigwood

• Publisher: Hart Publishing
• Year: 2010
• Print ISBN: 9781849460293
• eBook ISBN: 9781847317490
• Edition: 1
• Topic: Law
• Subtopic: Contract Law
• Index: Law

It has many times been said that contracts involve assumptions of obligation or liability, but what that means, and what it is that is assumed, have not often been discussed. It is to further such discussion that some of the author's previously published writings around this subject have been brought together in this book. His basic premises are that contractual obligation and liability in this context are two sides to the same coin and that an assumption of one is an assumption of both. Parties are bound not because liability has been imposed upon them by law as a result of their having entered into a contract but because, in the act of assuming, they have imposed it upon themselves. Contract provides a facility the purpose of which is to enable this to be done within the limits prescribed by law. The implication of these premises are much more significant than might be supposed when applied to such areas of contract as formation, consideration, intention to contract, exception clauses, privity and damages. The book concludes with a treatment of the role of assumption in tort. Because of the importance of its subject matter and its wide-ranging treatment, this book should appeal not only to teachers and postgraduate students of contract but also to practitioners in the field and to anyone else with an interest in contract theory.

1

Introduction

Despite its similar title, this collection of writings is not an attempt to trespass on the ground covered by Charles Fried in his Contract as Promise.¹ It does, however, have this in common with that work: it accepts that contracts are made up of promises and that promises involve assumptions of obligation. Professor Fried’s often-cited book contains an extended argument for, and defence of, the place of promises in contract theory, as the moral basis of contract and as declarations of the human will. By contrast, the pieces here collected concentrate on the role of the assumptions of which contractual promises are the expression. All are to some extent based on the proposition that a contractual promise is an assumption of legal obligations and their attendant liabilities, which are binding, not because they have been imposed by law ab extra upon fulfilment of the requirements for formation, but because the promisors, using means provided by law for that purpose, have themselves assumed them.

Of course, the obligations and liabilities thus assumed have to be as, and with the incidents, prescribed, implied, and circumscribed by law and it is the law which, self-help apart, supplies the remedies. But those remedies are to be seen, not as potential punishments for wrongdoing, but as going to determine the extent to which parties can by law bind themselves to their undertakings, either to performing them, or to the payment of damages or compensation for breach.

Once accepted, this proposition, that contracting parties assume rather than merely incur contractual liabilities, and that contract is a facility supplied by law to enable them to do so, has a number of implications. One is that it becomes no longer necessary to search for justifications for the existence of contracts and contract law. It is a sufficient that the facility is provided for the classic purposes of peace, order and good government. Suggested justifications such as, for example, upholding the institution of promising, or the sanctity of the human will, or protecting reasonable expectations, while they may undoubtedly have affected the way in which the law has been formulated, should also be characterised more accurately as motives for providing the facility. Then, too, intention to contract, its presence, of course, determined objectively, is seen to be a central requirement rather than peripheral or dispensable. The proposition that contractual liability is assumed also reveals the real consideration for a bilateral contract, as well as, as it happens, providing a test of the truth or otherwise of the view that contractual liability is imposed by law. This test takes the form of a problem posed by what Sir Frederick Pollock called ‘the secret paradox’, which was first identified by Sir William Anson in his 1879 book on contract.² Since then, a long succession of contract scholars,³ on both sides of the Atlantic, has sought to find a convincing solution, it is submitted without success, very largely because of one particular reason.

The paradox, and solutions put forward over the years, are canvassed in some detail in chapter two (‘The Essence of Contract’), which is the first of the pieces reproduced in this collection. The paradox arises from the fact that, in the great majority of cases at common law, consideration is required for the very existence of an executory bilateral simple contract. Unless and until there is consideration, there can be no contract. It follows, therefore, that the consideration each party provides has to be present and exchanged at the very point at which the contract is created, rather than something which results from formation.

It was obvious from the start that, at formation, there is an exchange of the parties’ respective promises or undertakings. But it was also apparent that, until a contract is formed, promises and undertakings might well be binding in honour or in other similar ways but, if that were all the parties were bargaining for, there would be no need for a contract. The answer to that difficulty, it was suggested, was that the real considerations were the binding obligations to which the contract gave rise. The trouble with that as a solution was thought to be that contractual obligations are the result of formation and, hence, could not be present and exchanged at formation itself.

In a post-modern world, it would be all too easy to dismiss the paradox as trivial and the long list of distinguished contributors to its attempted solution as a group of misguided formalists and scholastics.⁴ But the real reason for their interest was that they could see that what might be thought a puzzle of minimal import in fact raised quite fundamental questions about consideration in particular and contract in general, and was in consequence a challenge to received notions.

For his part, Sir Frederick Pollock concluded that no answer was possible. Even so, those who originally identified the problem were surely right to suppose that what contracting parties bargain for is not just words, moral obligations, or hopeful expectations but, rather, obligations which will be binding and enforceable in law. They were right, too, to recognise that at formation there is an exchange of promises and undertakings. What, it is submitted, misled them and their successors was the perception that contractual obligation is imposed upon the parties as the result of formation rather than something the parties assume by, and therefore contemporaneously with, the act of exchanging their promises or undertakings with an intention (objectively determined) of being bound by them in law.

On the view adopted in this book, what really creates an executory bilateral simple contract is, thus, the exchange of effective assumptions of binding legal contractual obligation made in a manner recognised and provided by law for that purpose. It follows, too, that the respective assumptions thus exchanged must also be the consideration each provides for the other. In the case of unilateral contracts, the position is slightly different. The consideration on the one side is the assumption of obligation made by the promisor and, on the other, the performance of the stipulated act or acts by the promisee, on completion of which the promisor’s assumption becomes binding upon him. In principle, the law could recognise other methods of contracting. After all, consideration is a feature peculiar to common law systems. The common law, itself, allows for inter partes contracts by deed without consideration and there could be no doctrinal objection to the creation or development of other forms.

Many of the consequences of adopting this view are summarised in chapter two. Several are considered in more detail elsewhere in the collection. As one such consequence, the treatment accorded to consideration in the textbooks is seen to be quite unnecessarily complicated. The only test for promissory consideration should be whether the purported assumptions were permitted by law and were not too vague, uncertain, or otherwise incapable of enforcement. In the case of unilateral contracts, the test for performative consideration would be whether it were of an act or acts within the law, known to have been stipulated for by the promisor.

There are consequences, too, for the variation of contracts and contracts to perform obligations already owed. These are canvassed in chapter three (‘Consideration and Benefit in Fact and in Law’) and in chapter four (‘Consideration and the Variation of Contracts’), both of which necessarily question the validity of the concept of consideration which is enunciated in Williams v Roffey Bros and Nicholls (Contractors) Ltd.⁵ Again, in chapter five (‘Consideration and the Joint Promisee’), it is submitted that the principle adopted by the High Court of Australia in Coulls v Bagot’s Executor and Trustee Co Ltd⁶ stemmed from a confusion between consideration for, and the performance of, executory bilateral contracts.

Again, if it were once accepted that the primary purpose of the contract facility is to enable parties to assume legal contractual obligations, it ought to follow that the function of exception and limitation clauses is to help delineate the obligations thus assumed. This was the basic premise of Exception Clauses.⁷ Its theoretical justification was discussed in chapter one of that book and the greater part of that chapter is reproduced in chapter six of this collection, under the title ‘The Function of Exception Clauses’. The contrary view, that exception clauses are merely defences to rights of action which accrue independently of them, also led to the development of the substantive doctrine of fundamental breach, as well as of the notion that the termination of contracts at common law for a discharging breach is retrospective in its effect. Both these matters are discussed in chapter seven, ‘The Second Rise and Fall of Fundamental Breach’.

Then, too, if the contract facility exists to enable the assumption of legal contractual obligation, the question arises whether the obligation thus undertaken is to perform or, otherwise, to pay the cost of performance, or, which might well be less, merely to compensate for the economic consequences of non-performance. In any individual case, the answer ought, so far as the law allows, to depend, in the first instance, on which of those sorts of obligation were undertaken. These questions are canvassed in the two chapters, ‘Contract Damages, Ruxley, and the Performance Interest’ (chapter eight) and ‘The Performance Interest, Panatown, and the Problem of Loss’ (chapter nine).

Another implication of the theme of this collection is that, in principle, and as already mentioned, law can (and in fact does) provide facilities by the use of which contractual undertakings can be assumed without the need for any reciprocal performance or undertaking by another party. Contracts by deed are only one such example. In some other jurisdictions, undertakings in the presence of a notary can have similar effect. More recent examples, it can be argued, have been provided in England and Wales by the Contracts (Rights of Third Parties) Act 1999 and, before that, in New Zealand, by the Contracts (Privity) Act 1982. This aspect of the two enactments is discussed in chapter ten, ‘Contract not Trust: Some Questions About the Contracts (Rights of Third Parties) Act from Another Perspective’.

Finally, the suggestion is made, in chapter eleven, ‘Assumption of Responsibility and Pure Economic Loss in New Zealand’, that an ‘assumption of responsibility’ within the Hedley Byrne line of cases can, in at least some circumstances, be an assumption of legal obligation and liability, just as in contract, with the difference that the obligation and liability assumed are in tort rather than contract.

The writings here collected may not all be up-to-date statements of the law as it is. Rather, the intention has been to use them to explore, in context, the implications of a basic theme, the correctness or otherwise of which ought not to be a matter of timing. A possible problem, however, is that most of these pieces, as published, included at least a summary statement of the overall theme. Retention of every such statement obviously carries the risk of tedium. On the other hand, lawyers, notoriously, tend not to read legal monographs from cover to cover. As it happens, the only full account is contained in chapter two, ‘The Essence of Contract’. Since the others are relatively brief, it has been decided to retain them.

It remains to express the author’s grateful thanks to Professor Rick Bigwood, without whose urgings, and his generosity in volunteering to act as editor, this collection would never have happened.

¹ Charles Fried, Contract as Promise: A Theory of Contractual Obligation (Cambridge, Mass, Harvard University Press, 1981).

² Sir William R Anson, Principles of the English Law of Contract (Oxford, Clarendon Press, 1879).

³ The list includes, besides Pollock and Anson, such luminaries, inter alios, as Langdell, Ames, Williston, Corbin, Llewellyn, Stone, Atiyah and Treitel.

⁴ See, eg, S Hedley ‘Keeping Contract in its Place—Balfour v Balfour and the Enforceability of Informal Agreements’ (1985) 5 Oxford Journal of Legal Studies 391, 402, who describes those involved as ‘High Priests’, and the point they debated as ‘not only simply trivial but utterly without practical import’.

⁵ Williams v Roffey Bros and Nicholls (Contractors) Ltd [1991] 1 QB 1 (CA).

⁶ Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 (High Court of Australia).

⁷ Brian Coote, Exception Clauses: Some Aspects of the Law Relating to Exception Clauses in Contracts for the Carriage, Bailment and Sale of Goods (London, Sweet & Maxwell, 1964).

2

The Essence of Contract

Introduction

It is more than a quarter-century, now, since Professor Grant Gilmore published his book The Death of Contract.¹ Doubtless he would be the first to admit that his title (reminiscent of a magazine cover of the period which proclaimed that God was dead) was a mite premature. The law of contract is still taught as such in law schools, and books and articles on it keep appearing in at least as much profusion as ever.

Nevertheless, behind the exaggeration of the title lay a core of serious truth and intent. Though contract law has survived thus far, Professor Gilmore has not been alone in arguing² that it ought not to continue as a separate legal category but should instead be absorbed, or reabsorbed, into tort or into a single law of obligations encompassing contract, torts and restitution.³ Outside the United States, similar arguments have been advanced, most notably by Professor PS Atiyah.⁴ At a less extreme level, there has also been argument that much of the so-called ‘classical’ law of contract which emerged in the nineteenth century, and which is still the staple of leading textbooks throughout the common law world, should be modified in important respects if not abandoned altogether. Under attack have been such doctrines as offer and acceptance, intention to contract, consideration (including its associated doctrine of privity) and such notions as ‘freedom of contract’ and the characteristic classical emphasis on the ‘intention of the parties’.⁵

To some extent, proposals of this kind are not new. If it is true, as has been suggested, that the classical common law of contract was a construct of the second half of the nineteenth century⁶ (though there has, of course, been continuous development since then), the attack upon it began while it was still in its early stages. For example, ever since the 1880s, the doctrine of consideration has been the subject of a dispute which brought its rational justification into contention and which has successively engaged a fairly high proportion of the leading academic contract lawyers on both sides of the Atlantic.⁷ Not long after that dispute developed, the American ‘realists’ began a reaction against the ‘formalism’ of classical contract law represented, for them, particularly by the teachings and writings of Professors Langdell and Williston of the Harvard Law School, the...

Table of contents

• Cover
• About Book
• Title
• Copyright
• Preface
• Acknowledgements
• Contents
• Table of Cases
• Table of Legislation
• 1. Introduction
• 2. The Essence of Contract
• 3. Consideration and Benefit in Fact and in Law
• 4. Consideration and the Variation of Contracts: A Different Solution
• 5. Consideration and the Joint Promisee
• 6. The Function of Exception Clauses
• 7. The Second Rise and Fall of Fundamental Breach
• 8. Contract Damages, Ruxley, and the Performance Interest
• 9. The Performance Interest, Panatown, and the Problem of Loss
• 10. Contract not Trust: Some Questions About the Contracts (Rights of Third Parties) Act from Another Perspective
• 11. Assumption of Responsibility and Pure Economic Loss in New Zealand
• Index