Putting Freedom of Contract in its Place

A recent strand of influential theorizing about contract law, which I refer to as sovereignty theory, suggests that by putting the parties’ procedural freedom to choose the terms of their agreements front and center contract law can simultaneously maximize efficiency and do justice between the parties: by honoring the terms that the parties have chosen under procedurally free and fair conditions, courts do justice between the parties; and, given that individuals know better than anyone else what is in their own interests, parties will rationally devise agreements that maximize the joint value of their transactions, thus, in the absence of externalities, maximizing social welfare.

Others have challenged the welfarist foundations of sovereignty theory. Here I challenge sovereignty theorists claim that it is the natural outgrowth of deontological political morality. A more plausible rights-based conception of contract, I argue, has at its foundation substantive justice and derives from that commitment a limited principle of equal freedom. But even if sovereignty theory were correct in supposing that the equal freedom principle applies to parties’ determinations of substantive matters—the primary rights and duties that make up the substance of their agreement—(a doubtful supposition, as I will argue), it doesn’t follow that the same principle applies to their determinations of procedural and remedial matters, such as the remedy a party ought to face in the event that she breaches the agreement. This is because such determinations are often responsive to the parties’ imperfect motivations and thus their own unwillingness to follow the true principles of justice. To respond to such departures from the ideal, we must appeal to second-best principles of justice—principles that respond justly to the fact of injustice. There is no reason to believe that those second-best principles will in general resemble those that regulate the ideal.

On my alternative conception, we should think of contracting parties ideally as offering their own visions of just relations between themselves. Insofar as their agreements represent substantively plausible attempts to do by the parties acting together in good faith, they are worthy of deference. This alternative conception can deliver a justification for granting a sphere of sovereignty to contracting parties while simultaneously setting principled limits on that grant, thus offer a compelling justification for doctrines—such as the penalty doctrine, the doctrine of substantial performance, a robust doctrine of changed circumstances, and a robust doctrine of substantive unconscionability—that sovereignty theorists regard with scorn.

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