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Contract law and distributive justice revisited

Published online by Cambridge University Press:  02 January 2018

Megan Richardson
Megan Richardson*
Affiliation:
New Zealand Law Commission*
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Extract

This article is a response to a series of articles on contract law and distributive justice. In the first article, published in the Yale Law Journal, Professor A. T. Kronman put forward the thesis that the law of contract is necessarily concerned with distributive justice – that is, with the ‘fair division of wealth among the members of society’. In the second article, published in the Oxford Journal of Legal Studies, W. N. R. Lucy rejected that thesis and argued that limits on contracting are based on freedom rather than distributive justice. In this article I argue that contract law is and should be concerned both with freedom and with the substantive fairness of the distribution effected between the parties.

Type
Research Article
Information
Legal Studies , Volume 10 , Issue 3 , December 1990 , pp. 258 - 270
Copyright
Copyright © Society of Legal Scholars 1990

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References

1 Kronman, ‘Contract Law and Distributive Justice’ (1980) 89 Yale Law Journal 472. He develops the argument further in ‘Wealth Maximisation as a Normative Principle’ (1980) 9 Journal of Legal Studies 227.

2 Lucy, , ‘Contract as a Mechanism of Distributive Justice’ (1989) 9 Oxford Journal of Legal Studies 132. CrossRefGoogle Scholar

3 This is the argument Charles Freid, for instance, makes in his book Contract as Promise (1981).

4 ‘Contract Law and Distributive Justice’, Supra, n 1, at 480.

5 Ibid, at 482, 483.

6 Lucy prefers the terminology of freedom to Kronman's voluntariness arguing that ‘voluntariness’ is limited to cases of actual (almost physical) choice. However the better view is perhaps that, unless a choice is unconstrained, the voluntariness approach does not work — ie that in this context voluntariness presupposes freedom.

7 ‘Contract as a Mechanism of Distributive Justice’, Supra, n 2, at 138.

8 Ibid, at 141.

9 Ibid, at 139.

10 The cases which Lucy discusses are primarily duress cases rather than unconscionability and undue influence cases (to which only passing references are made). But in duress cases there is active overreaching by the stronger party — so responsibility is evident.

11 [1985) AC 1000

12 Ibid, at 1024. It should be noted that, although Hart v O'Connor is a New Zealand case, Lord Brightman referred to English and Australian law being the same. In Australia a similar approach was adopted by the High Court in Commercial Bank of Australia v Amadio (1983) 151 CLR 447, now to some extent superseded by s 52A of the Trade Practices Act 1974. And in England, although unconscionability is a less developed doctrine, a close link can be found with the doctrine of undue influence explained in National Westminster Bank Plc v Morgan (1985) AC 686.

13 In making this claim that the moral foundation of contract is the beneficial practice it generates I am drawing on a useful article by Rawls, ‘Two Concepts of Rules’ (1955) 64 Phil Rev 1, though he later rejected the rule utilitarian argument in favour of his more directly liberal philosophy in A Theory of Justice (1971).Google Scholar

14 The point was not addressed expressly by the Privy Council since the argument centred around whether contractual imbalance could be a basis for setting aside a contract with a person ‘ostensibly sane but actually of unsound mind’ (1027). (The word ‘ostensibly’ is, of course, capable of different interpretations.).

15 In New Zealand this principle was established by the Court of Appeal in Nichols v Jessup discussed further infra, n 17 and associated text. There are dicta in Commercial Bank of Australia v Amadio, supra, n 12, to the same effect — see especially the judgment of Mason J at 467. The English undue influence cases have taken a more cautious view of the circumstances in which a party without actual knowledge can be held responsible (see eg Coldunell Ltd v Gallon (1986) QB 1184 but cf Bank of Credit & Commerce International SA v Aboody (1989) 2 WLR 759 at 787).

16 ‘Contract as a Mechanism of Distributive Justice’, Supra, n 2, at 132. Google Scholar

17 [1986) 2 NZLR 226

18 Ibid, at 229. McMullin J recognised that the measure of substantive unfairness may be broader than disparity of consideration: ‘Accepting the benefit of an improvement bargain by an ignorant person acting without the benefit of independent advice, which cannot be shown to be fair, may be unconscionable’ (234, emphasis added).

19 Ibid, at 235,236. In Commercial Bank of Australia v Amadio Mason J and perhaps Wilson J adopted the narrower Somers J view that substantive unfairness is relevant to the question of assessing consent (466,469), whereas Deane J's approach is closer to that of McMullin J (474, 479);.

20 The recent English undue influence cases have also been quite explicit about the separate significance of substantive unfairness — see, eg Coldunell Ltd v Gallon, supra, n 15, at 1194; Midland Bank plc v Shephard (1988) 3 All ER 17 at 21; Bank of Credit & Commerce International SA v Aboody, supra, n 15 at 774–777 — but cf National Westminster Bank v Morgan, supra, n 11, at 704 and 708 (merely contributes to presumption that influence exerted).

21 The argument has particularly been made by economics of law thinkers: see, eg Posner, ‘Duress, Bargaining Power, and Unconscionability’, Economic Analysis of law (3rd edn, 1986) 101; Epstein, ‘Unconscionability: A Critical Reappraisal’ (1975) 18 Journal of Law and Economics 293; Trebilcock, ‘An Economic Appraoch to the Doctrine of Unconscionability’, Reiter and Swan eds, Studies in Contract Law (1980) 379.

22 ‘Contract Law and Distributive Justice’, supra, n 1, at 498–510. The argument is not so much that contract law is always to be preferred but that sometimes it may be a less costly and intrusive method of achieving redistribution.

23 Both Kronman and Lucy refer to a useful article by J. L. Coléman on paretianism where the relationship between pareto superiority and pareto optimality is discussed: ‘Efficiency, Exchange, and Auction: Philosophical Aspects of the Economic Approach to Law’ (1980) 68 California Law Review 221.CrossRefGoogle Scholar

24 ‘Contract Law and Distributive Justice’, supra, n 1, at 488.

25 The Rawlsian justifications for paretianism are emphasised in ‘Contract Law and Distributive Justice’, Ibid, whereas the Kantian ones dominate in ‘Wealth Maximisation as a Normative Principle’, supra, n 1.

26 ‘Wealth Maximisation as a Normative Principle’, Supra, n 1, at 233 (emphasis added).Google Scholar

27 ‘Contract Law and Distributive Justice’, Supra, n 1, at 491, 492.Google Scholar

28 Alexander and Wang suggest that there may be a Rawlsian justification that the parties would have chosen this had they been behind the veil of ignorance: ‘Natural Advantages and Contractual Justice’ (1984) 3 Law and Philosophy 281, 285. Indeed, in the full Rawlsian sense of that concept, people would not only be unaware of their position in society (and therefore able to agree in a disinterested manner) — but society would not have begun. However, Kronman himself does not argue that directly, and the problem with the rationale is that the veil of ignorance, taken at this level of abstraction, bears no relation at all to reality.Google Scholar

29 (1983) 92 Yale Law Journal 763.CrossRefGoogle Scholar

30 Ibid, at 771, 772.

31 In the housing example Kronman's argument essentially rests on the assumption that: ‘In the United States, wealth and ownership of land are correlated to a sufficiently high degree that one may be used as an imperfect, but convenient, proxy for the other’.

32 ‘Paternalism and the Law of Contracts’, Supra n 29, at 772.Google Scholar

33 See ‘Contract Law and Distributive Justice’, supra, n 1, at 487: ‘a strictly individualistic interpretation of paretianism is likely to make the principle unworkable in all but a few cases’.

34 This is not to say that legislation on unconscionability would not be worthwhile — rather that in the end it will always come down to an individual assessment of the facts of a particular case, whether the judge is applying a statute or the common law.