Although something like a formalist approach survives in today’s notion of ‘at will’ employee contracts, formalism itself achieved its zenith during the first decades of the twentieth century. By that time its claim to impartiality was already being challenged by progres-sives, who saw it not as a reflection of eternal reason but as a parti-san defence of big business in its struggle against labour. As we shall see in the conclusion, legal realists had little difficulty in decon-structing its method of reasoning. Still, it was not its partisanship or philosophical incoherence that led to its demise but its failure to adjust to changes within capitalism itself.
The growing complexity of capitalism generated new conceptions of corporate property and ownership that effected profound changes in contract and tort law. On the old model, stockholders were busi-ness partners who shared equal liability and equal powers of decision-making; on the new model they were investors whose liability and decision-making powers were limited. On the old model, employees were ‘agents’ or ‘servants’ assumed to carry out the will of their
‘masters’; on the new model, they were masses of factory workers, whose connection with management was often impersonal and indi-rect. On the old model, the terms and effects of simple, face-to-face transactions between local proprietors of small, family-owned farms and businesses were relatively transparent and determinate; on the new model, the terms and effects of complex, impersonal transactions were anything but transparent and determinate; they involved multi-ple parties (stockholders, managers,financiers, middlemen, subcon-tractors, employees, etc.) operating gigantic enterprises with offices, markets, and suppliers spanning the globe.
These changes in capitalism meant that the transparency of the terms and the determinacy of the effects of legal agreements that
had been naïvely presupposed by classical formalists were becoming even less representative of social reality than they had once been.
The emergence of trusts and monopolies threatened to constrain the freedom of consumers and business proprietors in ways that had never been imagined; the capacity of large businesses to employ at will and for whatever wage (and under whatever condition of employment) masses of desperate workers (many of them newly arrived immigrants) threatened to constrain the freedom of workers to enter into mutually advantageous contracts. Finally, the enor-mous wealth generated by corporate capital created new inequalities between rich and poor, powerful and powerless, that threatened to explode the liberal-democratic basis underlying the very legitimacy of law itself.
What formalists denied – and what realists affirmed – was the emergence of a new legal paradigm that now competed with the old.
With its individualistic, natural law assumptions, the older, liberal paradigm was being superseded – at least in part – by a newer, corporate-welfare paradigm. The classical liberal invocation of a hard distinction between private and public law was abandoned along with the view that private law rested on reasons that were intu-itively or deductively certain.
Nothing exemplifies the collapse of the private–public law dis-tinction better than the collapse of the contract–tort disdis-tinction.
According to formalists, the rule for awarding damages in contrac-tual breach is expectancy: the plaintiff is awarded an amount that is equivalent to what he or she expected to get out of a contract. Thus, if my partner reneges on a contractual promise to buy my $100,000 home for $200,000, thereby denying me the $100,000 profit I expected to gain from the transaction, he should pay me $100,000 – or the difference between $200,000 and any lower amount that I later end up selling my house for. If, in addition to this loss, I was unable to reinvest my expected $100,000 profit in the purchase of a new home that I had expected to resell for an additional profit, I can sue to recover that loss as well.
The problem with using expectancy as a basis for calculating damages is that expected contractual gains cannot always be pre-cisely estimated. Contractual breach ended up costing me $200,000 minus the eventual purchase price of my home. But, given fluctuations in the housing market, is it certain that I could have resold my new home for what I had expected to?
Suppose it isn’t. In that case, a judge might impose a different, reliance-based method for awarding damages. Whereas expectancy-based damages put me in the position that I would have been in had there been no breach, reliance-based damages put me in the position that I was in prior to the agreement. According to the reliance rule, I would receive compensation for whatever special costs – transaction fees, home repairs, and so on – I incurred in preparing my house for sale to the original buyer. These were expenses that I incurred after the bargain was struck and damages awarded to me according to the reliance method cancel these out, restoring me to the position I was in prior to the agreement. These costs might be considerably less than the $100,000 I minimally expected to make from the sale of my home.
What’s important about this example is that reliance-based com-pensation is calculated in the same way as tort-based comcom-pensation.
It is not based on mutual self-imposed obligations – which in this case were limited to buying and selling property – but on obligations that society imposes on persons not to cause serious harm to others.
Labour law perfectly illustrates the breakdown of the formalist contract–tort distinction. During the late nineteenth and early twen-tieth centuries, failure of workers to honour their labour contracts by striking was not only regarded as breach of contract but was also considered a violation of the owner’s right to control his property.
Courts issued labour injunctions forcing workers to return to work and owners filed suit against workers for breach of contract, demanding damages from them in the amount equivalent to their expected losses in revenue.
With the passage of the Norris-LaGuardia Act in 1932, which restricted the power of courts to issue labour injunctions, and the Wagner Act of 1935, which upheld the right of workers to organize unions, labour contracts no longer enforced only the self-imposed obligations of workers and employees. The very right of workers to form unions without fear of reprisal by owners implied that the kind of formally signed ‘voluntary’ meeting of minds underwriting Yellow Dog contracts would henceforth be considered coercive.
Workers whose contracts had been terminated or who had been threatened with termination for joining unions could now sue for damages, in rare cases even exceeding what they lost from beingfired. Also imposed on both parties – often against their will – was a societal (public) obligation to bargain in good faith. This
obligation was especially enforced in key industries, such as mining, steel, and public transportation, which had a direct bearing on public well-being.
In sum, as the New Deal progressed cases involving threats and bad-faith bargaining were increasingly interpreted as harms – against the public if not against one of the contracting parties.
Government-brokered deals between big labour and big business were far removed from the purely self-regarding and self-imposed obligations that formalists conceived contracts to be. But such vio-lations of what had formerly been regarded as rational distinctions between contract and tort, private law and public law, raised a new question: could these violations be understood as reasonable according to another model of legal reasoning?
6.4. INSTRUMENTAL LEGAL REASONING: THE LAW AND ECONOMICS MOVEMENT
By the mid-1930s, legal realism had replaced formalism as the dom-inant paradigm of legal reasoning. Legal realists universally rejected formal legal reasoning as being unrealistic (unworkable) and phil-osophically incoherent. However, they disagreed about what should replace it. Radicals such as John Dewey accepted a democratic con-ception of legal reasoning that appealed to popular moral values, such as equality and community, instead of the rational idea of indi-vidual freedom defended by formalists. Their populist conception of legal reasoning thus made no pretence to being strictly scientific.
Moderate realists, such as Karl Llewelyn, defended an instrumental conception of legal reasoning that did. Inspired by Oliver Wendell Holmes Jr’s pioneering anti-moralistic interpretation of tort law in The Common Law (1881), they argued that legal reasoning was a scientific technique that provided an efficient means for implement-ing any value whatsoever. In particular, they thought that a morality-free legal technology would provide just the flexibility needed by New Deal administrators in regulating a complex economy.
Although both radical and moderate forms of realist legal rea-soning gradually gave way to natural law- and procedure-based forms following the Second World War, they have recently enjoyed a resurgence of popularity – albeit in modified forms. A new and more radical form of realism has insinuated itself in the CLS movement.
Meanwhile, moderate realism, with its equation of legal reasoning
and rational choice guided by cost-benefit calculation, has found a new home in the law and economics movement. As I noted earlier, many proponents of this movement are more willing than their realist predecessors to accept the rational efficiency of unregulated markets. However, contrary to formalists, they reject many of the formal-categorical distinctions separating different branches of private law. Indeed, they weaken the categorical distinction between private and public law, suggesting that all law can be explained in terms of public utility, or economic efficiency. To cite Posner:
The doctrinal luxuriance of common law is seen to be superficial once the essentially economic nature of the common law is under-stood. A few principles, such as cost-benefit analysis, the preven-tion of free-riding, decision under uncertainty, risk aversion, and the promotion of mutually beneficial exchanges, can explain most doctrines and decisions. (Posner 1990: 361)