For a useful guide to the historical development of the law of contract, see Seddon, N and Ellinghaus M Cheshire & Fifoot's Law of Contract (7th Aus ed 1997) ch 26.

The early law was primarily concerned with keeping the peace. Out of this concern developed the action for trespass which was designed to give a remedy to someone who was wronged so that they would not resort to self-help remedies. You learn about this and associated remedies in the Torts course. But the wrongs which were the subject of early legal remedies were limited and what characterised the early common law was the writ system whereby you had to be able to fit your particular grievance to a particular formula or writ. If you could not, then you could not get a remedy.

In relation to contract-type claims, the law was relatively unsophisticated. It allowed a remedy if someone did something badly (misfeasance) but not if he or she did not do it at all (nonfeasance). There was an exception to this, namely, when someone had failed to pay money. Money claims - called an action in debt- could be brought by a seller if goods had been delivered and not paid for; but a claim could not be brought by a buyer if the goods were not delivered at all. In such a case all that the buyer could was get his or her money back. Ordinary trading exchanges were therefore covered in a fashion. But you can see that the law had not adapted to the needs of a sophisticated trading economy which, as we have seen from the supermarket example, requires the ability to make enforceable promises about the future - called executory promises. If you wanted to be sure that someone would do something in the future, the only way was to get them to promise in a deed under seal. The action was called an action on a covenant. This was the only way of getting a remedy for nonfeasance. It was not until the 17th century that a general contractual remedy (called assumpsit) was developed to cover nonfeasance. So, the development of a general contract remedy was slow in coming. Specific areas of activity had special rules. This can be seen in the next part.

18th Century Paternalism

Before the industrial revolution, society was stratified, each person with his or her own status. Thus in feudal times a person's status was determined by birth and relations between people were principally governed by status rather than contract. What is meant by this is that a person could not really change his or her status by enterprise or endeavour. Property rather than enterprise was the principal source of wealth. This is not to say that there was no trading. There was but traders developed their own special rules, called the "law merchant", which had universal application amongst traders but was otherwise not applicable to day to day life. It was not the common law but rather a private system of law. Contract played a minor role and was mainly concerned with transferring of property. Some contract-like obligations were imposed, not because a person had agreed to them, but because they arose automatically, such as the obligation to pay a physician for services rendered. Even if the parties had agreed to a specific price this was not necessarily binding if it did not conform to community standards. So, obligations would arise in these times irrespective of the parties' wills or intentions.

The most important feature of early contract law was the fact that executory promises were not enforceable. Thus any promise to do anything in the future could not be enforced by simply making an agreement as it can to-day. Obligations arose in early contract law because something had already been done. Thus the obligation to repay a debt arose because the borrower had had the benefit of the loan. The obligation to pay a builder arose because the work had been done. The basis of imposing an obligation was that one party would be unjustly enriched at the expense of the other if the obligation was not fulfilled.

As already noted, it was possible by a special method to make executory promises binding and that was to use a formal document called a deed under seal. Thus, if there was sufficient ceremony and formality it was possible to create promises binding in the future. Deeds still exist to-day and are used in certain special transactions or to achieve a particular purpose.

The first transformation of the law of contract was to develop a way of enforcing executory promises. This it did by developing an action called assumpsit. If one person promised another to deliver a ton of gravel next Friday, payment on delivery, such an agreement would not have been enforceable. If the supplier failed to show up on Friday, no remedy was available unless the agreement was enshrined in a deed. The action of assumpsit was developed to meet this type of case. It was enough, in order to create a binding agreement, merely to exchange promises. This was of profound importance in the world of industry and commerce which was just starting to take off at the beginning of the industrial revolution. It enabled entrepreneurs to plan ahead. Trading no longer consisted of instant exchanges. Factories and other entrepreneurial enterprises became complex organisations in which reliable forward planning was essential for efficiency. Contract law, through the action of assumpsit, developed to meet this need.

Before turning to the 19th century, it is worth noting that much has been written about the basis of making binding promises. We have already started to explore this question. It is all very well to say that the action of assumpsit laid the ground work for sophisticated forms of exchange. But basic questions have to be asked about the business of promising. What is it that makes a promise binding? Exactly when does it become binding? The doctrine of consideration, as I have already indicated, was about this problem. Originally the word "consideration" probably meant motive or reason for imposing a binding obligation on someone. Thus the law was searching for a good reason to make promises binding. Much of the early law of contract was concerned with this question with different points of view holding sway at different times. This is discussed in the extract from Greig and Davis (HH pp 6-10).

In the end the law of contract rejected a moral theory, championed by Lord Mansfield, as being the good reason for making promises binding but instead adopted a theory of exchange or bargain - that is, promises were binding if they were part of a process of exchange, but not otherwise (deeds apart). It was not enough merely to promise.

The decision in Eastwood v Kenyon (1840) 11 A & E 438; 113 ER 482 was an important land mark because it set the seal on the consideration or exchange theory and put paid to the moral obligation theory which had achieved some success in Lord Mansfield's time. The case involved someone who as executor of a deceased estate had taken on himself the task of looking after the deceased's daughter until she became an adult. In doing so he had spent a lot of money and even had had to borrow money at one stage. The daughter, when she came of age and her husband when she married, promised to reimburse the plaintiff. When he was not reimbursed he sued on this promise. The court said that the promise to reimburse was a purely moral obligation. It was not supported by consideration. This was because it was not part of an exchange. What he had done in the past could not constitute part of an exchange. We will see that this idea is reflected in one of the rules of consideration which we will examine, namely, the rule that past consideration is no consideration.

We will see that much of the doctrine of consideration is about what amounts to a good consideration in the eyes of the law. It is here that there are some somewhat curious rules. The courts had to face the task of trying to define what they meant by consideration.

The basic idea was that there had to be an exchange of something recognised to be a consideration in law between the parties when they made an agreement. This is, of course, circular. The escape from the circle was provided by the accumulation of experience from the cases. In general terms, a consideration was something provided by the promisee (the person trying to enforce the promise) which was either a benefit to the promisor or a detriment to the promisee. An example of a benefit to the promisor is a promise of a sum of money. An example of something which is a detriment to the promisee is a promise to give up a right or to forego an opportunity. Often the consideration is both a benefit to the promisor and a detriment to the promisee, such as a promise by the promisee to pay money to the promisor.

The following case shows a curious example of how the courts struggled with the concept of benefit and detriment.

The peculiar nature of what the law considered to be a detriment and a benefit is revealed by the case of Shadwell v Shadwell (1860) 9 CB (NS) 159; 142 ER 62. In this case an uncle promised his nephew an annual sum of money if he married one Ellen Nicholl. The nephew duly married Ellen Nicholl and the money was paid for some time. The uncle died and his executor refused to pay the money. It was argued that this could not be a contractual obligation. What was the consideration provided by the nephew? Did he provide a benefit to his uncle or did he suffer a detriment? It does not seem so. Yet the court was prepared to say that when young Lancey - for that was the nephew's name - actually married Ellen Nicholl he was providing a consideration which made the uncle's promise binding. It was said that the nephew had either incurred a detriment by marrying Ellen Nicholl or had conferred a benefit on his uncle. What benefit? It was thought that the uncle must have wanted his nephew to marry Ellen Nicholl and that therefore it was a benefit to him when Lancey married her. The case is, to say the least, peculiar.

Another taste of the mysteries of consideration is the famous Carbolic Smoke Ball case. I won't go into the case in detail now because we will return to it. In that case Mrs Carlill responded to an advertisement by buying the defendant's product, a carbolic smoke ball, which was touted as a wonder cure for all sorts of maladies. The advertisement promised £100 to anyone who used the ball and yet contracted influenza. Mrs C duly obliged and sued for the £100 which the company had refused to pay. The case raised a number of basic issues about formation of contract. Can an advertisement be the basis of a contract? Can Mrs C's buying the smoke ball be consideration for the company's promise? Remember that her buying the smoke ball was a consideration for the smoke ball itself. Was getting the 'flu the consideration? and so on. Mrs C won her case and thereby provided law students for the next century at least with a taste of the mysteries of the law of contract. The case is important in establishing that a contract does not necessarily involve the exchange of executory promises. This type of contract, where only one party comes under an enforceable obligation - the company in this case - is called a unilateral contract. It takes the form: if you do this then I promise to do something in return, usually pay you money. The promisee is never under any obligation to do anything. He or she can take it or leave it. The promisor, on the other hand, is under a contractual obligation once the promisee has responded appropriately to the offer.

19th Century Laissez Faire

As a reaction to the stratified society of the 18th century and earlier, a new philosophy took hold. The philosophy of liberalism supposed that an individual should not be allocated a status at birth but instead should be free to compete equally with his or her neighbour. Such a person should not be hampered by oppressive laws. They should be kept to a minimum. Society was to break away from hierarchical organisation. Law was to play its most significant and strictest role at the level of the state. Government was subject to strict rules so as to prevent despotism. Law would then have a diminishing role as it descended through society. It would play a small role in industry and commerce and almost no role at the level of the family.

These ideas were taken up by economic thinkers whose place in society became increasingly important as economic activity started to burgeon.

Many of the principles of contract law which you will be studying reflect the philosophy of last century, what came to be known as laissez faire which means "leave alone". Its modern expression is "de-regulation" and the view that government should not interfere in the market place. Let the market decide who wants what. The economists call this the theory of perfect competition which envisages a market in which buyers and sellers are free agents, each of whom cannot influence the price or quantity of goods. The price of, say, tomatoes is determined by supply and demand; if there is an oversupply the price will fall, an undersupply the price will rise. If it rises too far people will stop buying but at the same time more suppliers will turn to tomato growing and supply will increase, thus bringing the price down again. This equilibrium was praised by 19th century economists and by free market adherents to-day as providing the perfect system for distributing goods and services. The quantities and prices of goods and services were determined by the very many individuals in the market who acted freely and rationally in making choices which were both in their own individual best interests and in the overall interests of the economy. Much of this is dealt with in the Law in Context course.

By contrast, other systems of distribution of goods and services, for example, by state direction were thought to be inferior. In communist countries there was traditionally no free market and the state determined who should get what and at what price.

Bound up with the philosophy of 19th century laissez faire were various beliefs which concerned the welfare of the individual. A person, free of constraints, acting rationally would be able to determine for himself or herself what he or she should buy and sell. The idea of individual autonomy was extolled to be the best state for people. They were free to make choices and free to make mistakes. If they made too many mistakes, then they would fall by the wayside and more talented people would come to the fore. The system thus ensured that the competent succeeded, with every person in theory having an equal opportunity to compete and to succeed. This was survival of the fittest, something which, in the natural world, Darwin had discovered in the 19th century and which had such a huge impact not just on science but also on philosophy.

When two people came together to make a deal, they would determine what was the fairest exchange. They could write into their contract whatever they pleased, free of state intervention or imposition. This became to be known as the will theory whereby the sole task of courts was to give force to the parties' intentions as disclosed by their agreement. It was not the court's job to write the contract for the parties or to impose a just solution on them. Justice was "blind". (This symbol of justice is still used to-day). The expression "freedom of contract" was the catch cry for this approach, namely, that the parties and not the state should determine the contractual arrangement. The idea was that a contract was a voluntarily assumed set of obligations. This is to be contrasted with other areas of the law, particularly torts. An obligation arises in tort because the law says so - the obligation is imposed. In contract, on the other hand, the parties, acting as free agents, decide for themselves what obligations they are prepared to take on. That was, at least, the theory.

A good statement of the will theory can be found on p 22 of Greig and Davis Law of Contract in the quotation from Cohen (1933) Harv L Rev 553 at 558. This, too, reflects the 19th century philosophy of laissez faire.

Another aspect of the 19th century view of commercial relations was that the rules under which business people operated should be very clear and as precise as possible. It was thought that business efficiency would be promoted with a legal system which promoted certainty and security in transactions. We will see that, for example, the rules of offer and acceptance are very precise and assume a certain degree of orderly and predictable behaviour. It was thought that certainty was more important than justice if the two values competed. So, for example, the rule that you are bound by a contract which you have signed, whether you have read it or not, promoted certainty at the expense of those who were unsophisticated or naive and either did not read or could not understand what they were signing.

The individualistic creed could not in practice survive in a pure form. The theory of perfect competition in which each player in the market is an individual who cannot by himself or herself exert any influence on supply or demand had to give way in the face of increasing concentration of economic power. Large corporations used their bargaining power to extract or impose conditions which were far from ideal on both employees and consumers. Freedom of contract meant freedom to exploit. For example, large railway companies could exempt themselves from liability in the event of an accident. The passenger had no choice but to accept the conditions imposed by the railway company. The result was that legislation was passed to curb the excesses of the railway companies (Railway and Canal Traffic Act 1854 (UK)). This was the beginning of the consumer revolution. A similar thing happened at the beginning of this century in Australia with the passing of the Sea-Carriage of Goods Act 1904 (Cth), documented by Greig and Davis Law of Contract on p 31, which curbed shipowners from unreasonably exempting themselves from liability. So the idea of freedom of contract and the idea that obligations were voluntarily assumed by free agents did not match the reality of economic power which, in effect allowed big players to dictate to little players. Standard form contracts were imposed by the powerful and if you wanted to do business with them you could take it or leave it. You could not bargain. Standard form contracts have been called a form of private legislation.

In fact, the 19th century was far from a time of laissez faire. The principal reason for this was that there was an early revulsion against the excesses of the entrepreneurs. In particular, the commodification of labour, that is, the treatment of people as a commodity - just another in-put to the manufacturing process - excited political response. Early in the 19th century laws were passed to control the employment of children in factories, to control hours of work and safety conditions.

20th Century Social Welfare

The spirit of the 19th century has given way in part to a more paternalistic concern for the individual. It is no longer assumed, as it was in the 19th century, that the individual is a free agent who can protect his or her own best interests. The market can be a cruel mechanism. People in a market model are merely units of production. There was a natural revulsion against this view and its consequences. The changes could be seen in legislation initially. Governments were prepared to intervene in the contract relationship in certain areas. The overall effect of such intervention was to protect the underdog against undue exploitation. Thus in the field of safety at work the onus was shifted from the worker to the employer to maintain proper standards. Compensation for injuries suffered in the workplace was assured by workers' compensation statutes. The common law changed too so that, for example, the complete defence of voluntary assumption of risk which prevented injured workers from claiming successfully, was greatly circumscribed. Landlords no longer had the freedom to impose whatever conditions they liked. Finance companies were controlled in their lending practices. People who sold goods had to guarantee certain minimum standards of quality. And so on. Now there are to be found legislative provisions which actually say in broad terms: you must make fair contracts. We will examine this legislation in this course.

The judges were slower to respond to the new spirit of welfarism. Many cases in the 20th century reflect the older views of laissez faire. One area where judges did respond to the facts of economic life, namely, that big corporations tended to wield their power to the detriment of consumers, was in the area of exemption clauses. Judges employed all sorts of tricky devices to strike down harsh exemption clauses. But it is significant that they never said: "that is not allowed because it is unfair". Instead they would find that the exemption clause had not been properly drafted or that it had not been sufficiently drawn to the attention of the person whose rights were taken away by the clause. Thus "freedom of contract" still operated as the basic principle in that a business could exempt itself from liability if the clause was well enough drafted.

In the last ten years or so in Australia the High Court has shown an inclination to develop the law along more welfarist lines. It could be said that this is a delayed reaction. The movement for de-regulation, for returning to a more market-oriented economy, is strong in the political sphere. Yet the judges are arguably moving in the opposite direction. We will see some quite remarkable examples in this course of how the law of contract is moving from the cut-and-dried, survival of the fittest, 19th century model to a softer, more uncertain law which expects commercial people to behave fairly towards each other.

Another curious phenomenon is that perfect competition, so beloved of economists, often does not work. Business people actually try to make sure that it does not work by combining together in cartels. Such practices are now illegal under the Trade Practices Act 1974 (Cth). So in one part of the Trade Practices Act (Part V) you will find consumer protection provisions which are needed to protect consumers against the power of big business and in another part of the Act (Part IV) you will find sections which consciously promote competition by forbidding anti-competitive practices. It is ironic that government intervention in the form of legislation is needed to promote free markets.