Making Freedom of Contract Real with Alan Schwartz | School of Law

Wednesday, October 15th, 2025
4:30 PM - 5:30 PM

Add to Calendar: Add to Calendar: 2025-10-15 16:30:00 2025-10-15 17:30:00 Making Freedom of Contract Real with Alan Schwartz Event Description It is widely but incorrectly believed that commercially sophisticated parties are free to make whatever contracts they choose. Contracts contain a “procedural” part and a “substantive” part. The procedural part regulates how contracts function. Thus, offers must be communicated, certain terms must be written, contracts must be performed in good faith. The substantive part regulates the terms of trade. Thus, parties can trade ten green widgets for price "p" or 12 blue widgets for price "q." The rules that constitute the procedural part are mandatory. This lecture focuses on three important procedural rules. The remedy rules require the promisor to transfer to a disappointed promisee the value the promisee would have realized from the transaction. Parties cannot contract to permit the promisor to pay less or require it to pay more. The interpretive rules authorize courts to admit all relevant and material evidence in order to find what the parties intended their contract to achieve. Courts ignore party requests to decide on less evidence—that is, to sacrifice accuracy for reduced trial costs. The modification rules prevent parties from restricting their right to modify even when banning modification would increase the parties’ expected gain. This lecture will argue that contract law’s mandatory rules should be reduced to defaults. Freedom of contract today thus exists only for a contract’s substantive part, but contracts also must satisfy two “enforcement constraints:” Courts will not enforce contracts unless they are procedurally just and not create externalities. The procedural justice constraint traditionally is satisfied when parties are sophisticated, reasonably informed and free from coercion. The no externalities constraint traditionally is satisfied when a contract’s performance would not impose material costs on non-parties. Scholars recently argued that contract law should contain a third constraint: Contracts must do substantive justice as between the parties. This constraint would require courts not to enforce a contract unless the parties were in roughly equal material and social circumstances; they negotiated with the goal of doing justice between them; and their contract would not worsen the circumstances of non-parties. Courts are becoming receptive to these claims. This lecture will argue to the contrary: Contract law should not add a substantive justice constraint. To summarize, sophisticated parties today are not free to decide how their contracts should be governed and their freedom regarding what to trade is increasingly threatened. To make freedom of contract “real,” the law should give these parties actual freedom over their commercial lives. Speaker Biography Alan Schwartz is Sterling Professor Emeritus of Law at Yale University. His appointments are in the Yale Law School and the Yale School of Management. Professor Schwartz’s academic specialties include corporate finance and corporate governance, mergers and acquisitions, bankruptcy, contracts and commercial transactions. He has published numerous articles and books in these fields. He has been identified by the Institute of Scientific Information as being in the top one half of 1% of social scientists worldwide in total citations, and by HeinOnline as one of the 50 most-cited law professors of all time. Professor Schwartz has been President of the American Law and Economics Association and Editor of The Journal of Law, Economics and Organization. He is a member of the American Academy of Arts and Sciences and director of Furniture Brands International, which is traded on the New York Stock Exchange. Professor Schwartz consults as an expert in corporate governance, mergers and acquisitions, bankruptcy, contracts and commercial law. Moot Courtroom School of Law School of Law America/New_York public

Event Description

It is widely but incorrectly believed that commercially sophisticated parties are free to make whatever contracts they choose. Contracts contain a “procedural” part and a “substantive” part. The procedural part regulates how contracts function. Thus, offers must be communicated, certain terms must be written, contracts must be performed in good faith. The substantive part regulates the terms of trade. Thus, parties can trade ten green widgets for price "p" or 12 blue widgets for price "q."

The rules that constitute the procedural part are mandatory. This lecture focuses on three important procedural rules. The remedy rules require the promisor to transfer to a disappointed promisee the value the promisee would have realized from the transaction. Parties cannot contract to permit the promisor to pay less or require it to pay more. The interpretive rules authorize courts to admit all relevant and material evidence in order to find what the parties intended their contract to achieve. Courts ignore party requests to decide on less evidence—that is, to sacrifice accuracy for reduced trial costs. The modification rules prevent parties from restricting their right to modify even when banning modification would increase the parties’ expected gain. This lecture will argue that contract law’s mandatory rules should be reduced to defaults.

Freedom of contract today thus exists only for a contract’s substantive part, but contracts also must satisfy two “enforcement constraints:” Courts will not enforce contracts unless they are procedurally just and not create externalities. The procedural justice constraint traditionally is satisfied when parties are sophisticated, reasonably informed and free from coercion. The no externalities constraint traditionally is satisfied when a contract’s performance would not impose material costs on non-parties. Scholars recently argued that contract law should contain a third constraint: Contracts must do substantive justice as between the parties. This constraint would require courts not to enforce a contract unless the parties were in roughly equal material and social circumstances; they negotiated with the goal of doing justice between them; and their contract would not worsen the circumstances of non-parties. Courts are becoming receptive to these claims. This lecture will argue to the contrary: Contract law should not add a substantive justice constraint.

To summarize, sophisticated parties today are not free to decide how their contracts should be governed and their freedom regarding what to trade is increasingly threatened. To make freedom of contract “real,” the law should give these parties actual freedom over their commercial lives.

Speaker Biography

Alan Schwartz is Sterling Professor Emeritus of Law at Yale University. His appointments are in the Yale Law School and the Yale School of Management. Professor Schwartz’s academic specialties include corporate finance and corporate governance, mergers and acquisitions, bankruptcy, contracts and commercial transactions. He has published numerous articles and books in these fields. He has been identified by the Institute of Scientific Information as being in the top one half of 1% of social scientists worldwide in total citations, and by HeinOnline as one of the 50 most-cited law professors of all time. Professor Schwartz has been President of the American Law and Economics Association and Editor of The Journal of Law, Economics and Organization. He is a member of the American Academy of Arts and Sciences and director of Furniture Brands International, which is traded on the New York Stock Exchange. Professor Schwartz consults as an expert in corporate governance, mergers and acquisitions, bankruptcy, contracts and commercial law.

Event Location

Moot Courtroom