1. Contract and Tort

There are two fundamental principles around which people can structure their interactions: voluntary agreement, and coercion. In the world of law, agreement is expressed through contract. Tort takes over where agreement has failed or not been made.

A tort suit is filed when one feels his rights have been violated. The role of the court is to determine the rights and responsibilities existing between the parties to the lawsuit.

For example, I punch you in the nose. There is no doubt that I caused your injury. You did not agree to my action. Barring some claim of self-defense, a court is certain to determine that I violated your rights, and hold me liable for your injury.

Contracts, by contrast, revolve around voluntary relationships. In exchange for a certain fee, I agree to paint your house. We might further agree that you will supply the ladders, and I will supply the paint. But there is no reason that our contract cannot go further, and also specify who will bear the risk of something going wrong. Most commonly, I may guarantee, or warrant, my work. I promise that under normal conditions, the paint job will last at least five years. If the paint turns out to be faulty, I bear that risk.

We might also agree on the distribution of the risk resulting from accidents. For example, you warn me that your ladders are old and rotten, and that if I am concerned about falling I should procure my own ladders. I agree to use yours, but note that I won’t buy you a new ladder if it breaks during the painting. I am then injured when the ladder breaks, and sue you for my damages. You claim, correctly, that I had accepted the risk of accident. But when you sue me to recover the cost of your broken ladder, I win on the grounds that you had agreed to bear the cost of that possibility. Even more likely, having agreed to the distribution of rights and responsibilities before hand, neither of us go to court.

This voluntary distribution of rights and responsibilities is fundamental to efforts to manage liability. It allows the manufacturer or seller of a product to place restrictions on its use, or otherwise avoid liability. Contract allows both parties to know in advance what risk they are assuming. Where each side knows in advance both its own obligations and those of the other party, each party has strong incentive to take proper precaution to protect its interests. Contractual allocation of risk allows consumers willing to take risks to gain access to products that a manufacturer might withhold from the market, for lack of insurance, were it liable for all accidents resulting from use of the product. Contract – the voluntary distribution of risks before an accident, when heads are cool – is thus a vital part of the risk management and predictability needed for insurers to evaluate a risk.

In addition to its attacks on causation, a major effort of the new tort jurisprudence has been to destroy the voluntary, contractual distribution of rights and responsibilities regarding the possibility of accidents.

This assault began in a most innocuous fashion, with the elimination of a largely dated legal concept called privity.