Contract theory (law)
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Template:ContractLaw Contract theory comprises many different theories and various interpretations of the various body of rules and subrules which define contract law.
Classical contract theory[edit]
Classical contract theory is the set of ideas and assumptions which underpinned the development of contract law in England and the United States during the 19th century. During this period, the prevailing liberal individualist philosophy of laissez faire elevated contract to a position of central importance in the law.
Classical contract theory was organised around the will theory of contract, which held that a contract represents an expression of the will of the contracting parties, and for that reason should be respected and enforced by the courts. The principles of modern contract law were founded on the concepts of individualism and free will over government intervention. They were encapsulated in a political theory labelled "contractualism" by Morris Cohen in 1933.[1]
This approach had two principal effects. Firstly, the courts were reluctant to recognise the existence of non-contractual obligations. Since the law of tort and restitution was still largely undeveloped, the courts tended to perceive social relations in contractual terms. The principles of contract law were seen as objective and neutral, and based on a respect for voluntary choices.
Criticism of classical theory[edit]
The will theory and the classical approach to contract have been comprehensively criticised by the legal realism movement. Legal realists demonstrated that contracts did not necessarily represent the will of the parties. The classical notion of individuals freely entering into contracts fails to take account of the complexities of social behaviour and the unequal distribution of economic power.
Another deficiency in the will theory is that many problems that contract law must deal with arise as a result of what parties have not expressly agreed upon, rather than what they have agreed upon. A contract could arise on the basis of an objective interpretation of the parties agreement, even if that was inconsistent with the true will of one of the parties.
Modern contract theory[edit]
Robert A. Hillman has identified the need to develop "a flexible, pragmatic model of modern contract law", including the rules, principles and theories currently used in the courts.[2] Patrick Atiyah has looked at modern contract theory in relation to its paradigm case, the bilateral executory contract.[3]
Default Rules and Complete Contracts[edit]
Contract theory also uses the notion of a complete contract, which is thought of as a contract that specifies the legal consequences of every possible state of the world. Because it would be impossible and costly for the parties to an agreement to make their contract complete, the law provides default rules which fill in the gaps in the actual agreement of the parties.
Economics[edit]
In economics, the theory of contracts is part of information economics and describes how economic actors use particular contractual arrangements to deal with information asymmetries.
References[edit]
- ↑ Cohen, Morris R, The Basis of Contract, Harvard Law Review, Vol. 46, No. 4 (February 1933), pp. 553–592
- ↑ Hillman, R. A., The Crisis in Modern Contract Theory, Cornell Law Faculty Publications, published 11 January 1998, accessed 29 December 2022
- ↑ Clark, R., P. S. Atiyah, Essays on Contract, Irish Jurist, Summer 1988, new series, Vol. 23, No. 1, pp. 175–177, accessed 29 December 2022
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