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WHAT IS THE ORIGIN OF A CONTRACT?

Human beings have the capacity to change their minds. They observe the world, calculate their interests, and act in the way they believe will best promote those interests. But, if everyone was free to change their minds according to the immediate circumstances, trade and commerce could not develop because there would be no guarantee that promises would be kept. Trade depends on stability in current behaviour, and predictability as to future behaviour. So there must be a system that reduces uncertainty and allows traders to make promises that others can rely on.

The natural reaction of a trader to a broken promise would be to threaten or use violence to encourage compliance. If the use of force becomes the norm, the emerging markets will be controlled by those with the most fearsome warriors. Hence, rulers must be involved to keep the peace and to enforce promises, i.e. state compulsion replaces private force. The idea that a promise might be enforced by a ruler does not ensure performance. The ruler must be accessible and develop a system to make decisions. But the threat of a ruler's involvement may increase the probability that the party in the wrong may keep his word. As commerce grows, there will be more promises made and it will be impractical for one ruler to act as a judge in every dispute. The power to resolve disputes must therefore be delegated, first to individuals with power and then to institutions. But if the resulting decision making is arbitrary, that is just as dangerous a source of uncertainty as the original lack of trust. So, rules must be developed to give some degree of certainty and predictability as to the outcome of the new courts.


WHAT POLICIES WILL THE LAW ENFORCE?

  • The ''peacekeeping function'' is a public good and what becomes a Social Contract between citizens and ruler to surrender some freedom in return for protection has become standard in all societies.

  • ''Economic benefits''. In addition to promoting stability in the transactions between individuals, it becomes possible for groups to work together for their mutual benefit. This leads to the concept of a Company or Corporation which allows internal agreement between the members of the group, and external predictability in the relationships between the group and its trading partners.

  • There is a ''moral basis'' for requiring an individual to keep his promise. Most cultures develop the Values of Honour and Honesty , and rely on Conscience to underpin morality. Dishonesty is wrong, particularly when one promise induces another person to take action. Equity or similar codes of fairness therefore require a person to obey the dictates of his or her conscience and so avoid causing loss to other people. In parallel, the concept of the ''wrong'' becomes codified in Tort — the law of private wrongs — which is based on the notions of personal accountability, Causation , and, in the modern law, Negligence , i.e. a duty of care owed to prevent foreseeable harm befalling another.



THE PHILOSOPHICAL BASIS OF CONTRACT

The freedom of contract demonstrates membership of a free civil society in which citizens have Autonomy . Henry James Sumner Maine (1822-1888), proposed that social structures evolve from roles derived from Status to those based on contractual freedom. A status system establishes obligations and relationships by birth, whereas a contract presumes that the individuals are free and equal. Modern Libertarianism such as that advanced by Robert Nozick (1938-2003) sees freedom of contract as the expression of the independent decisions of separate individuals pursuing their own interests in a "minimal state". Although each a contract may appear to undermine autonomy by imposing obligations, the reality is that free individuals only enter into transactions where both parties believe they will benefit.


SEE ALSO