• Video

Two Concepts of Contracts

Professor Todd Zywicki explains the two primary theories of Contracts - contracts as consent, and the economic theory of contracts. The first theory, contracts as consent, focuses on the ability of the parties to voluntarily accept and enter into the terms of a contract. The economic theory focuses on the external manifestation of a contract, rather than the intent or ability of the parties involved. https://youtube.com/watch?v=PZxid8_ATO0


So there are two predominant theories of contract. The first idea is sort of a philosophical idea. And this is associated with, in particular Randy Barnett and Charles Fried, which is the idea of contract as consent. The idea here is focusing on the autonomy of the individual and their voluntary consent to an obligation to another party that can be enforced by the government. So in many ways you could think of this as a simple extension or application of the idea of John Locke, in the idea that when people enter into civil society in a government relationship, they only assume those obligations either explicitly or tacitly that they freely or voluntarily assume. That is contract as consent. An alternative idea, the economic theory of contract, an economic of theory of contract says that it's not so much a matter of consent and what the parties agreed to do, but instead it's a matter of party's external manifestations. And it has to do with basically a social utilitarian calculus, which is that if you take certain objectively verifiable, reasonable actions that look like you are agreeing to be bound, then you can be bound. So these are two different theories, both in terms of what we call the positive theory, which is explaining the underlying logic of common law, the doctrines, as well as the normative theory of contract, which is what should contract try to do and what kind of promises should be enforceable and under which conditions. So under these different theories, the policy, the normative goals of the law are very distinct for the idea of contract as consent or in consent theory of contract. Basically the idea here is, is it is designed from a philosophical perspective to, to actualize parties autonomy, their reason, and their kind of dignity as individuals, to be able to voluntarily bind themselves to legally enforceable obligations. In the economic idea of contract, the normative idea here is, is that the purpose of law is essentially utilitarian, which is to, on net, make it easier for people as a whole, to be able to, to accomplish their goals. And what that means is that, under that system, you might end up with more people who end up entering into contract and not realizing it or thinking they've entered into a contract that they actually haven't. That idea is basically an economic idea that the rules are designed for the sort of long run of transactions posed to focusing on the individual will and conscious of intent of individual parties to a particular transaction.

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