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Why Are There Set Terms in Contracts?

How are the terms of a contract set? Professor Richard Epstein of NYU School of Law argues that the theory of mutual gains over time between parties is key to setting the proper terms in contracts. Terms are set up to prevent specific problems arising from different kinds of duress and misrepresentation, which ensure mutual gain. https://youtube.com/watch?v=MayGosq6uI8


When you put these contracts together, the model associated with them is essentially that both parties turn out to engage in voluntary transactions. The word ‘voluntary’ is notoriously slippery and what typically is understood is that the word voluntary is designed to negate in advance two ways in which agreement can be undermined. One of these is essentially through duress and what it means in effect is if I enter into a promise to convey something to you because you have put a gun on to my head. Even though I have agreed to the arrangement the duress will essentially negate the particular dealing question. The law always is worried about the effort of individuals to circumvent the basic obligations to respect the property rights of another, and the duress rules are designed to do that. And there is nobody in any legal system was ever rejected that proposition. The more difficult problem is that which is associated with mistake without the presence of coercion and this is divided into two parts. The first part involves the situation in which there’s a misrepresentation of the material fact by one party to the other. What happens is that the misrepresentation induces inefficient exchanges. The misrepresentations will leave people to put the wrong value on the property that they are surrendering or the property they are acquiring. When they make that kind of mistake ah what happens is there is no reason to believe that the transaction is going to be for mutual game. The second element is a simple mistake which is not induced by fraud and this is a much more complicated system to organize. In some cases you tell people you have to bear the risk of your own mistakes, and other cases you think that there mistake is so absolutely enormous that you are going to set aside the contract. What happens in practice is people start to negotiate over the prospect of mistakes and if you can have explicit terms when you can set aside the transaction based upon future events. It means that you can basically increase the efficiency of the transactions at the front end and encourage and facilitate the occurrence of voluntary, profit-maximizing transactions. You can only figure out what those terms are if you understand the mutual gain hypothesis over time as driving the way in which these particular additional obligations are going to be concretized.

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