Montreal, September 14, 2002  /  No 109
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Dr. Younkins is a Professor of Accountancy and Business Administration at Wheeling Jesuit University in West Virginia. He is the author of Capitalism and Commerce
by Edward W.Younkins
          Progress is difference and change. If individuals were not free to try new things, then there would never be any improvements. In order to have progress, there must be freedom to try new advances. Freedom to act in their own self-interest is the mainspring for a diversity of ideas, innovation and experiments that lead to the discovery of new products, services, and means of production. Freedom is a practical necessity for progress in an unpredictable, uncertain, and risky world. Progress is stifled when individuals cannot voluntarily make enforceable and binding contracts. The mechanism of contract furthers progress by sanctioning and stimulating specialization and permitting an extended order to evolve. People will voluntarily join together in common ventures that lead them to anticipate mutual gain. Traditional common law rules of contract foster forms of innovation that required cooperative efforts.
          A contract is a binding agreement between two or more parties that usually results in some type of performance. Trade and commerce could not thrive if freely made agreements were not normally carried out. Contract can be viewed as a method in which men bargaining with one another can make sure that their promises will last longer than their changeable states of mind. The law of contract provides a mechanism through which private individuals can, to a certain degree, predict, control, and stabilize the future. Contracts allow people to incur reciprocal responsibilities and commitments, to make promises others can rely on, to remove some uncertainty from life, and to establish reasonable expectations for future actions. 
          The idea of contract makes capitalism possible. Although markets can exist without contracts, it is clear that if every trade or agreement had to be completed immediately there could not be much future planning of production and distribution and limited circuitedness in people's business relationship with one another. Freedom of contract is essential to a competitive and open exchange economy. The diversity embodied by this system maximizes individual choice and freedom. 
Utilitarian or pragmatic conventions 
          Many view contracts as utilitarian or pragmatic conventions that act to secure people's expectations. Others consider contracts to be instruments by which rights to present and future alienable goods are ascribed, delineated, exchanged, or transferred. 
          A function of the state, operating mainly through the court system, is to enforce performance by requiring the promisor to fulfill his bargain on penalty of fine or imprisonment or by awarding judgment against him for money damages when, without legal reason, he fails to perform. State compulsion has replaced private force and customary and private law systems, which were common in earlier time periods. State enforcement in concerns of bargain and promise can be viewed as one of the state's most important functions behind only peacekeeping and property defense. In essence, a breach of contract is an indirect use of force. 
          With the advent of specialization of labor, human beings created an exchange mechanism through which a man, who can produce something more efficiently than another, can exchange it for another item that he would create less efficiently than the other person. A person gives in order to receive, and this giving and receiving arrangement is frequently protected by a formal contract. 
          Frequently, one or both sides to an agreement are carried out at a later date. In order for an exchange to be arranged at one point in time, with performance to take place later, the parties, rather than simply rely on one another's honor to secure performance, normally depend upon a legally enforceable obligation to comply with the agreement. 
          The contract is integral to a market economy. Think of the variety of commitments that must be honored for any firm to operate. Each of these arrangements is usually defined by contract. If most of these contracts were not carried out according to their terms, commercial transactions would be impossible. Any commercial organization consists of numerous separate activities bound into an effective whole through a collection of contracts. 
          In economic life the principle of contract requires the assent of all involved individuals. As embodiments of people's free will, contracts are the glue that holds a peaceful society together. 
          The idea that contracts are legally enforceable does not ensure performance, but does increase the probability of performance. When a party knows he may face legal action if he does not comply, he is more likely to complete his side of the bargain. In addition, if performance is not expected, the fact that a lawsuit may be brought may be sufficient to obtain an acceptable out-of-court settlement. 
     « Because of the idea of voluntary contract, patterns of social life are not dictated by a compelling central authority but rather by the independent decisions of individuals seeking their own happiness. »
          Contract liability is promissory liability. In a business society, where wealth largely consists of promises, it is of paramount importance to protect the interests of the individual promisees. Promises, in the form of contracts, have become a convention whereby people are able to realize their aims by creating expectations about one another's conduct. 
Key component of a free society 
          Contract law is a key component of a free society. Contracts involve a trade-off of flexibility for security and the voluntary assumption of mutual obligation and commitment. Through contract, a participant in civil society is differentiated from the atomistic individual. 
          Autonomous human beings have the rational ability and natural right to make their own life choices. A necessary condition of acting autonomously is the possibility of freely making mutually binding agreements. Autonomy thus requires freedom of contract. Better connections between persons can be made by contract, which works to mutual benefit, instead of through coercion, which does not. 
          Although a contract may appear to be the subordination of one man's will to another, the former gains more than he gives up, as does the latter. In a free society, the only transactions people engage in are positive-sum ones in which both parties believe they will benefit. 
          Historically, the rise of contract within Western civilization reflected the disintegration of a status-determined society. Contract became a tool of change and self-determination, an instrument of peace, and the only legitimate means of social integration in a free society. Progress depends on protected property rights and the confidence that contractual obligations will be honored. 
          Anglo-American contract law evolved as part of English common law. However, other legal systems such as the canon law of the Church and the customary law of merchants had influences on the common law. 
          The Greeks and Romans failed to develop any general law of contracts. However, Aristotle did emphasize that parties to a contract must have equal consideration under it and an equal wish to benefit from the exchange. The idea of reciprocal services underpinned the Aristotelian idea of fair contract. 
          The Church took a firm view of contracts due to its suspicions of the trader and concern for morality. For the medieval canonist, a man who does not keep his promise is guilty of falsehood. The Church therefore took steps to make sure that contracts were strictly enforced and properly constructed with due course for the rights of the parties. The Church taught that deceit is wrong and that a person should do what he says he will do, particularly when his word encourages another to take action or give a promise in reliance on that word. Ecclesiastical courts regarded the breaking of pledges as sins and enforced contract fulfillment with the penalty of excommunication. 
          Contract law has many similarities with the law of property and the law of torts (i.e., the law of private wrongs). The growth of trade and commerce and the associated lucrative court fees led the king's court system to begin handling matter that previously was within the exclusive jurisdiction of the ecclesiastical courts. Through incremental and slow modifications and extensions the judges of these courts developed a whole system of contractual principles based on analogies to property law and tort law. Legal sanctions used to enforce a promise were developed and included initially money damages against the defaulter and later specific performance of the promise. 
          According to Lon Fuller, the term "contract law" originally referred to the law that a contract itself brings into existence rather than to the law of or about contracts. If we think of contract law as the law that the involved parties themselves bring into existence by their agreement, the transition from customary law to contract law becomes an easy one to envision and understand. 
Business custom and the state 
          The tendency has been for courts to enforce business custom and practice as law. When business people develop a new practice, it is probable that it receives the forces of government-backed law. The private sector develops as ever-expanding base of customary law. For instance, enforceable rights and duties arise from a contract as well as from the provisions of various statutes. It follows that contracts voluntarily entered into by private persons provide a form of privately created law. When a contract becomes standardized reflecting long-term traditions, it reveals customary commercial law. When a contract incorporates a new business practice in response to dynamically changing business environments, it is likely to add to customary law just as common law is expanded through new court precedents.  
          Doctrines developed by merchant courts to deal with contracts and other business matters were absorbed into the common law and official courts began attracting business away from merchant courts. The financial self-interest of the English judges who were paid out of litigation fees was thus an influential factor regarding the absorption of the Law Merchant into the common law. 
          Sir Henry Sumner Maine, the nineteenth-century legal historian, wrote that progressive societies exhibit a development from status-bound roles to those founded more and more on contractual freedom. Whereas a status system establishes obligations, conditions, and interrelations by birth, contract regards individuals as free and equal moral agents developing their own bonds with others. In a free society, there is high degree of social mobility and freedom to associate in response to current and expected future needs. Social arrangements are a result of the independent decisions of separate individuals pursuing their own interests, rather than by a central powerful authority such as the state or the Church. 
          In Western society, with the steady dissolution of castes, social classes, guilds, ethnic cultures, and so on, human resources have become more available to organizers in business and other associations. Organizers compete for the best managerial and nonmanagerial employees, and with the freedom of association present in the era of contracts, it is possible to create successful organizations despite some interference by the state. 
          By treating individuals as free and equal generic units, contract permits people to create arrangements far beyond the plans of any grand designers. Only by treating individuals in this manner can overarching rules allow people to use their own knowledge, express their individuality, and take advantage of their own ideas by joining them and their property in various unanticipated ways. When people cannot make binding, enforceable commitments, dynamic progress is severely hampered. The idea of contract fosters progress by encouraging specialization and allowing an extended order to develop. It is especially important to have well-functioning legal systems when strangers interact in commercial and other situations. The goal of contract law is not to inspire legal suits but to settle or avoid them. Well-known rules that eliminate ambiguity make it more likely that promises will be kept. 
          The mechanism of contract is simple, universal, and powerful. It involves giving up something that you value in exchange for some other item that you value more. As a result, both parties gain. Furthermore, the basic idea of gaining via trade is suitable for repetition ad infinitum as what we received in one transaction can be reprocessed and resold in a subsequent transaction. Because of the idea of voluntary contract, patterns of social life are not dictated by a compelling central authority but rather by the independent decisions of individuals seeking their own happiness. Voluntary contracts involve positive-sum exchanges for the involved parties as human pleasures are increased by pairing resources with the individuals who value them highest. This benevolent system facilitates productive interactions which expand over time and exchanges until they include all people who possess the capacity to engage in exchanges that are seen as mutually beneficial. 
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