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Contract law is the body of law that regulates and enforces promises and exchanges, for either immediate or future performance, between two or more consenting parties. It also provides legal remedies if one or more of the parties break these agreements.
Contract law fulfills a moral, social, and economic function. The moral function of contract law is rooted in the premise that promises made are to be kept, which is almost universally recognized in customary law, as well as to varying extents in positive law. Socially, contract law is a means for regulating and defining social relationships, such as in the case of marriage contracts, or contracts between different social orders or castes. Economically, contract law facilitates commerce by providing a form of legal guarantee of remedies for broken contracts, which facilitated the development of long-term trade, as well as the use of negotiable instruments, such as letters of credit and bills of lading.
Moral Functions of Contracts
The legal scholar Harold J. Berman wrote that the Western ideal of contract law began with the theory that “a promise created an obligation to God” (Berman 1986, 112). Not only does the canon law of the Jewish, Islamic, and Christian faiths affirm this idea, nearly all cultures have a form of contract premised on the moral notion that promises are to be kept. In traditional India and China, contracts were often adjudicated in terms of moral principles (dharma in Hinduism; li in Confucianism); a contract which violated general rules of morality or equity could be ruled invalid, even if the acts were otherwise licit. Roman law mandated that contracts be “clothed,” that is, parties must have had a tangible purpose or reason (causa) for entering into a contract. Therefore, Roman law emphasized the binding nature of the promises made between parties, and in determining the legality of a contract, jurists in the Roman law tradition privileged the ends, or the reasons for creating the contract over the means by which the contract was created. Medieval canonists added an element of Christian morality to contract law which held that the final purpose of a contract, regardless of the intermediate expectations of the parties, must conform to moral principles. The Civil Code of Napoleon (1804) mandated that a valid contract was one to which parties voluntarily agreed, and that was done for licit purposes; the form of the contract was secondary to the ends. In Anglo-American common law, principles of equity applied as well, and the doctrine of unjust enrichment meant that courts could order quasi-contract actions, which are court ordered adjustments to contracts that are meant to restore equity between the parties, to recover sums from those unjustly enriched on behalf of plaintiffs.
Social Functions of Contracts
For most of the history of traditional China and Japan, there was no formal contract law, although other laws, such as imperial or feudal laws, could be used to seek legal protection and remedies in contract disputes. Moreover, customary law in China and Japan served the purposes of substantive contract law. This customary law was closely bound to the social structures of each society: the Confucian familial and clan hierarchy in China and the feudal system of traditional Japan. In China, the Confucian ideal of the family, which dictated strict obligations between individual family members, relationships of whole family units to each other, and to the society as a whole, superseded any individual contractual relationships. In other words, contractual relationships were bound first by the Confucian system, and only secondarily by the individual agreement. Traditionally in China, recourse to the courts was considered the very last resort in a contract dispute; arbitration was almost always preferable, because an irresolvable dispute signified a small breakdown in the traditional Confucian order. Similarly in Japan, contract disputes were almost always subject to mediation, except that where in China the family or clan formed the basis of arbitration, in Japan the feudal village more than the family was the operative unit. In the West, contract law formed part of a broader law of obligations which similarly defined social relations. The intricacies of the Roman system of patronage meant that Roman law considered “like” contracts (obligationes ex quasi contractu), such as the giving of gifts, to be a source of legally binding relationships. Even in modern business practice, as Stewart Macaulay has observed, contracts are less a means of regulating exchange than a method of building relationships, and a breach of contract is a serious break which “often results in a ‘divorce’ ending the ‘marriage’ between the two businesses, since a contract action is likely to carry charges with at least an overtone of bad faith” (Macaulay 1963, 65).
Economic Functions of Contracts
The English legal scholar Henry Maine wrote that a shift from “status to contract” was fundamental to the creation of modern social and economic systems (Maine 1917, 100). In other words, modern (i.e., Western) legal systems, contractual relationships, and economic systems depended on the social equality of the parties, the ability to freely enter into exchanges, and the confidence the law would enforce these exchanges. In ancient Greece, by comparison, although Athenian contract law allowed for absolute freedom to enter into contracts, in practice this only applied to citizens of the polis. In the seventeenth century, English jurists began to emphasize the concepts of “consideration” and the “bargain,” which, although similar to the Roman concept of causa, differed in that English common law generally did not consider either the ends of a contract nor the status of the parties involved. Instead, English law concentrated on the bargaining between parties from which a consideration, an act or promise by which one party acts in consideration of a reciprocal action, creates a binding agreement. English common law also developed the doctrine of “strict-liability,” which placed an absolute binding obligation on the parties regardless of the reason for nonperformance. In Paradine v. Jane (1647), a lessee was still bound to pay rent to his landlord, although the defendant’s lands and crops had been destroyed during the English Civil War, because the court ruled that contracts are entered into freely by the parties involved. This seemingly harsh measure, however, has been undeniably important in the development of commerce and trade by making negotiable instruments, such as letters of credit, checks, and bills of exchange (all of which are essentially contracts which promise future payments), a more efficacious way of transferring large sums of money, because no matter how many parties that negotiable instrument has passed, the recipient could expect payment because “strict liability” still bound the original issuer to the original contract.
Historians and Contract Law
The intricacies and formalities of contracts and contract law have often been imposing to the point that many historians have disregarded contract law as a subject of inquiry. However, contract law, even in its most formal expressions, reflects the historical context in which the law was created, or contract disputes adjudicated. Moreover, as the American legal scholar Lon L. Fuller observed, contract law is not only the positive law of contracts, but an expression of customary law, and thus “contract law…refers primarily, not to the law of or about contracts, but to the ‘law’ a contract itself brings into existence” (Fuller 1969, 14). Thus, for the historian, contract law can yield important information about culture, ideology, society, and economics and a valuable point of inquiry into the past.
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