Commodification and Contract Formation: Placing the Consideration Doctrine on Stronger Foundations

Abstract:     
Under the traditional consideration doctrine, a promise is only legally enforceable if it is made in exchange for something of value. This doctrine lies at the heart of contract law, yet it lacks a sound theoretical justification — a fact that has confounded generations of scholars and created a mess of case law.

This paper argues that the failure of traditional justifications for the doctrine comes from two mistaken assumptions. First, previous scholars have assumed that anyone can back a promise with nominal consideration if they wish to do so. We show how social norms against commodification limit the availability of the consideration form. Some promises are made in social contexts in which invoking consideration — that is, exchanging a promise in return for something of value — violates social taboos. Specifically, we show that anti-commodification taboos operate where the social message sent by a transaction is more important than the desire to transfer goods or services. Whereas previous scholarship has assumed one can always invoke consideration, we argue that anti-commodification norms make even nominal consideration unavailable within these contexts.

Second, scholars have assumed that when parties utilize a formalism — such as nominal consideration — to make their promises legally binding, they necessarily desire to be bound. Using a game-theoretic model based on asymmetric information, we dispute the conventional wisdom that the law should honor parties' intentions as articulated at the time of contract formation. We show how parties' expressed intentions may not conform to their underlying desires. A promisor may render her promise legally enforceable — even though she does not want to — in order to signal her sincerity to the promisee. As a result, in a cycle of inefficient signaling, other promisors may feel forced to do the same. Thus, the mere fact that parties take advantage of a legally binding form does not imply that they desire the existence of that option. Having the option to legally enforce a promise may harm both promisors and promisees.

Having exposed these two flawed assumptions, we provide a new framework for determining which promises the law should enforce. Ultimately, what matters is not whether the parties actually do invoke consideration, but rather whether they can invoke consideration. Norms prevent parties from invoking consideration where the social message sent by a promise is more important than the substance of the transaction — and these are precisely the types of promises in which inefficient signaling is likely to occur. In other words, norms block the use of consideration precisely where the option for legal enforcement of promises is most likely to harm both promisors and promisees. Therefore, only when social norms allow the use of consideration should we conclude that parties truly desire the option to have their promises legally enforced.

Keywords: Consideration, contract, law, game theory, signaling, social norms, commodification, Aghion, Hermalin, norms, prisoner's dillema

JEL Classifications: C70, D82, D80, K12

Accepted Paper Series