A Positive Law Theory of Contract

Abstract:     
Conventional, morally-based, theories of contract have failed us, because they are unable to explain many of the decisions of the courts in contract, and related, cases. They are, for example, unable to explain why courts will hold a party bound by a contract in circumstances where the party was mistaken and held a subjective intention to enter into a contract with different terms. Conventional theories are also unable to explain implied terms in contract; the basis for the requirement that mistaken payments be repaid; nor are they able to explain how and why the doctrine of consideration and the doctrine of promissory estoppel ought to be abandoned.

The criminal law faced a parallel problem half a century ago, when natural law explanations of criminal law were found wanting, and were replaced by a positive law theory which was able to explain the basis of the criminal law in terms of positive laws which had as their limited objective the maintenance of peace and good order in the public realm. A positive law theory of contract law, with a considerable explanatory power, has now been developed. That theory starts with the observation that property is an abstract construct created by the positive law of the state. The theory also notes that the meaning of property is such that it entails a number of propositions, or principles. For example, one of those principles stems from the observation that because X has an exclusive right to the use and possession of his property, Y also has an exclusive power to alter his property rights in ways chosen by him. This means, therefore, as a matter of principle derived from the meaning of property, that Y cannot alter, unilaterally, the respective property rights of X and Y. Several other principles are entailed by the meaning of property.

Those principles, when applied to the decisions of the courts in cases of the sort mentioned above, are able to provide explanations of, and therefore can be seen to govern, those decisions. That explanatory process is aided by a better understanding of the rules of social discourse which govern the use of implied messages, and by a better understanding of the adverse effect upon the law of contract of the medieval common law rule of evidence which excluded party testimony, and which was not abolished until the mid-nineteenth century.

Keywords: Contract, contract theory, positive law, natural law, property, implied terms, implied messages, mistaken payments, mistaken supply of goods and services, mistaken payments, consideration, debt, assumpsit, promissory estoppel, Barnett, Fried, Smith, Benson, Hedley, Gordley

JEL Classifications: K10, K12

Working Paper Series