The Common Sense of Contract Formation
University of Pennsylvania Law School
David A. Hoffman
University of Pennsylvania Law School; Cultural Cognition Project at Yale Law School
February 20, 2014
Stanford Law Review, Vol. 67, 2015
U of Penn, Inst for Law & Econ Research Paper No. 14-5
Temple University Legal Studies Research Paper No. 2014-06
Legally, much depends on the moment that a negotiation becomes a deal. Unlike torts or civil procedure or any area of public law, the laws of promissory exchange only apply to parties who have manifested their assent to be bound. Even so, the moral norms of exchange and promise are quite firmly entrenched and more broadly applicable than just legal contracts. Norms of promise-keeping and reciprocity, interpersonal courtesy, community reputation — these kinds of intangible goods have real effects on contract behavior. For this reason it is especially surprising that intuitions about formation have gotten so little attention from legal and behavioral scholars.
This paper offers five new empirical studies of commonsense approaches to contract formation. The first section of this Article surveys intuitions about what the law of formation is. In a world in which the vast majority of contracts are signed without the advice of counsel, most people have to draw inferences based on their background knowledge and beliefs. It turns out that the colloquial understanding of contract formation is about the formalization of an agreement rather than actual assent.
In the second part of the Article, we tease out the intuitive relationship between formation and obligation. The law of contracts is very clear that parties’ obligations to one another turn entirely on whether or not they have mutually manifested assent to be bound. And, in fact, we find that behavioral results suggest that legal (or legalistic) formation does enhance commitment to a deal irrespective of its power to impose sanctions; it seems that the law has freestanding normative force. However, we also find that the subjective sense of obligation is not as black or white as the law would predict. Parties are influenced by the natural, informal obligations to one another that build over the course of a transaction, increasing their commitment to the partnership in stages rather than all at once at the moment of formation.
Number of Pages in PDF File: 33
Keywords: Contracts, psychology, behavioral law & economics, microeconomic behavior, contract negotiation, drafting, formation, agreement, assent, formality, mailbox rule, terms that follow, moral norms, reciprocity, social obligation, performance, formalism, spectrum of obligation, empirical analysis
JEL Classification: D01, K12
Date posted: March 1, 2014 ; Last revised: June 9, 2015