Contract Theory

Classical Contract Theory

Classical contract theory is the set of ideas and assumptions that underpinned the development of contract law in England and the United States during the 19th century. During this period, the prevailing liberal individualist philosophy of laissez faire elevated contract to a position of central importance in the law.

Classical contract theory was organised around the will theory of contract, which held that a contract represents an expression of the will of the contracting parties, and for that reason should be respected and enforced by the courts. The principles of modern contract law were founded on the concepts of individualism and free will over government intervention. They were encapsulated in a political theory labelled "contractualism" by Morris Cohen.

This approach had two principal effects. Firstly, the courts were reluctant to recognise the existence of non-contractual obligations. Since the law of tort and restitution was still largely undeveloped, the courts tended to perceive social relations in contractual terms. The principles of contract law were seen as objective and neutral, and based on a respect for voluntary choices.

Criticism Of Classical Theory

The will theory and classical approach to contract have been comprehensively criticised by the legal realism movement. Legal realists demonstrated that contracts did not necessarily represent the will of the parties. The classical notion of individuals freely entering into contracts fails to take account of the complexities of social behaviour and the unequal distribution of economic power.

Another deficiency in the will theory is that many problems that contract law must deal with arise as a result of what parties have not expressly agreed upon, rather than what they have agreed upon. A contract could arise on the basis of an objective interpretation of the parties agreement, even if that was inconsistent with the true will of one of the parties. This approach, based on what a "reasonable man" would believe, requires the court to make a policy decision as to whether liability should be imposed.