An essay in the deconstruction of contract doctrine

Some consequences of the suggested approach, with reference to specific hard cases, are sketched in Section 6. Section 7 concludes. Even though both Roman law [10] and the Talmudic literature [11] dealt with the issue of price adequacy, the doctrine of the just price traces its lineage to Aristotle'sNicomachean Ethicsand to Thomas Aquinas'Summa Theologiae. In the framework of Aristotle's virtue ethics, Aquinas identifies equality as the requisite for commutative justice in mutual dealings.

The doctrine of the just price is concisely outlined with reference to the sale contract.

After recognizing that "buying and selling seem to be established for the common advantage of both parties", Aquinas contends that:. Therefore if either the price exceeds the quantity of the thing's worth, or, conversely, the thing exceeds the price, there is no longer the equality of justice: and consequently, to sell a thing for more than its worth, or to buy it for less than its worth, is in itself unjust and unlawful.

While the Summa Theologiaedoes not articulate what exactly comprises a just price, [13] in his commentary on Aristotle's Nicomachean Ethics Aquinas explains that the value of things "has a reference to human need. Therefore, according to the majority of scholars, "the normal measure of something's value [is] the price it would currently fetch in the market secundum communem forum , i. Aquinas clarifies his approach with two important qualifications. Openly distinguishing between ethics and law, he limits the scope of the theory of the just price as a legal doctrine.

Since "human law is given to the people among whom there are many lacking virtue, and it is not given to the virtuous alone," it "suffices for it to prohibit whatever is destructive of human intercourse, while it treats other matters as though they were lawful, not by approving of them, but by not punishing them. Writing as a philosopher and a theologian, Aquinas was not concerned with formulating a comprehensive legal doctrine. While he made reference to Roman law, mentioning for example the rule on gross disparity laesio enormis, C. Neither did medieval jurists, even though traces of Aristotelian ideas may be found in Baldus' commentary on the Roman doctrine of laesio enormis, where he notes that an unjust price violates the principle of equality.

In addition to affirming the principles of commutative justice and equality in exchange, Dominican Domingo de Soto and Jesuits Luis de Molina , Leonardus Lessius , and Juan de Lugo identified the just price with either the current market price or with the price set by public authorities. In Lessius' words, "the just price is either that which is fixed by the public authority in consideration of the common good or that which is determined by the estimation of the community communi hominum aestimatione.

A detailed taxonomy of the circumstances "causing the estimation of the goods to rise or fall" is provided again by Lessius:. Next, there are circumstances pertaining to the seller: his labor, the expenses, the risks, and the damages he incurs in obtaining, transporting, and storing the goods. Furthermore, the mode of selling plays a role, namely whether the commodities are offered spontaneously or sold on demand. A final factor concerns the buyers, whether they are few or many, and whether there is lack or abundance of money.

Compared with modern and contemporary views, this approach shows two original features which are important to note. First, it bases price justice on a substantive standard. As de Soto puts it, "the justice of the price does not depend in any way on the person, but it is assessed per se, absolutely. Despite explicit and sophisticated references to cost of production and utility to the buyer, this approach cannot be considered a theory of value in the modern sense, since its architects did not intend to formulate an economic theory on the worth of goods and services.

Luigi Pasinetti's clarification regarding the economic thought of ancient and medieval philosophers can be extended to later Scholastics: they were trying to state standards of ethical and legal behavior and thus "it was not contradictory for them to try to set out [m]any separate arguments, provided that they all helped [t]o achieve the final effect.

Lessius' comment on utility marks the difference:. The reason thereof is that no one is allowed to sell to another precisely that which belongs to that other person.

Contract Law Overview: What is the Gateway Issue on ALL Contracts Essays?

Now, the subjective utility is that which the good offers to the buyer, not to the seller. It comes forth from a circumstance of which the seller is not the cause. By the same token, the "estimation of the community" which determines the just price cannot be equated to the dynamics of a perfectly competitive market, as some historians of economic thought are wont to argue. After recalling the maxim of Roman law that "the prices of goods are defined neither by affection nor by private advantage but rather in common" D.

The first explicit attack against the doctrine of the just price comes from Christian Thomasius in De aequitate cerebrina, a book published in criticizing the Roman law on gross disparity. First, he identifies the fallacy of the just price doctrine in the belief that "the prices of things originate from a natural comparison between them and are nearly an intrinsic quality thereof.

European Review of Private Law

Thomasius' arguments, however, are hardly original. In keeping with his radical dismissal of Aristotelian virtues theory and emphasis on self-interest and free will, Thomas Hobbes had already suggested a similar approach in a famous remark in his Leviathan,published in "The value of all things contracted for is measured by the appetite of the contractors, and therefore the just value is that which they be contented to give. For neither, if I sell my goods for as much as I can get for them, do I injure the buyer, who sought, and desired them of me?

Neither if I divide more of what is mine to him who deserves less, so long as I give the other what I have agreed for, do I wrong to either? In rejecting the theory of the just price, both Hobbes and Thomasius start from the same philosophical assumptions. In the aftermath of the modern dismissal of metaphysics, discourse on moral philosophy began to exclude the problem of identifying the telosor "end" of man and the notion that the virtues are a necessary means of helping him reach that end.

Fostered by the new philosophical paradigm of modernity, the two objections raised by Thomasius against the doctrine of the just price swiftly became a commonplace in the emerging market economy. In the first English treatise on contracts, John Powell states that "it is the consent of parties alone, that fixes the just price of any thing, without reference to the nature of things themselves, or to their intrinsic value.

With express reference to "Aristotle's approach to economic problems", Ludwig von Mises criticizes those for whom "value was considered as objective, as an intrinsic quality inherent in things. The criticism that the doctrine of the just price regards value as an intrinsic property of things is, however, groundless.

Indeed, the later Scholastics themselves explicitly reject the concept of an intrinsic value of goods. In accordance with Aquinas' statement that "articles are not valued according to the dignity of their nature", but "are priced according as man stands in need of them for his own use," [42] de Soto affirms that "the prices of things have to be evaluated not according to their nature, but to the extent they serve human use. According to the former, "the just price does not originate from the nature of things … but depends on how far they are serviceable for human use.

The argument based on private autonomy is much more serious, as it marks a crucial aspect of the modern break with the Aristotelian tradition and is a cornerstone of the emerging free market economy. The claim that the just price coincides with the price agreed upon by the contracting parties is rooted in the philosophical developments which followed Descartes' critical philosophy and English empiricism.

By reducing the scope of reason to logical deduction and immediate sense experience, both approaches denied the possibility of a rational normative judgment. As a consequence, the only way to find a foundation for making a choice was either claiming that choosing in accord with one's inclination is normatively good, as utilitarianism did, or identifying some other normative criterion, which Kant and Hegel recognized in the free and autonomous choice.

Under both approaches, will and freedom to choose are central. Using exclusively free will as a normative criterion, however, can have negative consequences. Both moral philosophy [50] and economic theory [51] provide many examples of the negative externalities resulting from unfettered economic activity. Similarly, some free agreements are patently difficult to justify, such as those resulting in economic compulsion [52] or haphazard distribution of wealth [53].

Freedom of contract as sole determinant of justice also neglects to consider both the possibility of unequal relationships and the behaviour of people in real-world situations. Max Weber's seminal Wirtschaft und Gesellschaft famously highlights the role played by power in economic relationships and the consequent distortions of the free market mechanism. According to a common line of reasoning, the flaws of a model of contractual justice based solely on free will can be corrected by identifying a set of conditions under which freedom of contract could be effective.

Such a view asserts that the task of the law is to remove the obstacles that inhibit equality between parties, thus assuring an "appropriate initial status quo," which is traditionally identified with John Rawls' "principle of justice chosen behind the veil of ignorance. Having determined that "justice is hard to define, impossible to measure and subjective at the edges," the DCFR identifies several principles of contractual justice - such as "not allowing people to rely on their own unlawful, dishonest, or unreasonable conduct" and prohibiting parties from "taking undue advantage" [59] - as means to guarantee a genuine freedom to contract.

By the same token, the DCFR addresses price justice only from a procedural perspective: while "the adequacy of the price to be paid" is excluded from the unfairness test, except when the contract terms are not "drafted in plain and intelligible language" [sec. Even though, as demonstrated by the provisions in the DCFR, such an approach often seems to reach the same outcomes as one based on the doctrine of the just price, [60] a model grounded in substantive justice is more complete. Any system of social control, including a procedure aimed at assuring the justice of transactions, needs to be legitimated, and this legitimization can only be found in a substantive value of the system.

Naturally, the need for a substantive value does not implyper sethat such a value be equality in exchange, as suggested by just price theory. However, several arguments show the reasonabless of adopting precisely this suggestion.


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Empirical economic research offers evidence that firms and indviduals are commonly motivated by concerns of price fairness. In a famous article, Kahneman, Knetsch and Thaler discussed what they called "a principle of dual entitlement". Using market prices, posted prices and the history of previous transactions as "reference transactions", they found that a substantial majority of the population studied thinks that.

A firm is not allowed to increase its profits by arbitrarily violating the entitlement of its transactors to the reference price, rent or wage. When the reference profit of a firm is threatened, however, it may set out new terms that protect its profits at transactors' expenses. From a contractual justice standpoint, while the aforementioned convergence between outcomes of procedural fairness and of substantive fairness does exist, its cause appears to be inverted: it is not the removal of inequality that brings about substantive justice, but rather people's desire for substantive justice that results in the use of legal remedies to eliminate inequality.

As many scholars have pointed out, the traditional legal doctrines of fraud, misrepresentation, duress, undue influence and mistake "have frequently been used to police the fairness of transactions between parties of unequal bargaining power. Finally, in positive law substantive price justice is much more pervasive than might be expected. Oft-cited cases such as usury laws, the remedies provided by the Unidroit principles for cases where "the contract or an individual term of it, at the time of the conclusion of the contract, gave the other party an excessive advantage" [artt.

Under Scandinavian law "a contract may be modified or set aside, in whole or in part, if it would be unreasonable or contrary to principles of fair contract" [art. A model of contract justice based on substantive price fairness requires the clarification of two issues: the relationship between this model and the market mechanism for price formation, and the role played by the law in ensuring price adequacy.

While just price theory suggests that prices should be evaluated according to a normative criterion beyond the mere outcome of the economic process, the market price can nonetheless be considered a good proxy for the just price. Normal market conditions embody many of the factors affecting the moral judgment of price justice: as German philosopher Peter Koslowski has noted, "the conditions of the market price formation, the market process and price formation by competition are themselves constitutive criteria of the assessment of the just price".

PrawfsBlawg: Research Canons: Contracts

For this reason, "the assumption can be made initially, until the contrary is proven, that the market price is just. Where objects are unique or markets are so evidently imperfect so as to make the market price indeterminable, the evaluation of price justice resorts to the specific criteria developed by the later Scholastics: features of the goods exchanged, the cost of production, the mode of selling, and the supply of money. Such a relationship between the just price and the market price illustrates that the proposed approach works as an external constraint to freedom of contract, not as a paternalistic dictation of the price to the parties.

Per Koslowski's salient observation, "just price theory does not formulate positive norms, but negative norms of price formation, economic and social minimum requirements that the subjectivized price system must be able to satisfy. Recalling the aforementioned distinction between law and ethics by Aquinas and his note that it "suffices" for the law "to prohibit whatever is destructive for human intercourse," it is therefore easily understandable why a long-standing tradition - from the Roman doctrine oflaesio enormis to the Unidroit Principles - limits judicial intervention on free agreements to cases of gross disparity.

These are the cases with a high risk of negative externalities in which legal intervention is worth the cost. Placing the burden of proof on the party who claims the injustice of the price further reduces the likelihood of excessive intervention. These qualifications address the traditional objection that protective legal measures - in this case, the possibility of establishing the just price as a matter of law - will be priced ex-ante [70] and thus parties "will pay for protections that many of them would rather waive for a discount. This very same mechanism might, however, become a competitive advantage for "virtuous" players.

All other things being equal, compliance with the requirements of price justice enhances reputation and lowers legal risks, thus enabling lower prices and a competitive advantage. From a different perspective, the traditional objection overlooks the capacity of the law to shape societal values.

The harsh model sketched by Justice Thomas asserting that. Empirical economic research corroborates this conclusion. A final remark should be devoted to the objection that determining whether a price is grossly unjust is extremely difficult.

Article excerpt

Antitrust analysis has often characterized the effort to distinguish between competitive prices and unfairly high prices as a "daunting, if not impossible, task. Recent studies show, however, that the difficulty may be overstated. Indeed, while it may be arduous to identify an ubiquitous test, viable solutions may be offered by profitability analysis i. Hard cases on contractual justice have been proposed since antiquity.