Why are contracts binding?

Why are contracts binding? This question, often coming from a non-expert, if posed it probably generates two consecutive reactions: as before, the wonder of the interlocutor caused by the alleged banality of the question; second, a tautological repetition of the principle itself, which translates more simply into the statement “contracts are binding, because that’s how it works”. Behind the appearance of banality often hides a great scientific debate that allows us to consider an issue as acquired due to its evidence.

 

In the Italian legal system, the reference standard is that contained in the provisions of the first paragraph of art. 1372 cod. civ., entitled effectiveness of the contract : «The contract has the force of law between the parties. It can only be dissolved by mutual consent or for causes admitted by law ». Through the iconic expression “force of law between the parties”, the legislator intended to attribute legal value to the relations that the legal entities decide to regulate through a contract. The parties are therefore granted contractual autonomy (see Article 1322 of the Italian Civil Code) in order to achieve interests worthy of protection.

 

If we start from this reasoning, asking why contracts are binding is equivalent to asking what is the rationale underlying these rules and therefore, ultimately, what is the function of the contract itself . A comparative investigation with common law systems is the way we propose to take. In fact, in English contract law we find a series of theories that deserve to be analyzed. However, there is a need for a premise: the common law and civil law systemsthey are characterized by strong elements of diversity – for an analysis of which we refer to another location – and this survey therefore presents objective difficulties. Therefore, it is proposed to analyze only some features of the common law system , which may make it possible to compare with the technical normative data of the Italian legal system, in order to have a greater understanding of it. Let us therefore recall, for purposes of exposition, our research question: why are contracts binding?

 

The first theory we refer to is called Promise-keeping and will theory , for which we mention one of its strongest supporters, C. Fried, who, in Contract as a Promise: the theory of contractual obligation (1981), to the question « why are contracts enforced? »Responds in terms of moral obligation :

“If we decline to take seriously the assumption of an obligation […] to that extent we do not take the promisor seriously as a person “.

On the basis of this theory, contracts would be binding on the parties by virtue of a moral obligation : the promisor , the contracting subject in its passive version of the contractual relationship, gives rise to a binding agreement as its very statement must be taken seriously ; if this were not the case, the subject himself would not be considered with respect. Such a theory, applied in our legal system, presents elements of interest that would allow us to explain some features of our civil law: first, it explains the relativity of the contract , for which the contract generates obligations only between the parties. This element of the common law system,if placed in comparison, it finds a sure correspondence in the second paragraph of art. 1372 cod. civ. in which the same principle is affirmed. Furthermore, the theory would be able to illustrate the moment in which contractual liability arises , which can be defined as the instant from which the subjects are bound to a declaration, which, if violated, determines the obligation to pay compensation for the damage caused. to the other party.

 

Although this theory has some useful elements for our investigation, we must nevertheless arrive at its incompatibility with our legal system. As has been stated, the theory places a moral obligation at the basis of this binding relationship . In our legal system, on the other hand, the moral importance cannot be taken as the source of a contractual obligation: only a courtesy service, such as financially assisting a relative in need, is capable of only giving rise to moral obligations. The reference standard is contained in art. 2034 cod. civ., titled natural obligation . Its moral characterit has no relevance from a legal point of view, so much so that the occurrence of compensation in the event of violation is not configurable.

 

The second theory that we are going to analyze is called Reliance theory : the major supporters L. Fuller and W. Perdue in The Reliance Interest in Contract Damages (1936) affirm how the binding nature of contracts derives from the trust that the subjects have placed in their respective contractual commitments. A contractual obligation ensures that legal entities are not harmed in the face of the counterparty’s default, in the claims they had placed reliance on. Such an expectation would therefore be the source of contractual liability. Even this theory, if compared with the rules of our legal system, finds various correspondences: a first comparison, which would accredit the theory, can be made towards the rules on the interpretation of the contract .

 

The law provides for a series of rules through which a subject (even a third party) can objectively interpret the provisions that express the will of the parties. In particular, in art. 1362 cod. civ., it is stated that the contract must be interpreted taking into account the common intention of the parties , evaluated through the analysis of their overall behavior . If the latter becomes relevant, it is possible to conclude the importance of the reliance that the subjects have made on the behavior, and therefore on the declarations, of the counterparty. In English law, this rule would have its counterpart in that instrument of interpretation called the objective test of intentions. Moreover, this theory also collides with incompatibilities with our legal system; therefore it is not possible to accept it as a solution. Clearly, not everything can be explained in terms of reliance; in fact, it is not necessarily the reliance that gives rise to contractual liability. Whether or not this reliance is worthy of protection is determined by its correspondence with facts that objectively justify it. The concept can be explained in the words of M. Chen-Wishart in “Contract Law”:

“Your reliance is not my problem, unless I have given a voluntary undertaking”.

Contractual responsibility therefore arises only with a meeting of consensus intended to create a contract, and certainly not when an assignment is disregarded. In this case, pursuant to art. 1337 cod. civ., which may possibly arise is only a pre-contractual liability , which by definition lies outside the contractual framework.

 

As we begin to conclude, a third theory that could give an answer to our question finds its genesis in the economic analysis of contract law across the Channel. The theory takes the name of “Welfare maximization theory  and affirms that the need for certainty and the maximization of legal traffic lies at the basis of the constraint . According to this approach, exchanges between private individuals must be supported by contract law since the same subjects, promoting and acting to pursue their personal interest, would determine a consequent benefit also for society. The subjects are conceived as rational-maximisers of their own welfareand, as such, they sell one asset only in exchange for another, to which they attribute a greater value.

 

An economic theory of contracts finds correspondence in many norms and institutes of our system. The certainty and maximization of legal traffic is, in fact, one of the cardinal principles of our legal system, so much so that this comes to recognize a legal value even in unreal situations, as happens in cases of apparentia iuris (see article  The perception of external behaviors: appearance in law ). Such a way of conceiving contractual law would then find a secure regulatory link in the rules relating to contractual liability and would seem to assume the role of ratioof the same. In particular, reference can be made to Article 1218 of the Italian Civil Code. civ., which – entitled “debtor’s responsibility  – states that the debtor who does not perform the performance due is required to compensate the damage, if he does not prove that he is not responsible for the delay or non-execution of the service itself.

 

Another example of the economic soul of the contractual institution is the dual method of liquidating the damage; in fact, the pecuniary damage occurs in the two components of emerging damage , i.e. the current loss resulting from the non-fulfillment and loss of profit, which is identified in the loss of financial gain that would presumably have been achieved if the obligation had been fulfilled in regular way. The same contract, finally, is an ‘agreement between two or more parties by definition to establish, regulate or terminate a legal relationship equity “(Art. 1321 cod. Civ.), Where the element of net-worthacts as a distinction with other legal transactions. This third theory of trade maximization therefore seems the most convincing from many points of view, even when compared with our legal system. Furthermore, the theory allows the analysis of the concept of awareness of the parties at the time of the conclusion of the contract. This awareness of the parties is linked to the concept of consideration of English contract law. The “consideration” is one of the requirements of the contracts that can be explained again in the words of M. Chen-Wishart:

“In order to acquire the right to enforce another’s undertaking, a party must undertake to give [something back] as the price for his / her undertaking”.

In the English contractual practice a contract is binding in two cases: in the first, if the sacrifice of one of the two parties corresponds to a sacrifice of the other (ie a consideration); in the second, if the contract is contained in a document that certifies the will of the contracting parties, the presence or absence of the consideration being superfluous here. Although the element of consideration does not appear explicitly in our ordering among the requirements of the contract , it could still be present indirectly. Although in free-of-charge contracts the party who benefits from them does not bear a sacrifice (the consideration of the common law system), however the law imposes an aggravated formalistic regime for these contracts. For example, in the donation contract, art. 782 cod. civ. imposes the form of the public deed. This formalistic regime is envisaged in such a way as to draw the donor’s attention more to the economic weight and the sacrifice he makes. In the absence of the public deed, in which therefore the donor expresses his will, the donation is void.

 

In conclusion, where English law actively provides for the need for consideration to attribute validity to a contract, Italian law indirectly provides that, in cases where an economic loss does not correspond to an enrichment, a requirement of form is met. The last comparison highlights a fact. Both legal systems provide for protection mechanisms in favor of contracting parties. These protections, provided in an active way as in English law, or passive as in Italian law, always and in any case have as their object the assets of legal entities. In light of this, it can therefore be affirmed again how economic theory provides the most convincing answer to our question and how the economic side occupies a substantial part of contract law.

 

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