ECONOMICS OF LAW

CIA 3

ECONOMICS OF LAW: ON CONTRACTS

Rahul Baid

1533348

6 Economic Honours A

ABSTRACT:

A contract is an agreement between two or more named parties about their future actions in
order to provide for the fulfilment of the promises made by them. It is a specification of
actions by the parties regarding their obligations towards each other and also function of
conditions around them. The present study aims at identifying the rationale behind the
contract, why are contracts formed, the importance of contract law and enforceability and the
remedies for the breach of the contract.

INTRODUCTION:

A contract is an agreement between two or more named parties about their future actions in
order to provide for the fulfilment of the promises made by them. It is a specification of
actions by the parties regarding their obligations towards each other and also function of
conditions around them. The action mentioned above is usually related to the delivery of a
product, the performance of a service and the money that is to be paid for performing the
activity assigned and the functions of the conditions comprises of uncertain and unforeseen
situations, the past/present course of actions of the parties and the messages sent by them.

Any contract is completed only when the agreement between the parties thoroughly considers
all the possible conditions that might arise and when the actions are completely based on
exhaustive conditions. [ CITATION Ste03 \l 2057 ].

THE MAJOR REASONS BEHIND THE FORMATION OF A CONTRACT ARE:

 Formation of a contract leads to the provision of goods and services. Usually one
party is the supplier of the goods and services and the other party demands the
commodities provided by the seller. Thus a contract between both the parties leads to
 the mutual desirability of needs and helps in the fulfilment of the aims of both the
parties.
 A contract is formed because it leads to the sharing of risks between the parties. Thus,
an agreement between the insured and risk-neutral insure leads to the sharing of risks
incurred by the insured leading to the sharing of risks and allocating the risks between
two or more parties.
 Another reason for the formation of a contract is the timing of consumption of the
good or a commodity traded.
 Differences in opinion is also a reason for the formation of contracts. Usually, the
parties have different opinions and believes about the goods and services – might be
about the future prices, the durability of the product or the likelihood of an event
occurring and hence a contract helps in keeping the promises of both the parties
intact.

More than one reason can apply while a contract is made based on the nature of the contract
and the provision of the contracts to the promisor and the promisee.

A CONTRACT IS FORMED ON THE BASIS OF SEVERAL DETERMINANTS:

[ CITATION Lou99 \l 2057 ]

 Search Effort: Usually there are effort put in by parties to find partners who would be
willing to get into contract with them and there are chances that these efforts might
not be socially efficient.
 Mutual Consent and Legal Recognition of contracts: A contract is said to be valid
only if both the parties are in sound mind and are willing to accept the conditions of
the agreement.
 Offer and Acceptance: Every contract involves the participation of two or more
parties wherein one party makes the offer to another party in order to sign a contract
regarding the performance of an activity. If the offer is accepted, only then the
contract is said to be valid and legally enforceable.
 Disclosure: Disclosure criteria refers to the situation wherein all the information
regarding the contract has to be disclosed to all the parties that might be involved in
the formation of contract. The non-disclosure of any information related to the
contract can reject the base of the contract and the contract becomes void all together.
  Duress and Emergency: Any contract that is formed under pressure or in
circumstances that might be unethical in nature is said to be void and non-enforceable
in the court.

Any contract is said to be valid in the eyes of law only when the offer is made and accepted
in the sound mind of all the parties. Any contract signed in the state of undue pressure or in
the influence of illegal activities is termed to be non-acceptable and void and the party
affected by such an activity has the right to decide the actions that needs to be taken over the
issue.

ROLE OF CONTRACT LAW AND THE IMPORTANCE OF ENFORCEABILITY:

Contract Laws are important because it underpins the economic setup of the society. In this
complex world of contracts, the contract law plays essential role in ensuring that the parties
do not defy and break the contracts on their beneficial opportunity. To curb the opportunistic
behavior of the parties involved in a contract, the commencement of the contract laws was
seen as extremely beneficial.

From the point of view of business, contract laws play an important role in determining and
ensuring that the transactions happen in a legal manner without any discrepancies. In the case
of individuals, the contract law plays a major role in protecting their interest and saves the
society from the illicit activities of one party to the entire community and from the viewpoint
of government, laws help in maintaining a sound economy led on the path of growth and
development with the main concentration on the welfare of the society.

The increasing importance of contracts in our society helps to explain the major reasons why
the law enforces them. The enforceability of contract laws in an essential component of
the society because:

 In the absence of contract laws, and lack of enforceability of contracts by court, there
are high chances of appropriating funds before performing the contract. If there is no
enforceability of the contracts laws, the exchange of goods and services for money
would become void and the basic structure of the economy would be disrupted.
 Another reason for the enforceability of contracts is because of lack of trust and
honesty. The inference of people that in the lack of enforceability, the party might not
perform the task of delivering the goods and services or the promised service at the
right point of time with the right resources.
  Enforceability of a contract by court is also required for fixing the prices of goods and
the services in advance and avoiding price holdup.

Therefore enforceability is very essential because in the absence of the laws and authorities,
there are high chances of incompleteness of contracts.

Contract laws helps in dealing with the breach of contracts and helps in analyzing the reasons
behind the breach of contracts. The remedies implied during the breach of contracts are:

 Whenever any party breach a contract, they often have to pay damages. The damage
measure might be a rule or governing what a party in breach should pay can be
applied by the court or it can be stipulated in advance by the parties to the contract.
By providing damage measures, the parties have an incentive to perform in order to
avoid any punishment charges that might be imposed if they do not work.
 Five basic remedies for breach of contract includes: money damages, restitution,
rescission, reformation and specific performance. Parties that are affected by the
breach of a contract have the complete right to benefit and get reimbursed on the
damages that they might occur. If the breach is a total breach, then the plaintiff is
entitled to get the entire compensation on the costs incurred by him and if the
damages are partial, then the plaintiff is entitled to the amount of costs that are
incurred by him or the costs that the law feels is appropriate.
 Restitution is a method through which the injured person is entitled to get back the
same position as he was in before the formation of contracts.
 Rescission is a method through which the injured who enters into a contract because
of illegal methods or mistakes and fraud gets justice by the way of terminating the
contractual duties of both the parties.
 Reformation is a measure through which the court has the right to amend the
contract in order to eliminate inequality in the performing of activities by all the
parties.
 Specific performance is a process wherein one party is compelled to perform as
nearly as possible all his duties and promises. This remedy is there only when the
money damages cannot compensate the plaintiff.

Therefore, we see that a contract is an agreement between two or more parties wherein they
are entitled to perform their tasks without breaking any code in between. The contract law
ensures that the duties of all the parties are performed in the most efficient manner without
nay discrepancies arising in between. The general rationale for non-enforcement of contracts
is to prevent a loss in welfare to one or both parties. Moreover there are times when the
contracts are non-enforceable because they involve the sale of things to be inalienable such as
human organs, babies and voting rights. Therefore, the justification of the breach/incomplete
contracts is recognized as involving externalities or the welfare of contracting parties.

REFERENCES
Honey, R. (2017). Renovating the Concept of Consent in Contract and Property Law. In New
Directions for Law in Australia (pp. 337-346). ANU Press.

Louis Kaplow, S. S. (1999, February). Economic Analysis of Law. Harvard Law School .

Shavell, S. (2003). Economic Analysis of Contract Law. National Bureau of Economic

Research .