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Contracts IN LAW
OVERVIEW OF CONTRACTS
This chapter presents an overview of contracts; it is concerned with the definition of contracts,
the basic justifications for their existence, and with important aspects of contractual practice and
of the law of contracts. Subsequent chapters will deal in greater detail with certain aspects of
contract law and with particular types of contracts.1
1. Definitions and Framework of Analysis
1.1 Basic definitions. By a contract I mean a specification of the actions that named
parties are supposed to take at various times, generally as a function of the conditions that hold.
The actions typically pertain to delivery of goods, performance of services, and payments of
money, and the conditions include uncertain contingencies, past actions of parties, and messages
sent by them. For example, a contract might state that a photographer should take pictures at a
wedding on February 1st, that the buyer should pay the photographer $1,000 within a week of the
wedding, that the buyer may cancel if he notifies the photographer by January 1st, and that the
photographer may cancel if he becomes ill. It is apparent that because the notions of actions and
of conditions are broad, the conception of a contract is very broad.
A contract will be said to be completely specified (or simply complete) if the list of
conditions on which the actions are based is explicitly exhaustive, that is, if the contract provides
literally for each and every possible condition in some relevant universe of conditions. In a
contract for a photographer to take wedding photographs, suppose that the universe of conditions
is everything that could happen to the photographer (becoming ill, receiving an offer to take
photographs at another wedding the same day) and everything that could happen to the wedding
couple (becoming ill themselves, breaking off their engagement). A completely specified
contract would then have to include an explicit provision for each of these possible conditions
pertaining to the photographer and to the wedding couple. Although, as we will discuss,
contracts are far from completely specified in reality, the concept of a complete contract will be
, helpful for clarifying our thinking about contracts. Moreover, we will sometimes want to
simplify by assuming that the universe of relevant conditions is small (we might suppose that it is
only: the wedding photographer either becomes ill, or he does not), in which case we can well
imagine a completely specified contract.
A contract will be said to be incomplete if it is not completely specified, which is to say,
if the contract does not list explicitly all the possible conditions in the universe under
consideration. For example, a contract that reads “Photographer shall take wedding pictures on
March 14,” would obviously be incomplete because it does not list any conditions; so would a
contract that says “Photographer shall take wedding pictures on March 14, unless the
photographer develops appendicitis,” as this contract mentions only the single condition of
appendicitis in the universe of possible conditions. Note that although these two contracts are
incomplete, they do implicitly provide complete instructions for what the parties are to do under
all conditions. The contract that says simply that the photographer shall take wedding pictures on
March 14 implies that he should take the pictures under all conditions, even though it does not
state that explicitly. Thus, according to the definition we are employing, an incomplete contract
may well provide a complete set of instructions by implication.2
An incomplete contract that does not provide a complete set of instructions explicitly or
by implication is said to have gaps. For example, suppose that the wedding photography contract
states that if the weather is sunny, the ceremony will be held in the backyard and a video camera
should be used, and that if there is rain and the ceremony is held inside the house, only still
photographs need to be taken. This contract does not state explicitly or imply what is to be done
if the weather is cloudy; thus, it has a gap.
1.2 Mutually beneficial contracts. A contract is said to be mutually beneficial or, in the
language of economics, Pareto efficient, if the contract cannot be modified so as to raise the
well-being -- the expected utility -- of each of the parties to it. We would suppose that contracts
would tend to be mutually beneficial: If a contract can be altered in a way that would raise the
expected utility of each party, we would think that this would be done. For example, suppose
that the wedding contract states that the photographer should appear at 10 AM in the morning, but
Contracts IN LAW
OVERVIEW OF CONTRACTS
This chapter presents an overview of contracts; it is concerned with the definition of contracts,
the basic justifications for their existence, and with important aspects of contractual practice and
of the law of contracts. Subsequent chapters will deal in greater detail with certain aspects of
contract law and with particular types of contracts.1
1. Definitions and Framework of Analysis
1.1 Basic definitions. By a contract I mean a specification of the actions that named
parties are supposed to take at various times, generally as a function of the conditions that hold.
The actions typically pertain to delivery of goods, performance of services, and payments of
money, and the conditions include uncertain contingencies, past actions of parties, and messages
sent by them. For example, a contract might state that a photographer should take pictures at a
wedding on February 1st, that the buyer should pay the photographer $1,000 within a week of the
wedding, that the buyer may cancel if he notifies the photographer by January 1st, and that the
photographer may cancel if he becomes ill. It is apparent that because the notions of actions and
of conditions are broad, the conception of a contract is very broad.
A contract will be said to be completely specified (or simply complete) if the list of
conditions on which the actions are based is explicitly exhaustive, that is, if the contract provides
literally for each and every possible condition in some relevant universe of conditions. In a
contract for a photographer to take wedding photographs, suppose that the universe of conditions
is everything that could happen to the photographer (becoming ill, receiving an offer to take
photographs at another wedding the same day) and everything that could happen to the wedding
couple (becoming ill themselves, breaking off their engagement). A completely specified
contract would then have to include an explicit provision for each of these possible conditions
pertaining to the photographer and to the wedding couple. Although, as we will discuss,
contracts are far from completely specified in reality, the concept of a complete contract will be
, helpful for clarifying our thinking about contracts. Moreover, we will sometimes want to
simplify by assuming that the universe of relevant conditions is small (we might suppose that it is
only: the wedding photographer either becomes ill, or he does not), in which case we can well
imagine a completely specified contract.
A contract will be said to be incomplete if it is not completely specified, which is to say,
if the contract does not list explicitly all the possible conditions in the universe under
consideration. For example, a contract that reads “Photographer shall take wedding pictures on
March 14,” would obviously be incomplete because it does not list any conditions; so would a
contract that says “Photographer shall take wedding pictures on March 14, unless the
photographer develops appendicitis,” as this contract mentions only the single condition of
appendicitis in the universe of possible conditions. Note that although these two contracts are
incomplete, they do implicitly provide complete instructions for what the parties are to do under
all conditions. The contract that says simply that the photographer shall take wedding pictures on
March 14 implies that he should take the pictures under all conditions, even though it does not
state that explicitly. Thus, according to the definition we are employing, an incomplete contract
may well provide a complete set of instructions by implication.2
An incomplete contract that does not provide a complete set of instructions explicitly or
by implication is said to have gaps. For example, suppose that the wedding photography contract
states that if the weather is sunny, the ceremony will be held in the backyard and a video camera
should be used, and that if there is rain and the ceremony is held inside the house, only still
photographs need to be taken. This contract does not state explicitly or imply what is to be done
if the weather is cloudy; thus, it has a gap.
1.2 Mutually beneficial contracts. A contract is said to be mutually beneficial or, in the
language of economics, Pareto efficient, if the contract cannot be modified so as to raise the
well-being -- the expected utility -- of each of the parties to it. We would suppose that contracts
would tend to be mutually beneficial: If a contract can be altered in a way that would raise the
expected utility of each party, we would think that this would be done. For example, suppose
that the wedding contract states that the photographer should appear at 10 AM in the morning, but
