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Conferences on the Virtues

By Fr. Bruno Cocuzzi, ocd

 

Number 53

 

Justice and Injustice in Voluntary Exchanges

Or Concerning Contracts…

 

First Question – The general Notions concerning Contracts and their Different Kinds…

 

A voluntary exchange is said to occur when someone willingly transfers something of his own to another.  And this may be done in several ways, by:

 

1.       Handing it over either (a) gratis or (b) for something of equal value, as in buying and selling or in “swapping”.

 

2.       Handing it over for a time, (i.e., expecting it to be returned) either (a) gratis or (b) for compensation.  The former, of course, is called lending, and the latter leasing.

 

3.       Handing it over either (a) to be kept safe as “on deposit” and “in storage”, or (b) as security on a debt, i.e., as collateral or as the payment of a “bond”.

 

All of the above are said to be contracts, though they represent only some of the voluntary exchanges to which we give that name.  The necessity of these kinds of exchanges is required by the very social nature and interpersonal needs of human individuals.  My author enlarges upon this last statement.

 

Since the human individual [person] cannot attain happiness without the aid of others, he not only tends toward living in society but also towards entering into covenants with others.  Given the vast number of categories of goods, no one person can possess them all; and given the limits of individual human powers, everyone knows that no one man can be a tiller of the soil and at the same time exercise all the other arts and crafts [needed to sustain human life].  And even if he could, it would not be expedient, since, by giving himself exclusively to one craft, he becomes an expert therein and plies it with much greater perfection.  Indeed, through division of labor, the quantities of [different] artifacts produced is immense.  If he produces just one kind of thing, he will have more than he needs for himself, on the one hand, and on the other, he will be in need of many other things which he is unable to produce for himself.  Hence it is necessary that, applying those things he has in superabundance against those things which he does not have, he obtains the latter through “bargaining”.

 

Thus, since no one possesses all the things that are necessary and useful to him, nor is able to make them all himself, he makes every effort to obtain them from others, whether by “swapping”, buying and selling, leasing and renting, or by other forms of mutual exchange and contracts.  By this very fact, the power [of human beings] to alienate [property] and enter into contracts is proven [to exist]. since without commerce and mutual exchange we human beings would not be able to own those things and enjoy the benefits to be derived therefrom, for which purpose they were created.

 

From all the above, it is easy to see that not all the kinds of exchanges noted above are recognized as true “contracts” in human society.  Excluded are those that are gratuitous or beneficent in nature.

 

The general principle that governs true contracts, and which is more fundamental than, and superior to, the mutual consent of the contracting parties, is that there be equality (or equivalency) between what is given and what is received.

 

Although this general rule is applied chiefly in contracts of “buying and selling”, it remains true for all “exchanges” freely agreed upon by the parties thereto.  Of the essence of true contracts, also, is that the parties stand on an equal footing.

 

Contracts in General

 

A contract is a special kind of a “pact” or “covenant” between two parties, as a result of which each assumes an “obligation” to the other party.  If only one of the parties becomes “obligated” to or “owes” something to the other in virtue of the pact, it remains a mere pact or covenant, and is called a gratuitous promise or gift.  A contract could therefore be “defined” as:

 

An agreement reached between one or more individuals by means of which each of them assumes a [legal] obligation to the other (or each of the others) to give something, to do something, or not to do something.

 

1.       An Agreement – This requires the freely given consent of the contracting parties, and is what causes the contract to exist.  It is called the formal cause of the contract.

 

2.       Between one or more individuals – This identifies those who are the subjects of the Contract.

 

3.       By means of which each assumes a [legal] obligation to each of the others – This indicates that each of the parties is “bound in conscience” to fulfill the obligation assumed by the contract.

 

Although the word “legal” does not appear in my textbook, I have added it because in civil human society only those agreements which create binding obligations that the Civil Law will enforce are considered “contracts”. 

 

These obligations are the effect or result of the contract.

 

4.       To give something, do something, or not do something – This indicates the object or the matter of the contract.

 

Since for every right there exists a corresponding obligation (and vice versa), it follows that with every contract rights are also created or transferred.

 

Contracts are entered into “freely” only when there is a “deliberate” will or intention to assume the obligation or to confer its corresponding right.  To be deliberate, in turn, there must be sufficient knowledge and reflection on the part of the contracting parties.

 

A contract becomes a kind of “private law” which governs the contractual relationship (until the respective covenants are fulfilled) between the parties.

 

We said above that the general Law of equivalency is paramount to the “private law” created by the contract.  Similarly, Positive Civil Law always supersedes the private law created by a contract.  Any contract which attempts to “oust” Civil Law in one or more of the particulars of the agreement reached, would be unenforceable at Law as regards those particulars, but, provided there is no radical injustice involved, the contract would still be binding in conscience.

 

Contracts necessarily require at least two contracting parties.  Clearly no one can enter into a “relationship with himself”; neither can one create a right in someone, nor transfer a right to someone, who is ignorant of or unwilling to accept the right in question. 

 

Hence, in all contracts that are morally and binding it is possible to distinguish three distinct elements:

 

1.       The essential or substantial elements:  (a) the mutual consent (agreement); (b) the object or matter; and (c) the subjects.

 

2.       The “natural” elements (for want of a better name).  These are supplied by and included implicitly by Civil Law or local custom and usage.

 

3.       The “accidental” elements, which have to do with minor details, such as how or when or where, etc. matter of the contract is to be delivered and/or the other obligations are to be fulfilled.

 

The Different “Kinds” of Contracts

 

A.  By reason of the effect of the agreement, Contracts are:

 

Unilateral – when the agreement creates an obligation to give something, do something or not do something in favor of the other in only one of the two contracting parties (the donor or promisor)

 

This may sound illogical, because it is possible for someone to be under an “obligation” to accept something.  However, since all obligations are considered onerous in Moral Theology and in Canon Law (and always or almost always in Civil Law as well, I believe), the “consent” to accept a thing of value with no strings attached –a pure benefit- (which is certainly not onerous) does not create an “obligation” in the donee or pomisee.

 

Bilateral – when, of course, obligations are created in both parties to the contract.

 

These are further subdivided according to whether (i) the matter or object of the contract is something certain or well determined, or is (ii) a matter of chance or otherwise not certainly known or defined.

 

An example of a contract of chance would be a contract entered into between a “Sponsor or Underwriter” and, say, a Race car Driver.  The driver promises the Sponsor a certain percentage of his “winnings”.  The Sponsor knows that he may end up with that very percentage of “nothing”.

 

B.     By reason of the intention, Contracts are:

 

Gratuitous – when the donor or promisor intends to transfer a good or a right or do something as a gift or favor, without seeking any personal material reward or benefit in return.

 

Onerous – when the intention is to give or transfer something of value, or to do something that “costs” in terms of time, energy or inconvenience, in return for a good or a service in return.  All truly bilateral contracts are onerous as regards the parties thereto.

 

Mixed – that is, partly gratuitous and partly onerous, as when something is sold at a substantial discount, or something of little value is accepted in return for the transfer of a valuable good or for the performance of a valuable service.

 

Of course, even in the case of gratuitous contracts, that is, when someone “binds himself in conscience” to make a gift or do a favor, there is a kind of a “reward” or compensation.  But that is always in the nature of a “spiritual” or “psychological” good, namely, the perceived satisfaction the benefactor derives from giving tangible evidence to the beneficiary of the love and esteem in which he or she is held.

 

C.     By reason of the manner or form in which the contract is established:

 

Explicit and formal – when clearly stated verbally or by a writing or by unequivocal signs or deeds.

 

Implicit and virtual – as in those situations where one assumes an office or an employment, in which one implicitly promises to fulfill the duties characteristic of the office or the employment taken.

 

It is possible to make further distinctions in regard to explicit and formal contracts.  They could be simply consented to as when no special wording or formalities are required to make it valid and enforceable.  Or they could be solemnly consented to, as when special wording or formalities are required, e.g., in the case of a contract to buy and sell real property, or in a mortgage contract.

 

D.     By reason of the consent, Contracts are:

 

Conditioned – as when the terms (or matter) of the contract do not create enforceable obligations on either or all of the parties until the happening of a certain event.

 

Absolute – as when there are no such conditions.

 

E.      By reason of its subsistence (capacity to stand alone or not) – Contracts are:

 

Principal – capable of standing alone.

 

Subsidiary or Accessory – when they depend upon or corroborate a principal contract.  This happens in the case of transferring rights to “collateral”, or in a mortgage contract.

 

In bilateral onerous contracts there are four different ways the “exchanges” may take place:

 

            I give something so that You give something in return.

 

            I give something so that You do something in return.

 

            I do something so that You do something in return.

 

            I do something so that You give something in return.

 

In virtue of what was said above about the fundamental need we human beings have to enter into covenants with others, it follows that States and Nations have the right and the duty to make laws to govern the contracts that undergird human society.

 

Thus, human positive law may determine and define the rights and obligations of the parties to certain types of contracts, the effects of the contract, the conditions and formalities requisite to their being recognized as valid and enforceable, etc.

 

These would include all those things that must be verified in order that a contract may come into being:

 

-          whether certain wording is required makes the “agreement” legitimate;

-          who those subjects are (age, mental capacity) who can (or cannot) enter into valid contracts;

-          what matters may lawfully be the “objects” of a contract (gambling contracts, contracts for criminal activity, for example, would be excluded;

-          whether the contract must be notarized or otherwise formally acknowledged; etc. 

 

Second Question – The Consent [to the agreement] required by a Contract…

 

Three conditions must be verified to make the “consent” to the agreement effectual and valid:

 

1.       It must be Internal, that is, a true, deliberate and free act of the will.  It must be an authentically human act, in other words.  The consent must include the intention to bind oneself legally [and in conscience].

 

Contracts entered into “jokingly”, or by a person not fully alert and in control of his or her mental faculties, or under duress, would not be valid for failing to satisfy this first requirement.

 

2.       The Internal Consent must be Externally manifested.  That is, the intention to assume binding obligations must be made known clearly and unequivocally.

 

3.       The Internal, Externally manifested Consent must be Mutual, i.e., made known to all other parties to the Contract.  That is because no one of the parties could be deemed (by the Civil Law) to have consented to assume the burdens (binding obligations) of the contract without the assurance that the others have themselves also assumed corresponding burdens.

 

With regard to (1) above, the apparent free and deliberate consent could be vitiated [legally ineffective] because of Error and Fraud.

 

Error differs from Ignorance because the latter is merely the lack of knowledge.  Error requires that the intellect reach a conclusion or make a judgment that turns out to be false.

 

The principles governing a contract entered into with error are:

 

1.       A Substantial Error renders the contract invalid.  An error is substantial when it has to do with the “object” or matter of the contract, namely, what is promised and what is expected, or with the “identity” of the other party or parties to the contract, or with any of the other conditions requisite for a valid contract.

 

2.       Accidental Error does not render a contract invalid.  By definition, an accidental error is not a substantial error.  For example, through my attorney I enter into a contract to buy the house of a certain “Evelyn”.  I mistakenly judge that Evelyn is a woman.  Evelyn turns out to be a man.

 

Fraud is the deliberate deception of another, that is, purposely causing another to make an error of judgment.  It can be committed either by doing or saying something, or by failing to do or say something that should be done or said.

 

The principle regarding Fraud and the comments thereon are exactly the same as those governing Error.  Fraud concerning the substantial elements of a contract render it invalid, whereas Fraud concerning the accidental elements do not.

 

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