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Sender:
Fergus Farrow
Date:
Wed, 4 Jul 2007 16:27:08 +1000
Re:
A Positive Law Theory of Contract

 

Dear List Members

  

SSRN Working Paper:  “A Positive Law Theory of Contract

May I draw to the attention of list members my paper "A Positive Law Theory of Contract" which I have recently posted online on the Social Science Research Network website.

The paper may be of interest to RDG members because, amongst other things, the positive law theory of contract which I advance has a broad application to cases involving alterations, contractual and non-contractual, which parties make to their respective property rights; and is able to explain conclusively, by reference to underlying legal principles, the basis of the obligation upon a payee to repay a mistaken payment.

Why a positive law theory of contract? To start with, because conventional theories of contract, with their preoccupation with the question as to the moral justification for the use of the force of the state to enforce contractual obligations, have failed to explain many of the decisions of the courts in cases involving contractual disputes. An example of such a failure is the inability of conventional theories to explain the basis of the decisions of the courts in implied terms cases, especially in those cases where neither party turned its mind to the subject matter of the implied term.

A further reason to consider a positive law theory of contract is because we have already replaced, in recent decades, a natural law based theory of criminal law with a positive law theory of that body of law, and perhaps a parallel development in contract law may be opportune.

What is the ground for a positive law theory? The starting ground for such a theory is the observation that property is not an inherent characteristic of the world around us, but, rather, it is an abstract legal construct. Because it happened millennia ago, we have tended to forget, in relation to the institution of a regime of property, that the institution of such a regime required the positive law action (of a remote predecessor state) to bring such a regime into existence in the first place.

In carrying out that task, the predecessor state had to:

(a) make a policy decision to institute a regime of private property;

(b) promulgate a definition of the meaning of property;

(c) make laws setting down what a person had to do if that person was to become the first owner of an item of property which had not previously been owned by any other person; and

(d) appoint an adjudicative body with power to resolve disputes between parties who had set about altering their property rights after becoming, in accordance with law, the first acquirers of items of property.

It is not at all difficult to accept that the above steps involved the predecessor state using its sovereignty to make practical, secular positive laws along those lines.

The more difficult problem in the development of a positive law theory of contract is to provide an account of the basis upon which the courts have acted when they exercised their power to resolve disputes about whether, and in what manner, the parties had altered their respective property rights.

Natural law theories, of course, deal with that problem on the basis that the courts have had regard to moral principles when resolving such disputes.

However, in my positive law approach to this problem, I demonstrate that the decisions of the courts in such cases can be explained on the basis that the scope of the court’s exercise of their power to resolve such disputes has been constrained impliedly, if not expressly, by a body of propositions, or principles (in the logical rather than moral sense), which are logically entailed by the positive law meaning of property.

This is not to say that the courts have set down expressly the principles in question, and have then applied those principles expressly when deciding cases. Indeed, there is no evidence to suggest that they have followed such a path.

However, it may be observed that if, broadly, the decisions of the courts in relevant cases were not consistent with the meaning of property, and of the propositions logically entailed by the meaning of property, then the decisions of the courts in cases involving disputes about property rights would become, over time, logically incoherent. Such an outcome would, of course, have been unacceptable to commercial entities, and, in turn, to the state. Therefore, to the extent that the body of decisions in question are, on the whole logically coherent, it follows that the courts have at least had an intuitive awareness of the need to ensure that their decisions are consistent with the meaning of property, and with the propositions entailed by that meaning, and have made their decisions accordingly (in the precedent cases in particular).

Thus, on this argument, the principal task of a positive law theory of contract is to identify the propositions, or principles, entailed by the meaning of property, and to test the explanatory value of those principles by applying them in the examination of the decisions of the courts in relevant cases.

The positive law meaning given to private property, or rather the meaning given to the ownership of property, is straightforward enough, namely: an owner of an item of property holds an exclusive right, recognised and protected by the courts, supported by the power of the state, to the use and possession of that item of property, subject to the operation of the law of the state otherwise (including, for example, the revenue laws).

In examining what is entailed by that meaning, it is noted that, in the absence of a law to the contrary, an owner’s exclusive right to the use of her property extends to her having an exclusive power to alter her property rights in whatever manner chosen by her.

It may be further noted that an owner’s exclusive power to alter her property rights implies, as a matter of legal principle, the principle that: A cannot alter, unilaterally, the respective property rights of A and B.

It further follows from that non-unilateral principle that if parties are to alter their respective property rights, they must let each other know what they are doing, and they must act mutually, resulting in the principle that: if parties are to alter their respective property rights in certain respects, then they must communicate, one to the other, the mutual message that they are altering their property rights in those respects.

There is a corollary to the mutual messages principle, namely that: if parties communicate, one to the other, the mutual message that they are altering their respective property rights in certain respects, then they have altered their rights in those respects (subject to the law otherwise).

There is further principle, namely that because an owner has been provided by positive law with an exclusive power to alter her property rights in whatever manner she chooses, then, in the absence of any positive law authorisation to the contrary, the courts are precluded from substituting their decision, for the owner’s decision, as to how an owner should have, or may have, altered her property rights.

Those principles, once they have been identified, can be applied in the examination of the decisions of the courts in cases involving disputes as to whether, and in what manner, parties have altered their respective property rights.

An example of one such class of case is where a court has found that the contract made by the parties contains an implied term. However, on the basis of one of the principles implied by the meaning of property, the court itself is precluded from inserting, of its volition, such a term into the contract. It therefore follows that the parties, by their conduct, must have caused the implied term. However, the only way in which that proposition can make sense is that the parties have communicated an implied message that their contract contain the implied term.

For this reason my paper contains an examination of the admittedly complex, and not at all self-evident, rules of social discourse governing the use of implied messages. However, when those rules of discourse are applied to the facts of implied terms cases, it can be shown that the parties have indeed, in such cases, communicated a mutual implied message that the subject contract is to contain an implied term.

In a later part of the paper, the implied messages analysis is also applied to cases involving a mistaken payment. Amongst other things, it is shown that in such cases the parties, in accordance with the complex rules governing the use of implied messages, have communicated a mutual implied message that the ownership of the money paid to the payee passes immediately to the payee, subject to the condition that, should the payment be discovered subsequently to have been mistaken, the payee is to hold from that moment onwards an undifferentiated portion of his assets for the benefit of the payer, with that portion having a money’s worth equal to the amount of the mistaken payment; with, conversely, the payer having a legally-enforceable claim to the payment to him of that amount.

On that basis, then, the situation of the payer and payee in a mistaken payment case has parallels with the situation of a lender and borrower under a loans contract caused by a mutual express contract-making message communicated by the parties. Under such a loan contract, ownership of the loan amount passes to the borrower when the loan is taken down, subject to the condition that the borrower holds, as and from the due date or due dates, an undifferentiated portion of his assets for the benefit of the lender, with that portion having a money’s worth equal to the amount of interest and principal payable as and from the due date, or due dates; with, conversely, the borrower having a legally-enforceable claim to the amount payable on the due date, or due dates.

Of course, the unjust enrichment account of the basis of a mistaken payee’s obligation to repay is not entirely removed from the explanation of the obligation grounded in the principles entailed by the meaning of property. In particular, that unjust enrichment account has a connotation that unless prevented by law, the mistaken payee would be unjustly enriched, and hence the law should take the steps necessary to prevent, or redress, such an injustice. However, such an account is morally intuitive, rather than that it explains, by reference to underlying legal principle, the decisions of the courts in mistaken payment cases.

By contrast, the positive law account of the obligation to repay a mistaken payment is grounded in the principle that a mistaken payee cannot lay an unconditional claim to the payment made to him because the parties have not communicated a mutual message, express or implied, that he held an unconditional claim to the money. Conversely, the positive law account of the obligation says that the parties communicated a mutual implied message that the payment was conditional, with the payee having a legal obligation to repay if, and when, it was discovered that the payment was mistaken.

If list members want to examine the argument on this issue in more detail they may do so by downloading the paper in full from the SSRN site. They may also find the broader application of the positive law theory of contract to the decision in Smith v Hughes; the basis of contractual obligation; the doctrine of consideration; and the doctrine of promissory estoppel to be of interest as well.

Fergus Farrow
Owen Dixon Chambers West.

Fergus Farrow
Barrister-at-Law
C/- Clerk Green
Owen Dixon Chambers West
525 Lonsdale St
Melbourne Vic 3000
Australia

Phone: (61 3) 9225-6526 mobile: 0412-130-585 Fax: (61 3) 9225-7884 DX 98


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