Mises Daily Articles
Property Rights and the Theory of ContractsTags Free MarketsPhilosophy and MethodologyPrivate Property
The right of property implies the right to make contracts about that property: to give it away or to exchange titles of ownership for the property of another person. Unfortunately, many libertarians, devoted to the right to make contracts, hold the contract itself to be an absolute, and therefore maintain that any voluntary contract whatever must be legally enforceable in the free society.
Their error is a failure to realize that the right to contract is strictly derivable from the right of private property, and therefore that the only enforceable contracts (i.e., those backed by the sanction of legal coercion) should be those where the failure of one party to abide by the contract implies the theft of property from the other party.
In short, a contract should only be enforceable when the failure to fulfill it is an implicit theft of property. But this can only be true if we hold that validly enforceable contracts only exist where title to property has already been transferred, and therefore where the failure to abide by the contract means that the other party's property is retained by the delinquent party, without the consent of the former (implicit theft). Hence, this proper libertarian theory of enforceable contracts has been termed the "title-transfer" theory of contracts.1
Let us illustrate this point. Suppose that Smith and Jones make a contract, Smith giving $1000 to Jones at the present moment, in exchange for an IOU of Jones, agreeing to pay Smith $1100 one year from now. This is a typical debt contract. What has happened is that Smith has transferred his title to ownership of $1000 at present in exchange for Jones agreeing now to transfer title to Smith of $1100 one year from now. Suppose that, when the appointed date arrives one year later, Jones refuses to pay. Why should this payment now be enforceable at libertarian law? Existing law (which will be dealt with in greater detail below) largely contends that Jones must pay $1100 because he has "promised" to pay, and that this promise set up in Smith's mind the "expectation" that he would receive the money.
Our contention here is that mere promises are not a transfer of property title; that while it may well be the moral thing to keep one's promises, that it is not and cannot be the function of law (i.e., legal violence) in a libertarian system to enforce morality (in this case the keeping of promises). Our contention here is that Jones must pay Smith $1100 because he had already agreed to transfer title, and that nonpayment means that Jones is a thief, that he has stolen the property of Smith. In short, Smith's original transfer of the $1000 was not absolute, but conditional, conditional on Jones paying the $1100 in a year, and that, therefore, the failure to pay is an implicit theft of Smith's rightful property.
Let us examine, on the other hand, the implications of the now prevalent "promise" or "expectations" theory of contracts. Suppose that A promises to marry B; B proceeds to make wedding plans, incurring costs of preparing for the wedding. At the last minute, A changes his or her mind, thereby violating this alleged "contract." What should be the role of a legal enforcing agency in the libertarian society? Logically, the strict believer in the "promise" theory of contracts would have to reason as follows: A voluntarily promised B that he or she would marry the other, this set up the expectation of marriage in the other's mind; therefore this contract must be enforced. A must be forced to marry B.
As far as we know, no one has pushed the promise theory this far. Compulsory marriage is such a clear and evident form of involuntary slavery that no theorist, let alone any libertarian, has pushed the logic to this point. Clearly, liberty and compulsory slavery are totally incompatible, indeed are diametric opposites. But why not, if all promises must be enforceable contracts?
A milder form of enforcing such marriage promises has, however, been employed, let alone advocated, in our legal system. The old "breach of promise" suit forced the violator of his promise to pay damages to the promisee, to pay the expenses undergone because of the expectations incurred. But while this does not go as far as compulsory slavery, it is equally invalid. For there can be no property in someone's promises or expectations; these are only subjective states of mind, which do not involve transfer of title, and therefore do not involve implicit theft. They therefore should not be enforceable, and, in recent years, "breach of promise" suits, at least, have ceased to be upheld by the courts. The important point is that while enforcement of damages is scarcely as horrendous to the libertarian as compulsory enforcement of the promised service, it stems from the same invalid principle.
Let us pursue more deeply our argument that mere promises or expectations should not be enforceable. The basic reason is that the only valid transfer of title of ownership in the free society is the case where the property is, in fact and in the nature of man, alienable by man. All physical property owned by a person is alienable, i.e., in natural fact it can be given or transferred to the ownership and control of another party. I can give away or sell to another person my shoes, my house, my car, my money, etc. But there are certain vital things which, in natural fact and in the nature of man, are inalienable, i.e., they cannot in fact be alienated, even voluntarily.
Specifically, a person cannot alienate his will, more particularly his control over his own mind and body. Each man has control over his own mind and body. Each man has control over his own will and person, and he is, if you wish, "stuck" with that inherent and inalienable ownership. Since his will and control over his own person are inalienable, then so also are his rights to control that person and will. That is the ground for the famous position of the Declaration of Independence that man's natural rights are inalienable; that is, they cannot be surrendered, even if the person wishes to do so.
Or, as Williamson Evers points out, the philosophical defenses of human rights
are founded upon the natural fact that each human is the proprietor of his own will. To take rights like those of property and contractual freedom that are based on a foundation of the absolute self-ownership of the will and then to use those derived rights to destroy their own foundation is philosophically invalid.2When a man renounces his liberty he renounces his essential manhood, his rights, and even his duty as a human being. There is no compensation possible for such complete renunciation. It is incompatible with man's nature, and to deprive him of his free will is to deprive his actions of all moral sanction. The convention, in short, which sets up on one side an absolute authority, and on the other an obligation to obey without question, is vain and meaningless. Is it not obvious that where we can demand everything we owe nothing? Where there is no mutual obligation, no interchange of duties, it must, surely, be clear that the actions of the commanded cease to have any moral value? For how can it be maintained that my slave has any "right" against me when everything that he has is my property? His right being my right, it is absurd to speak of it as ever operating to my disadvantage.
Or, in short, if a man sells himself into slavery, then the master, being an absolute master, would then have the right to commandeer the funds with which he had "bought" the slave. Jean-Jacques Rousseau, The Social Contract, bk. 1, chap. 4, in E. Barker, ed., Social Contract (New York: Oxford University Press, 1948), p. 175.
Hence, the unenforceability, in libertarian theory, of voluntary slave contracts. Suppose that Smith makes the following agreement with the Jones Corporation: Smith, for the rest of his life, will obey all orders, under whatever conditions, that the Jones Corporation wishes to lay down. Now, in libertarian theory there is nothing to prevent Smith from making this agreement, and from serving the Jones Corporation and from obeying the latter's orders indefinitely. The problem comes when, at some later date, Smith changes his mind and decides to leave. Shall he be held to his former voluntary promise?
Our contention — and one that is fortunately upheld under present law — is that Smith's promise was not a valid (i.e., not an enforceable) contract. There is no transfer of title in Smith's agreement, because Smith's control over his own body and will are inalienable. Since that control cannot be alienated, the agreement was not a valid contract, and therefore should not be enforceable. Smith's agreement was a mere promise, which it might be held he is morally obligated to keep, but which should not be legally obligatory.
In fact, to enforce the promise would be just as much compulsory slavery as the compulsory marriage considered above. But should Smith at least be required to pay damages to the Jones Corporation, measured by the expectations of his lifelong service which the Jones Corporation had acquired? Again, the answer must be no. Smith is not an implicit thief; he has retained no just property of the Jones Corporation, for he always retains title to his own body and person.
What of the dashed expectations of the Jones Corporation? The answer must be the same as in the case of the disappointed suitor or bride. Life is always uncertain, always risky. Some people are better and some are poorer "entrepreneurs," i.e., forecasters of future human action and events of the world. The prospective bride or bridegroom, or the Jones Corporation, are the proper locus of risk in this matter; if their expectations are disappointed, well then, they were poor forecasters in this case, and they will remember the experience when dealing with Smith or the breacher-of-marriage-promise in the future.
If mere promises or expectations cannot be enforceable, but only contracts that transfer property titles, we can now see the application of the contrasting contract theories to an important real-life case: do enlistee-deserters from the army, as well as draftees, deserve total amnesty for their actions? Libertarians, being opposed to the draft as compulsory slavery, have no difficulty in calling for total exoneration for deserting draftees. But what of enlistees, who enlisted in the army voluntarily (and setting aside the case of those who may have enlisted only as an alternative to the compulsory draft)? The "promise" theorist must, strictly, advocate both punishment of the deserters and their compulsory return to the armed forces. The title-transfer theorist, on the contrary, maintains that every man has the inalienable right to control his own body and will, since he has that inalienable control in natural fact. And, therefore, that the enlistment was a mere promise, which cannot be enforceable, since every man has the right to change his mind at any time over the disposition of his body and will. Thus, seemingly minor and abstruse differences over the theory of contracts can and do imply vital differences over public policy.
In contemporary America, outside the glaring exception of the armed forces, everyone has the right to quit his job regardless of whatever promise or "contract" he had previously incurred.3 Unfortunately, however, the courts, while refusing to compel specific personal performance of an employee agreement (in short, refusing to enslave the worker) do prohibit the worker from working at a similar task for another employer for the term of the agreement. If someone has signed an agreement to work as an engineer for ARAMCO for five years, and he then quits the job, he is prohibited by the courts from working for a similar employer for the remainder of the five years. It should now be clear that this prohibited employment is only one step removed from direct compulsory slavery, and that it should be completely impermissible in a libertarian society.
Have the employers, then, no recourse against the mind changer? Of course they do. They can, if they wish, voluntarily agree to blacklist the errant worker, and refuse to employ him. That is perfectly within their rights in a free society; what is not within their rights is to use violence to prevent him from working voluntarily for someone else.
One more recourse would be permissible. Suppose that Smith, when making his agreement for lifelong voluntary obedience to the Jones Corporation, receives in exchange $1,000,000 in payment for these expected future services. Clearly, then, the Jones Corporation had transferred title to the $1,000,000 not absolutely, but conditionally on his performance of lifelong service. Smith has the absolute right to change his mind, but he no longer has the right to keep the $1,000,000. If he does so, he is a thief of the Jones Corporation's property; he must, therefore, be forced to return the $1,000,000 plus interest. For, of course, the title to the money was, and remains, alienable.
Let us take a seemingly more difficult case. Suppose that a celebrated movie actor agrees to appear at a certain theater at a certain date. For whatever reason, he fails to appear. Should he be forced to appear at that or at some future date? Certainly not, for that would be compulsory slavery. Should he be forced, at least, to recompense the theater owners for the publicity and other expenses incurred by the theater owners in anticipation of his appearance? No again, for his agreement was a mere promise concerning his inalienable will, which he has the right to change at any time. Put another way, since the movie actor has not yet received any of the theater owners' property, he has committed no theft against the owners (or against anyone else), and therefore he cannot be forced to pay damages. The fact that the theater owners may have made considerable plans and investments on the expectation that the actor would keep the agreement may be unfortunate for the owners, but that is their proper risk. The theater owners should not expect the actor to be forced to pay for their lack of foresight and poor entrepreneurship. The owners pay the penalty for placing too much confidence in the actor. It may be considered more moral to keep promises than to break them, but any coercive enforcement of such a moral code, since it goes beyond the prohibition of theft or assault, is itself an invasion of the property rights of the movie actor and therefore impermissible in the libertarian society.
Again, of course, if the actor received an advance payment from the theater owners, then his keeping the money while not fulfilling his part of the contract would be an implicit theft against the owners, and therefore the actor must be forced to return the money.
For utilitarians shocked at the consequences of this doctrine, it should be noted that many, if not all, of the problems could be easily surmounted in the libertarian society by the promisee's requiring a performance bond of the promissor in the original agreement. In short, if the theater owners wished to avoid the risk of nonappearance, they could refuse to sign the agreement unless the actor agreed to put up a performance bond in case of nonappearance. In that case, the actor, in the course of agreeing to his future appearance, agrees also to transfer a certain sum of money to the theater owners in case he fails to appear.
Since money, of course, is alienable, and since such a contract would meet our title-transfer criterion, this would be a perfectly valid and enforceable contract. For what the actor would be saying is: "If I do not appear at Theater X at such and such a date, I hereby transfer as of the date the following sum _____, to the theater owners." Failure to meet the performance bond will then be an implicit heft of the property of the owners. If, then, the theater owners fail to require a performance bond as part of the agreement, then they must suffer the consequences.
Indeed, in an important article, A.W.B. Simpson has pointed out that performance bonds were the rule during the Middle Ages and in the early modern period, not only for personal services but for all contracts, including sales of land and money debts.4 These performance bonds evolved on the market as voluntary penalty or penal bonds, in which the contractor obligated himself to pay what was usually twice the sum he owed in case of failure to pay his debt or fulfill his contract at the agreed-upon date. The voluntarily contracted penalty served as an incentive for him to fulfill his contract. Thus, if A agreed to sell a parcel of land in exchange for B's agreed-upon payment of a money price, each would obligate himself to pay a certain sum, usually twice the value of his contractual obligation, in case of failure to pay. In the case of a money debt, called "a common money bond," someone who owed $1000 agreed to pay $2000 to the creditor if he failed to pay $1000 by a certain date. (Or, more strictly the obligation to pay $2000 was conditional upon the debtor's paying $1000 by a certain date. Hence the term "conditional penal bond.")
In the above example of a contract to perform personal service, suppose that the failure of the actor to appear cost the theater owner $10,000 in damages; in that case, the actor would sign, or "execute," a penal performance bond, agreeing to pay $20,000 to the theater owner upon failure to appear. In this sort of contract, the theater owner is protected, and there is no improper enforcement of a mere promise. (Of course, the agreed-upon penalty does not have to be twice the estimated value; it can be any amount assented to by the contracting parties. The double amount became the custom in medieval and early modern Europe.)
In the course of his article, Simpson revises the orthodox historical account of the development of modern contract law: the view that the theory of assumpsit — of basing the enforcement of a contract upon a mere promise, albeit with consideration — was necessary to provide a workable system of contract enforcement in supplement to the crude property-rights concepts of the common law. For Simpson shows that the rise of assumpsit in the sixteenth and seventeenth centuries in England was not the result of new-found attention to the world of business contracts but rather a replacement for the rapid decline of the penal performance bond, which had served business needs well enough for centuries.
Indeed, Simpson points out that the performance bond proved to be a remarkably flexible instrument for the handling of complex as well as simple contracts and agreements. And the performance bond was formal enough to guard against fraud, yet easy enough to execute for the convenience of commercial transactions. Furthermore, in its centuries of use, almost no creditors bothered to sue in the courts for "damages" (in a "writ of covenant"), since the "damages" had been fixed in advance in the contract itself. As Simpson writes:
there are obvious attractions from a creditor's point of view in contracts which fix a penalty in advance, especially when the alternative is assessment of damages by juries.5
But why the decline of the penal bond? Because the courts began to refuse to enforce these obligations. For whatever the reason, whether for misguided "humanitarian" or for more sinister reasons of special privilege, the courts began to balk at the toughness of the law, at the fact that they had been enforcing contracts to their full extent. For the bond meant that "for any default in performance the whole penalty was forfeit."6
At first, during the Elizabethan era, the Courts of Chancery began intervening to relieve the debtor (the obligor) in cases of "extreme hardship." By the early seventeenth century, this relief was broadened to all cases in which misfortune befell the obligor and where he paid the contracted amount a short time later; in such cases, he only had to pay the principal (contracted amount) plus what the courts decided were "reasonable damages" — thus waiving the requirement to pay the agreed-on penalty.
The intervention expanded further in later years until, finally, in the 1660s and early 1670s, the Chancery Courts simply outlawed penalty payments altogether, whatever the contract, and only required the defaulting obligor or debtor to pay the principal plus interest costs, as well as "reasonable damages" assessed by the court itself — usually by a jury. This rule was swiftly adopted by the common-law courts in the 1670s, and then formalized and regularized by statutes at the turn of the eighteenth century. Naturally, since bonded penalties were no longer enforced by the courts, the institution of the penal performance bond swiftly disappeared.
The unfortunate suppression of the performance bond was the result of a mistaken theory of contract enforcement that the courts had adopted in the first place: namely, that the purpose of enforcement was to compensate the creditor or obligee for: the default of the debtor — i.e., to make him as well off as he would have been without the making of the contract.7
In previous centuries, the courts had felt that "compensation" consisted of enforcing the penal bond; it then became fairly easy for the courts to change their minds, and to decide that court-assessed "damages" were compensation enough, relieving the "harshness" of the voluntarily stipulated penalty. The theory of contract enforcement should have had nothing to do with "compensation"; its purpose should always be to enforce property rights, and to guard against the implicit theft of breaking contracts which transfer titles to alienable property. Defense of property titles — and only such defense — is the business of enforcement agencies.
Simpson writes perceptively of the
tension between two ideas. On the one hand we have the idea that the real function of contractual institutions is to make sure, so far as possible, that agreements are performed [e.g., the enforcement of the penal bond]. On the other hand we have the idea that it suffices for the law to provide compensation for loss suffered by failure to perform agreements.
The latter view places severe limits on the enthusiasm with which performance is required; moreover, in contracts for personal services (such as the actor example above), "a positive value is attached to the right to break the contract so long as the defaulting party is made to pay compensation.8
What of gift-contracts? Should they be legally enforceable? Again, the answer depends on whether a mere promise has been made, or whether an actual transfer of title has taken place in the agreement. Obviously, if A says to B, "I hereby give you $10,000," then title to the money has been transferred, and the gift is enforceable; A, furthermore, cannot later demand the money back as his right. On the other hand, if A says, "I promise to give you $10,000 in one year," then this is a mere promise, what used to be called a nudum pactum in Roman law, and therefore is not properly enforceable.9 The receiver must take his chances that the donor will keep his promise. But if, on the contrary, A tells B: "I hereby agree to transfer $10,000 to you in one year's time," then this is a declared transfer of title at the future date, and should be enforceable.
It should be emphasized that this is not mere wordplay, much as it might seem so in particular cases. For the important question is always at stake: has title to alienable property been transferred, or has a mere promise been granted? In the former case, the agreement is enforceable because a failure to deliver the transferred property is theft; in the latter case, it is a mere promise which has not transferred title to property, a promise that may be morally binding, but cannot be legally binding on the promissor. Hobbes was not engaging in mere word-play when he correctly wrote:
Words alone, if they be of the time to come, and contain a bare promise [nudum pactum], are an insufficient sign of a free gift and therefore not obligatory. For if they be of the time to come, as tomorrow I will give, they are a sign I have not yet given, and consequently that my right is not transferred, but remaineth till I transfer it by some other act. But if the words be of the time present, or past, as, I have given, or do give to be delivered tomorrow, then this is my tomorrow's right given away today…. There is a great difference in the signification of [the] words … between I will that this be thine tomorrow, and I will give it thee tomorrow: for the word I will, in the former manner of speech signifies a promise of an act of the will present; but in the latter, it signifies a promise of an act of the will to come: and therefore the former words, being of the present, transfer a future right; the latter, that be of the future, transfer nothing.10
Let us now apply the contrasting theories to a pure gift agreement, rather than an exchange. A grandfather promises to pay his grandson's way through college; after a year or two in college, the grandfather, whether from suffering business reverses or from any other reason, decides to revoke his promise. On the basis of the promise, the grandson has incurred various expenses in arranging his college career and foregoing other employment. Should the grandson be able to enforce the grandfather's promise through legal action?
In our title-transfer theory, the grandson has no right whatever to the grandfather's property, since the grandfather retained title to his money throughout. A mere naked promise can confer no title, and neither can any subjective expectations of the promisee. The costs incurred by the grandson are properly his own entrepreneurial risk. On the other hand, of course, if the grandfather transferred title, then it would be the grandson's property and he should be able to sue for his property. Such a transfer would have occurred if the grandfather had written: "I hereby transfer $8000 to you (the grandson)," or had written: "I hereby transfer $2000 to you at each of the following dates: 1 September 1975, 1 September 1976, etc."
On the other hand, on the expectations model of contracts, there are two possible variants: either that the grandson would have a binding legal claim on the grandfather because of the mere promise, or that the grandson would have a claim on the expenses that he had incurred on the expectation of the promise being fulfilled.11
Suppose, however, that the original statement of the grandfather was not a simple promise, but a conditional exchange: e.g., that the grandfather agreed to pay the grandson's full college tuition provided that the grandson made weekly progress reports to the grandfather. In that case, according to our title transfer theory, the grandfather has made a conditional transfer of title: agreeing to transfer title in the future provided that the grandson performed certain services. If the grandson in fact performed such services, and continues to perform them, then the tuition payment is his property and he should be legally entitled to collect from the grandfather.12
Under our proposed theory would fraud be actionable at law? Yes, because fraud is failure to fulfill a voluntarily agreed upon transfer of property, and is therefore implicit theft. If, for example, A sells to B a package which A says contains a radio, and it contains only a pile of scrap metal, then A has taken B's money and not fulfilled the agreed upon conditions for such a transfer — the delivery of a radio. A has therefore stolen B's property. The same applies to a failure to fulfill any product warranty. If, for example, the seller asserts that the contents of a certain package include 5 ounces of product X, and they do not do so, then the seller has taken money without fulfilling the terms of the contract; he has in effect stolen the buyer's money. Once again, warranties of products would be legally enforceable, not because they are "promises," but because they describe one of the entities of the agreed-upon contract. If the entity is not as the seller describes, then fraud and hence implicit theft have taken place.13
Would bankruptcy laws be permissible in a libertarian legal system? Clearly not, for the bankruptcy laws compel the discharge of a debtor's voluntarily contracted debts, and thereby invade the property rights of the creditors. The debtor who refuses to pay his debt has stolen the property of the creditor. If the debtor is able to pay but conceals his assets, then his clear act of theft is compounded by fraud. But even if the defaulting debtor is not able to pay, he has still stolen the property of the creditor by not making his agreed-upon delivery of the creditor's property.
The function of the legal system should then be to enforce payment upon the debtor through, e.g., forced attachment of the debtor's future income for the debt plus the damages and interest on the continuing debt. Bankruptcy laws, which discharge the debt in defiance of the property rights of the creditor, virtually confer a license to steal upon the debtor. In the pre-modern era, the defaulting debtor was generally treated as a thief and forced to pay as he acquired income. Doubtless the penalty of imprisonment went far beyond proportional punishment and hence was excessive, but at least the old legal ways placed responsibility where it belonged: on the debtor to fulfill his contractual obligations and to make the transfer of the property owed to the creditor-owner. One historian of American bankruptcy law, though a supporter of these laws, has conceded that they trample on the property rights of the creditors:
If the laws of bankruptcies were based on the legal rights of individuals, there would be no warrant for the discharge of debtors from the payment of their debts as long as they lived, or their estates would continue to exist…. The creditor has rights which must not be violated even if adversity be the cause of the bankrupt's condition. His claims are part of his property.14
In defense of the bankruptcy laws, the utilitarian economist might reply that, once these laws are on the books, the creditor knows what may happen to him, that he compensates for that extra risk with a higher interest rate, and that therefore actions under the bankruptcy law should not be regarded as expropriation of the creditor's property. It is true that the creditor knows the laws in advance, and that he will charge a higher interest rate to compensate for the resulting risk. The "therefore," however, does not at all follow. Regardless of foreknowledge or forewarning, bankruptcy laws are still violations and, hence, expropriations of the property rights of the creditors. There are all sorts of situations on the market where prospective victims may be able to maneuver so as to minimize the harm to themselves of institutionalized theft. The theft is no more moral or legitimate because of such praiseworthy maneuvering.
Moreover, the same utilitarian argument could be used about such crimes as mugging or burglary. Instead of deploring crime against store-keepers in certain sections of a city, we might then argue (as utilitarian economists) as follows: after all, the storekeepers knew what they were doing in advance. Before they opened the store, they knew of the higher crime rate at that location and were therefore able to adjust their insurance and their business practices accordingly. Should we say, therefore, that robbery of storekeepers is not to be deplored or even outlawed?15
In short, crime is crime, and invasions of property are invasions of property. Why should those farseeing property owners who took some advance measures to alleviate the effects of prospective crime be penalized by being deprived of a legal defense of their justly owned property? Why should the law penalize the virtue of forethought?
The problem of defaulting debtors may be met in another way: the creditor, taking account of the debtor's honest attempts to pay, may voluntarily decide to forgive part or all of the debt. Here it is important to stress that in a libertarian system which defends property rights, each creditor may forgive only his own debt, may only surrender his own property claims to the debtor. There can then be no legal situation in which a majority of creditors compel a minority to "forgive" their own claims.
Voluntary forgiveness of a debt may occur after the fact of default, or it may be incorporated into the original debt contract. In that case, A could lend B $1000 now, in exchange for $1000 a year from now, provided that, given certain conditions of unavoidable insolvency, A would forgive B part or all of that debt. Presumably, A would charge a higher interest rate to compensate for the additional risk of failure. But the important point is that in these legitimate situations of forgiveness, the discharge of debt has been voluntarily agreed upon, either in the original agreement or after default, by the individual creditor.
Voluntary forgiveness takes on the legal-philosophical status of a gift by the creditor to the debtor. Oddly enough, while title-transfer theorists see such a gift as a perfectly legitimate and valid agreement to transfer title to money from a creditor to a debtor, current legal doctrine has questioned the validity of such an agreement to forgive as a binding contract. For, in current theory, a binding contract must be a promise exchanged for a "consideration," and in the case of forgiveness, the creditor receives no consideration in exchange. But the title-transfer principle sees no problems with forgiveness: "The creditor's act by way of releasing a claim is of the same kind as an ordinary act of transfer. In either case the act is simply the manifested consent of the owner of the right."16
Another important point: in our title-transfer model, a person should be able to sell not only the full title of ownership to property, but also part of that property, retaining the rest for himself or others to whom he grants or sells that part of the title. Thus, as we have seen above, common-law copyright is justified as the author or publisher selling all rights to his property except the right to resell it. Similarly valid and enforceable would be restrictive covenants to property in which, for example, a developer sells all the rights to a house and land to a purchaser, except for the right to build a house over a certain height or of other than a certain design.
The only proviso is that there must, at every time, be some existing owner or owners of all the rights to any given property. In the case of a restrictive covenant, for example, there must be some owners of the reserved right to build a tall building; if not the developer himself, then someone who has bought or received this right. If the reserved right has been abandoned, and no existing person possesses it, then the owner of the house may be considered to have "homesteaded" this right, and can then go ahead and build the tall building. Covenants and other restrictions, in short, cannot simply "run with the property" forever, thereby overriding the wishes of all living owners of that property.
This proviso rules out entail as an enforceable right. Under entail, a property owner could bequeath this land to his sons and grandsons, with the proviso that no future owner could sell the land outside the family (a deed typical of feudalism). But this would mean that the living owners could not sell the property; they would be governed by the dead hand of the past. But all rights to any property must be in the hands of living, existing persons. It might be considered a moral requirement for the descendants to keep the land in the family, but it cannot properly be considered a legal obligation. Property rights must only be accorded to and can only be enjoyed by the living.
There is at least one case in which the "promised expectations" model is in grave internal contradiction, depending upon whether one stresses the "promise" or the "expectations" part of the theory. This is the legal problem of whether "purchase breaks hire." Thus, suppose that Smith owns a tract of land; he leases the land for five years to Jones. Smith, however, now sells the land to Robinson. Is Robinson bound to obey the terms of the lease, or can he oust Jones immediately? On the promise theory, only Smith made the promise to lease the land; Robinson did not so promise, and therefore Robinson is not bound to respect the lease. On the expectations theory the lease agreement generated expectations in Jones that the land would be his for five years. Therefore, on the former grounds, purchase breaks hire, whereas it cannot do so on the expectations model. The title-transfer theory, however, avoids this problem.
On our model, Jones, the leaseholder, owns the use of the property for the contractual period of the lease; five years of property use has been transferred to Jones. Therefore Robinson cannot break the lease (unless, of course, the breaking of hire under such conditions was expressly included as a provision in the lease).
There is one vitally important political implication of our title-transfer theory, as against the promise theory of valid and enforceable contracts. It should be clear that the title-transfer theory immediately tosses out of court all variants of the "social contract" theory as a justification for the State.
Setting aside the historical problem of whether such a social contract ever took place, it should be evident that the social contract, whether it be the Hobbesian surrender of all one's rights, the Lockean surrender of the right of self-defense, or any other, was a mere promise of future behavior (future will) and in no way surrendered title to alienable property. Certainly no past promise can bind later generations, let alone the actual maker of the promise.17
Cato's Letters, no. 59, in D. L. Jacobson, ed., The English Libertarian Heritage (Indianapolis, Ind.: Bobbs-Merrill, 1965), p. 108.
The current law of contracts is an inchoate mixture of the title-transfer and the promise-expectations approaches, with the expectations model predominating under the influence of nineteenth- and twentieth-century legal positivism and pragmatism. A libertarian, natural-rights, property-rights theory must therefore reconstitute contract law on the proper title-transfer basis.18
Immanuel Kant, in contrast to numerous utilitarian and pragmatist philosophers, attempted to derive contract theory from a transfer rather than a promise basis. Immanuel Kant, The Philosophy of Law: An Exposition of The Fundamental Principles of Jurisprudence as the Science of Right (Edinburgh: T. and T. Clark, 1887), p. 101. Unfortunately, however, Kant's position had two major defects. First, he assumed that the voluntary transfers of property must take place within a framework of obedience to an imposed general will of civil society. But free choice and such civil obedience are inherently contradictory. And second, Kant emphasized that contracts are voluntary when the subjective mental states of the contracting parties are in agreement. But how can courts determine the subjective mental states of the parties to an agreement? Far better for libertarian contract theory is to hold that when two parties act to transfer titles, and neither is under threat of physical violence, then the contract is thereby revealed as voluntary, consensual, and valid. In short, consent by both parties is determined by observing actions under non-coercive conditions. See Hallock v. Commercial Insurance Co., 26 N.J.L. 268 (1857); William Anson, Principles of the English Law of Contract, 2nd ed. (1882), p. 13; and Samuel Williston, "Mutual Assent in the Formation of Contracts," selected="true" Readings on the Law of Contracts (New York: Macmillan, 1931), pp. 119–27.
- 1. In Williamson M. Evers, "Toward A Reformulation of the Law of Contracts," Journal of Libertarian Studies 1 (Winter 1977): 3–13. I am indebted in this section of the book to this excellent paper, particularly for its critique of existing and past laws and theories of enforceable contracts.
- 2. Evers, "Law of Contracts," p. 7. Rousseau argued trenchantly against the validity of a slave contract:
- 3. On the importance of self-ownership and freedom of the will in forming the basis for the current judicial doctrine prohibiting the compulsion of specific performance to fulfill personal service contracts, see John Norton Pomeroy, Jr., and John C. Mann, A Treatise on the Specific Performances of Contracts, 3rd ed. (Albany, N.Y.: Banks, 1926), sec. 310, p. 683.
- 4. A.W.B. Simpson, "The Penal Bond With Conditional Defeasance," Law Quarterly Review (July 1966): 392–422.
- 5. Ibid, p. 415.
- 6. Ibid., p. 411.
- 7. For an expanded critique of the compensation concept see pp. 203–6, 238–51 below, especially the critique of Robert Nozick's Anarchy, State, and Utopia.
- 8. Simpson goes on to point out that while the enforcement of private, voluntarily agreed upon "penalties in terrorem of the party from whom performance is due" has now disappeared, the State and its courts themselves use this technique, and thus have arrogated a monopoly of such methods to themselves, e.g., in requiring bail, releasing someone on recognizance, or penalizing someone for contempt of court. Simpson, "Penal Bond," p. 420. The difference, of course, is that these state penalties are unilateral and compulsory rather than voluntarily agreed upon in advance by the obligor. Al; this is not to imply that the medieval courts were perfect; for one thing, they refused to enforce any contracts of money loans charging interest as committing the "sin of usury."
- 9. The Roman legal principle was that a "naked promise" (nudum pactum) could not be the subject of a legal action: Ex nudo pacto non oritur actio. On the nudum pactum, see John W. Salmond, Jurisprudence, 2nd ed. (London: Stevens and Haynes, 1907), p. 318; Pherozeshah N. Daruvala, The Doctrine of Consideration (Calcutta: Butterworth, 1914), p. 98; and Frederick Pollock, Principles of Contract, 12th ed., P. Winfield, ed. (London: Stevens and Sons, 1946), pp. 119–20.
- 10. Thomas Hobbes, Leviathan, pt. 1, chap. 14 [italics Hobbes's].
- 11. The present state of contract law is fuzzy on this kind of case. Whereas until recently a tuition promise was not actionable, it is now possible that recovery against the grandfather would be enforced for costs incurred on expectation of the promise being fulfilled. See Merton Ferson, The Rational Basis of Contracts (Brooklyn: Foundation Press, 1949), pp. 26–27; and Grant Gilmore, The Death of Contract (Columbus: Ohio State University Press, 1974), pp. 59ff.
- 12. See Evers, "Law of Contracts," pp. 5–6. On the other hand, as indicated above, the grandson could not be required to perform the service should he change his mind, for that would be compulsory slavery. He would be required, however, to repay the grandfather.
- 13. In older law, the action of deceit against the vendor of a chattel upon false warranty was, indeed, a pure action of tort (theft in our sense). James Barr Ames, "The History of Assumpsit," Harvard Law Review 2, no. 1 (15 April 1888): 8. For a contrasting promise view, see Roscoe Pound, Jurisprudence (St. Paul, Minn.: West, 1959), pp. 111,200; and Oliver Wendell Holmes, Jr., The Common Law, Howe ed., (Cambridge, Mass.: Belknap Press of Harvard University Press, 1963), p. 216.
- 14. F. Regis Noel, "A History of the Bankruptcy Clause of the Constitution of the United States of America" (Washington: doctoral dissertation, Catholic University of America, 1920), pp. 187,191. Noel goes on to assert that the creditor's rights must be overridden by public policy," the "common good," and the "paramount rights of the community," whatever these may be. Quoted by Lawrence H. White, "Bankruptcy and Risk" (not published), p. 13.
- 15. I owe this example to Dr. Walter Block.
- 16. Ferson, The Rational Basis of Contracts, p. 159. On the absurd consequence of current contract theory in questioning the validity of voluntary forgiveness, see Gilmore, The Death of Contract, p. 33.
- 17. As Rousseau states, "Even if a man can alienate himself, he cannot alienate his children. They are born free, their liberty belongs to them, and no one but themselves has a right to dispose of it … for to alienate another's liberty is contrary to the natural order, and is an abuse of the father's rights." Rousseau in Barker, ed., Social Contract, pp. 174–75. And, four decades before Rousseau, in the early 1720s, the libertarian English writers John Trenchard and Thomas Gordon, in their Cato's Letters — widely influential in forming the attitudes of the American colonies — wrote as follows:
- 18. The current requirement that there must be "consideration" for a promise to be enforceable is a philosophically confused injection of title-transfer principles into the law of contracts. See Edward Jenks, The History of the Doctrine of Consideration in English Law (London: C.J. Clay and Sons, 1892), chap. 3. Contracts as enforceable promises entered English law by way of Church canon law, and the customary law merchant, as well as by the post-Norman Conquest doctrine of assumpsit. Assumpsit enforced such allegedly implied "promises" as innkeepers or common carriers in accepting customers. On assumpsit, see Jenks, History of Doctrine of Consideration, pp. 124–25; and James Barr Ames, "History of Assumpsit," in selected="true" Readings on the Law of Contracts (New York: Macmillan, 1931) pp. 37–40.
The pre-Norman Conquest law of England was on a property rights, title-transfer basis. Essentially, every debt was considered a bailment for a specific set of chattels. One problem with this variant is that people are not able to agree now to assign title to goods at some future date; as a result, creditors did not have a lien on debtors' future assets if the latter had no money to pay at the time of default. Moreover, the sole emphasis on physical possession of the property meant that the pre-Conquest English notion of "title" to property was highly defective. Thus, after a sale contract had been concluded, the seller, under that notion, did not have the right to sue for the money-price (since it had not been a previous physical possession of the seller and therefore could not be construed as a bailment, although the buyer could sue for delivery of the goods). It was partly because of such primitive defects in pre-Conquest contract theory that the promise model was able to take hold. Although see also the decline of the penal bond, pp. 139–40 above. See Robert L. Henry, Contracts in the Local Courts of Medieval England (London: Longmans, Green, 1926), pp. 238–41, 245. Also see Jenks, History of the Doctrine of Consideration, pp. 115–18; Frederick Pollock, "Contracts," Encyclopedia Britannica, 14th ed. (1929), vol. 6, pp. 339–40; Ames, "The History of Assumpsit," pp. 55–57; Ferson, The Rational Basis of Contracts, p. 121; and especially Evers, "Law of Contracts," pp. 1–2.
On views of debt in other cultures similar to those of pre-Conquest England, see Max Gluckman, The Ideas in Barotse Jurisprudence (New Haven, Conn.: Yale University Press, 1965), pp. 177, 182–83, 198; John D. Mayne, Treatise on Hindu Law and Usage, 11th ed., N.C. Aiyar, ed. (Madras: Higginbothams, 1953), pp. 395–447; Daruvala, The Doctrine of Consideration, p. 270; and E. Allan Farnsworth, "The Past of Promise: An Historical Introduction to Contract," Columbia Law Review 69, no. 4 (April 1969): 587.