Consent Theory of Contract

Entitlement Theory and Contract: The Central Importance of Consent

Entitlements as the Root of Contractual Obligation

The function of an entitlements theory based on individual rights is to define the boundaries within which individuals may live, act, and pursue happiness free of the forcible interference of others. A theory of entitlements specifies the rights that individuals possess or may possess; it tells us what may be owned and who owns it; it circumscribes the individual boundaries of human freedom. Any coherent theory of justice based on individual rights must therefore contain principles that describe how such rights are initially acquired, how they are transferred from person to person, what the substance and limits of properly obtained rights are, and how interferences with these entitlements are to be rectified.

These constituent parts of an entitlements theory comport substantially with the traditional categories of private law. The issue of initial acquisition of entitlements in real and chattel resources is dealt with primarily in property law; tort law concerns the protection of and proper limits on resource use; and contract law deals with transfers of rights between rights holders. Each category contains principles of rectification for the breach of legal obligations.

Viewing contract law as part of a more general theory of individual entitlements that specifies how resources may be rightly acquired (property law), used (tort law), and transferred (contract law) is not new. And, of course, the actual historical development of these legal categories has not perfectly conformed to the conceptual distinctions that an entitlements approach suggests. But this approach has long been neglected as a way of resolving some of the thorniest issues of contract theory and doctrine.

According to an entitlements approach, rights may be unconditionally granted to another (a gift), or their transfer may be conditioned upon some act or reciprocal transfer by the transferee (an exchange). Contract law concerns ways in which rights are transferred or alienated. Accordingly, the enforceability of all agreements is limited by what rights are capable of being transferred from one person to another. Whether a purported right is genuine or can be legitimately transferred is not an issue of contract theory only, but is one that may also require reference to the underlying theory of entitlements–that is, the area of legal theory that specifies what rights individuals have and the manner by which they come to have them. In this respect, the explanation of the binding nature of contractual commitments is derived from more fundamental notions of entitlements and how they are acquired and transferred.

The subjects of most rights transfer agreements are entitlements that are indisputably alienable. In such cases the rules of contract law are entirely sufficient to explain and justify a judicial decision. However, in rare cases–such as agreements amounting to slavery arrangements or requiring the violation of another’s rights–contract law’s dependency on rights theory will be of crucial importance in identifying appropriate concerns about the substance of voluntary agreements. For example, agreements to transfer inalienable rights [FN99]–rights that for some reason cannot be transferred–or to transfer rights that for some reason cannot be obtained, would not, without more, be valid and enforceable contracts.

Although existing theories of contractual obligation have failed to recognize this dependent relationship explicitly, such a notion may sometimes be implicit. For example, it is difficult to understand how any theory based on the “will” of the individual or the rectification of “harm” to an individual caused by reliance makes sense without assuming a background of more basic individual rights. One would not care at all about an individual’s expressed “will” or any reliance injury she might have sustained unless that person has a pre-contractual right to “bind herself” or a right to be protected from certain kinds of harm. Efficiency-based theories also depend on a (usually assumed) set of entitlements that form the basis of subsequent “efficient” exchanges. [FN101] The many gaps in these articulated theories of contract are, in practice, most probably filled by our shared intuitions about fundamental individual rights. Making this conceptual relationship explicit helps to clarify what continues to be a hazy understanding of contractual obligation. (…)

The Allocative and Distributional Function of Individual Rights

Any concept of individual rights must assume a social context. If the world were inhabited by one person, it might make sense to speak of that person’s actions as “good” or “bad.” Such a moral judgment might, for example, look to whetheror not that person had chosen to live what might be called the “good life.” [FN102] It makes no sense, however, to speak about this person’s rights. As one court noted: “Unless and until one is brought into relation with other men, or property, or rights, he has no obligation to act with reference to them; and this is true whether the obligation be called legal, moral, or reasonable.”

From the moment individuals live in close enough proximity to one another to compete for the use of scarce natural resources, some way of allocating those resources must be found. In short, some scheme of specifying how individuals may acquire, use, and transfer resources must be recognized. Certain facts of human existence make certain principles of allocation ineluctable. For example, it is a fundamental human requirement that individuals acquire and consume natural resources, even though such activity is often inconsistent with a similar use of the same resources by others.

“Property rights” is the term traditionally used to describe an individual’s entitlements to use and consume resources–both the individual’s person and her external possessions–free from the physical interference of others. [FN104] That possession and use of resources is by *295 “right” suggests that any attempt at physical interference with possession and use may be resisted by force if necessary. [FN105] Additionally, if another interferes with a rightful distribution of resources, this violation may be rectified by redistributing resources. [FN106] Some rights to property can be exclusive and others less so. The exact contours of a proper theory of rights need not be specified here. [FN107] Only the recognition that some allocation of rights to resource possession and use is an unavoidable prerequisite of human survival and of human fulfillment is relevant to this discussion.

Although entitlements to resources can be acquired directly from nature by individual labor, in a complex society they will more likely be acquired from others. [FN108] Contract law, according to an entitlements approach, is thus a body of general principles and more specific rules the function of which is to identify the rights of individuals engaged in transferring entitlements, and thereby indicate when physical or legal force may legitimately be used to preserve those rights and to rectify any unjust interference with the transfer process.

Consent as the Moral Component of a Contractual Transaction

The areas of moral obligations and legal obligations are not coextensive. [FN109] A moral obligation is something we ought to do or refrain from doing. A moral obligation that is not also a valid legal obligation can only be legitimately secured by voluntary means. That is, one may have a moral obligation to do something, but unless there is also a valid legal obligation, one cannot legitimately be forced by another to do it. A moral obligation is only a legal obligation if it can be enforced by the use or threat of legal force. [FN110] This added dimension of force requires moral justification. The principal task of legal theory, then, is to identify circumstances when legal enforcement is morally justified.

Entitlements theories seek to perform this task by using moral analysis to derive individual legal rights, that is, claims that may be justifiably enforced. [FN112] A theory of contractual obligation is the part of an entitlements theory that focuses on liability arising from the wrongful interference with a valid rights transfer. Until such an interference is corrected–by force if necessary–the distribution of resources caused by the interference is unjust. Justice consists of correcting this situation to bring resource distribution into conformity with entitlements.

To identify the moral component that distinguishes valid from invalid rights transfers, it is first necessary to separate moral principles governing the rightful acquisition and use of resources from those governing their transfer. Rights are the means by which freedom of action and interaction are facilitated and regulated in society, [FN114] and thus the rights we have to acquire previously unowned resources and to use that which we acquire must not be subject to the expressed assent of others. Although societal acquiescence may be a practical necessity for rights to be legally respected, no individual or group need consent to our appropriation of previously unowned resources or their use for our rights to morally vest. [FN115]

Similarly, principles governing rights transfer should be distinguished from principles governing resource use. Tort law concerns obligations arising from interferences with others’ rights. A tortfeasor who interferes with another’s rights (rather than obtaining a valid transfer of those rights to herself) is liable because of that interference, not because she consented to be held liable for her actions that impair another’s rights. A tortfeasor can be said to “forfeit” (as opposed to alienate or transfer) rights to resources in order to provide compensation to the victim of the tort. [FN116]

In contrast, contract law concerns enforceable obligations arising from the valid transfer of entitlements that are already vested in someone, and this difference is what makes consent a moral prerequisite to contractual obligation. The rules governing alienation of property rights by transfer perform the same function as rules governing their acquisition and those specifying their proper content: facilitating freedom of human action and interaction. [FN117] Freedom of action and interaction would be seriously impeded, and possibly destroyed, if legitimate rights holders who have not acted in a tortious manner could be deprived of *298 their rights by force of law without their consent. [FN118] Moreover, the moral requirement of consent mandates that others take the interests of the rights holder into account when seeking to obtain the rights she possesses. [FN119] Wallace Matson succinctly describes the view of justice that makes consent the moral component of contractual transfer:

“[Justice is] … rendering every man his due. A man’s due is what he has acquired by his own efforts and not taken from some other man without consent. A community in which this conception is realized will be one in which the members agree not to interfere in the legitimate endeavors of each other to achieve their individual goals, and to help each other to the extent that the conditions for doing so are mutually satisfactory…. Such a community will be one giving the freest possible rein to all its members to develop their particular capacities and use them to carry out their plans for their own betterment…. [T]his activity is The Good for Man….”

Consequently, the consent of the rights holder to be legally obligated [FN121] is the moral component that distinguishes valid from invalid transfers of alienable rights in a system of entitlements. [FN122] It is not altogether novel to suggest that consent is at the heart of contract law, [FN123] although the claim that contractual obligation arises from a consent to a transfer of entitlements and is thereby dependent on a theory of entitlements is not widely acknowledged. [FN124] Yet it is certainly a commonly *300 held and plausible conception of ownership that owning resources gives one the right to possess, use, and dispose of them free from the use or threat of force by others.

In a modern society the chain between initial acquisition of resources and their ultimate consumption can be quite long and complicated. While controversies may exist, even among those who acknowledge the legitimacy of property rights in principle, about the proper mode of resource acquisition [FN126] and the proper manner of resource use, [FN127] a valid transfer of rights must be conditioned on some act of the rights holder. The allocative function that an entitlements theory is devised, in part, to fulfill suggests that the way rights are transferred is by consent.

In sum, legal enforcement is morally justified because the promisor voluntarily performed acts that conveyed her intention to create a legally enforceable obligation by transferring alienable rights. Within an entitlements approach, contractual obligation, as distinct from other types of legal obligation, is based on that consent.

Defining Consent

For information on this subject, please see the entry on consent agreement.

Determining Contractual Obligation in a Consent Theory

The Presumptive Nature of Consent

Richard Epstein has suggested that legal principles used to determine obligation can best be thought of as presumptive in nature. [FN162] That is, legal principles which attempt to describe in a general fashion what obligations will result from certain actions ought not to be applied in an “absolute” fashion. Rather, legal principles ought to state a “prima facie case” of legal obligation that describes the normal or presumptive connection between specified acts and their legal consequences. [FN163] Any such presumption of obligation, however, may be “rebutted” if other facts are proved to have existed that are generally recognized by a legal system as undermining the normal significance of the prima facie case. Such responses or “defenses” to the prima facie case are themselves only presumptively compelling. They in turn may be rebutted by still other facts alleged by the person seeking relief. In this way the principles or elements that determine legal obligation come in “stages.” [FN164]

In a consent theory, absent the assertion of a valid defense, proof of consent to a transfer of alienable rights (plus breach) is legally sufficient to obtain a judgment for breach of contract. Consent is prima facie binding because of its usual connection with subjective assent (thereby protecting the reliance interest of the promisor) and because people usually have access only to the manifested intentions of others *310 (thereby protecting the reliance interest of the promisee and others as well as the “security of transactions”). The next two sections will discuss the prima facie case of consent and the role that defenses to consent play in a consent theory.

Establishing the Prima Facie Case of Consent

There are two ways to manifest one’s intention to be legally bound. The first is to deliberately “channel” one’s behavior through the use of a legal formality [FN165] in such a way as to explicitly convey a certain meaning–that of having an intention to be legally bound–to another. This is the formal means of consenting. The second is by indirectly or implicitly conveying this meaning by other types of behavior. This is the informal means of consenting.

a. Formal Consent.–For a considerable part of the history of the common law, the principal way of creating what we now think of as a contractual obligation was to cast one’s agreement in the form of a sealed writing. [FN166] Actions based on informal promises were subject to the defense of wager, and this seriously undermined a promisee’s ability to obtain enforcement. [FN167] The rise of the action of assumpsit can be understood as the way common law judges responded to competitive pressures [FN168] to escape this (and other) procedural barriers to the enforcement of informal promises.

As was noted above, [FN169] however, the emergence of assumpsit as the principal action of contractual enforcement required the development of a doctrinal limitation on the enforcement of commitments–that is,the doctrine of consideration. [FN170] This development eventually resulted in the ascendancy of the bargain theory of consideration, which had the unintended consequence of creating doctrinal problems for the enforcement of formal commitments where there was no bargained-for consideration. Notwithstanding their ancient history, formal commitments, such as those under seal, came to be thought of as “exceptions” to the “normal” requirement of consideration. Expressions such as “a seal imports consideration” or is “a substitute for consideration” became commonplace. [FN171]

Despite such cases and restatements, [FN172] formal promises have had an uncertain place in the law of contract [FN173] because they lacked a theoretical underpinning. In a climate of opinion dominated by notions of “bargain” and “induced reliance,” where there is no bargain and no demonstrable reliance to support enforcement, the presence of a meaningful formality may not be enough to satisfy a court. [FN174] Not even the renowned contract writings of Lon Fuller [FN175] were able to change the formal contract’s orphan status.

A consent theory of contract, however, provides the missing theoretical foundation of formal contracts and explains their proper place in a well- crafted law of contract. The voluntary use of a recognized formality by a promisor manifests to a promisee an intention to be legally bound in as unambiguous a manner as possible. As one court noted:

If a party has fully and absolutely expressed his intention in a writing sealed and delivered, with the most solemn sanction known to our law, what should prevent its execution where there is no fraud or illegality? [FN176]

Formal contracts ought to be an “easy” case of contractual enforcement, but prevailing theories that require bargained-for consideration, induced reliance, or even economic “efficiency” would have a hard time explaining why. [FN177] In a consent theory, by contrast, there need be no *312 underlying bargain or demonstrable reliance for such a commitment to be properly enforced.

The same holds true–as Lon Fuller again recognized–for nominal consideration and for false recitals of consideration. [FN178] A consent theory acknowledges that, if properly evidenced, a recital by the parties that “consideration” exists may fulfill the channeling function of formalities, whether or not any bargained-for consideration for the commitment in fact exists. If it is widely known that the written phrase “in return for good and valuable consideration” means that one intends to make a legally binding commitment, then these words will fulfill a channeling function as well as, and perhaps better than, a seal or other formality. [FN179] The current rule that the falsity of such a statement permits a court to nullify a transaction because of a lack of consideration [FN180] is therefore contrary to a consent theory of contract. [FN181]

b. Informal Consent.–Consent to transfer rights can be express or implied. Formal contracts expressing consent to transfer alienable rights pose no problem for a consent theory. The enforcement of informal commitments where evidence of legally binding intentions is more obscure, however, has plagued contract law for centuries. [FN182] In such agreements courts must infer assent to be legally bound from the circumstances or the “considerations” [FN183] or “causa” [FN184] that induced the parties’ actions.

*313 (i) Bargaining as Evidence of Consent.–Within a consent theory, bargained-for consideration would perform a channelling role. [FN185] The fact that a person has received something of value in return for a “promise” may indeed indicate that this promise was an expression of intention to transfer rights. [FN186] Moreover, in some circumstances where gratuitous transfers are unusual, the receipt of a benefit in return for a promise should serve as objective notice to the promisor that the promise has been interpreted by the other party to be legally binding. [FN187]

Although the existence of a bargain or other motivation for a transaction may be good evidence of the sort of agreement that has been made, in a consent theory the absence of consideration does not preclude the application of legal sanctions if other indicia of consent are present. To return to the examples given by Fried, [FN188] if it can be proved that a party voluntarily consented to be legally bound to keep an offer to transfer rights open, to release a debt, to modify an obligation, or to pay for past favors, these commitments are enforceable (provided that other contract requirements such as acceptance are met).

Where bargaining is the norm–as it is in most sales transactions–there is little need for the law to require explicit proof of an intent to be legally bound, such as an additional formality, [FN189] or even proof of the existence of a bargain. In such circumstances, if an arms-length agreement to sell can be proved, there presumptively has been a manifestation of intent to be legally bound. For this reason, the Uniform Commercial Code’s stricture that “[a] contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract” [FN190] is entirely consonant with a consent theory.

*314 In a legal system animated by a consent approach, the recognition that “consideration” is only presumptive evidence of consent and that consent can be shown by other means might produce results that correspond remarkably to current practice. To avoid unnecessary confusion and error, however, it is important to understand the theoretical framework. [FN191]

(ii) Reliance as Evidence of Consent.–A consent theory also identifies those circumstances where the presence of reliance provides an adequate substitute for the traditional requirement of consideration. If the primary function of consideration is to serve as one way of manifesting assent to be legally bound, and not as a requirement of a prima facie case of contractual obligation, then asserting the equivalence of reliance and consideration [FN192] is less problematic. Expenditures made by a promisee in reliance on the words and conduct of the promisor may prove as much about the nature of this transaction as the existence of consideration, especially where the reliance is or should be known to the promisor. [FN193]

Suppose that A makes a substantial promise to B–for example, a promise to convey land. The promise is clear, but it is ambiguous as to its intended legal effect. Does A intend to be bound and subject to legal enforcement if she reneges, or is she merely stating her current view of her future intentions? Now suppose thatB announces to A his intention to rely on A’s promise in a substantial way–for example, by building a house on the land–and that A says nothing. Suppose further that B commences construction and observes A watching in silence. It would seem that under such circumstances A’s ambiguous legal intent has been clarified. By remaining silent in the face of reliance so substantial that B would not have undertaken it without a legal commitment from A–A could not reasonably have believed that B intended to make a gift to her of the house–A has manifested an intention to be legally bound. [FN194]

In this manner, a promisor’s silence while observing substantial reliance on the promise by the promisee can manifest the promisor’s assent *315 to the promisee. [FN195] In a consent theory, if consent is proved, then enforcement is warranted even if a bargain or a formality is absent.

As was discussed above, [FN196] when we seek to discern “reasonable” (or prudent) reliance on a promise, a conclusion cannot be reached that is independent of the perceived enforceability of the promise, which brings us full circle to the question of enforceability with which we started. A theory based only on reliance cannot, therefore, answer this question. By contrast, in a consent theory, reliance is legally protected (and therefore deemed to be justified) only if it is reliance on a manifested intention to be legally bound. [FN197] Reliance on a commitment that is something less than a manifested intention to be legally bound is not legally protected and is undertaken at the promisee’s own risk.

The only assessment of “reasonableness” that is required in a consent theory of contractual obligation is an assessment of the “reasonable,” or probable, meaning of the promisor’s words and conduct. However difficult such an interpretive inquiry into meaning might sometimes be, it is not plagued with the same kind of circularity that attaches to an assessment of “reasonable reliance.” Interpretation of meaning in the contractual context is a matter of determining either (a) the usual nonlegal meaning of words, (b) the special meaning of legal terms of art or formalities that have been freely employed by the parties, [FN198] or (c) some other special meaning jointly understood by the parties. [FN199] In any event, this is the sort of inquiry all of us routinely engage in every day when we communicate. [FN200]

By providing a clearer criterion of enforceability that is available to the parties, a consent theory encourages informed action. Once the legal standard for contractual enforcement is known to be consent, who is to *316 say what conduct is then “reasonable” or prudent? It may be prudent to rely on a commitment that is known to be unenforceable, given other things that the promisee may know about the promisor, or it may not. This is not for a court to decide. It should by now be clear, however, that a consent theory would identify instances of contractual obligation that a bargain theory would ignore and thereby would better protect and facilitate reliance: one need not have relied on a bargain to be protected in a consent theory.

Once it is determined that reliance is protected because (and therefore when) it is based on consent, a court must still decide how much reliance is to be protected–that is, what is the extent of liability for consequences caused by a breach of an admittedly enforceable obligation? [FN201] The standard approach is to adopt a “foreseeability” [FN202] assessment of liability that is much the same kind of prudential or predictive judgment that is employed in assessing the existence of reliance-based obligation: what would a promisor have reasonably expected a promisee to have done in reliance on the contract? But much the same problem exists for this issue of liability that was seen above with respect to the issue of obligation. [FN203] Here, as there, what most persons will do depends on their perception of what the legal rule is concerning the extent of liability, and therefore such a prediction cannot itself determine the legal rule.

Just as a consent theory addresses the problem of obligation by employing the criterion of “consent to obligation,” it would handle the problem of extent of liability by employing the criterion of “consent to liability.” This is much the same answer as was suggested by Justice Holmes in Globe Refining Co. v. Landa Cotton Oil Co. [FN204] and has been called the “tacit-assent” test. [FN205]

*317 While some have objected to the often fictional nature of such “tacit” consent, [FN206] the source of this problem lies not with a consent theory. It lies instead with the centuries-old judicial reluctance to enforce express clauses that specify the extent of liability where such clauses differ from the standard for damages that the courts would apply on their own. [FN207] With this as the legal background, why would rational economizing parties negotiate such a clause unless they strongly disagreed with that background and could devise a way to subvert it? By recognizing contracting parties’ right to consent to extent of liability as well as to obligation, we can anticipate fictional “tacit” assent to be supplanted by actual agreements– whether implied or expressed–when parties disagree with the background rule established by the courts. [FN208]

To the extent, however, that parties can freely “opt out” of complete liability for all forseeable consequential damages, the adopting of a consent theory in this area is less pressing than it is at the level of obligation. For most parties know that they are entering into a contract and, if so, they can and do provide for clauses that limit by consent the consequences for which they may be liable. In contrast, if a consent theory is not employed to assess the existence of an obligation, parties who do not know that they are contracting cannot always or easily take steps to avoid an obligation that might be imposed upon them.

In sum, bargained-for consideration and nonbargained-for reliance are equivalent to the extent that the existence of either in a transaction may manifest the intentions of one or both of the parties to be legally bound. In any case, the absence of either bargained-for consideration or reliance will not bar the enforcement of a transfer of entitlement that can be proved in some other way–for example, by a formal written document or by adequate proof of a sufficiently unambiguous verbal commitment. [FN209]

Contract Defenses: Rebutting the Prima Facie Case of Consent

Consent, either formal or informal, is required to make out a prima facie case of contractual obligation. This means that, in the absence of an “affirmative” defense to the prima facie case of contractual obligation, the manifested intention of a party to transfer alienable rights will justify the enforcement of such a commitment. Traditional contract defenses can be understood as describing circumstances that, if proved to have existed, deprive the manifestation of assent of its normal moral, and therefore legal, significance. These defenses may be clustered into three groups, each of which undermines the prima facie case of consent in a different way.

The first group of defenses–duress, misrepresentation, and (possibly) unconscionability [FN210]–describes circumstances where the manifestation of an intention to be legally bound has been obtained improperly by the promisee. The manifestation of assent either was improperly coerced by the promisee [FN211] or was based on misinformation for which the promisee was responsible. [FN212] The second group–incapacity, infancy, and intoxication–describes attributes of the promisor that indicate a lack of ability to assert meaningful assent. The third group–mistake, impracticability, and frustration–stem from the inability to fully express in any agreement all possible contingencies that might affect performance. Each describes those types of events (a) whose nonoccurrence was arguably a real, but tacit assumption upon which consent was based, and (b) for which the promisee should bear the risk of occurrence. [FN213] Each type of defense thus is distinguished by the way it undermines the normal, presumed significance of consent. But all valid contract defenses describe general circumstances where the appearance of assent tends to lack its normal moral significance.

These traditional contract defenses would function in a consent theory, as they do currently, to preserve the actual voluntariness of rights transfer, in those rare cases where consent has been improperly coerced or where we are willing to acknowledge other circumstances, *319 such as misinformation, that vitiate the presence of consent. This refusal to enforce some instances of apparent assent does not, however, reflect a retreat to a subjective will theory. It remains true that an objective manifestation of intent to be legally bound is sufficient to give rise to an enforceable commitment. The only qualification is that this objective manifestation must have been voluntary. [FN214]

A consent theory explains both the modern reception of the objective theory in the prima facie case of contractual obligation and the traditional defenses to the prima facie case which are based on circumstances that in some significant fashion rebut the usual voluntary nature of consent. When such circumstances are proved to have existed, even a manifested assent to be legally bound does not justify enforcement.

Author: Randy E. Barnett
Copyright © 1986 by the Directors of The Columbia Law Review Association