CONTRACT LAW What principles governed “classical contract law"?

This essay will focus on the fundamental values of classical contract law and would further recognize the elements that make up “modern contract law" which we now know as neo-classical contract law. It would touch upon the history of contract law and how it has evolved. Moreover, how the role of law has changed with respect to contracts, carried out with evidentiary support. Contract law is defined as a contract between two parties where consensus ad idem exits (mutual agreement), and is legally enforceable and recognizable. Different conventional approaches are taken in order to check the validity of a contract. The first approach is recognised as the objective test that analytically checks the key constituents of a valid contract. These constituents include offer, recognition, deliberation and intention. Lord Denning took the initiative to outline the second approach which is known as the subjective test. This test focuses only on the intention of the two parties that enter into an agreement.

Classical contract law has always been inflexible rather than a flexible tool. The policies that were used were never the real aims of the two parties that entered into an agreement nor were the conditions of the transactions. The policies of classical contract were based mainly on a solitary moment in time i.e the moment in which the contract was configured. It was completely numerical and often two-folded. Before the 19th century, the existing moderate viewpoint of laissez faire gave rise to contract theory in the legal world. Contract theory was developed around the will theory of contract which proposed that a contract between two parties exists on the basis of their own free will. Two parties who enter into a contract do so because they have the “freedom to contract" [1] . Charles Fried has been awarded for presenting the concept of will theory, which is usually considered to be a traditional view. His theory suggests that contracts are built upon promises and these promises should not be broken as it is erroneous to dissatisfy the other party. Fried further adds to his theory that the contract is in a way restricted as it is mainly based on freedom and self-sufficiency. Hence, the courts should not hinder as these contracts are obligated by one’s own choice and free will.

Contract law has progressed and taken its “modern" shape mainly on the theory which suggests that “all pacts must be kept" [2] . This element has been kept in mind traditionally as well. During the early centuries when a barter system existed in order to enhance trade and exchange goods a pact was kept , as referred to in “The History and Theory of English Contract Law" [3] by Thomas. A. Street. Two parties who met together to exchange one good for another had a mutual agreement and entered into a contract. It was a promise that was kept by both the parties and could not be broken, however now violation of contracts has been acknowledged by the common law legal system. The fundamental values of modern contract law lie with the notion of individualism. This thought has not been fully identified by the courts as they believe that contracts should not be based on individualism, but rather on socialism. Ian Roderick and Gilmore argue that the classical contract has been diminished. However, in reality it has not been finished but has only changed its shape into what is known as the reliance theory or modern contract theory. This change took place as the classical theory falls short on explaining the complicated social activities and the imbalance of economic power and has been disapproved by many legal realists.

Furthermore, reliance theory is a recent observable fact that explains the classical contract theory. Reliance theory promotes that liability should be imposed as the other party is dependent on them. This theory further adds to the classical theory which suggested that freedom and self-sufficiency exists in contracts and highlights that contracts now include benefits such as justice and fairness. The reliance theory, unlike the will theory is more compatible with the existing law and the concept of freedom in contracts have now been raised, as suggested by A. S. Atiyah in “The Rise and fall of Freedom of Contract" [4] . Relations are typically held together by their own internal values and wider social or economic factors. As it says in relational theory in the Macneil mould, exchange relations are governed by a number of norms. In unembellished meaning, a contract is acknowledged as a legally enforceable agreement by courts in any given jurisdiction, but other characteristics of a relational contract is a 'contract' that is understood to cover economic exchange in general.

Currently, the divergence from the superlative thought of freedom to contract is omnipresent, particularly in consumer contracts. Two parties that enter into a legal contract nose to nose rarely meet up the conditions that make up the hypothesis about contract law. Hence, agreements that are made “personally" cannot be considered as the key concept of contracts. However, the classical theory of contract illustrates that such agreements are standard and sufficient. Moreover, modern contracts have introduced a new way to enter into a legally binding agreement, which is simply done on the internet. Parties may enter into a contract by agreeing to something on the internet by just one click. Like the classical theory, in this case informed consent is also taken but through the option of continuing the procedure on the website and accepting the terms and conditions. Nevertheless, it is not possible for the two parties to discuss the contract personally which can lead to some questions being unanswered and some terms being misunderstood as explained in the Legal Studies Research Paper on Contract Theory [5] by Brian Bix.

There are still a few areas where the classical contract theory can still be resigned with the existing law. Norweb v Dixon [6] is a case in which it was stated that parties enter into a contract by their own free will, which mirrors the classical contract theory. In addition, the notion that a contract is not considered being a contract until the offer is accepted was also displayed in this case that imitates the classical theory. Another case which highlights that fact that the classical theory is still valid is Chapel and Co v Nestle [7] . In this case the main element of discussion was the decree of consideration and that it must be enough but not necessarily fulfilled. The classical theory suggests that if consideration can be recognized by courts then it is considered to be a legally binding contract, however the assessment of the consideration is not vital. This could be seen in the aforementioned case as wrappers were taken as consideration.

Conversely, there are many instances where the classical theory does not resolve with the present law, thus it has been modified and changed into what we now know as the modern contract theory. The new theory states that a contract is obligatory as the other party depends on whom it has entered the contract with. Modern classical theory has been matched up to the present law as it considers social welfare and equity. Errington v Errington [8] is a case in which the court decided that the one-sided offer that was made should be left open for some duration. This idea resolves with the modern theory but not with the classical theory as the court forced a duty on the two parties that they could not generate on their own. Williams v Roffey [9] is also another case that should be taken into consideration as its judgement is of great value in context to the modern contract theory. The court stated that consideration can exist on the basis of rational reliance, which previously was not considered to be adequate as in the case of Stilk v Myrick. [10] Moreover, Third Parties Act of 1999 [11] is an Act of Parliament that is of great significance. It has had an immense impact on the classical principle of privity of contract law and consideration. Privity of contract suggests that a third party cannot legally prosecute if a contract is violated, even if it was obtaining benefits out of the contract. After this Act it has been suggested that parties that enter into a contract should consider the third party rights clause, in contrast to the classical contract theory which suggest that the notion of free will exists.

In addition, the principle of classical contract theory which stated that freedom to contract exists has been diminished as the law has been revised, which reconciles with the modern theory. Unfair Contract Terms Act [12] and Unfair Terms in Consumer Contracts Regulations [13] have restricted the freedom of contract and highlights social goodness. Modern contract theory has adopted a new principle known as promissory estoppel after the Central London Property v High Trees [14] case. The case suggested that it is possible to enter into an enforceable contract without any consideration. This notion was not adopted by the classical theory of contract.

As a result- modern contract and classical contract theory share similar values to a certain extent. The neo-classical theory has adopted new principles, such as, promissory estoppel and the ability to enter into a contract without any consideration, as opposed to the classical theory. Cases such as Chapel and Co v Nestle, suggest that consideration need not be adequate. On the other hand, Stilk v Myrick illustrate that consideration must be sufficient, which reflects upon the classical theory.



Pacta Sunt Servanda:

Will and Reliance theory:



Street, Thomas., “The History and Theory of English Contract" (Beard Books; Law-classic, 1999)

Atiyah, Patrick., “The Rise and Fall of Freedom of Contract" ( Paperback; Oxford, 1985)


Bix, B “Contract Law Theory" Legal Studies Research Paper Series No. 06.-12