Chapter XII: On Contracts

Human actions divided into simple or mixed—Gratuitous, or accompanied with mutual obligation—Acts by way of exchange, adjustment of what is to be given or one—Partnership—Contracts—Previous equality—As to knowledge of all circumstances—As to freedom of consent, requisite in contracts of exchange, of sale, of commission and loan—Price of things in what manner to be rated—Transfer of property by sale—What kind contrary to the law of nature—Money—Its use as the standard value of all things—No abatement in the rent or hire of a thing on account of ordinary accidents—Increase or diminution of just salaries—Usury, by what law forbidden—Interest not coming under the name of usury—Insurance—Partnerships of Trade, Naval Associations—Inequality in the terms of a contract no way repugnant to the law of nations.

I. and II. OF all human actions, wherein the interest of others is concerned, some are simple, and some are mixed. In those of the former description all service is purely gratuitous, but in the latter it is a traffic of exchange. In the one case the service is granted without a requital, but in the other it is accompanied with an obligation on both sides. Gratuitous services are either immediate in their effect, or to take place at some future time. A beneficial service may be said to be immediately performed, when it confers an advantage, to which the person so benefitted has no direct or absolute right. As a gift transfers property, where there is no previous right. A subject, which has been already discussed. And promises may be said to relate to some future gift, or action, of which a full and sufficient explanation has before been given.

Services accompanied with mutual obligation are those where the use of a thing is allowed to any one without a complete alienation, or where labour is given in expectation of some valuable consideration. Under the first of these heads we may reckon the loan and use of all consumable or inconsumable property: and under the latter we may place all commissions to transact business, or all trusts to preserve the property of another. Similar to which are all promises of something to be done, except that they regard a future time. And in this view we may consider all the actions, which are now to be explained.

III. In all acts of exchange, there is either an adjustment of shares, or the profits are regarded as a common stock. And such adjustments are made by the Roman Lawyers in the following terms, “I give this to receive that in return, I do this in order for you to do that, or I do this for you to give me that.” But the Romans exclude from that adjustment certain kinds of contracts, which they call EXPRESS ENGAGEMENTS. Not because they are entitled to any such peculiar name more than the simple acts of exchange already mentioned: but because from frequent use they have naturally derived a character similar to that of the original contract, from which they are named, though they are not attended exactly with the same circumstances, nor expressed directly in the same terms. Whereas in other contracts less frequently in use, the form was confined to an exact statement of all the circumstances of the case. An action upon which was therefore called by the Roman law an ACTION IN PRESCRIBED WORDS.

For the same reason, if those contracts, which are in general use, be accompanied with any of the requisite formalities, as in a bargain or sale, if the price had been agreed upon, though no part of the agreement had been performed by either of the parties, the civil law enforced an obligation to fulfil them. But as it considers those contracts which are seldom used, more in the light of voluntary engagements, depending upon the good faith of the respective parties, than upon legal obligation, it leaves both sides at liberty to relinquish them at any time prior to their being naturally performed.

Distinctions of this kind are unknown to the law of nature, which gives SIMPLE AGREEMENTS equal authority with those, that are included by civilians in the class of EXPRESS CONTRACTS. And on the score of antiquity their pretensions are far superior. It is therefore perfectly conformable to the principles of nature to reduce the adjustment of all agreements, without any regard to the distinction between SIMPLE and EXPRESS CONTRACTS, to the three species already named. Thus, for instance, one thing is given for another, which constitutes barter, the most ancient kind of traffic; the next step in the progress of commercial intercourse is where one kind of money is given for another, a transaction which by merchants is called exchange; and a third species of contract is where money is given for any thing, as in the acts of selling and buying. Or the USE of one thing may be given for that of another; money also may be given for the USE of a thing, which last method constitutes the acts of letting and hiring.

The term use is to be understood here as applied not only to the bare unproductive use of a thing, but to that which is attended with profit, whether it be temporary, personal, hereditary or circumscribed, as was the case among the Hebrews with regard to transfers, which could be made for no longer a time than till the year of Jubilee. The very essence of a loan consists in a return of the same kind of thing after a stated period. A return which can take place only in things regulated by weight, number, or measure, whether it be in commodities or money. But the exchange of labour branches out into various kinds of recompence or return. As, for instance, a person gives his labour for money, which in the daily transactions of life is called hire or wages: where one undertakes to indemnify another for accidental losses or damages, it is called insurance: a species of contract scarce known to the ancients, but now forming a very important branch in all mercantile and maritime concerns.

IV. Acts of communication are those, where each contributes a share to the joint stock. Perhaps on one side, money, and on the other, skill and labour may be given. But in whatever way these concerns are regulated, they come under the denomination of partnerships. With this class we may rank the alliances of different states in war. And of the same description are those naval associations of individuals, so frequently formed in Holland for protection against pirates or other invaders, which is generally called an ADMIRALTY, and to which the Greeks gave the name of a joint fleet.

V. and VI. Now mixed actions are either such in themselves, or made so by some adventitious circumstance. Thus if I knowingly give one person a greater price for a thing than I can purchase it for of another, the excess of price may be considered partly as a gift, and partly as a purchase. Or if I engage a goldsmith to make me any article with his own materials, the price which I give will be partly a purchase, and partly wages. The feudal system too might be considered as a train of mixed contracts. Where the grant of the fee might be considered as a beneficial act; but the military service required by the Lord, in return for his protection, gave the fee the nature of a contract, where a person did one thing expecting for it the performance of another. But if any payment is attached to it by way of acknowledgement, it partakes of the nature of a quit rent. So money sent to sea by way of venture is something compounded of a contract, of a loan, and of an insurance.

VII. All acts beneficial to others, except those that are purely gratuitous, come under the denomination of contracts.

VIII. In all contracts, natural justice requires that there should be an equality of terms: insomuch that the aggrieved party has an action against the other for overreaching him. This equality consists partly in the performance, and party in the profits of the contract, applying to all the previous arrangements, and to the essential consequences of the agreement.

IX. As to an equality of terms previous to the contract, it is evident that a seller is bound to discover to a purchaser any defects, which are known to him, in a thing offered for sale; a rule not only established by civil laws, but strictly conformable to natural justice. For the words of agreement between contracting parties are even stronger than those, on which society is founded. And in this manner may be explained the observation of Diogenes the Babylonian, who in discussing this topic said, it is not every degree of silence, which amounts to concealment; nor is one person bound to disclose every thing, which may be of service to another. Thus for instance, a man of science is not strictly bound to communicate to another that knowledge, which might redound to his advantage. For contracts, which were invented to promote a beneficial intercourse among mankind, require some closer and more intimate connection than bare good-will to enforce their obligation. Upon which Ambrose has justly remarked, “that, in contracts, the faults of things exposed to sale ought to be made known, of which unless the seller has given intimation, though he may have transferred the right of property by sale, yet he is liable to an action of fraud.”

But the same cannot be said of things not coming under the nature of contracts. Thus if any one should sell his corn at a high price, when he knows that many ships laden with grain are bound for that place, though it would be a act of kindness in him to communicate such intelligence to the purchasers, and though no advantage could be derived to him, from withholding the communication, but at the expense of charity, yet there is nothing unjust in it, or contrary to the general rules of dealing. The practice is vindicated by Diogenes in the passage of Cicero alluded to, he says, “I carried my commodities and offered them to sale, in selling them I demanded no greater price than others did; if the supply had been greater I would have sold them for less, and where is the wrong done to any one?” The maxim of Cicero therefore cannot generally be admitted, that, knowing a thing yourself, to wish another, whose interest it is to know it also, to remain ignorant of it, merely for the same of your own advantage, amounts to a fraudulent concealment. By no means; for that only is a fraudulent concealment which immediately affects the nature of the contract: as for instance, in selling a house, to conceal the circumstance of its being infected with the plague, or having been ordered by public authority to be pulled down. But it is unnecessary to mention, that the person, with whom a seller treats, ought to be apprised of every circumstance attending the thing offered for sale; if it be lands, whether the tenure be subject to a rent-charge, or service of any kind, or be entirely free.

X. and XI. Nor is the equality that has been explained confined solely to the communication of all the circumstances of the case to the contracting parties, but it includes also an entire freedom of consent in both.

In the principal act itself, the proper equality requires that no more should be demanded by either party than what is just. Which can scarce have a place in gratuitous acts. To stipulate for a recompence in return for a loan, or for the service of labour or commission is doing no wrong, but constitutes a kind of mixed contract, partaking of the nature of a gratuitous act, and an act of exchange. And in all acts of exchange, this equality is to be punctually observed. Nor can it be said that if one party promises more, it is to be looked upon as a gift. For men never enter into contracts with such intentions, nor ought the existence of such intentions ever be presumed, unless they evidently appear. For all promises or gifts, in these cases, are made with an expectation of receiving an equivalent in return. “When, in the words of Chrysostom, in all bargains and contracts, we are anxious to receive MORE and give LESS than is due, what is this but a species of fraud or robbery?” the writer of the life of Isidorus in Photius, relates of Hermias, that when any thing, which he wished to purchase was valued at too low a rate, he made up the deficiency of the price, thinking that to act otherwise was a species of injustice, though it might escape the observation of others. And in this sense, may be interpreted the law of the Hebrews.

XII. There remains another degree of equality to be considered, arising out of the following case. It may happen in contracts that although nothing is concealed, which ought to be made known, nor more exacted or taken by one party than is due, yet there may be some inequality without any fault in either of the parties. Perhaps, for instance there might be some unknown defect in the thing, or there might be some mistakes in the price. Yet, in such cases, to preserve that equality, which is an essential requisite in all contracts, the party suffering by such defect or mistake, ought to be indemnified by the other. For in all engagements it either is, or ought to be a standing rule, that both parties should have equal and just advantages.

It was not in every kind of equality that the Roman law established this rule, passing over slight occasions, in order to discourage frequent and frivolous litigation. It only interposed its judicial authority in weighty matters, where the price exceeded the just value by one half. Laws indeed, as Cicero has said, have power to compel, or restrain men, whereas philosophers can only appeal to their reason or understanding. Yet those, who are not subject to the power of civil laws ought to comply with whatever reason points out to them to be just: So too ought they, who are subject to the power of human laws, to perform whatever natural and divine justice requires, even in cases, where the laws neither give nor take away the right, but only forbear to enforce it for particular reasons.

XIII. There is a certain degree of equality, too, in beneficial or gratuitous acts, not indeed like that prevailing in contracts of exchange, but proceeding upon a supposition of the hardship, that any one should receive detriment from voluntary services, which he bestows. For which reason a voluntary agent ought to be indemnified for the expence or inconvenience, which he incurs, by undertaking the business of another. A borrower too is bound to repair a thing that has been damaged or destroyed. Because he is bound to the owner not only for the thing itself, by virtue of the property which he retains in it, but he owes a debt of gratitude also for the favour of the loan; unless it appears that the thing so lent would have perished, had it even remained in possession of the owner himself. In this case, the owner loses nothing by the loan. On the other hand, the depositary has received nothing but a trust. If the thing therefore is destroyed, he cannot be bound to restore what is no longer in existence, nor can he be required to make a recompence, where he has derived no advantage; for in taking the trust he did not receive a favour, but conferred one. In a pawn, the same as in a thing let out for hire, a middle way of deciding the obligation may be pursued, so that the person taking it is not answerable, like a borrower, for every accident, and yet he is obliged to use greater care, than the bare depositary, in keeping it safe. For though taking a pledge is a gratuitous acceptance, it is followed by some of the conditions of a contract. All these cases are conformable to the Roman law, though not originally derived from thence, but from natural equity. Rules, all of which may be found among other nations. And, among other works, we may refer to the third book and forty-second chapter of the GUIDE FOR DOUBTFUL CASES, written by Moses Maimonides, a Jewish writer.

Upon the same principles the nature of all other contracts may be explained; but the leading features in those of certain descriptions seemed sufficient for a treatise like the present.

XVI. The general demand for any thing, as Aristotle has clearly proved, constitutes the true measure of its value, which may be seen particularly from the practice prevailing among barbarous nations of exchanging one thing for another. But this is not the only standard: for the humours and caprice of mankind, which dictate and controul all regulations, give a nominal value to many superfluities. It was luxury, says Pliny, that first discovered the value of pearls, and Cicero has somewhere observed, that the worth of such things can only be estimated by the desires of men.

But on the other hand, it happens that the plentiful supply of necessaries lowers their price. This Seneca, in the 15th chapter of his sixth book on benefits, proves by many instances, which he concludes with the following observation, “the price of every thing must be regulated by the market, and notwithstanding all your praises, it is worth nothing more than it can be sold for.” To which we may add the authority of Paulus the Lawyer, who says, the prices of things do not depend upon the humours and interest of individuals, but upon common estimation, that is, as he explains himself elsewhere, according to the worth which they are of to all.

Hence it is that things are valued in proportion to what is usually offered or given for them, a rule admitting of great variation and latitude, except in certain cases, where the law has fixed a standard price. In the common price of articles, the labour and expence of the merchant in procuring them is taken into the account, and the sudden changes so frequent in all markets depend upon the number of buyers, whether it be great or small, and upon the money and marketable commodities, whether they be plentiful or scarce.

There may be indeed be casualties, owing to which a thing may be lawfully bought or sold above or below the market price. Thus for instance, a thing by being damaged may have lost its original or common value, or that, which otherwise would not have been disposed of, may be bought or sold from some particular liking or aversion. All these circumstances ought to be made known to the contracting parties. Regard too should be had to the loss or gain arising from delay or promptness of payment.

XV. In buying and selling we must observe, that the bargain is completed from the very moment of the contract, even without delivery, and that is the most simple way of dealing. Thus Seneca says, that a sale is a transfer of one’s right and property in a thing to another, which is done in all exchanges. But if it be settled that the property shall not be transferred immediately, still the seller will be bound to convey it at the stated period, taking in the mean time all the profits and losses.

Whereas the completion of bargain and sale, by giving the purchaser a right of possession and ejectment, and conveying to him the hazard with all the profits of the property, even before it is transferred, are regulations of the civil law not universally observed. Indeed some legislators have made the seller answerable for all accidents and damages, till the actual delivery of possession is made, as Theophrastus has observed in a passage in Stobaeus, under the title of laws, where the reader will find many customs, relating to the formalities of sale, to earnest, to repentance of a bargain, very different from the rules of the Roman law. And among the Rhodians, Dion Prusaeensis informs us that all sales and contracts were confirmed by being entered in a public register.

We must observe too that, if a thing has been twice sold, of the two sales the one is valid, where an immediate transfer of the property has been made, either by delivery of possession, or in any other mode. For by this means the seller gives up an absolute right, which could not pass by a promise alone.

XVI. It is not every kind of monopoly that amounts to a direct violation of the laws of nature. The Sovereign power may have very just reasons for granting monopolies, and that too at a settled price: a noble instance of which we find in the history of Joseph, who governed Egypt under the auspices of Pharaoh. So also under the Roman government the people of Alexandria, as we are informed by Strabo, enjoyed the monopoly of all Indian and Ethiopian goods.

A monopoly also may, in some cases, be established by individuals, provided they sell at a reasonable rate. But all combinations to raise the necessary articles of life to an exorbitant rate, or all violent and fraudulent attempts to prevent the market from being supplied, or to buy up certain commodities, in order to enhance the price, are public injuries and punishable as such. Or indeed ANY WAY of preventing the importation of goods, or buying them up in order to sell them at a greater rate than usual, though the price, UNDER SOME PARTICULAR CIRCUMSTANCES, may not seem unreasonable, if fully shewn by Ambrose in his third book of Offices to be a breach of charity; though it come not directly under the prohibition of laws.

XVII. As to money, it may be observed that its uses do not result from any value intrinsically belonging to the precious metals, or to the specific denomination and shape of coin, but from the general application which can be made of it, as a standard of payment for all commodities. For whatever is taken as a common measure of all other things, ought to be liable, in itself, to but little variation. Now the precious metals are of this description, possessing nearly the same intrinsic value at all times and in all places. Though the nominal value of the same quantity of gold and silver, whether paid by weight or coin will be greater or less, in proportion to the abundance or scarcity of the things for which there is a general demand.

XVIII. Letting and hiring, as Caius has justly said, come nearest to selling and buying, and are regulated by the same principles. For the price corresponds to the rent or hire, and the property of a thing to the liberty of using it. Wherefore as an owner must bear the loss of a thing that perishes, so a person hiring a thing or renting a farm must bear the loss of all ordinary accidents, as for instance, those of barrenness or any other cause, which may diminish his profits. Nor will the owner, on that account, be the less entitled to the stipulated price or rent, because he gave the other the right of enjoyment, which at that time was worth so much, unless it was then agreed that the value should depend upon such contingencies.

If an owner, when the first tenant has been prevented from using a thing, shall have let it to another, all the profits accruing from it are due to the first tenant, for it would not be equitable that the owner should be made richer by what belonged to another.

XIX. The next topic, that comes under consideration, is the lawfulness of taking interest for the use of consumable thing; the arguments brought against which appear by no means such as to command our assent. For as to what is said of the loan of consumable property being a gratuitous act, and entitled to no return, the same reasoning may apply to the letting of in consumable property for hire, requiring a recompence for the use of which is never deemed unlawful, though it gives the contract itself a different denomination.

Nor is there any more weight in the objection to taking interest for the use of money, which in its own nature is barren and unproductive. For the same may be said of houses and other things, which are unproductive and unprofitable without the industry of man.

There is something more specious in the argument, which maintains, that, as one thing is here given in return for another, and the use and profits of a thing cannot be distinguished from the thing itself, when the very use of it depends upon its consumption, nothing more ought to be required in return for the use, than what is barely equivalent to the thing itself.

But it is necessary to remark, that when it is said the enjoyment of the profits of consumable things, whose property is transferred, in the use, to the borrower or trustee, was introduced by an act of the senate, this does not properly come under the notion of Usufruct, which certainly in its original signification answers to no such right. Yet it does not follow that such a right is of no value, but on the contrary money may be required for surrendering it to the proprietor. Thus also the right of not paying money or wine borrowed till after a certain time is a thing whose value may be ascertained, the delay being considered as some advantage. Therefore in a mortgage the profits of the land answer the use of money. But what Cato, Cicero, Plutarch and others allege against usury, applies not so much to the nature of the thing, as to the accidental circumstances and consequences with which it is commonly attended.

XX. There are some kinds of interest, which are thought to wear the appearance of usury, and generally come under that denomination, but which in reality are contracts of a different nature. The five shillings commission which a banker, for instance, charges upon every hundred pounds, is not so much an interest in addition to five per cent, as a compensation for his trouble, and for the risk and inconvenience he incurs, by the loan of his money, which he might have employed in some other lucrative way. In the same manner a person who lends money to many individuals, and, for that purpose, keeps certain sums of cash in his hands, ought to have some indemnity for the continual loss of interest upon those sums, which may be considered as so much dead stock. Nor can any recompence of this kind be branded with the name of usury. Demosthenes, in his speech against Pantaenetus, condemns it as an odious act of injustice, to charge with usury a man, who in order to keep his principal undiminished, or to assist another with money, lends out the savings of his industry and frugal habits, upon a moderate interest.

XXI. Those human laws, which allow a compensation to be made for the use of money or any other thing, are neither repugnant to natural nor revealed law. Thus in Holland, where the rate of interest upon common loans was eight per cent, there was no injustice in requiring twelve per cent of merchants; because the hazard was greater. The justice and reasonableness indeed of all these regulations must be measured by the hazard or inconvenience of lending. For where the recompence exceeds this, it becomes an act of extortion or oppression.

XXII. Contracts for guarding against danger, which are called insurances, will be deemed fraudulent and void, if the insurer knows beforehand that the thing insured is already safe, or has reached its place of destination, and the other party that it is already destroyed or lost. And that not so much on account of the equality naturally requisite in all contracts of exchange, as because the danger and uncertainty is the very essence of such contract. Now the premium upon all insurances must be regulated by common estimation.

XXIII. In trading partnerships, where money is contributed by both parties; if the proportions be equal, the profits and the losses ought to be equal also. But if they be unequal, the profits and the losses must bear the same proportion, as Aristotle has shewn at the conclusion of the eighth book of his Ethics. And the same rule will hold good where equal or unequal proportions of labor are contributed. Labor may be given as a balance against money, or both labor and money may be given, according to the general maxim that one man’s labour is an equivalent for another man’s money.

But there are various ways of forming these agreements. If a man borrows money to employ his skill upon in trading for himself, whether he gains or loses the whole, he is answerable to the owner for the principal. But where a man unites his labor to the capital of another in partnership, there he becomes a partner in the principal, to a share of which he is entitled. In the first of these cases the principal is not compared as a balance against the labor, but it is lent upon terms proportioned to the risk of losing it, or the probable gains to be derived from it. In the other case, the price of labour is weighed, as it were, against the money, and the party who bestows it, is entitled to an equivalent share in the capital.

What has been said of labour may be applied to voyages, and all other hazardous undertakings. For it is contrary to the very nature of partnerships for any one to share in the gain, and to be exempt from the losses. Yet it may be so settled without any degree of injustice. For there may be a mixed contract arising out of a contract of insurance in which due equality may be preserved, by allowing the person, who has taken upon himself the losses, to receive a greater share of the gain than he would otherwise have done. But it is a thing quite inadmissible that any one should be responsible for the losses without partaking of the gains; for a communion of interests is so natural to society that it cannot subsist without it.

What has been said by writers on the civil law, that the shares are understood to be equal where they are not expressly named, is true where equal quotas have been contributed. But in a GENERAL partnership the shares are not to be measured by what may arise from this or that article, but from the probable profits of the whole.

XXIV. In naval associations the common motive of utility is self-defence against pirates: though they may sometimes be formed from less worthy motives. In computing the losses to be sustained by each, it is usual to estimate the number of men, the number of ships, and the quantity of merchandise protected. And what has hitherto been said will be found conformable to natural justice.

XXV. Nor does the voluntary law of nations appear to make any alteration here. However, there is one exception, which is, that where equal terms have been agreed upon, if no fraud has been used, nor any necessary information withheld, they shall be considered as equal in an external point of view. So that no action can be maintained in a court for such inequality. Which was the case in the civil law before Dioclesian’s constitution. So among those, who are bound by the law of nations alone, there can be no redress or constraint on such account.

And this is the meaning of what Pomponius says, that in a bargain and sale, one man may NATURALLY overreach another: an allowance which is not to be construed, as a right, but is only so far a permission, that no legal remedy can be used against the person, who is determined to insist upon the agreement.

In this place, as in many others, the word natural signifies nothing more than what is received by general custom. In this sense the Apostle Paul has said, that it is naturally disgraceful for a man to wear long hair; a thing, in which there is nothing repugnant to nature, but which is the general practice among some nations. Indeed many writers, both sacred and profane, give the name of NATURAL to what is only CUSTOMARY and HABITUAL.

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