Contract theory: Meaning (information, definition, explanation, facts)

Contract theory is the body of legal thought that investigates normative and conceptual problems in contract law.

Why Are Contracts Enforced

The central problem for contract theory is the question, Why are contracts enforced? One prominent answer to this question focuses on the economic benefits of enforcing bargains. This first approach could be said to offer a utilitarian theory of contracts. A second approach to the question emphasizes the role of promise and draws on deontological moral theory. This second view is associated with Charles Fried, who articulated the promise theory of contract in his book Contract as Promise.

Contract theory also utilizes the notion of a complete contract, which is thought of as a contract that specifies the legal consequences of every possible state of the world. Because it would be impossible and costly for the parties to an agreement to make their contract complete, the law provides default rules which fill in the gaps in the actual agreement of the parties.