Contracts: A Fundamental Element of Modern Civilization

Contracts: A Fundamental Element of Modern Civilization

During the cancellation of federal government programs, payments were recently halted for work that private contractors had already completed. Cancelling a contract is serious but not always unthinkable. But refusing to pay for contracted work that has already been done is an outrage for which there is an appropriately negative term: stiffing.

The sanctity of contracts is fundamental to modern civilization. Recognition of this principle goes back centuries, and is summarized in the Latin expression pacta sunt servanda---"agreements must be kept."

Contracts are necessary to enable human cooperation, especially the large scale cooperation allowing us to live productive, peaceful lives. As Gordon Tullock explains in The Logic of the Law:

"It is clear that situations in which making such an enforceable promise is desirable are fairly frequent. I wish to buy a house and do not have enough money to do so. Borrowing the money will improve my satisfaction, but in order to do so I have to convince the lender that I will repay. Perhaps I can get away with an unenforceable promise, but for most people such loans are only possible if there is some mechanism to enforce the repayment."

Enforcing contracts is one of government's main functions, so important that contract law is a required course for first year law students. Even the countries governed by Communists during the Cold War, where private enterprise was illegal, had provisions for enforcing contracts between different state enterprises.

Contract law was therefore the main class that I audited during my 1970-1971 sabbatical at the Harvard Law School. My focus that year was voluntary associations, which are created by mutual consent of their parties to the exchange or transfer of inducements. Contracts are a critically important type of voluntary association precisely because they are legally enforceable.

During my sabbatical I also attended classes on Corporations and Labor Law. Labor Law focuses on collective bargaining contracts between unions and employers, while corporations are based on complicated contracts between the different parties making them up.

Upholding contracts is so important that our founding fathers inserted the following words in the Constitution: "No state shall ....pass any ... law impairing the obligation of contracts." (Article I, section 10)

Without government, terms of voluntary associations would not be enforceable. Government thus allows voluntary associations on a scale otherwise impossible. It is no exaggeration to say that private enterprise rests on public foundations.

It is bad enough when private individuals or corporations stiff their workers or organizations with which they have done business, although as we all know this is not uncommon. There are some well-known people from whom the prudent will demand payment in advance.

But when a government stiffs private contractors who have completed their assignments it is especially alarming. A government's bonds are a contract with the people who buy them. If it can repudiate its public debt , as some members of Congress have repeatedly threatened to do during showdowns over the national debt limit, no one will lend it money.

If government employment is going to be substantially downsized, getting essential work done will required contracting more of it it out to private companies. They will be reluctant to bid on this work if they doubt they will get paid for it.

We praise individuals whose word is "as good as their bond." Government's word, given in the contracts it makes, needs to be as good as its bonds.

And government should not just abide by its formal contracts. What about U.S. promises of refuge for Afghanistanis who helped our forces during the war? They will be slaughtered if forced to go back there, which may be about to happen. But if we stiff allies, who will help us in future wars?

A government should set a good example to the people it governs. "Pacta sunt servanda" remains an old reminder of a principle that is still all too relevant.