The Canon Law of Contracts

A developed body of contract law was needed by the church in the twelfth century, if only to regulate the myriads of economic transactions between ecclesiastical corporations. 16In addition, the ecclesiastical courts sought and obtained a large measure of jurisdiction over economic contracts between laymen, where the parties included in their agreement a "pledge of faith" -- and for that, too, it was important that the canon law of contracts should command respect.

In contract law, more even than in property law, the canonists were able to incorporate a great many of the concepts and rules that were being developed contemporaneously by the glossators out of the rediscovered texts of Justinian. The reasons for that were twofold: first, the older Roman law (especially the ius gentium) had achieved a very high level of sophistication in the field of contracts, and much of its vocabulary in that field, as well as many of its solutions to individual questions, could be applied in the twelfth century to the newly burgeoning commercial life of western Europe; second, the twelfth­century glossators of the Roman law were particularly sophisticated in their reconstruction and transformation of the older Roman law of contracts, in part just because of the demands placed upon them in that respect by the rapid economic changes of their time.

In particular, the older Roman law provided names for various ways of forming contracts and for various types of contracts that fell within those forms. Thus Gaius had written that certain types of contracts were formed by following a prescribed verbal formula, others by formal entry in certain account books, a third type by delivery of the object covered by the contract, and a fourth type by informally expressed consent.

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In addition to an elaborate classification of classes and types of contract, the Justinian texts included hundreds of scattered rules opinions of jurists, holdings in decided cases, decrees of

emperors, and so forth____ concerning their operation. Nowhere, however, did they contain a

systematic explanation of the reasons for the classification or for the rules.

In attempting to construct such an explanation, the glossators of the late eleventh and twelfth centuries seized on an obscure passage in the Digest which states that even an innominate contract gives rise to an obligation if there is a basis (causa), though otherwise it does not, and that "therefore a naked agreement does not give rise to an action." 17The writer may have meant only that innominate contracts do not give rise to an action until one party has performed. "The glossators," as James Gordley has put it, "took him to mean a great deal more. The word they picked out and turned into a general principle was 'naked'; to produce an action, an agreement must be 'clothed.' Causa was then defined as the presence of 'clothing.' Accursius defines causa as 'something given or done which clothes an agreement.' " 18Thus the word causa was used by the glossators as a generic term for the various reasons why various types of contracts were (or should be) legally binding.

Bartolus and Baldus-were able to go further and to construct not merely a synthesis of the Roman law of contract but what today might be called a general theory of contract. They did so by starting from Aristotelian concepts of distributive and commutative justice and by using Aristotelian categories of substance and accidents as well as authentic Aristotelian definitions of final cause, formal cause, material cause, and efficient cause. ¹⁹

The theory of contract which was developed by the postglossators in the fourteenth century was built, however, not only on the foundations of the Romanist legal science of the twelfth- and thirteenth­century glossators -- as viewed through Aristotelian concepts, categories, and definitions -- but also on the foundations of the legal science, and, above all, the legal system, of the twelfth -- and thirteenth­century canonists.

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What the canonist added to Romanist legal science was, first, the princi_ple that promises are in themselves binding, as a matter of conscience, regardless of whether or not they are "clothed"; and second, that the causa which forms the basis of a contract, and which__________________________________________________________ if it is a proper causa___________________________________________________________

gives it validity, is to be defined in terms of the preceding moral obligation of the parties which justifies their having entered into the particular contract.

The canonists started from the principle of penitential discipline that every promise is binding, regardless of its form: pacta sunt servanda ("agreements must be kept"). Therefore it is not a defense to an action on a contract that the contract was not in writing or not made under oath. An oath and a promise without an oath are equal in the sight of God, they said; not to fulfill the obligations of a pact is equivalent to a lie.

Yet it did not follow that all promises are binding. Only agreements supported by a proper causa -- in the sense of justification -- were considered legally binding. "There was causa if the promisor had in view a definite result, either some definite legal act or something more comprehensive such as peace. And in order that morality might be safeguarded, it was not only necessary that the promisor should have an object but that this object should be reasonable and equitable." ²⁰

In contract law, "reason" and "equity," for the twelfth-century canonists and Romanists alike, required a balancing of gains and losses on both sides. In every contract the things or services exchanged should have an equal value. This was called the principle of "just price." The phrase itself, pretium iustum, was taken from a passage in the Digest which provided that where the seller of an estate (fundus) had received less than half the "just price" he might sue the buyer, who would, however, retain the choice of the manner of discharging the obligation (presumably either by paying the balance or by rescinding the contract). 2£This rule (which on the face of it looks like a remedy for an unpaid seller) first reappeared in western Europe in the Brachylogus, a textbook on Roman law of the early twelfth century, where, characteristically, it was broadened to apply to any contract of sale. ²² The canonists applied the same rule. ²³ By further elaboration, the doctrine of just price was developed as an overriding principle for testing the validity of any contract.

The problem, of course, was to determine what is just. Both the Romanists and the canonists started with the principle that normally the just price is the common estimate, that is, the market price. ²⁴ It was not considered to be a fixed price: it varied according to diversity of time and place. Where, as in the case of land, it may be difficult to establish a market price, the just price might be determined by consideration of the income from it or by examining sales made of places existing nearby or, if all else failed, by asking the opinion of men who have special acquaintance with local prices.

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The Romanists treated a deviation from the just price as a misrepresentation or a mistake of fact; that is, they assumed that if a buyer paid more than the market price, or a seller took less, it was because he did not know what the market price was, and they devised various remedies for the victim, depending on whether or not the misinformation had been deliberately conveyed by the other party. They also applied the rule that was used by the canonists in cases of marriage contracted under a mistake of fact, namely, that if the person who was so mistaken would hav e entered into the contract even if he or she had known the true

circumstances, then the mistake was not material and would not render the contract void.

The canonists were also concerned, however, with another aspect of a sale at other than the just price, namely, the excess profit derived by one of the parties. Profit making in itself -- contrary to what has been said by many modern writers-was not condemned by the canon law of the twelfth century. To buy cheap and sell dear was considered to be proper in many types of situations. If one's property had increased in value since the time it was first purchased, there was nothing wrong with selling it at an increased price. If a craftsman improved an object by his art, he was entitled to charge more for it than he had paid. But even when there was no improvement, as when a merchant bought goods for the purpose of reselling them at a profit, the canonists said that this profit was entirely proper, provided that the motive was not greed but the desire to maintain himself and his dependents.

As such, it paralleled another doctrine of the canon law, the prohibition against usury. Usury was denounced in the Old and New Testaments and had been denounced in the church from early times. 26 However, the definition of usury was never entirely clear and it kept changing. Sometimes it seemed to refer to any profit derived from the lending of money, no matter what the purpose or form. In agrarian societies, where tillers of the soil must survive hungry periods prior to the harvesting and sale of crops, those who engage in lending money at interest are apt to be both needed and hated, both wanted and condemned. In western Europe in the ninth, tenth, and early eleventh centuries (before the great revival of commerce), when borrowing was almost always for consumption rather than for production or investment, the church had proclaimed many blanket prohibitions against the sin of usury.

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In the late eleventh and early twelfth centuries, however,the economic situation began to change drastically. Henceforth money was needed also for financing fairly large_scale economic enterprises. It was also needed for financing fairly large_scale military enterprises of the church itself. At the same time, as John Noonan has pointed out, "many churches and monasteries were heavily endowed and under a constant pressure to find suitable investments for their funds. The monasteries were, indeed, the chief lenders to the nobles departing on the Crusades. The purchase of annuities by churches and pious institutions was on a very large scale... The papacy itself often had large idle sums on deposit in banks." 27

Under these circumstances, the canon lawyers began to systematize for the first time the law of usury.

They started with the broad, general concept of an earlier time-the sin of usury consists in lending money for profit. Gratian defined it as "whatever is demanded beyond the principal," and stated that the usurer, like the thief, was bound to restore what he has taken in excess of the loan. ²⁸ Moreover, canon law in the twelfth century extended the doctrine of usury to the sale of goods on credit where the price charged is higher than that charged for a cash sale. At the same time, however, a large number of different types of financing operations and credit devices -- for profit -- were declared to be nonusurious. Where the borrower was an enemy, a vassal, or an unjust possessor, interest might be charged. Where interest was compensation for a loss incurred through lending, it might be charged; also an agreement was valid that the borrower would pay a financial penalty if he failed to return the loan at the agreed time. In addition, a lender holding a pledge might deduct from its revenues his expenses in caring for it. Eventually, in the latter part of the thirteenth century, it was held that a higher price might be charged for a credit sale than for a cash sale where the lender, as a result of making the loan, suffers a loss or is deprived of a profit that he would otherwise have made. Indeed, the canonists first used the Roman word "interest" (interesse) to mean a lawful charge for the loan of money, as distinguished from the sin of usury.

In addition, canon law recognized the validity of a wide variety of commercial contracts that began to flourish in the late eleventh and twelfth centuries, under which risk money was advanced for the sake of a profit. These included joint ventures in the form of a partnership, the socalled census (which was an obligation to pay an annual return from income-producing property), and the sale of debts by a creditor to a third party at a discount. Finally, the Roman "deposit" was transformed into a loan of money for investment, with an optional rate of interest.

The canon law of usury thus developed as a system of exceptions to the prohibition against usury. Like the doctrine of the just price, the doctrine of usury was a flexible rule both against unconscionability and against unfair competition. John Gilchrist is unquestionably right in his

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judgment that the principles of the canon law provided an important foundation for the rapid expansion of commercial and financial activities in western Europe in the twelfth century. 29 - Through enforcement of formless contracts ("a man's word is his bond"), through the concept of preceding moral obligation (causa) as the key to determining what contracts are valid, through doctrines of unconscionability and unfair competition in the form of unjust price and usury, the canonists were able, with the help of Romanist legal science, to create a subsystem of contract law within the system of canon law as a whole.