The nexus of contracts theory is an idea put forth by a number of economists and legal commentators (most notably
Michael Jensen and William Meckling as well as
Frank Easterbrook
Frank Hoover Easterbrook (born September 3, 1948) is an American lawyer, jurist, and legal scholar who has served as a United States circuit judge of the U.S. Court of Appeals for the Seventh Circuit since 1985. He was the Seventh Circuit's chief ...
) which asserts that
corporations are nothing more than a collection of
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
s between different parties – primarily
shareholders, directors, employees, suppliers, and customers. Proponents of this theory contend that all disputes about the obligations of a particular corporation should be settled by resort to the methods used to interpret contracts, and that
court
A court is any person or institution, often as a government institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in acco ...
s should not imply the existence of
fiduciary
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for examp ...
duties on behalf of corporate officers and directors. Alternatively, the nexus of contracts theory can also be viewed as a method of enhancing corporate
plausible deniability, insofar as it is a way of "passing the buck" down a chain of contractual obligations and losing all semblance of responsibility in the "nexus." This can pose a practical loophole for corporate entities, a theoretical strength for those wishing to forward corporate ideology, and a legal problem for those who wish to take corporate entities to court. Another strength of this
theory of the firm
The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. Firms are key drivers in ec ...
is a firm begins to transcend border and defy simple classification when it is really intertwined by its contracts into a number of different countries and with a number of different stakeholders. For example, can
General Motors be classified as strictly a U.S. company if it has contractual obligations with workings in China, customers in Europe, or stock investors in Canada?
Law and economics
{{Law-stub