Free Markets and the Unsecured Contract.

The realm of the free market secured contract is relatively straight forward. The secured contract is fundamentally a simple transaction; the security is exchanged directly for the credit, held by a third party or pledged in case of default by the debtor. It is when the contract is drawn up without security where problems can develop. This doesn’t necessarily have to be the case.

To simplify matters, it isn’t necessary to discuss contracts drawn up with third party security; that of insurance, bonding or any other variation, including post contract property liens. It’s not important how a contract is secured but whether it is or isn’t. It is misunderstanding absence of security and state reinforcement of the same misunderstanding that has brought so much conflict to agreements.

It is doubtful the unsecured contract will go away. Unless return somehow becomes disconnected with risk, there will always be an incentive to forego security in exchange for higher return. Also, we must  take into account the reality that many debtors lacking security are highly credit worthy.

Simple transactions that involve exchange of product and payment are easily resolved. Depending on whether the product or the payment is received first, either party could be the creditor. Fraud occurs when the second party fails to deliver. The first party has every right to take the necessary action to recover payment {or product} or something of equal value. This is everyday business and easily comprehended.

Contracts for services are similar, although disputes can be more common due to subjective opinions on the “quality” of the service. A standard practice that works well with service contracting is the “partial” payment. This is the traditional method of paying for labor. Contracts are short term and if the creditor/employer/client doesn’t like the results, they can move on and try someone else.

Those providing labor can do the same. There is usually a trial period in which the employer and the employee decide if their arrangement is compatible. During this period, the employer agrees to pay the wage regardless of the output of the employee. This avoids many disputes that might occur initially. If they are both satisfied at the end of the period, they can commence a regular employer/employee relationship.

The service provider can halt the work process if they fail to receive payment. Agreed upon periodic payments allow ongoing negotiation and communication to occur, which can help avoid disputes. The knowledgeable client doesn’t fork over full payment before work begins. It is also much easier to use third party mediation if there are convenient stopping points with which to gauge the progress and commitment of both sides to the contract, rather than pushing a contentious agreement to its endpoint.  

While these all can be classified as unsecured contracts, they really are of very little concern when it comes to conflicts and the use of force to “remedy” failure to perform. For that, we must venture into an economic area that is not all brick and mortar. While it may deal with the concrete world, it also touches on the world of possibility, probability and circumstance; areas often not within our control.

The most unpredictable field of unsecured credit contracts would have to be that of investment. All investment contracts involve the future and since we don’t know what the future holds in store, this uncertainty guarantees the one thing we can be sure of: the presence of risk.

When it comes to unsecured investment risk, the creditor and debtor both face similar risk: the possibility that they will leave the contract worse off than when they entered. This is the same risk common with all enterprise, with each particular instance exhibiting a greater or lesser degree.

Both creditor and debtor, whether individuals or groups, enter into an investment contract if they believe that it will be in all probability the best possible course of action. The creditor holds the belief that there is no better location for his capital at that time and the debtor believes that his commitment to the debt and the required action during contract execution will ultimately improve his standing.

But, no one can predict what will actually happen. The creditor must do all possible to investigate not only the worthiness of the debtor but the worthiness of their joint enterprise. The debtor’s duty is to rehearse the required course of action and its possible consequences. He must be sure that it is within his or his group’s abilities to perform the action{s} and that the expected return is within reason.

The debtor’s promise can only be based on that which is physically possible. The debtor can promise to “commit” to performance of future actions and calculate possible returns on those actions but the debtor cannot predict with complete accuracy and the creditor cannot rely with certainty on what will actually occur. The best laid plans are subject to forces greater than all of us and out of the control of the most capable.

There is no need to deal with unsecured credit/debt contracts in which the creditor and debtor share the return according to a contracted percentage. Since they are both cooperating in regards to risk and reward and proportionality of the return has been established in the contract, the important consideration will only be the completion of the required action and the absence of fraud.

The most perplexing situation would involve the creditor who desires a “fixed” rate of return based on the credit amount. We have established that it is impossible for either the creditor or debtor to determine the exact return prior to the completion of the contract. So, the question remains “can the debtor guarantee full and complete payment based on a fixed percentage return?”

The answer again, based on our inability to forecast future events, would be no. Forces beyond the control of either party, especially market forces, could render complete repayment impossible as easily as they could provide for windfall profit.

Due to this fact, as long as the debtor has carried out the actions required by the contract to his best ability, the lack of control he may have over the ultimate return and the resulting lack of full repayment does not indict him for either fraud or deception. The debtor cannot perform miracles, if he could, all credit would be unnecessary!

In circumstances where the debtor has performed to the best of his ability, yet the return does not reach the desired estimated level, there is no reason why Lysander Spooner’s provision that the creditor have access to the products of credit as his own in an amount that satisfies the remaining debt shouldn’t be carried out. Without repayment, they are rightfully his and a worthy debtor will have no problem with this. If this condition is satisfied the debt should be considered erased as it always should when the term of the contract has expired and both parties have performed to their best abilities within any area they have physical control over.

A last consideration, as part of the contract can the debtor offer further action to remedy non payment, even an extension of the contract duration, based not on the original investment but further action by the debtor solely to meet the full repayment of the original debt?

Reason would tell us that this “good faith” gesture to repay the amount despite the lack of desired results exists as part of but in separation from the original agreement. If, as we said, the debtor has performed as well as could be expected with regards to the original credit contract but greater forces have prevented full repayment then the fundamental contract should be considered fulfilled and the secondary provision viewed in isolation.

During the extension period, the debtor should be allowed full access to sustainable income and the debtor’s livelihood should never be threatened. This should be applied in the same manner whether the debtor is a group or an individual. Third party services could be employed to determine when repayment is warranted and when the retention of earnings or revenue is a better choice for all involved.

Outside of examples where outright fraud or deception is evident, it is doubtful if the use of force is warranted to remedy unsecured contracts wherein both parties completed the agreed upon actions but the results don’t  completely meet their hopeful expectations. It’s obvious we should avoid anything resembling our present system of state enforced security which encourages predatory practices and discourages free trade. Releasing the debtor from liability from forces beyond his control is a step in that direction.

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