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) which asserts that

corporations A corporation or body corporate is an individual or a group of people, such as an association or company, that has been authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law as ...

are a collection of

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

s between different parties – primarily

shareholder A shareholder (in the United States often referred to as stockholder) of corporate stock refers to an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the ...

s, directors, employees, suppliers, and customers. It has replaced the legal theory of the

corporation A corporation or body corporate is an individual or a group of people, such as an association or company, that has been authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law as ...

. 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 an institution, often a government entity, with the authority to adjudicate legal disputes between Party (law), parties and Administration of justice, administer justice in Civil law (common law), civil, Criminal law, criminal, an ...

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 (legal person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, ...

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 Plausible deniability is the ability of people, typically senior officials in a formal or informal chain of command, to deny knowledge or responsibility for actions committed by or on behalf of members of their organizational hierarchy. They may ...

, 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 eco ...

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.

References

Law and economics {{Law-stub