Relational contract theory: Challenges and queries

Northwestern University Law Review

Volumn 94, Issue 3, 2000, Pages 877-907

  Macneil, Ian R ^a  

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EID: 0000900683     PISSN: 00293571     EISSN: None     Source Type: Journal    
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References (135)

1. Parts I-IV of this article follow closely the paper distributed at the Symposium. As the paper of each participant was prepared largely independently, there was little or no interplay among them. Except for an occasional footnote to illustrate a point, I have largely resisted the temptation to change these four Parts to create such interplay.
2. See infra Part II.
3. See infra Part III.
4. See Eric A. Posner, A Theory of Contract Under Conditions of Radical Judicial Error, 94 NW. U. L. REV. 749 (2000).
5. "challenge vb 1 : to demand as due or deserved : REQUIRE . . . 3 : to dispute esp. as being . . . invalid, or outmoded : IMPUGN . . . 5 a : to confront or defy boldly : DARE b : to call out to duel or combat c : to invite into competition 6 : to arouse or stimulate esp. by presenting with difficulties . . . " WEBSTER'S NINTH NEW COLLEGIATE DICTIONARY 224 (Merriam Webster ed., 1983).
6. "Contract" refers to such relations, and the contract refers to a particular example of such relations. The definition in the text is literally broader than that specified in IAN R. MACNEIL, THE NEW SOCIAL CONTRACT 4 (1980) [hereinafter MACNEIL, NEW SOCIAL CONTRACT]: "By contract I mean no more and no less than the relations among parties to the process of projecting exchange into the future." This reasonably has confused some readers, although I never meant to exclude either the past or present from the concept. Indeed, I do not believe it to be possible for a present exchange to occur without projecting it into the future, since the exchange has at least this future: "Hands off! This is mine now."
7. Reasons for this are suggested in Ian R. Macneil, Barriers to the Idea of Relational Contract, in THE COMPLEX LONG-TERM CONTRACT: STRUCTURES & INTERNATIONAL ARBITRATION 31 (Fritz Nicklisch ed., 1987) [hereinafter Macneil, Barriers].
8. Ian R. Macneil, The Many Futures of Contracts, 47 SO. CAL. L. REV. 691, 693 (1974) [hereinafter Macneil, Many Futures] (discussing "the real life of contractual behavior").
9. See id.
10. See MACNEIL, NEW SOCIAL CONTRACT, supra note 6; Ian R. Macneil, Exchange Revisited Individual Utility and Social Solidarity, 96 ETHICS 567 (1986) [hereinafter Macneil, Exchange Revisited] (the 1978-79 draft of this article, which contained far more anthropological data than the version finally published, is now lost); Macneil, Many Futures, supra note 8.
11. See MACNEIL, NEW SOCIAL CONTRACT, supra note 6; Ian R. Macneil, Exchange Revisited Individual Utility and Social Solidarity, 96 ETHICS 567 (1986) [hereinafter Macneil, Exchange Revisited] (the 1978-79 draft of this article, which contained far more anthropological data than the version finally published, is now lost); Macneil, Many Futures, supra note 8.
12. See MACNEIL, NEW SOCIAL CONTRACT, supra note 6; Ian R. Macneil, Exchange Revisited Individual Utility and Social Solidarity, 96 ETHICS 567 (1986) [hereinafter Macneil, Exchange Revisited] (the 1978-79 draft of this article, which contained far more anthropological data than the version finally published, is now lost); Macneil, Many Futures, supra note 8.
13. Research is on file with author.
14. Research is on file with author.
15. See IAN R. MACNEIL, CONTRACTS: INSTRUMENTS OF SOCIAL CO-OPERATION - EAST AFRICA (1968); IAN R. MACNEIL, The Tanzania Hire-Purchase Act, 2 E. AFRICAN L.J. 84 (1966).
16. See IAN R. MACNEIL, CONTRACTS: INSTRUMENTS OF SOCIAL CO-OPERATION - EAST AFRICA (1968); IAN R. MACNEIL, The Tanzania Hire-Purchase Act, 2 E. AFRICAN L.J. 84 (1966).
17. See Ian R. Macneil, Relational Contract Theory as Sociology: A Reply to Professors Lindenberg & de Vos, 143 J. INST. & THEORETICAL ECON. 272 (1987) [hereinafter Macneil, Sociology].
18. See Ian R. Macneil, Political Exchange as Relational Contract, in GENERALIZED POLITICAL EXCHANGE: ANTAGONISTIC COOPERATION AND INTEGRATED POLICY CIRCUITS 154 (Bernd Marin ed., 1991).
19. See Macneil, NEW SOCIAL CONTRACT, supra note 3, at 111-17.
20. See Macneil, Many Futures, supra note 8, at 696-720. In this earlier version of the primal roots of contract, I listed the social matrix last - it is hard to escape the individualistic intellectual bias of modern society. See Macneil, Barriers, supra note 7, at 31.
21. See Macneil, Many Futures, supra note 8, at 696-720. In this earlier version of the primal roots of contract, I listed the social matrix last - it is hard to escape the individualistic intellectual bias of modern society. See Macneil, Barriers, supra note 7, at 31.
22. Which, be it remembered, is used here to mean relations among people who have exchanged, are exchanging, or expect to be exchanging in the future.
23. See Ian R. Macneil, Values in Contract: Internal and External, 78 NW. U. L. REV. 340, 347 (1983) [hereinafter Macneil, Values].
24. When I first set them out, there were five behavioral categories; see Macneil, Many Futures, supra note 8, at 809. Then there were six (with some changes); see Ian R. Macneil, Contracts: Adjustments of Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract Law, 72 NW. U. L. REV. 854, 895 (1978) [hereinafter Macneil, Contracts: Adjustments]. Then there were nine; see MACNEIL, NEW SOCIAL CONTRACT, supra note 3. Finally, there were ten; see Macneil, Values, supra note 19, at 347.
25. When I first set them out, there were five behavioral categories; see Macneil, Many Futures, supra note 8, at 809. Then there were six (with some changes); see Ian R. Macneil, Contracts: Adjustments of Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract Law, 72 NW. U. L. REV. 854, 895 (1978) [hereinafter Macneil, Contracts: Adjustments]. Then there were nine; see MACNEIL, NEW SOCIAL CONTRACT, supra note 3. Finally, there were ten; see Macneil, Values, supra note 19, at 347.
26. When I first set them out, there were five behavioral categories; see Macneil, Many Futures, supra note 8, at 809. Then there were six (with some changes); see Ian R. Macneil, Contracts: Adjustments of Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract Law, 72 NW. U. L. REV. 854, 895 (1978) [hereinafter Macneil, Contracts: Adjustments]. Then there were nine; see MACNEIL, NEW SOCIAL CONTRACT, supra note 3. Finally, there were ten; see Macneil, Values, supra note 19, at 347.
27. When I first set them out, there were five behavioral categories; see Macneil, Many Futures, supra note 8, at 809. Then there were six (with some changes); see Ian R. Macneil, Contracts: Adjustments of Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract Law, 72 NW. U. L. REV. 854, 895 (1978) [hereinafter Macneil, Contracts: Adjustments]. Then there were nine; see MACNEIL, NEW SOCIAL CONTRACT, supra note 3. Finally, there were ten; see Macneil, Values, supra note 19, at 347.
28. These categories are not intended to be exhaustive in the sense of constituting an all-inclusive social theory. They lack at least three elements: (1) local norms (given that every contract is part of a social matrix which almost certainly has behavior patterns and norms that are either not at all or only inadequately encompassed by the ones I have wrinkled out); (2) a theory of history (required by the fact that all contracts are part of a particular historical social matrix); and (3) an all-inclusive theory of personality. See Macneil, Values, supra note 19, at 343 n.5. For an extensive discussion of the relation between history and relational contract theory, see id. at 397-416.
29. I think this is what Harold Berman had in mind when he said twenty years ago at a presentation I gave to the Harvard Law School faculty that I did not have a theory. The notion that repetitive behavior creates norms could, I suppose, be thought to be "theoretical," but I consider it simply to be a reasonably provable observation about human behavior. Berman's comment ignored the theoretical additions to descriptions treated in Parts III and IV below. 22 Except perhaps in the minds of formal modelists.
30. A very short and undeveloped version of this propositional core of relational contract theories appeared in Ian R. Macneil, A Brief Comment on Farnsworth's "Suggestion for the Future," 38 J. LEGAL EDUC. 301, 302 (1988).
31. A transaction in this sense is any event possessing discreteness sufficient to distinguish it from the flow of contractual relations of which it is part but which can be thought of as somehow separate from that flow. Many events shade off into the remaining relations in such a way that endless dispute could be had about whether they are "transactions." For example, a boss's casual remark to a white employee might give rise to serious dispute whether it was part of an alleged transaction in which the employee was given a pay raise at the expense of a black employee. This fuzziness, however, raises no problems for relational contract theory as a theory. Indeed any such difficulty simply reinforces the proposition that transactions occur only within relations. It is difficult even to conceive of a transaction occurring totally outside any relation. The Vikings' decision to raid or trade, depending on which appeared more profitable at any given moment, may come as close as anything outside of theoretical models.
32. "Efficient" is used here in its normal sense of effective or productive without waste, not in the bizarre and solipsistic technical senses of rational choice theory.
33. Where more specific relational contract theories are being considered in this Article, I shall clearly differentiate them.
34. "Substance" and "behavior" are, of course, neither clearly separate categories nor independent of each other. Nonetheless, even though it may be difficult to label the categories, we know the categorical difference between prices, plans for bridges, specification of software functions, and golden handshakes, on the one hand, and processes of agreement, corporate governance structures, arbitration provisions, and specification of completion dates, on the other.
35. In this day when one must have a "theory" to survive in the legal academic rat race, there is singularly little recognition that liberal pragmatism is a theory. Woe be unto the young - or maybe even older - liberal academic whose work, however fine (indeed, even superb) fails to gussy up this pragmatic theory into some convoluted, over-intellectualized, and essentially obscurantist "theory." Nonetheless, liberal pragmatism underlay the work of the likes of Arthur Corbin and Karl Llewellyn and the many other drafters of the Uniform Commercial Code. And it continues to underlie the work of scholars like Lawrence Tribe, of institutions like the American Law Institute (to a limited degree), and, as noted below, of legislatures and courts throughout the country. Liberal pragmatism may seem passé in legal academia at the moment, because so many "isms" and specific intellectual theories like rational choice theory, game theory, critical race theory, and others have become the dominating fashions. Many of these "isms" and intellectual theories are, however, either little more than rationalizations for this regulatory theory or, as is typically the case with rational choice theory economics, little more than rationalizations for the exact opposite.
36. The converse may be true too, of course; explicitly individualistic approaches may be quietly founded in relational theory - witness Adam Smith's moral philosophy.
37. See Robert C. Ellickson, Law and Economics Discovers Social Norms, 27 J. LEGAL STUD. 537 (1998).
38. Macneil, Values, supra note 19, at 344.
39. The separation is somewhat artificial and the two could be combined since understanding is the first step toward recognition and possibly further consideration. Nonetheless, separation is useful in order to strip out what is seriously controversial in relational contract theory and what is not.
40. Recently these issues have blossomed into threats of a full blown trade-war with the United States moving to impose 100% tariffs on some European imports to compensate for the alleged trade loss not to itself, but for the benefit of United States multinationals dominating Latin American banana industries. See Banana Row May Trigger Trade War, THE SCOTSMAN, Dec. 16, 1998, at 22; Gary Duncan, Banana Trade War Will Hit UK Hardest, THE SCOTSMAN, Dec. 22, 1998, at 21; William Chisholm, Clinton Friend Blamed over Borders Cashmere Jobs Crisis - Tycoon 'Pressured US Politicians to Retaliate in Banana Trade War,' THE SCOTSMAN, Jan. 8, 1999.
41. Recently these issues have blossomed into threats of a full blown trade-war with the United States moving to impose 100% tariffs on some European imports to compensate for the alleged trade loss not to itself, but for the benefit of United States multinationals dominating Latin American banana industries. See Banana Row May Trigger Trade War, THE SCOTSMAN, Dec. 16, 1998, at 22; Gary Duncan, Banana Trade War Will Hit UK Hardest, THE SCOTSMAN, Dec. 22, 1998, at 21; William Chisholm, Clinton Friend Blamed over Borders Cashmere Jobs Crisis - Tycoon 'Pressured US Politicians to Retaliate in Banana Trade War,' THE SCOTSMAN, Jan. 8, 1999.
42. Recently these issues have blossomed into threats of a full blown trade-war with the United States moving to impose 100% tariffs on some European imports to compensate for the alleged trade loss not to itself, but for the benefit of United States multinationals dominating Latin American banana industries. See Banana Row May Trigger Trade War, THE SCOTSMAN, Dec. 16, 1998, at 22; Gary Duncan, Banana Trade War Will Hit UK Hardest, THE SCOTSMAN, Dec. 22, 1998, at 21; William Chisholm, Clinton Friend Blamed over Borders Cashmere Jobs Crisis - Tycoon 'Pressured US Politicians to Retaliate in Banana Trade War,' THE SCOTSMAN, Jan. 8, 1999.
43. But not always. For example, consumer boycotts of particular products, whether for political reasons or for health fears or other reasons, may originate largely outside the supermarket-consumer relation but nevertheless have immense effect on it.
44. Hereinafter called "relationists" (although the other participants in this Symposium prefer "relationalists").
45. Hereinafter called "discretists." As will be seen in Part V.A, we all now seem to be relationists until it comes to the law. Since, however, we are dealing only with legal analysts, it is unnecessary to use a more precise term: "legal discretists."
46. Neither can legislators, but the nature of their occupation makes them far less prone to forget about relations. Nonetheless, there are many issues where they tend to do so.
47. Something analogous would occur in academic analysis, whether relational contract theory, game theory, or legal analysis of discrete contract law.
48. See supra note 27.
49. A recognition of relations does seem, belatedly, to be coming into that branch of the social sciences. I was amused to learn that law and economics has finally discovered norms. See Ellickson, supra note 30, at 537. I was less amused to read that "[l]ike virtually all legal scholars, the founders of classical law and economics featured unsocialized individuals in their analyses of hypothetical legal problems. Id. at 540 (emphasis added). Virtually all? How many is that? I introduced the notion of socialized individuals in teaching-connected publications over thirty years ago and to formal legal scholarship in two articles in 1974. The major one, see Macneil, Many Futures, supra note 8, was published in the Southern California Law Review while Ellickson was a faculty member at U.S.C. Since then, I have published THE NEW SOCIAL CONTRACT, supra note 6, and no less than fifteen articles, largely in American law reviews, all dealing with socialized individuals. Casual searches through Westlaw revealed 495 citations for the decade starting at the beginning of 1990. What kind of scholarship uses the term "virtually all" in this context? Ellickson went on to castigate law-and-society scholars as being admired "more for grubbing for facts than for building overarching theory." Ellickson, supra note 30, at 546. A neat trick, to ignore the one person identified with a group who has developed an overarching theory, and then chastise the whole group for failing to produce one! Ah, well, why should I complain? After all, Ellickson does acknowledge me elsewhere; see Robert C. Ellickson, Of Coase and Cattle: Dispute Resolution Among Neighbors in Shasta County, 38 STAN. L. REV. 623, 686 (1986) (citing Macneil, Many Futures, supra 8). Ellickson's work is in fact one of the major vindications of essential contract theory, the norms of which resonate throughout Ellickson's findings. Ellickson cites Many Futures in the final footnote for the limited proposition that "[c]ontracts scholars have long known that norms are likely to be especially influential when disputants share a continuing relationship." Id. at 686.
50. A recognition of relations does seem, belatedly, to be coming into that branch of the social sciences. I was amused to learn that law and economics has finally discovered norms. See Ellickson, supra note 30, at 537. I was less amused to read that "[l]ike virtually all legal scholars, the founders of classical law and economics featured unsocialized individuals in their analyses of hypothetical legal problems. Id. at 540 (emphasis added). Virtually all? How many is that? I introduced the notion of socialized individuals in teaching-connected publications over thirty years ago and to formal legal scholarship in two articles in 1974. The major one, see Macneil, Many Futures, supra note 8, was published in the Southern California Law Review while Ellickson was a faculty member at U.S.C. Since then, I have published THE NEW SOCIAL CONTRACT, supra note 6, and no less than fifteen articles, largely in American law reviews, all dealing with socialized individuals. Casual searches through Westlaw revealed 495 citations for the decade starting at the beginning of 1990. What kind of scholarship uses the term "virtually all" in this context? Ellickson went on to castigate law-and-society scholars as being admired "more for grubbing for facts than for building overarching theory." Ellickson, supra note 30, at 546. A neat trick, to ignore the one person identified with a group who has developed an overarching theory, and then chastise the whole group for failing to produce one! Ah, well, why should I complain? After all, Ellickson does acknowledge me elsewhere; see Robert C. Ellickson, Of Coase and Cattle: Dispute Resolution Among Neighbors in Shasta County, 38 STAN. L. REV. 623, 686 (1986) (citing Macneil, Many Futures, supra 8). Ellickson's work is in fact one of the major vindications of essential contract theory, the norms of which resonate throughout Ellickson's findings. Ellickson cites Many Futures in the final footnote for the limited proposition that "[c]ontracts scholars have long known that norms are likely to be especially influential when disputants share a continuing relationship." Id. at 686.
51. A recognition of relations does seem, belatedly, to be coming into that branch of the social sciences. I was amused to learn that law and economics has finally discovered norms. See Ellickson, supra note 30, at 537. I was less amused to read that "[l]ike virtually all legal scholars, the founders of classical law and economics featured unsocialized individuals in their analyses of hypothetical legal problems. Id. at 540 (emphasis added). Virtually all? How many is that? I introduced the notion of socialized individuals in teaching-connected publications over thirty years ago and to formal legal scholarship in two articles in 1974. The major one, see Macneil, Many Futures, supra note 8, was published in the Southern California Law Review while Ellickson was a faculty member at U.S.C. Since then, I have published THE NEW SOCIAL CONTRACT, supra note 6, and no less than fifteen articles, largely in American law reviews, all dealing with socialized individuals. Casual searches through Westlaw revealed 495 citations for the decade starting at the beginning of 1990. What kind of scholarship uses the term "virtually all" in this context? Ellickson went on to castigate law-and-society scholars as being admired "more for grubbing for facts than for building overarching theory." Ellickson, supra note 30, at 546. A neat trick, to ignore the one person identified with a group who has developed an overarching theory, and then chastise the whole group for failing to produce one! Ah, well, why should I complain? After all, Ellickson does acknowledge me elsewhere; see Robert C. Ellickson, Of Coase and Cattle: Dispute Resolution Among Neighbors in Shasta County, 38 STAN. L. REV. 623, 686 (1986) (citing Macneil, Many Futures, supra 8). Ellickson's work is in fact one of the major vindications of essential contract theory, the norms of which resonate throughout Ellickson's findings. Ellickson cites Many Futures in the final footnote for the limited proposition that "[c]ontracts scholars have long known that norms are likely to be especially influential when disputants share a continuing relationship." Id. at 686.
52. As required by the first three propositions whenever it is concluded that the relations will have an impact on the transactional analysis.
53. In this respect relational analysis is not unlike the work of litigators in unraveling complex factual situations intertwined with complex law. As more knowledge is gathered about the facts, new legal strands appear requiring more knowledge about the law. And as more knowledge is gathered about the law, inadequacies in knowledge about the facts appear requiring more factual investigation.
54. See supra Part II.A.
55. And to neo-classical contract law, although less so.
56. Another example is highly detailed wage scales found in some collective bargaining agreements.
57. I do not believe rational choice theory without transaction cost analysis can ever tell us anything about large areas of the non-substantive behavioral aspects of contracts or transactions. See Ian R. Macneil, Contract Remedies: A Need for Better Efficiency Analysis, 144 J. INST. & THEORETICAL ECON. 6 (1988) [hereinafter Macneil, Better Efficiency]; Ian R. Macneil, Efficient Breach of Contract: Circles in the Sky, 68 VA. L. REV.947 (1982) [hereinafter Macneil, Efficient Breach]. While these articles advance this proposition respecting only efficient breach, I believe the principles explored there apply to all non-substantive behavioral aspects of contracts related to such matters as consent and the structuring of contracts, and all of the law of contracts pertaining thereto. Those principles would not apply, however, to law or other controls aimed directly at deterring, regulating, or requiring particular substantive contractual conduct, such as prohibition of sales of drugs, prohibiting racial discrimination in employment, or requiring airbags in cars.
58. I do not believe rational choice theory without transaction cost analysis can ever tell us anything about large areas of the non-substantive behavioral aspects of contracts or transactions. See Ian R. Macneil, Contract Remedies: A Need for Better Efficiency Analysis, 144 J. INST. & THEORETICAL ECON. 6 (1988) [hereinafter Macneil, Better Efficiency]; Ian R. Macneil, Efficient Breach of Contract: Circles in the Sky, 68 VA. L. REV.947 (1982) [hereinafter Macneil, Efficient Breach]. While these articles advance this proposition respecting only efficient breach, I believe the principles explored there apply to all non-substantive behavioral aspects of contracts related to such matters as consent and the structuring of contracts, and all of the law of contracts pertaining thereto. Those principles would not apply, however, to law or other controls aimed directly at deterring, regulating, or requiring particular substantive contractual conduct, such as prohibition of sales of drugs, prohibiting racial discrimination in employment, or requiring airbags in cars.
59. Understanding any transaction requires understanding all essential elements of its enveloping relations. See Part II.B.3.
60. Transaction cost analysis has been associated with rational choice theory ever since R. H. Coase published The Problem of Social Cost, 3 J. LAW & ECON. 1 (1960), and it is the keystone of the institutional school of economics exemplified by Oliver Williamson, who refers to it as transaction cost economics. See, e.g., Oliver E. Williamson, Transaction Cost Economics Meets Posnerian Law and Economics, 149 J. INST. & THEORETICAL ECON. 99 (1993). To the extent, however, that economics is equated only with pure rational choice theory, it is clear that any worthwhile transaction cost analysis is not economics at all. It is straightforward, untheoretical empiricism, determining as a matter of existential fact just what the costs are of exchanging things of value in particular ways - sociology. Perish the thought! But it happens to be true.
61. Transaction cost analysis has been associated with rational choice theory ever since R. H. Coase published The Problem of Social Cost, 3 J. LAW & ECON. 1 (1960), and it is the keystone of the institutional school of economics exemplified by Oliver Williamson, who refers to it as transaction cost economics. See, e.g., Oliver E. Williamson, Transaction Cost Economics Meets Posnerian Law and Economics, 149 J. INST. & THEORETICAL ECON. 99 (1993). To the extent, however, that economics is equated only with pure rational choice theory, it is clear that any worthwhile transaction cost analysis is not economics at all. It is straightforward, untheoretical empiricism, determining as a matter of existential fact just what the costs are of exchanging things of value in particular ways - sociology. Perish the thought! But it happens to be true.
62. It is thus already partly relational, irrespective of its name.
63. This is illustrated by the term "efficient breach," used by transaction cost analysts right along with rational choice theorists who show little interest in transaction costs. The term is far too narrow, because it virtually ensures that important transaction costs will be missed from the analysis. In those situations to which its advocates apply it, anything short of thinking in terms of "efficient nonperformance of contract" will almost certainly guarantee such omissions. See Macneil, Better Efficiency, supra note 46; Macneil, Efficient Breach, supra note 46.
64. This is illustrated by the term "efficient breach," used by transaction cost analysts right along with rational choice theorists who show little interest in transaction costs. The term is far too narrow, because it virtually ensures that important transaction costs will be missed from the analysis. In those situations to which its advocates apply it, anything short of thinking in terms of "efficient nonperformance of contract" will almost certainly guarantee such omissions. See Macneil, Better Efficiency, supra note 46; Macneil, Efficient Breach, supra note 46.
65. The risk is not, however, as great as it is respecting non-transaction cost discrete analysis. The simplistic view of life held by even the very best and brightest of discretists is, to put it mildly, sometimes amazing. For example, in his contribution to the Symposium, Professor Posner said: Even something as transitory as a stock transaction is constrained by nonlegal sanctions. The buyer and seller in the secondary market do not deal with each other. They both deal with a middleman, the broker, who takes pains to develop a reputation for honesty, and who usually is employed by a firm with a brand name, built up over years. Posner, supra note 4, at 756. A stock transaction in the secondary market epitomizing transitory contract? In fact, of course, it epitomizes the exact opposite - embeddedness, both nonlegal and legal. First, the subject of the exchange is not an apple to be eaten immediately upon acquisition. Its subject is a "commodity," which has neither existence nor meaning except as part of the incredibly complex relations of modern corporations. Thus, the transaction makes no sense whatever if understood to be transitory. The exchange itself is embedded not only in the bit of broker relation described by Professor Posner, but in a wide range of relations, both nonlegal and legal, particularly the latter. Even the most transitory customers now have complex relations with their brokers. Gone is the day when one can walk into a broker's office and simply buy or sell something. Various kinds of regulation force an extensive relationship on the parties whether they want it or not, including fiduciary obligations on the broker. Moreover, there are at least two brokers, buying and selling, and often more, who also have non-legal and legal relations with each other that all impact on the "transitory" transaction. All are performing under the umbrella relations of one or more self-regulatory organizations, in turn under the constant scrutiny of the Securities Exchange Commission. The relational nature of "transitory" share transactions was vividly demonstrated by the failure of the London Stock Exchange computer on April 5, 2000. The resulting collapse of the market laid startlingly bare the intimate connection of each transaction to all the others, not just as to prices, but as to their being able to occur at all. Moreover, since April 5 was the last day of the United Kingdom's tax year, the relation of these transactions to the public fisc was revealed. There was an immediate clamorous demand that the government extend the 1999-2000 tax year; fortunately, this demand was quickly rejected.
66. See, e.g., Fred O. Boadu, Relational Characteristics of Transboundary Water Treaties: Lesotho's Water Transfer Treaty with the Republic of South Africa, 38 NAT. RESOURCES J. 381 (1998).
67. See supra Part II.A.1.
68. Where broad studies are impracticable, a case study may nonetheless be highly illuminating. A first draft is in hand dealing with one effort, Professor Bernstein's article on the resolution of disputes among members of the National Grain and Feed Association (NGFA). See Lisa Bernstein, Merchant Law in a Merchant Court: Rethinking the Code's Search for Immanent Business Norms, 144 U. PA. L. REV. 1765 (1996) [hereinafter Bernstein, Merchant Law].
69. I seem to have started this unfortunate phenomenon by using "relational contract theory" to refer to my own work. At least the first use of the phrase found in a Westlaw search on January 19, 1999 is in Macneil, Values, supra note 19. That search produced 112 articles using the phrase or its plural. Three of the earliest four of the 112 articles are my own. TP-ALL is unfortunately far from an ideal database for searches of this kind: the number of publications covered are extremely limited until well into the 1980s, additions of journals have been made prospectively only, and it still omits many of the more academic journals. There are other ill consequences of my use of the phrase. First, it tended to force my factual descriptions about contract behavior, and the norms they generate, into becoming a theory, whereas, as noted above, they stand separately as descriptions. This has led to the wrong question (Is the theory any good?) being asked about the descriptions. The proper question is, Are the descriptions accurate and, if so, useful for gaining insight into contract? Second, calling all my work "relational contract theory" confuses three different theories: (1) that defined by the core propositions, see Part II, (2) essential contract theory (treated here) and (3) relational/as-if-discrete theory, see Part IV.
70. It appears most fully as a theory in MACNEIL, NEW SOCIAL CONTRACT, supra note 6, and in Macneil, Values, supra note 19.
71. It appears most fully as a theory in MACNEIL, NEW SOCIAL CONTRACT, supra note 6, and in Macneil, Values, supra note 19.
72. See Part I.A.2.
73. See infra text accompanying note 80.
74. Insofar as rational choice theory is concerned its defects suggest that it can be so used only in very limited ways. See discussion supra note 42.
75. In Macneil, Values, supra note 19, at 415 n.236, I expressed the hope that "the umbrella relational theory would be relational contract theory not unlike that described . . . [but that] it certainly need not be, and probably will not be." (The word "umbrella" meant a comprehensive or better essential contract theory, not the core propositions of relational contract theories discussed in Part II here.) I went on to suggest that it might need to be richer, for example in economic analysis, in institutional thinking, in conflict and decisionmaking theory, and in philosophy. See discussion supra note 19.
76. Hereinafter, for reasons discussed below, this type is referred to as "as-if-discrete."
77. Initially I used the word "transactional" for "discrete," but that was fairly easy to change.
78. This spectrum of contractual behavior is sometimes treated as a relational contract theory in itself, although even as a theory it is only an adjunct to essential contract theory.
79. For over a decade, my scholarly work has been on arbitration law.
80. See Macneil, Sociology, supra note 14, at 276.
81. Because "intertwined" is close to being a synonym for "relational" the change was somewhat cosmetic anyway.
82. Much of the discreteness they demonstrate relates to how they are embedded in relations, not to whether they are so embedded.
83. See Macneil, Barriers, supra note 7. For "Western," now read "virtually worldwide."
84. However important openness to change is in economic relations, there will nevertheless always be a great need for fixed and reliable planning. Or, in the terms emphasized here, presentation will always occur in economic relations, since it tends to follow planning as a matter of course. (To presentiate is "to make or render present in place or time; to cause to be perceived or realized as present." 8 OXFORD ENGLISH DICTIONARY 1306 (1933) (quoted in Ian R. Macneil, Restatement (Second) of Contracts and Presentiation, 60 VA. L. REV. 589 (1974) ).) Nor does a modern technological economy permit the demise of discreteness. Highly specialized products and services, the hallmark of such an economy, produce a high degree of discreteness of behavior, even though their production and use are closely integrated into ongoing relations. When, for example, an automobile manufacturer orders thousands of piston rings of a specified size from another manufacturer with which it regularly deals, no amount of relational softening of discreteness and presentiation will obscure the disaster occurring if the wrong size shows up on the assembly line. Nor would the disaster be any less if the failure had occurred in an even more relational pattern (e.g., if the rings had been ordered from another division of the auto manufacturer). Both discreteness and presentiation must be served in such an economic process, whether it be carried out between firms by discrete separate orders, between firms under long-established blanket orders, or within the firm. See Macneil, Contracts: Adjustments, supra note 20, at 854. Mention of the modern world should not obscure the fact that as-if-discreteness is, and always has been, an essential part of human behavior. See Macneil, Exchange Revisited, supra note 10; Macneil, Many Futures, supra note 8, at 701-10.
85. However important openness to change is in economic relations, there will nevertheless always be a great need for fixed and reliable planning. Or, in the terms emphasized here, presentation will always occur in economic relations, since it tends to follow planning as a matter of course. (To presentiate is "to make or render present in place or time; to cause to be perceived or realized as present." 8 OXFORD ENGLISH DICTIONARY 1306 (1933) (quoted in Ian R. Macneil, Restatement (Second) of Contracts and Presentiation, 60 VA. L. REV. 589 (1974) ).) Nor does a modern technological economy permit the demise of discreteness. Highly specialized products and services, the hallmark of such an economy, produce a high degree of discreteness of behavior, even though their production and use are closely integrated into ongoing relations. When, for example, an automobile manufacturer orders thousands of piston rings of a specified size from another manufacturer with which it regularly deals, no amount of relational softening of discreteness and presentiation will obscure the disaster occurring if the wrong size shows up on the assembly line. Nor would the disaster be any less if the failure had occurred in an even more relational pattern (e.g., if the rings had been ordered from another division of the auto manufacturer). Both discreteness and presentiation must be served in such an economic process, whether it be carried out between firms by discrete separate orders, between firms under long-established blanket orders, or within the firm. See Macneil, Contracts: Adjustments, supra note 20, at 854. Mention of the modern world should not obscure the fact that as-if-discreteness is, and always has been, an essential part of human behavior. See Macneil, Exchange Revisited, supra note 10; Macneil, Many Futures, supra note 8, at 701-10.
86. However important openness to change is in economic relations, there will nevertheless always be a great need for fixed and reliable planning. Or, in the terms emphasized here, presentation will always occur in economic relations, since it tends to follow planning as a matter of course. (To presentiate is "to make or render present in place or time; to cause to be perceived or realized as present." 8 OXFORD ENGLISH DICTIONARY 1306 (1933) (quoted in Ian R. Macneil, Restatement (Second) of Contracts and Presentiation, 60 VA. L. REV. 589 (1974) ).) Nor does a modern technological economy permit the demise of discreteness. Highly specialized products and services, the hallmark of such an economy, produce a high degree of discreteness of behavior, even though their production and use are closely integrated into ongoing relations. When, for example, an automobile manufacturer orders thousands of piston rings of a specified size from another manufacturer with which it regularly deals, no amount of relational softening of discreteness and presentiation will obscure the disaster occurring if the wrong size shows up on the assembly line. Nor would the disaster be any less if the failure had occurred in an even more relational pattern (e.g., if the rings had been ordered from another division of the auto manufacturer). Both discreteness and presentiation must be served in such an economic process, whether it be carried out between firms by discrete separate orders, between firms under long-established blanket orders, or within the firm. See Macneil, Contracts: Adjustments, supra note 20, at 854. Mention of the modern world should not obscure the fact that as-if-discreteness is, and always has been, an essential part of human behavior. See Macneil, Exchange Revisited, supra note 10; Macneil, Many Futures, supra note 8, at 701-10.
87. However important openness to change is in economic relations, there will nevertheless always be a great need for fixed and reliable planning. Or, in the terms emphasized here, presentation will always occur in economic relations, since it tends to follow planning as a matter of course. (To presentiate is "to make or render present in place or time; to cause to be perceived or realized as present." 8 OXFORD ENGLISH DICTIONARY 1306 (1933) (quoted in Ian R. Macneil, Restatement (Second) of Contracts and Presentiation, 60 VA. L. REV. 589 (1974) ).) Nor does a modern technological economy permit the demise of discreteness. Highly specialized products and services, the hallmark of such an economy, produce a high degree of discreteness of behavior, even though their production and use are closely integrated into ongoing relations. When, for example, an automobile manufacturer orders thousands of piston rings of a specified size from another manufacturer with which it regularly deals, no amount of relational softening of discreteness and presentiation will obscure the disaster occurring if the wrong size shows up on the assembly line. Nor would the disaster be any less if the failure had occurred in an even more relational pattern (e.g., if the rings had been ordered from another division of the auto manufacturer). Both discreteness and presentiation must be served in such an economic process, whether it be carried out between firms by discrete separate orders, between firms under long-established blanket orders, or within the firm. See Macneil, Contracts: Adjustments, supra note 20, at 854. Mention of the modern world should not obscure the fact that as-if-discreteness is, and always has been, an essential part of human behavior. See Macneil, Exchange Revisited, supra note 10; Macneil, Many Futures, supra note 8, at 701-10.
88. However important openness to change is in economic relations, there will nevertheless always be a great need for fixed and reliable planning. Or, in the terms emphasized here, presentation will always occur in economic relations, since it tends to follow planning as a matter of course. (To presentiate is "to make or render present in place or time; to cause to be perceived or realized as present." 8 OXFORD ENGLISH DICTIONARY 1306 (1933) (quoted in Ian R. Macneil, Restatement (Second) of Contracts and Presentiation, 60 VA. L. REV. 589 (1974) ).) Nor does a modern technological economy permit the demise of discreteness. Highly specialized products and services, the hallmark of such an economy, produce a high degree of discreteness of behavior, even though their production and use are closely integrated into ongoing relations. When, for example, an automobile manufacturer orders thousands of piston rings of a specified size from another manufacturer with which it regularly deals, no amount of relational softening of discreteness and presentiation will obscure the disaster occurring if the wrong size shows up on the assembly line. Nor would the disaster be any less if the failure had occurred in an even more relational pattern (e.g., if the rings had been ordered from another division of the auto manufacturer). Both discreteness and presentiation must be served in such an economic process, whether it be carried out between firms by discrete separate orders, between firms under long-established blanket orders, or within the firm. See Macneil, Contracts: Adjustments, supra note 20, at 854. Mention of the modern world should not obscure the fact that as-if-discreteness is, and always has been, an essential part of human behavior. See Macneil, Exchange Revisited, supra note 10; Macneil, Many Futures, supra note 8, at 701-10.
89. This is most certainly not an exaggeration. Indeed, anyone who thinks it is has almost certainly been captured completely! 71 It is difficult even to conceive of one theoretically, although discretists regularly seem to think they have done so in using as-if-discrete models.
90. The reason for this lies in basic human nature. See Macneil, Exchange Revisited, supra note 10.
91. Unlike as-if-discrete transactions, relational contracts generate extensive internal social matrices.
92. Macneil, Values, supra note 19, at 350-51.
93. For prescription, see infra Part IV.C.
94. MACNEIL, NEW SOCIAL CONTRACT, supra note 6.
95. One weakness that I have always perceived in the relational/as-if-discrete spectrum is that it seems to fits most uneasily with contractual situations that are both heavily relational and heavy with as-if-discreteness. (This was an important aspect of the above comparison of primitive contractual relations with modern contractual relations.) As this combination is universal in modern bureaucratic society, I have always found this troubling. In principle, it is not problematic, since the use of multiple factors along what are really multiple spectra always presupposes combinations where some factors are towards one end and some towards the other. On the other hand, the pattern is so important in modern life that I wonder whether it may not require something more than the relational/as-if-discrete spectrum.
96. Both discretists and relationists quite regularly misinterpret the role of discreteness in essential contract theory. As an example of the former, Professor Posner describes situations where "the initial contract will most likely have nothing to say about events occurring many years later." Posner, supra note 4, at 751 (emphasis added). The fact is, of course, that only in the rarest of situations where there is something identifiable as an "initial contract" will that contract have nothing to say about events, even many years later. The Constitution of the United States is an example of such an initial contract; it has a great deal to say about events even centuries later, in spite of the initial contract's having obvious and extreme limitations due to intervening change. Posner goes on: One of Macneil's contributions was to help legal scholars to see that the traditional model, however convenient it was from a methodological perspective, was simply inadequate for analyzing this important side of contractual behavior. But having acknowledged this, we must proceed with some sort of analysis. Id. Unfortunately, what Posner means by "this important side of contractual behavior" refers to circumstances where the "initial contract" has no role whatever - an essentially empty set. It is a particularly empty set in the areas of commercial law that most discretists, including Professor Posner, use to discredit essential contract theory. Use of this empty set then permits a denial of any role for discreteness in essential contract theory: If Macneil is right, and courts cannot resolve contractual disputes by discovering initial contractual intentions on the basis of documents and other evidence, cannot use such intentions (even if they exist) to guide behavior late in the life of a relational contract, cannot enforce contracts in a way that maximizes their value ex ante, cannot fill in gaps by imagining the hypothetical bargain -then, what should the courts do? Id. The answer is, of course, that the courts will seldom, if ever, have to face such a question. What they will have to do is fill in gaps where it is patent that the initial intentions are patently no longer enough standing alone to sustain a sensible decision in the face of later change.
97. I have touched on this in Values, supra note 19, at 370-72 (discussing the transformation of norms when they are imposed by law rather than as generated within the contract). Bernstein deals extensively with this issue in Merchant Law, supra note 54. I am in the course of preparing an article centered on Bernstein's article as an example of both relational and non-relational analysis.
98. I have touched on this in Values, supra note 19, at 370-72 (discussing the transformation of norms when they are imposed by law rather than as generated within the contract). Bernstein deals extensively with this issue in Merchant Law, supra note 54. I am in the course of preparing an article centered on Bernstein's article as an example of both relational and non-relational analysis.
99. See supra text accompanying note 58.
100. See, e.g., Macneil, Values, supra note 19, at 416-18 (attack on excessive bureaucratization of modern life). For another example, visit the mythical land of Post-Technique in Macneil, NEW SOCIAL CONTRACT, supra note 6, at 112-16.
101. See, e.g., Macneil, Values, supra note 19, at 416-18 (attack on excessive bureaucratization of modern life). For another example, visit the mythical land of Post-Technique in Macneil, NEW SOCIAL CONTRACT, supra note 6, at 112-16.
102. Such personal excursions have given hostages to discretists, who have treated them as part of essential contract theory as a way of attacking it, sometimes in a manner more worthy of political debate than of intellectual exchange. See, e.g., Richard A. Posner, The New Institutional Economics Meets Law and Economics, 149 J. INST. & THEORETICAL ECON. 73, 84 (1993). Something must have touched a nerve there!
103. It always bears repeating my firm belief that no social analysis of any kind can be validly separated from the observer's psyche in such a way as to make it positivist in the sense we mean when speaking of physical sciences.
104. This proposition is not limited to relational contract; it is part of the broader proposition that contract law should generally track the behavior and norms found in any contract to which it applies.
105. See Macneil, Values, supra note 19.
106. See, e.g., Bernstein, Merchant Law, supra note 54.
107. This was written before I saw Professor Posner's paper for the Symposium, which is clearly such an attack.
108. Posner, supra note 4, at 4.
109. Robert E. Scott, The Case for Formalism in Relational Contract, 94 NW. U. L. REV. 847, 852 (2000).
110. "Living contracts" is the best term I have been able to conjure to describe contractual relations (i.e., all contracts) as they exist outside the dispute mechanisms of the legal system (i.e., the contract-at-law). The separation is necessarily somewhat artificial, since living contracts always live at least in the shadow of their counterpart, the contract-at-law. Indeed, as discussed below, contract-at-law penetrates every element of the essential socioeconomic matrix with which every contract is irretrievably intermixed.
111. See supra Part II.A.
112. Combined contextual analysis of relations and transactions is more efficient and produces a more complete and sure final analytical product than does commencing with non-contextual analysis of transactions. See supra Part II.
113. The adjective "academic" requires stress. Discretism is an incredibly handy tool for an unlimited range of social, economic, and political purposes, including particularly as a smokescreen and apologia for the exercise of raw power, e.g., eulogies to "the market." Needless to say, such uses will not disappear just because academics come to their senses and acknowledge its limits.
114. Scott, supra note 89.
115. Discretists tend to have much trouble with such neo-classical ideas as unconscionability, good faith, and assurances of performance. I have no doubt that Professor Scott, who is both a relationist and a discretist, would in other circumstances expand his definition to include neo-classical contract law, but that is not what he said at the Symposium.
116. Melvin A. Eisenberg, Why There is No Law of Relational Contracts, 94 NW. U. L. REV. 805 (2000). Professor Eisenberg appeared to have the idea that acceptance of relational contract principles would require legal enforcement of, for example, tacit household patterns about who takes out the garbage and who cooks the meals. Of course they do not, any more than neo-classical contract law requires enforcement of more explicit promises about such matters. As Professor Feinman says: Because its paradigmatic unit of inquiry is the extensive relation rather than the discrete transaction, relational contract focuses on the necessity and desirability of trust, mutual responsibility, and connection. Not all of these bonds should be legally enforceable, but beginning analysis by recognizing them is likely to produce a broader set of obligations. Jay M. Feinman, Relational Contract Theory in Context, 94 NW. U. L. REV. 737, 748 (2000).
117. Melvin A. Eisenberg, Why There is No Law of Relational Contracts, 94 NW. U. L. REV. 805 (2000). Professor Eisenberg appeared to have the idea that acceptance of relational contract principles would require legal enforcement of, for example, tacit household patterns about who takes out the garbage and who cooks the meals. Of course they do not, any more than neo-classical contract law requires enforcement of more explicit promises about such matters. As Professor Feinman says: Because its paradigmatic unit of inquiry is the extensive relation rather than the discrete transaction, relational contract focuses on the necessity and desirability of trust, mutual responsibility, and connection. Not all of these bonds should be legally enforceable, but beginning analysis by recognizing them is likely to produce a broader set of obligations. Jay M. Feinman, Relational Contract Theory in Context, 94 NW. U. L. REV. 737, 748 (2000).
118. Presumably there will be some relations involving exchange and reciprocity where there is no sovereign contract law under such definitions, leaving the legal governance entirely to other kinds of law.
119. Lewis v. Benedict Coal Co., 361 U.S. 459 (1960). For a discussion of this case, see Elizabeth Mertz, An Afterword: Tapping the Promise of Relational Contract Theory - "Real" Legal Language and a New Legal Realism, 94 NW. U. L. REV. 909, 916-17 (2000).
120. This is not to say that his end-position was necessarily motivated primarily by his beliefs about contract doctrine; they may, of course, have been partially or even wholly rationalizations for the substantive result he thought proper.
121. See supra Part II.A.
122. As noted supra note 77, this proposition is part of a broader one that contract law should generally track the behavior and norms found in any contract to which it applies. See supra Part IV.D.
123. Since none of the participants in the Symposium couched their positions as general responses to any of my Challenges/Queries, however, it is unclear just how far they would go in opposition to my position.
124. See supra note 85 and accompanying text.
125. For example, I have noted that [s]overeign imposition of norms on contract, in contrast to their generation within the contract, results in a transformation of the contract's values. That is, the values of imposing contract norms -whether common, discrete, or relational - are not identical to the values reflected by their internal generation. Not only is a[] . . . norm [imposed by contract-at-law] theoretically different - respecting consent, for example - but it will be practically different as well. Macneil, Values, supra note 19, at 370.
126. Even though it does not address it specifically.
127. See supra text accompanying note 88.
128. This is particularly interesting relative to third party liability coverage. Normally the discrete policy limits apply, but not if the insurer violates its duty of good faith in negotiating settlements, in which case the limits may disappear altogether.
129. As interpreted by Professor Posner; others may have their doubts.
130. Nash v. Atlantic White Tower Sys., Inc., 170 A.2d 341, 343 (Pa. 1961).
131. Professor Posner's narrow focus on repeat commercial transactions, where legal intervention into partial breakdowns is generally rare, makes it is easy for him to ignore them. Nonetheless, even in relations characterized by fairly discrete, but repeat transactions, partial breakdowns do occur, as illustrated, for example, by Professor Bernstein's field studies, particularly where arbitration is in use. See discussion supra note 54. A personal example: Plaintiff (buyer) and defendant (seller) in an arbitration involving breach of a printing contract were happily discussing various aspects of their current contracts as I (arbitrator) walked into the room. When the hearing started, the defendant conceded that the single contract in dispute in the arbitration had been breached. He also conceded that, for some time, the plaintiff had not been receiving the timely performances he needed. In the course of the hearing the plaintiff said, "The only reason I am here is to get this son-of-a-bitch's attention." Plaintiff presented no evidence of damages from the breach, but it was obvious that the late performances were causing him non-negligible losses and other kinds of serious problems. The only question left for me to decide was whether a quite draconian agreed-upon damages clause was enforceable under the governing law, a strictly yes-or-no question. Neither yes nor no harmonized, however, with the behavior and norms of the parties' generally successful and clearly continuing contractual relationship. I told the parties that I could make an award of only zero or of the specified amount and of nothing in between. I suggested that neither might be the best thing for their business relations, and asked them if they wanted to talk about a compromise. Receiving an affirmative answer, I left the room. Five minutes later they called me back, gave me a modest figure, and that was the amount I awarded.
132. Professor Bernstein's work suggests that, in certain quite limited circumstances, the parties may wish to adhere to literal contractual terms in dispute resolution, even though they would not normally do so in the living contract. Berstein, Merchant Law, supra note 54.
133. Professor Bernstein's work describes situations where the parties do not want even apparently highly qualified arbitrators to implement such norms. Id. 113 This is paralleled by discretist definitions of contract law, which permit easy and effectively hidden elimination from the picture of all nonconsensual aspects of the law governing contractual transactions and relations. Thus, in classical contract law the consent principle is so central that all regulation, except illegality and fraud, is a foreign world totally excluded from the contract picture. This remains true in part of neoclassical contract law, except for such peripheral principles as unconscionability, good faith, and the like. These tend to hover around the fringes, as indeed they should in the consent-centered structure of neoclassical contract law. Thus, discretists can easily appear to be analyzing the law of contracts, when in fact they are analyzing only the consent part of contracts.
134. Not only could they not occur without such a matrix, but they cannot even be understood without knowledge of the social matrix. What, for example, does a bid of "5,000" at an auction mean if you do not know whether the
135. That is, of course, unless it is claimed that the discretist legal theory can somehow capture all the essential elements of the contract-at-law. That, however, would be entirely inconsistent with the initial concession. None of the participants in the Symposium made such a claim overtly and, as shown above, a paper such as Professor Posner's is hardly a step in that direction.