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Adam Smith and the Social Foundation of Agreement: Walford v Miles as a Relational Contract

Document Cited in Related
Vincent
Published date01 September 2017
DOI10.3366/elr.2017.0435
Author
Pages376-404
Date01 September 2017

That Reason, Passion answer one great aim; That true Self-Love and Social are the same; That Virtue only makes our Bliss below; And all our knowledge is: Ourselves to Know.              Pope, Essay on Man, IV, 395–398

INTRODUCTION: THE PROBLEM OF SELF-INTEREST

In his 2013 judgment in Yam Seng Pte Ltd v International Trade Corporation Ltd,1 Leggatt J put forward the most substantial and interesting review of the English doctrine of agreement to be found in the modern case law. It claimed that contract law institutionalised a spectrum of other-regarding, moral duties which cluster around the concept of good faith, and that it therefore may be wise for the English law to explicitly recognise good faith. Not all of these duties will obtain in every contract, but some, notably the duty of honesty, should.2 I have elsewhere analysed the detail of Leggatt J's judgment and in particular the alternative ways in which good faith might be recognised in the English law.3 I will put this to one side because I wish to focus on the claim that the law of contractual agreement institutionalises other-regarding, moral duties, and, even if this claim is allowed, it leaves entirely open the possible form of the recognition of good faith.

A decision of the High Court, such authority as Yam Seng might exercise could largely be only persuasive and, in brief, its treatment of good faith4 has not been found very persuasive on the more or less score of occasions it has been at least mentioned in the higher courts of England and Wales.5 The principal result6 of its consideration by the Court of Appeal has been the drawing of a distinction between the interpretation and the implication of good faith. Whilst the parties may stipulate a duty of good faith which should be recognised as a matter of interpretation, in the absence of such stipulation a duty of good faith should not be implied into a contract.7

As stated, this distinction is, with respect, not securely founded. Citing the already famous dictum of Lord Neuberger PSC (Lords Sumption and Hodge JJSC concurring) in Marks and Spencer v BNP Paribas, the Court of Appeal told us that:

whatever the broad similarities between them, [interpretation and implication] are ‘different processes governed by different rules’ … because ‘the implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision’.8

This is to claim that, if one is not implying good faith, one is not implying. This is not so. Instead of implying that the parties intentions were formed on the basis of (and therefore should be interpreted against) an attitude which Leggatt J sought to capture by reference to good faith, the distinction between interpretation and implication actually does imply, in the absence of a stipulation of good faith, that the parties' intentions were formed on the basis of (and therefore should be interpreted against) an attitude of self-interest. In the House of Lords judgment in Walford v Miles which is regarded as the definitive modern statement of this attitude, Lord Ackner (with whom all their Lordships concurred) said that:

the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations.9

 As it was from this self-interested attitude that Leggatt J sought to depart,10 he seems, save in the cases of express stipulation of good faith, where perhaps his labours were not so imperatively required, to have laboured (so far at least) largely in vain

I am of the opinion that no real progress will be made until this opposition of the attitudes towards contracting thought to be captured by good faith and self-interest is shown to be the false dichotomy it is. I have long believed that the English law in fact contains the doctrinal resources to do this,11 but I do not wish again to go over ground now so well covered by Leggatt J.12 I want, initially at least, to step away from the distinction between interpretation and implication, indeed from the law which Leggatt J sought to organise around good faith, and turn to the social philosophical roots of the understanding of self-interest in the law of contract; which means, of course, turning to Adam Smith.13

In what may be the most influential passage in all of modern European social thought, Smith unforgettably wrote that:

In civilised society [man] stands at all times in need of the co-operation and assistance of great multitudes [and] has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour … and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.14

What does this description of exchange in terms of self-interest mean for a law of contract which attempts to provide the legal framework for economic action? As it has been taken up in neo-classical economics and in the classical law of contract, Smith's concept of self-interest has been regarded as emptying exchange of other-regarding moral content, Lord Ackner's views in Walford v Miles being a paradigmatic expression of this

But I will argue that Lord Ackner did not grasp the essential, other-regarding dimension of Smith's concept of economic self-interest, and therefore the essential, other-regarding moral content of the doctrine of agreement in the law of contract. Our understanding of Lord Ackner's famous dictum, and indeed of Walford v Miles itself, is seriously undermined by our defective concept of self-interest.

 SMITH ON SELF-INTEREST AND THE FUNCTIONS OF GOVERNMENT

It is very arguable that Smith's most important achievement was, with others of whom Mandeveille was the most important other than Smith himself, to give self-interest a central and, more importantly, a positive, role in modern moral and political philosophy and, as part of this, in what is now “economics”. As will be seen,15 it is ultimately impossible to separate Smith's views of the exercise of self-interest specifically in the economic sphere from his views of its exercise generally, and an adequate discussion of the relationship of the specific and the general would require Smith's views of the overall range of human motivations to be taken into account. But, so far as it is possible, I shall avoid discussion of Smith's general moral philosophy and will broaden out discussion of his understanding of the self-interest which motivates economic exchange only in so far as this is needed for the analysis of the exercise of self-interest through contract.

Smith regarded it as a very positive feature of self-interest as the motivation of economic exchange that it was quite distinct from a direct concern with the public interest. Smith believed the impulse to “bettering our condition” to be universal amongst humankind,16 but that the material and hence cultural improvement of modern European society arose from a particular means of betterment. In the “Age of Commerce”, the highest of the four stages of the development of European society,17 the general liberation of “a certain propensity in human nature … to … exchange one thing for another”18 had brought about the general division of labour which is the source of the historically unprecedented wealth of that Age.19 The division of labour, however, was “not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion”.20 It rather was an unintended consequence of the degree of specialisation permitted by the generalisation of exchange.

It is impossible even to be remotely fully cognisant of, much less to supervise, the tantamount to infinite complexity of economic action under a developed division of labour.21 Economic order in commercial society is established, not by a conscious attempt to establish that order, but as an emergent property of economic actors' pursuit of their self-interest:

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage indeed, and not that of society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society … every individual necessarily labours to render the annual revenue as great as he can. He generally indeed neither intends to promote the public interest, nor knows how much he is promoting it … he intends only his own gain and he is … led by an invisible hand to promote an end which was no part of his intention.22

Smith himself saw the invisible hand, by the working of which “the obvious and simple system of natural liberty establishes itself of its own accord”,23 as the hand of Providence.24 This is, of course, not acceptable to the preponderance of contemporary opinion, though rejection of Smith's views does not mean that we therefore now have an adequate understanding of how the pursuit of self-interest leads, not to chaos, but to economic order. This presumably is why the invisible hand, a mere metaphor if divorced from Smith's views, remains the principal way we describe the mechanism at work. We fortunately can here merely accept the existence of that mechanism and note only that Smith saw laissez faire as a...

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