The Real and the Paper Deal: Empirical Pictures of Relationships, Complexity and the Urge for Transparent Simple Rules
| Date | 01 January 2003 |
| DOI | http://doi.org/10.1111/1468-2230.6601003 |
| Published date | 01 January 2003 |
| Author | Stewart Macaulay |
The Real and the Paper Deal: Empirical Pictures of
Relationships, Complexity and the Urge for
Transparent Simple Rules
Stewart Macaulay
n
Assume that contract law matters, at least in some subset of all the situations
where people consider making or do make contracts. Also assume that contract
law should rest to a large extent on choice or responsibility for misleading others
about one’s choices. Making these assumptions, we must be concerned with how
the legal system deals with the expectations of the parties. One approach is formal.
Judges can limit themselves to dealing with only the formal expressions of the
parties - the paper deal. They need ask only whether the parties signed or accepted
a document, and if they did, what is the ‘plain meaning’ of the words they used.
Sometimes, writings labeled ‘contract’ do capture many if not most of the
expectations of those who sign them.
Often, however, the paper deal will not reflect the real deal: a writing can be
inconsistent with the actual expectations of the parties. Courts frequently have
sought to protect such actual expectations despite the presence of a writing that
does not mention them or even one that is inconsistent with them. However,
establishing real expectations often is very difficult. Courts face what Richard
Danzig has called ‘the capability problem.’
1
Some expectations, for example, are
only tacit assumptions - what I would have said if I had thought about a question
that I did not think about. Even if the parties did have real expectations that they
did not express in their written document, we must worry that today’s testimony
about them will be self-serving and fabricated to make the case come out the right
way. Also, proving the real deal often will be very costly. The parties must convey
a commercial context to a judge or to jurors. They may come to the task with
little, if any, knowledge of the part of the business world in question. Experts can
inform them, but experts are not free.
If we want our courts to carry out the expectations of the parties to contracts,
both those that they express in writing and those that are left unrecorded or even
unspoken, we must accept a contract law that rests on standards rather than on
clear, quantitative rules. Contract law then will talk of ‘good faith’, ‘duties of
cooperation’, or ‘within limits set by commercial reasonableness.’
2
Others have
written much about what standards are most appropriate.
3
n
Malcolm Pitman Sharp Hilldale Professor, Theodore W. Brazeau Bascom Professor of Law, The
University of Wisconsin Law School. I have discussed the issues considered in this article with my
Wisconsin colleagues, John Kidwell and William Whitford, and I have learned much from them.
David Campbell commented on a draft of this article, and it is much better as a result. All mistakes
are mine; I did not take all the good advice offered. An earlier draft of this paper was presented at
a seminar, ‘Implicit Dimensions of Contracts’, held at the LSE on 26 November 2001 and funded
by the MLR Annual Seminar Competition.
1 R. Danzig, The Capability Problem in Contract Law (Mineola, NY: Foundation Press Inc.,
1978).
2 See, eg, Uniform Commercial Code y2-311(1): ‘An agreement for sale which is otherwise
sufficiently definite yto be a contract is not made invalid by the fact that it leaves particulars of
performance to be specified by one of the parties. Any such specification must be made in good
faith and within the limits set by commercial reasonableness.’
rThe Modern Law Review Limited 2003. (MLR 66:1, January). Published by Blackwell Publishing Ltd.,44
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
However, there are objections to writing contract law in the qualitative fashion
that seems necessary that are so well known that we can call them classic.
Furthermore, there are also classic responses to these objections.
4
In this paper I
will ask whether we can do more than just reprise these old songs and hear one
group of scholars, judges and lawyers sing one song while another group whistles
the other. We can clarify our choices by examining each from a law and society
perspective - that is, by asking how the law in action appears from the point of
view of business people and their lawyers. Moreover, we can gain a little ground in
at least one limited subset of contract cases if we focus on judges in such disputes
serving as agents of settlement. With all of its flaws, such coerced cooperation may
be the least bad solution in many situations.
I will review briefly some of the reasons that the paper deal often does not reflect
the real deal or the implicit dimension of contract. I will consider the somewhat
chaotic responses American courts have given to the problem. I will look at what
relational contract theory suggests courts should do and what a concern about the
rule of law offers. My conclusion is not startling: we cannot have our cake and eat
it too. There are costs and benefits flowing from focusing on the paper deal and
from focusing on the real deal. The twentieth century history of American
contract law and scholarship reflects cycles of privileging one judgment about
those costs and benefits and then rejecting it and adopting another. Finally, I will
suggest that in a limited subset of all contract cases, we should be content with
almost any approach that leads to settlements that give expression, more or less, to
relational norms and values.
The gap between the real deal and the paper deal
Things are easier for some parties and courts if the legal system focuses entirely on
any written document that the parties have signed or accepted. If legal agencies do
this consistently, corporate lawyers, for example, need worry less about what their
client’s sales people say or do. However, this approach requires courts to close
their eyes to real expectations resting in the implicit dimensions of contract and
significant reliance on them. Contracts are always more than the contract
document. We have long known the many reasons for this: Words do not have a
fixed meaning that every speaker of the language will translate the same way. We
create the meaning of written language by bringing to the words some measure of
3 D. Campbell, ‘Reflexivity and Welfarism in the Modern Law of Contract’ (2000) 20 Oxford
Journal of Legal Studies 477, 497, notes that much American writing on contracts, except that of
Ian Macneil, criticises classical contract law but fails to set out a rival theory. I have said: ‘people
should not attempt to write about contracts until they have studied Macneil.’ S. Macaulay,
‘Relational Contracts Floating on a Sea of Custom? Thoughts About the Ideas of Ian Macneil
and Lisa Bernstein’ (2000) 94 Northwestern University Law Review 775, 776. Nonetheless, I am
skeptical about whether anyone can create a complete rival theory applicable to all kinds of
contracts without a good deal of oversimplification. I also doubt that any such grand rival theory
could be sold to the judges and lawyers who would have to put it into practice. See J. M.
Feinman, ‘Relational Contract Theory in Context’ (2000) 94 Northwestern University Law
Review 737. I would be pleased to be proven wrong. My contribution, if any, will be only to look
at proposals and arguments advocating positions and to ask whether they seem compatible with
business practices about which I know something. Pointing out over generalisations and
questionable assumptions is still valuable work.
4 The best discussion of these classic pro and con arguments is D. Kennedy, ‘Form and Substance
in Private Law Adjudication’ (1976) 89 Harvard Law Review 1685.
The Real and the Paper DealJanuary 2003]
45rThe Modern Law Review Limited 2003
context, background assumptions, our experiences, and, too often, our bias,
ignorance and stupidities.
5
Also, it is very hard to bring the future to the present and provide that X will
happen if event Y takes place.
6
Our ability to predict the future is limited, and
even careful business people often leave gaps in written contracts. The world
changes and surprises us: Wars break out in places where we do not expect them;
or our contract may have dealt with a war but left open what happens when the
indirect effect of a major terrorist attack makes performance much more costly;
OPEC drives up energy costs unexpectedly; new technologies, often involving
computers, change things so that an older contract no longer makes sense.
Even when we can foresee that it is possible that something might happen, there
are limits on the time that we can or should spend on trying to provide for all
contingencies in our contracts. In most instances, it would not pay to hire enough
people with the skill needed to review what is printed in fine print on the back of
various sellers’ forms such as proposals, acknowledgment of orders and invoices.
A firm that is filling thousands of purchase orders every week could not afford to
take the time to negotiate all the details of every transaction. Moreover, as Tom
Palay notes: ‘looking beyond the [written] contract is important because parties
who have, or anticipate, strong relational ties with their contracting opposites are
not particularly worried about initial terms of agreement.’
7
In many situations
careful contract negotiation signals distrust when the situation calls for a business
marriage.
Furthermore, we must remember that business corporations are collections of
people and their activities are seldom tightly coordinated. Those who negotiate the
deal often are not the people who draft the written document recording it. Still
others must perform the contract. This opens the possibility that, for example, a
firm’s lawyers may have different assumptions and expectations than its
purchasing agents, sales people, and engineers.
Strategy may be involved too. If I want a clause that says if event X takes place,
then consequence Y will follow, you may demand something in exchange that I do
not want to give you. When I anticipate this, it may be better to avoid raising the
issue in negotiations and hope that the matter can be resolved if event X ever takes
place.
Lawyers deal with many of these problems by fabricating detailed standard
form contracts that typically are written in legal or technical language that ‘is not
meant to be read, still less to be understood.’
8
The written document, however,
may be seen by purchasing agents, sales personnel and engineers as a formality
created only to please the whims of the lawyers. It is also possible that parties will
5 See Professor Linzer’s discussion of Shore vMotorola, in P. Linzer, ‘Rough Justice: A Theory of
Restitution and Reliance, Contracts and Torts’ (2001) Wisconsin Law Review 695, 764–772. The
price of the position I take in this article is that I have to accept that sometimes judges will use
their discretion to reach results that I think are outrageous. Shore vMotorola was for me an
unhappy example.
6 By the ‘real deal’ I mean both those actual expectations that exist in and out of a written contract
and the generalised expectation that a trading partner will behave reasonably in solving problems
as they arise. My experience talking with business people suggests that reading written contracts
clauses to one another seldom would be seen as a reasonable way to solve problems. There may
be situations where applying the letter of a written document would be a reasonable way to cope
with a contract problem, but I suspect that these situations are a very limited group of all
contract problems. Also, there are situations where parties do not expect the other to act
reasonably for the mutual benefit of the relationship. Again, I would expect this to be a very
limited group of cases because some trust is needed before most people will make contracts.
7 T. M. Palay, ‘A Contract Does Not a Contract Make’ (1985) Wisconsin Law Review 561, 562.
8 The phrase is Lord Justice Devlin’s. See McCutcheon vDavid MacBrayne, Inc [1964] 1 WLR 125.
The Modern Law Review [Vol. 66
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