The death of Contract Law

Par Ayman Daher
Publié en 2005 sur jurizone

Much like the development of the modern corporation in the 1800's, the legal world faces today the emergence of new kinds of efficient institutions. Hybrids, strategic alliances, "compacts", franchising agreements, multinational subsidiaries, a flurry of sui-generis institutions that are not under any law of securities regulations and that operate outside the traditional realm of contract law.

"Long-term contracts with complex performance structures are being used more and more often as legal basis for the coordination of economic activities between legally independent enterprises." When AT&T and IBM enter into a ten year agreement for coordinated research and development, the law of contract that is written in our books doesn't begin to lay a handle on this relationship. These parties are basically free to do whatever they want. Their entire relationship is outside the sphere of influence of the contractual law, a law that is a century old already.

The hybrid is an entity, which has elements of hierarchical organization, integration from different firms, but still has well defined independence of these firms.

To describe it in two phrases: the hybrid is formed by entrenched interdependence but staunch independence. This situation is not addressed by the law except in specific examples. Historically, the law has treated situations of long-term contracting and "special" relationships by developing complete areas of the law to govern them. Examples of this are employment law or landlord-tenant regulation. Jurists try to fit other kinds of arrangements into the prevalent contractual law or under the heading of business associations and deal with them through the lens of corporate law. But hybrids emerge between parties, who give more weight to behaviors such as, role integrity, contractual solidarity and harmonization with social matrices rather than stressing procedural behaviours such as the effectuation of consent which is dealt with heavily in our contract law.

Transactional contracts and hybrid contracts are not on the same conceptual plane. The effectuation of consent, which is very important in discrete transactions, doesn't need to be emphasized in hybrid situations because "consent" is implicit to the relationship. In hybrid situations, the parties consent on being linked, they do not consent on individual transactions, although in practice, the actual consent to the transactional activity that is happening within the relationship exists because it is as if all the individual "consents" needed were agreed to at a prior moment. That "blanket" effectuation of consent happened at a level higher than the transaction, a supra-transactional level, it happened at the relationship stage.

If I go on the dance floor and ask a pretty stranger for a dance, the most important element I will be looking for is a clear explicit acquiescence. If I'm with my life partner, whom I've danced with many times, I'll know when she wants to dance, what songs she likes, how tired she feels at this moment; furthermore, I will expect consent. The relationship we have together has given me "trump-card blanket consent". So in other words, whether dancing with a stranger or with a loved one, there actually needs to be the effectuation of consent but the behavioural norms that exist at the transactional level of a transactional contract or at the transactional level of a hybrid contract exist equally, but their manifestation is different.
The conclusion that should be drawn is that when a contractual scenario becomes more relational and the parties start to have some integration with one another, the relationship that develops leaves the conceptual plane of relationships based on transactions, and enters a supra-transactional stage where the relationship becomes based on norm creation as to assist the transactions that are occurring within it.

The transaction-based relations still exist, but are encompassed in a normative environment created by the relationship. The word contract should be used only to describe the legal institution that crystallizes the transaction, while we should call the legal institution that crystallizes the relationship a "normative constitution", or "articles of integration", or "symbiotic charter". The contract becomes virtually meaningless, and the contractual law that exists is but an afterthought.

The hybrid contract is a status contract. It defines the relationship. It is a shell. And the contract is simply an instrument with which the general duties of the parties, but mostly their status, are defined. The contract has no elements of price, quantity, specifics that we would find in a contract; it is a power dividing tool. It is the definition of the power structure. Savigny and Gierke theorized that from 1800 to 1880, we had a shift from status being the source of obligations, to obligations being themselves the source. This was due to the rise of the individual in society, "I work not because I am a serf, but because I agree with the other to work for him".

The individual was no longer shackled by his status, he could choose to be obliged to do something as opposed to be someone. Today's economic reality , we see a return to the status being the source of obligations. It is no longer the contract, but the status defined in the contract that is the source of the obligation. We don't say X owes a duty to market Y's property because that's what was written in the contract. We say X has this duty because X is the franchisee of Y, and as the franchisee, he has to market these goods. And Y, as the franchisor has to help him. X becomes the franchisee not through a contract that is governed by the law, he is the franchisee through the economic relationship that he has defined with Y. Indeed, the law, except for a rare landmark Quebec case, does not truly regulate this type of relationship.

The franchise contract does not specify the real duties of the parties, only their roles. But the courts don't recognize this relationship as an employment one, they apply contract law to it, which fails to protect parties where contracts are drawn widely. That means that the agreements aren't enforceable. They are enforced because of economic reasons or personal relationships, or fear of being shunned by eventual contractants, but not by the law!

This situation has other problematic issues, how do we distinguish between the actual independent contractants or employees that usually have unions and recourse and a body of law that protects them but now are at the mercy of general contract law? A general contract law that I remind you once again does not recognize quasi-employees. How to have functional dispute resolution? Without the court system as a backer, what other means do we have? How to make sure no oportunistic behavior occurs even though parties can't bank on the court system, and present contractual law doesn't recognize relations?

The many question this poses are left to the minds of the reader. But the most important point is to realize that the contract law in our books, developed for the 19th century is not equipped with the tools to recognize and manage the hybrid contracting of the 21st century. Lawyers have become economists and negotiators. They define these relationships through complex autonomous structures which are so removed from legislative and judge made law that society might have forever lost its control on corporate action.

All right reserved © 2005, Ayman Daher.