The promises (and pitfalls) of contract governance
Today, the ‘materialization of contract law’ (Renner 1949; Wieacker 1967) has a slightly sour ring to it because even stern adepts of consumer protection law have grown aware of the intricacies of judicial engagements with fast-evolving, sensible areas of social organization (Damm 1999). In response, contract theorists have begun to turn their curious minds to an even more layered analysis of contractual governance, both with regard to a political critique of power relations (Kreitner 2005) and a better understanding of contractual networks (Amstutz 2009; Teubner 2007).
These developments are crucial elements in the formation of a new regulatory landscape, which can be described neither with reference to the state as sole law- producer nor with reference alone to legal rules when we attempt to depict present and emerging regulatory structures (Calliess/Renner 2009; Ladeur 1997). It should be against this background and in light of legal scholars’ attempts to make sense of the legal-sociological, legal-pluralist and evolutionary theories, as well as prospects of an emerging transnational regulatory (and normative?) order (Cotterrell 2009; Cranston 2007; Schmitthoff 1961) that we continue to posit the project of ‘contract governance’ vis-a-vis complementing bodies of theory interested in social ordering. Scholars addressing a confrontation between legal and non-legal approaches to contract governance should be mindful of the questionability of law’s boundaries as such - today as in the past. As Holmes said:
It is perfectly proper to regard and study the law simply as a great anthropological document. It is proper to resort to it to discover what ideals of society have been strong enough to reach that final stage of expression, or what have been the changes in dominant ideals from century to century. It is proper to study it as an exercise in the morphology and transformation of human ideas. The study pursued for such ends becomes science in the strictest sense. (Holmes 1899, at 444)
It is clear, then, that ‘contract governance’ enters the scene with considerable baggage, baggage we need to study closely to unpack the continued prominence that contractarian thinking enjoys in the field of corporate governance. The layered inheritance of contract governance expresses itself in the triple dimension of contract governance itself, which can mean that contracts govern, or that we are concerned with the governance of contracts, or with the governance of contracts that govern (Orts 1995). Traditional law and economics scholars would likely embrace the governing function of contracts, while progressive lawyers attached to the (judicial and regulatory) materialization of law would tend to focus on the scope of adjudication and judge-made contract law, captured in the governance of contracts (Adams/Brownsword 1987). Contract governance, understood as a conceptual framework, is an ingenious proposition as an intellectual undertaking and as a research enterprise because it naturally captures both of these dimensions. Because of this capture it is possible to see the inside and the outside of contract governance, which illustrates the complex assumptions that go into the project of contract governance, as currently pursued, from the start and explains its promise for a continued depiction of the corporation as a contractual structure. But what has forcefully been shown in the interpretation of the business corporation as a nexus of contracts (Bratton 1989) can just as aptly be applied to the idea of contract governance itself. In both corporate governance and in contract governance, the construction of a complex governance architecture on contract as a self-explanatory and auto-legitimizing principle detaches the contract from its legal-regulatory context by associating it with a sphere distinct from the state and regulatory ‘intervention’. Such an unironic rendering of contract governance understood as governance by contract ‘invisibilizes’ the ‘basis of contract’ (Cohen 1932) and hereby continues to ignore the scathing critique offered by Holmes in 1905 [Holmes, J, dissent in: Lochner v. New York, 198 U.S. 45 (1905)].
As already alluded to above, such an isolating depiction of contract governance as ‘autonomous’ from other, allegedly ‘interventionist’ forms of lawmaking and regulatory governance repeats what a number of law and economics scholars have been arguing regarding the autonomy of so-called social norms. Scholars identify and herald social norms as the glue of highly differentiated, modern market societies whose complexity renders any attempt by the state’s regulatory apparatus and the judiciary futile (Posner 2000; Scott 2005).
There is, certainly, another reading of the idea of contract governance that depicts it as a comprehensive societal ordering framework (Collins 1997; Teubner 2000). This reading would hope to undo the ‘discovery of social norms by law and economics’ scholars (Ellickson 1998) in order to appreciate the concept of contractual governance as part of a comprehensive theory of contract in a liberal society (Collins 1999; Macneil 1980). Pondering the embeddedness of contract governance in a framework of both institutional and normative reference points ensures that the connection between society and the practice (and theory) of contracting is never left out of sight. That connection is severed when one plays contract governance off against the
governance of contract, as is done by social norms theorists and proponents of a neo-formalist approach to contract law (Scott 2000). In contrast, the genius of contract governance has always been the recognition that these two dimensions cannot be separated in a way that one would potentially trump the other. To do so would render absurd the fact that contracting is part of societal interaction. To recognize contractual governance (as governance through contract) as part of society, however, connects the theory of contract governance with the theory of society. And the latter is far too complex to be captured in the scrutiny of this or that instance, where courts wandered into the judicial resolution of complex contractual relationships.
Contract governance cannot be reduced to a theory of social norms independent from the theory of society in which it is embedded. This theory, however, is not fully accessible for the law itself, as it has its own legal rhymes and reasons. But the differentiation of the legal system occurs as the law reacts to the world over time. In doing so, it receives impulses from economics, politics and religion that perturb, impregnate and challenge the law and its toolkit.