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Sunday, July 17, 2005

On Collaboration, Organizations, and Conciliation in the General Theory of Contract

My latest theoretical excursion is available for download on SSRN here.  Let me know what you think; I have to take it through revisions this summer for late fall publication.  Here is an abstract:

This short piece exposes a central shortcoming of all general theories of contract that purport to be comprehensive and descriptive: they tend to exclude whole types of contracts to make their theories fit. As the essay explains, there are contracts between individuals (Type (1)), between organizations (Type (3)), and between individuals and organizations (Type (2)). By carefully analyzing Daniel Markovits’s recent attempt at a contract theory in his Contract and Collaboration, 113 YALE L.J. 1417 (2004), as well as looking at Schwartz and Scott’s recent effort in Contract Theory and the Limits of Contract Law, 113 YALE L.J. 541 (2003), I am able to expose how contract theorists ignore various Types of contracts to their theories’ detriment. At the conclusion, I suggest how Types of contracts are relevant to contract theory construction—and how a focus on Types can point to a resolution of some of the ongoing debates in contract theory.

Posted by Ethan Leib on July 17, 2005 at 12:29 PM in Article Spotlight | Permalink


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Will revise accordingly. Thank you.

Posted by: Ethan Leib | Jul 18, 2005 6:29:03 PM

Your reply to my last comment crossed wires with my second comment. You make a good point vis. the actual function of corporate contracts being wealth maximization rather than the full range of human interests (and possibly also the past people's lives thing, though I need to think about that one some more). I guess my answer is that corporate contracts need not be aimed solely at wealth maximization, and there's a burgeoning body of corporate law literature saying that they shouldn't be. (more on this later, albeit much later and in print) But still, in terms of the way the world actually operates, that could easily be the basis for a fair distinction between the moral status of corporations and that of people. (And politically, I'd like there to be one.)

I think your essay would be strengthened if you explicitly made that point. Markowits is highly unconvincing in just assuming it.

Posted by: Paul Gowder | Jul 18, 2005 6:10:52 PM

Actually, now that I think about it some more, Markowits's point is kind of self-contradictory once we look at the nature of the idea of a promise.

Why must we keep promises? Kant would say (and Markowitz seems to be making an unabashedly Kantian argument, so I'm going to charge him with this belief) that one must keep a promise because failing to keep a promise fails to treat the promisee as an end, as someone who is worthy of the dignity of promise-keeping. (Or alternatively, that promise-breaking violates the universalization principle, but I'm not going there right now.)

It follows that it is unethical to make a promise to an entity (a maybe-being, as it were) that is not worthy of that dignity, because to do so would be to tell a lie: it would be to make a representation of an intent to be bound by promise norms. If one views the entity to whom one promises as unworthy (because nonhuman) of those promise norms, one must be lying when one makes a promise to them. Alternatively, I suppose, one would be agreeing to bind oneself to the rule of promise-keeping even to that entity that it not independently worthy of promise keeping, but one need not keep that second-order promise, for the same reason!

It follows that one can not make a promise (without lying) to an entity that is unworthy of promise keeping. It's what Habermas and Appel would call a "performative contradiction" -- the making of the promise implies a worthiness to enforce it on the part of the receipient which one denies in the same breath.

We can then define promise as "a committment to action made to an entity which is to be treated as an end."

When we do that, we see that the quoted text from Markowits is a contradiction: he maintains that corporations are not to be treated as ends ("Organizations, by contrast, have no comparable moral status"), but in the same breath maintains that we must understand corporations as the objects of promises ("contractual promises made to organizations address only the organizations"). Since a promise can only be made to an end, he's refuted himself.

Posted by: Paul Gowder | Jul 18, 2005 5:59:05 PM

I think the short answer is that corporations just don't have the sort of moral status that people have. This intuition has appeal even if we still want to say that corporations are just collections of people after all; a corporation is people, to be sure, but it is more besides and generally lives on past people's lives--and those things suggest that perhaps they can't be neatly treated as simple persons in contract law.

One way to justify dividing contracts this way comes from Schwartz & Scott (2003): firms (corporations of a certain kind and a certain size) can mostly be presumed to be profit seekers. If we treat firms as "homo economicus," the law & economics take on contract law is easier to digest. But individuals often make contracts with a wider range of goals than the maximization of wealth; and we might think the law of contracts controlling these individuals needn't prioritize welfare maximization. Or so one could argue.

Nate Oman loves these issues--and he is more in your camp. See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=681728.

Posted by: Ethan Leib | Jul 18, 2005 5:44:24 PM

Markowits's reply is a little ... uh... well... lets just say it stretches the bounds of my credulity.

First of all, of course corporations should be treated as means, but means for whom? The very concept of a means implies some correlative ends that we seek to serve via the means, and those ends can only be the shareholders.

His claim that promises made to organizations only "address" the organizations themselves, and such promisors only "intend" to make a promise to the organizations themselves appears to be a bald assertion with no basis in reality.

In terms of "addressing," the term is totally undefined. If we view an "address" as a statement, manifested in sound waves, or electrons in the case of electronic transactions, that arrives in someone else's ears or eyes, then a human is the addressee: someone's gotta read the e-mail or take the call. Now, I suppose one could have a completely automated process, where a corporation's web server receives an order, charges a credit card, puts the money in a bank account, and sends a command to the production line to spit out a widget, which is wrapped by a machine and plunked on a conveyer belt to the mailbox. But it doesn't require a corporation to do that. An individual could set up a structure like that too, in which case that notion of "addressing" would be utterly useless for distinguishing between individuals and corporations.

So "addressing" obviously can't be with reference to the actual hearer of the communication. What else could it be? The name used? Or the real party in interest? If the real party in interest, we're back to my epiphenomenal theory. If we understand "address" to mean "name," then sure, we say we're making a deal with microsoft rather than with microsoft's shareholders. But can we really make an ethical distinction on the basis of naming? If I'm making a deal with you, does it make any difference, as an ethical matter, whether I say "I, Paul Gowder, promise to pay twenty dollars to buy a widget from you, Ethan Leib" versus "I, Emperor Norton promise to pay twenty dollars to buy a widget from you, Edna St. Vincent Millay?" Surely not.

The "address" business seems thus totally incoherent. And the intent one doesn't make any more sense:

Suppose I make a contract with you: "I, Paul ("Emperor Norton") Gowder agree that my Robot, Jake, will mow your lawn in exchange for twenty dollars which my guardian ad litem will use for my benefit." Do we intend that the promises of this contract be made by and to me? Or is it the robot that is giving my performance and the guardian ad litem that is receiving the performance? Again, as an ethical matter. Surely I'm the contracting party. The same holds, mutatis mutandis, if we replace "Robot, Jake" and "guardian ad litem" with "XYZ corp." If you, by entering into the Robot-Guardian contract with me, have an "intent" to make a promise to me (rather than my guardian ad litem), then you similarly have an "intent" to make a promise to me rather than my corporate penumbra.

The opposite position would commit an anthromorphic fallacy. Only humans can act, in the sense of making choices about desired future-states. And only an actor can make a promise.

Actually, for corporations, it's even more absurd to describe them as the objects of intent for promises than robot. How can an entity that has no physical existence make a promise, or be the object of an intent to make a promise? What are you making a promise to? It makes as much sense to make a promise to a corporation as it does to make one to this comment, or to the ideal of goodness, or to my bank account.

In fact, I suspect (on, AFAIK, just as much -- zero -- actual psychological evidence as Markowits has for the contrary conclusion) that people, when they make deals with corporations, experience their money as going to actual people: be they the managers of the corporations, or the shareholders, or whoever. They don't actually "intend" to make a deal with a nonexistent entity, they "intend" to make a deal with an aggregate of people who will fill different roles in the transaction. They experience actual people as having the duty to perform. When I receive a package fedex and it doesn't get delivered, I don't curse the nonexistent corporate entity, I curse the idiot delivery driver.

Posted by: Paul Gowder | Jul 18, 2005 5:23:30 PM

With little time today, I can only point you to Markovits's own reply:

"The collaborative view describes the distinctive forms of respect and community that contracts engender, but these broader notions do not directly apply to organizations at all. Individual persons have reasons to respect and seek community with each other because individual persons' moral status commands that they be treated never merely as means but always as ends in themselves. Organizations, by contrast, have no comparable moral status, even when there are treated, artificially, as persons at law. Quite to the contrary, organizations should be treated precisely as mere means, and someone who treats an organization as an end in itself makes, at least presumptively, a moral error. Organizations are simply not the kinds of creatures to which the broader moral framework that supports the collaborative ideal directly applies, so that relations involving organizations that is, between organizations or between organizations and individual persons cannot directly participate in the value of contractual collaboration.

This much is straightforward. But it remains possible that contracts involving organizations might generate a morally valuable collaborative relation indirectly, in one of two ways: First, contracts involving organizations might engender collaboration among the individual persons who, as stakeholders in the organizations, stand behind the organizations and bear the consequences of their contractual activity; and second, contracts involving organizations might engender collaboration among the individual persons who, as the organizations' agents, front the organizations and contract on their behalves. I remain open to these possibilities and accept that my views here are preliminary only, so that contracts involving *1466 organizations may perhaps be brought within the collaborative framework by some argument I have not anticipated. But I am inclined nevertheless to reject both suggestions, and indeed for analogous reasons.

On the one hand, contractual promises made to organizations address only the organizations and not their agents or stakeholders. Such promises may be received by the organizations' agents and may inure to the benefits of the organizations' stakeholders, but this is not sufficient to make them promises in favor of the agents or stakeholders, who never become promisees themselves. The intentions in such promises make no reference to these individual persons but only to the organizations, so that a contractual promise made to an organization does not address the individual persons associated with the organization at all. A promisor in such a case simply does not adopt, through her promise, any intentions toward these associated persons, although the promise may of course affect these persons, and the promisor may carry previously existing intentions toward them (for example, intentions to benefit them) with her into the promise.

And, on the other hand, contractual promises that bind organizations also regard only the organizations and not their agents or stakeholders. Such promises may be triggered by the organizations' agents and may burden the organizations' stakeholders, but this is not sufficient to make the promises count against the agents or stakeholders, who never become promisors themselves. The intentions in such promises again make no reference to these individual persons (even if they are intentions of the individual persons who, as agents, actually speak the promises), but refer only to the organizations, so that a contractual promise made on behalf of an organization does not bind the individual persons associated with the organization at all. Nor do these persons adopt any intentions through the promise, although the promise may, of course, influence their intentions, not least because they may carry into the promise previously existing intentions that their organizations should keep their contracts.

One might say, therefore, that organizations are, as a general matter, freestanding with respect to the intentions and obligations in which the collaborative account of contract traffics. [FN106] Promises that make reference to *1467 organizations do not generally implicate the agents and stakeholders, out of whose actions they arise and to whose interests they inure, in any promissory relations of their own. This is not a hard and fast rule, to be sure, and some contractual promises that formally involve organizations only may in substance address the organizations' stakeholders or agents: When an organization is very small it may, within the relevant contractual practice, be understood as indistinguishable from its stakeholders, and even when an organization is larger, particular agents or stakeholders may become personally engaged in the organization's contracts, perhaps because of the intimacy or intensity of their involvement with the contractual practice in question. [FN107] In such cases, an individual person becomes, in the context of a contractual relation, identified with an organization, and may therefore participate in the intentional relations that the contract involves. But these are by their nature unusual cases, and in the more typical circumstance organizational contracts will not draw individual persons associated with the organizations into any collaborative relations.

The collaborative account of contract therefore seems not to apply, either directly or indirectly, to contracts that involve organizations. [FN108] Organizations cannot engage the values of respect and community that underwrite the collaborative ideal, and an organization's contracts draw neither its agents nor its stakeholders into collaboration. The theory of contractual obligation that I develop in these pages therefore does not, at least in any straightforward way, encompass contracts that involve organizations. This limitation does not, however, undermine the collaborative view's claim to capture the essence of contract or indeed its practical importance. To begin with, alternative approaches to contracts involving organizations succeed only on terms that reveal such agreements to be far removed from contract's conceptual core. And moreover, there may be good reason to assimilate contracts including organizations to the collaborative view in order to protect collaboration among individuals."

Posted by: Ethan Leib | Jul 18, 2005 4:15:28 PM

also (anticipating an objection to my comment): the fact of limited liability (both in the case of corporate stockholders, who are only liable to the extent of their share value, and in the case of citizens, who are only liable to the extent of their tax burden) doesn't seem to change the fact that those stockholders and citizens are taking an obligation to me. It's just a limited obligation. We have lots of limited obligations: if my nephew buys a car from you, and I co-sign the loan, my obligation is limited to the amount that my nephew doesn't pay. That doesn't mean that it's not an individual obligation...

Posted by: Paul Gowder | Jul 18, 2005 3:13:47 PM

Ethan: you know my autonomist biases, and I haven't read Markovits's piece, but one general question that comes to mind is: why can't type (2) and (3) contracts be compatible with the collaborative view? After all, a corporation or governmental entity is not -- except in the formalistic sense -- an entity in itself. It acts for and through an aggregation of people. It doesn't exist except as -- I suppose we can call it an epiphenomenon of the wills of the people who make it up, that the legal system (for perverse reasons of its own) has chosen to give some kind of contractual status to.

It would seem to me that (contrary to Markovits's apparent characterization of this view as an "ethical error") type (2) and (3) contracts are reducible to type (1) contracts: when I call up the cellphone company and sign up for a term of service, I talk to another human, qua human, who speaks in a representative capacity for the stockholders of the cellphone company, who are also humans, qua humans, and who make a collective obligation (imposed from the representative's words) to provide service to me in exchange for my obligation to pay money collectively to them. If my obligation to comply with a contract with my local sole proprietorship grocer arises from my obligation to treat that grocer as an end, then my obligation to pay my cellphone bill would seem to equally arise from my obligation to treat the stockholders of the company as ends, since it's finally their interests that are at stake and they are the recipient of my committment.


Of course, that doesn't mean that we can't make distinctions between types (1), and (2) and (3) (particularly (2)) in terms of the differential power relationships between the parties and consequent ability to break any kind of collaborative framework, but that's different from saying that we don't actually make a deal with people when we make them with corporations.

Posted by: Paul Gowder | Jul 18, 2005 2:32:49 PM

Why don't you read it and get back to me. It's quite a modest piece, I assure you. As for the ethics of overstating your theses in abstracts to get attention--we can debate that on another day.

Posted by: Ethan Leib | Jul 18, 2005 12:31:38 PM

This is a "form, not substance" comment. It's a good thing to propose new paradigms, new ways of looking at things, problems with widespread ways of conceptualizing issues. But if you say you're going to "expose a central shortcoming of all general theories of contract," you risk being dismissed by both law review editors and by scholars in the field, who are apt to feel rather irritated when half-baked new faculty tell them that everything they've ever done is flawed! You may be right-- haven't read your piece, and I'm no fan of markovits etc. But if you want people to take you seriously, tone it down.

Posted by: law prof | Jul 18, 2005 10:11:04 AM

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