Revisiting the Contracts Scholarship of Stewart Macaulay, Post VIII: Gordon Smith

This is the eighth in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay.  More about the online symposium can be found here.  More information about this week’s guest bloggers can be found here.

Gordon Smith is Associate Dean and Glen L. Farr Professor of Law at BYU’s Reuben Clark Law School.  

Doctrinesof Last Resort 

Last week I had occasion to re-read “The Pathof the Law” by Oliver Wendell Holmes Jr., and I was reminded of my manydiscussions about contract law with Stewart Macaulay (pictured, below left). During my time teachingat Wisconsin, the Contracts professors held weekly lunches to discuss thematerials we were covering in class. These discussions would often turn to thefundamental question that Stewart began to wrestle with in his famous study“Non-Contractual Relations in Business” and that has fascinated him ever since,namely, “What good is contract law?”

 In “The Path of the Law,” Holmesoffered a well-known and provocative perspective on this question: the purposeof law is to constrain “the bad man.” Whether Holmes actually believed that onewho “want[s] to know the law and nothing else … must look at it as a bad man”is the subject of some dispute, but the bad man has become an importantstarting point for thinking about law for generations of law students andremains a powerful image for legal scholars. 

In “Non-Contractual Relations in Business” – and in our lunchtimediscussions – Stewart didn’t seem to have much faith in law to constrain thebad man. Mark Suchman deftly summarized the core insight of Stewart’s mostfamous work: “Legal doctrine and legal recourse often matter very little . . .since most transactions are governed, in practice, by informal community norms,enforced by informal social sanctions.” On more than one occasion, therefore, Ipressed Stewart on whether his emphasis on the impotence of contract law underminedour teaching of the course to first-year law students.

But the point for Stewart was never thatcontract law is irrelevant, only that it is sometimes overemphasized by legalscholars, particularly legal scholars who rely on highly reductionist theoriesof human behavior. Indeed, in his more recent article, “The Real and the PaperDeal,” Stewart observes, “doc­trine can matter.” In my contribution to the book, I focus on a collection of legal doctrines, which I call the“doctrines of last resort,” and I argue that these doctrines matter becausethey facilitate contract formation.

The doctrines of good faith and fair dealing,fiduciary duty, and unjust enrichment are doctrines of last resort because theyare activated only when all other potentially applicable commands fromconstitutions, stat­utes, regulations, ordinances, common law decisions andcontracts have been exhausted. In these circumstances – where positive law andprivate ordering are otherwise incomplete – contracting parties relyheavily on informal social sanctions to protect against opportunism, but thedoc­trines of last resort reinforce these social sanctions. Rather thanregulating all of the deviations and adjustments that are common in contractualrela­tionships, doctrines of last resort constrain extreme deviations fromsocial norms, reinforcing agreements precisely in those contexts where informalsocial sanctions are weakest.

In my essay, I introduce the notion of“boundary enforcement,” arguing that the doc­trines of last resort are unitedby a similar objective: the establishment of boundaries on self-interestedbehavior to mitigate opportunism.  Thisconcept is developed further in my working paper (with Jordan Lee) entitled Discretion, which focuses on the role of the duty of loyalty.  Two insights about boundary enforcement arecrucial to that paper and not limited to fiduciary law. First, “boundary enforcement”suggests that courts should respect the reasonable exercise of private decisionmaking within the boundaries established by the doctrines of last resort. Incontract law, for example, courts should generally respect the deals struck bythe parties, even if the courts would have struck a different deal. Second,when boundaries are not established by the contracting parties, courts oftenturn to industry customs and social norms to establish the limits ofself-interested behavior, and this is a sensible way to meet the reasonableexpectations of the parties. By establishingthe boundaries of opportunism in this way, the doctrines of last resort notonly constrain the bad man, but embolden private parties to form contractual relationships,thus servicing another important value in law: the promotion ofentrepreneurial action.

[Posted, on Gordon Smith’s behalf, by JT]