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Contract Law Isn’t Even Contract Law
Yesterday, Peter Robinson had some short thoughts on marriage law being reduced to contract law. I got to wondering if most of us don’t make the classic mistake (codified in Sabrdance’s Laws, though I don’t recall the number) — “Don’t mistake the model for the reality.” It’s really easy to think of marriage as a contract. And it’s really easy to think how contracts work: there are provisions, everyone follows them to the letter, if someone doesn’t follow them there are specified sanctions, and the courts can sort it all out.
Now, I haven’t been involved in that many contracts, but I’m pretty sure that’s not actually how contracts work in real life because I listen to people who use contracts all the time. Here’s one recent example: “We set up a system that would in extremis function exactly as coldly, efficiently, impersonally, and legally as the most cartoonish games-mill dev studio in the world.” In the next paragraph, though, the author points out that they often ignored the contract-fudging, overlooking things and slackening up on the restrictions of the contracts. The host of that website has commented that he won’t work with anyone on a contract who he wouldn’t already work with over a handshake. I’ve read entrepreneurs talking about developing products and working with suppliers and venders saying similar things: contracts aren’t worth much if the handshake isn’t worth much.
There’s an entire subgenre of the management research literature addressing how organizations work with each other, and they often work on handshakes too. Even if they have contracts, they will ignore them to get the projects done. Notably, everyone involved has to know each other to make this happen. The clearest example of businesses that operate on a handshake are diamond dealers and garment manufacturers in New York City. The diamond dealers are all Jews, and many of them are family members. In the research, they said they couldn’t do their jobs—which often involve letting someone walk out of a store with tens of thousands of dollars of jewels with nothing but a promise to bring them back the next day—without high levels of trust. The garment district was more diverse, but not the supply chains. From design to rack chains that were entirely German or entirely Polish and, again, often based on family. Because of the need to trust deliveries that can’t be checked and make changes on the fly, the managers again thought contracts were useless (even if they did write them).
Step out of pure business: home loans are crazy, which is why, for a very long time, you had to borrow the funds from friends and family if you wanted to buy land. Megan McArdle went on at length several years ago on how our home mortgage markets rely on the fact that home owners won’t invoke the penalties to strategically default.
Academically, this was Coase’s major insight in “Theory of the Firm”: that contracts are so cumbersome and unwieldy that entrepreneurs would rather not use them, preferring instead to manage everything internally through much more flexible procedures — like an employee handbook subject to revision.
It seems to me that marriages work much the same way. That means, in order for marriages to work, you need very strong social norms, which in turn require a very thick society — one very rich in that great buzzword “social capital.” Contracts don’t replace that. We can pretend they do, but that’s because we analyze contracts within that thick social context. When we actually rely on the contracts, we are “in extremis.” Once that social capital is gone, we’ll discover that contracts don’t actually work the way we think they do, and we’ll fall back — as we always do — on using government to enforce contracts … but without any expectations on how to do so.
Published in General
Really? It seems to me Coase’s theory of the firm addressed marketing costs in general, not just the cost of making explicit contracts.
He describes marketing costs as “the cost of using the price mechanism”. These costs include the price of explicit contracts (when such contracts are used), but aren’t limited to it. Many exchanges done on (something approximating) an open market occur without signing explicit contracts. Buying groceries, for example.
I may have an implicit contract with my grocer that he’ll refund me if the strawberries at the bottom of the box are moldy, and I won’t lie just in order to get a refund. But I don’t have to sign anything. And that same type of implicit contract seems to govern many employer-employee relations as well.
Suggesting that explicit contracts are all that distinguish marketing costs from in-firm costs strikes me as a bit off.
I agree that contracts don’t replace the informal bargaining most of us are willing to do with each other to keep minor disputes from escalating into courtroom drama. Yet it seems this very act of informal bargaining establishes social norms. Not always the social norms you or I would prefer, but social norms nonetheless.
So yes, what’s actually written in a contract supplies the outer boundaries, for when we’re in extremis. But since we’re norm-making animals, once the outer limits are delineated, couldn’t we be trusted more to re-establish norms through informal bargaining if we’re given the freedom to do so?
I suspect even contractual marriage would be largely governed by informal, agreed-upon norms.
I work for a small company in the construction business. We pay very close attention to contract terms.
Last time I was working consulting through a large corporation, we had one engagement where I came into the meeting and the customer says, “Oh, we don’t want anything like that; we want this.”
“So, why did you sign the contract that is for that?”
“We didn’t really understand what the contract was saying, but we wanted to do business with you.”
Four word Dilbert reference: Bill Gates’ pool boy.
In hindsight, it was also a strike against the guy who negotiated the contract on our side. Charming fellow, as many salesmen are, but he had no clue how to do his job.
Contracts in my business server one of two functions:
1. Regulating the minutia. We have lots of capital equipment, and we have service agreements in place to cover repairs, service calls, etc. Boilerplate CYA stuff.
2. Custom Product Development. We insist on these along with hefty down payments only on large scale projects, just so companies know we’re serious and they’d better be too. Saves trouble when a company tries to back out of a 1000 pc order after taking just 20 pcs in delivery (after insisting at the beginning that this project had a 10K life).
Everything else is just handled in routine procedures.
BUT….
Let me tell you about about the ISO / 6 Sigma / LEAN / {jargony thing} suppliers and customers. Their OCD adherence to these standards makes them some of the biggest PIA accounts. We avoid doing any custom work for these guys because every bloody design change, even in concept development, has to be documented, signed in triplicate, buried in a peat bog, dug up, filed, lost…
And when they screw it up anyway they blame us! Then they start waving the paperwork at us.
(cont from 5)
This is all a roundabout way to say that the moment the contract gets whipped out you can effectively write off the relationship. The real business in business is handled in accepted cultural practices, handshakes, business lunches, social calls, etc.
The same goes with employees too. The moment an employee starts in on the Handbook you know they’re looking for an angle against you, rather than just trying to work with you to address their issue.
Contracts as a new basis of marriage? You would only feel these are necessary if you are certain that your marriage is dubious going in, and if you don’t trust your spouse not to stab you in the back.
If you let yourself become overly dependent on contracts you run another huge risk: events your contract did not anticipate.
Case in point:
I had to deal with a contract manufacturer who was building a sub assembly for us. At their insistence I spent months documenting in excruciating detail how this thing went together, trying to anticipate every way they could mis-read the Work Instructions.
Well, they beat me anyway. Circuit boards come in arrays (say a grid of 4 x5). You put the parts in then break up the array into individual boards. Well this was a very small board (about 1″ by 1.5″) so I insisted that they not use any automated equipment to separate the array as they had a bad track record. I instructed them to separate by hand, with a note that they could use pliers on an empty area of the board for leverage.
So the assembler used giant pliers to grip the whole of the board, crunching the parts and killing it. This supplier then insisted it was my fault for not telling them where they should not grip. This mindless legalism rather soured that relationship.
As a process management consultant, I happen to agree. Filling in reports takes the place of getting actual work done. I have talked clients out of going there and steered them towards ways of having built-in workflow systems. If you want to see really messed up process management efforts, though, try the government. It doesn’t matter if the people doing the work know that the process documentation exists or if they can read and translate it, but you have to document the processes.
And someone wants to apply this to marriage?
Ah the employee handbook.
I frequently travel 119 miles to job sites, and our out of town distance to get per diem is 120 miles. they just changed it to 125 yesterday. If people wanted to start denying my expense reports over 7 miles, they would find that I am an incredibly effective paperwork nazi.
That said, I do custom technology implementations, and I write statements of work so there is no confusion as to what is going to happen while I am on site and what the system will do when I leave site. I find that when you do your fighting on the front side of the project you are the hero at the end with delighted customers who become your biggest evangalists. But you have to break through the fog and a common unfortunate assumption that a fixed price bid comes with an assumption of unlimited work and changes.
Also I think the value of the contract is its public commitment features. People when making a public commitment to others are more likely to stick to it.
That’s the other side of the equation too – when an employer whips out the employee manual over something like that then the employer is misbehaving too. People have to show some humanity and sense and recognize that contracts and the like are there only for when things get really out of hand.
I think that’s one of the areas that our government is getting so wrong lately – overreaction to minor offenses, and neglect and abuse of the most salient points and main objectives of our laws. It’s like dealing with a cop who will confiscate your car and raid your house over doing 58 in a 55 but who ignores the arsonist or the bank robber.
I don’t disagree with the main thesis of this post (that contracts are poor substitutes for trusting relationships), but I think the author is forgetting that the alternative being discussed was the law.
And in that context I still find contractual relationships much more harmonious than relationships between two parties whose terms are governed by the state.
Doesn’t that presume that the state will enforce contracts impartially? It’s not hard to find news reports of contract litigation in which the judge has effectively rewritten or voided a contract because the terms were (ex post) considered unfair, or contrary to public policy. And that’s before you consider sloppily drafted contracts (of which I’ve seen plenty). Remember the way FDR voided contracts by making “gold clauses” illegal? It seems to me that faith in consistent government enforcement of private contracts in naive — especially if those contracts start to take on a standardized form.
Even if it is just a relationship between two individuals/companies and will never come into the civil courts, I believe being explicit in what the agreement is will be helpful. A friend of mine goes by a simple rule of three questions:
If you can’t give three “Yes” answers, do not sign.
This is an argument for keeping contracts about marriage focused on what happens if one of the participants wants to end the marriage.
No one has suggested it’s a good idea to try to use them to determine who does the laundry.
Actually, such things have been done. Several years ago (maybe twenty?), there was even a marriage contract that specified frequency of sexual relations. That particular marriage contract was very specific and many, many pages long.
Right, but notice how few of those exist now, despite how it’s possible now. The point is, clearly very few marriage contracts would attempt such a thing.
Correct. Contracts do not exist for when things are going well. They exist for when things are NOT going well.
Your general point is valid, your semantics are not. And that was my point. Had you said, “Few have suggested . . .” I would have had no basis for comment. Precision is important, especially when discussing contracts and contract law.
Oh, so you’re that guy….
What? You didn’t know by now?
There is a story, perhaps apocryphal, about a rock band that insisted that any venue where they performed provide a big bowl of M&M’s, with one color removed. They later admitted that they did this to test whether the venue was actually reading the minutiae of the contract and taking it seriously down to the smallest details.
It was Van Halen, and the story is true.
I agree, but again, look at the alternative in this situation: government law – also enforced by the courts.
As many times as I’ve heard of a judge effectively re-writing a contract, I’ve also heard about a family court judge stripping away a father’s right to see his children based on unsubstantiated claims made by a vicious mother in a divorce trial.
Of course judges shouldn’t be deciding these types of issues. But we crossed that Rubicon once we accepted divorce as a standard outcome of marriage. Given that reality, I would rather have contractual marriage – which only get sent to court when there is a major disagreement – than the current situation, in which nearly every divorce needs a judicial stamp of approval.
Isn’t the reason for the existence and use of the Prenuptial Agreement?
I don’t remember the way FDR voided contracts by making “gold clauses” illegal. Maybe I never knew.
Can you summarize?
I realize I could look it up on wikipedia or google, but I assume it would lack a right-of-center analysis, and I assume it would lack concision.
This is a very good point, but the same point can also be made about the law.
Previous law made divorce very difficult. But people wanted to escape the bonds of their marriages, so the democratic process made it much simpler to get a divorce. Today, marriage has effectively been stripped of one of its few core tenets: a lifelong partnership.
In other words, the law also can’t replace social capital. And not only when it comes to marriage: any of us could easily get away with a number of petty crimes on any given day, but we don’t – not because we’re afraid of the law, but because we know being honest pays dividends on a societal level.
Which? FDR’s action? Judges in various suits rewriting? Or something else?
Makes sense.
As someone else in the thread said, contracts are only there for when things go bad.
Contracts only work if the other party knows you will win in court and are willing to fight it out. If you aren’t willing to fight or don’t have the resources to win, the other party can push you around.
Contracts are only as good as your willingness and ability to enforce them.
A company I worked with had a contract with a bigger company and things went sour. We had to choose, go to court, or settle for getting less out of the relationship. We settled.
FDR’s action.
I have updated my original comment.
Before I wrote
> “I don’t remember. Maybe I never knew. Can you summarize?”
Now it reads
> I don’t remember the way FDR voided contracts by making “gold clauses” illegal. Maybe I never knew. Can you summarize?”