Overview
This lecture introduces relational contract theory, contrasts it with classical and neoclassical theories, and explains its key features, criticisms, and place within broader legal studies.
Relational Contract Theory
- Relational contract theory emphasizes the social and communal roots of contracts, focusing on human relationships rather than just economic efficiency.
- Ian Macneil criticized neoclassical contract theory's focus on rational self-interest, arguing it overlooks the importance of ongoing relationships.
- Macneil, influenced by empirical sociological studies (notably Macaulay's work), observed real-world commercial practices where written contracts often take a backseat to business customs and trust.
- The theory contends that contract formation is gradual, involving ongoing negotiation and relationship-building, rather than a single event.
- Contracts exist on a spectrum: "discrete" contracts (one-off, minimal relationship, e.g. buying gas) to "relational" contracts (long-term, trust-based, e.g. complex business deals).
- Discrete contracts focus on detailed planning and legal terms due to low trust; relational contracts rely more on social norms and ongoing interaction.
- Business practices (such as those in the Australian Navy contracts) have adopted relational approaches, focusing on managing relationships and processes rather than exhaustive contract terms.
Criticisms and Application
- Critics argue relational contract theory lacks clear, determinate legal principles, as it originated from sociological observation rather than legal doctrine.
- Courts have begun to use the concept of relational contracts in disputes, sometimes importing duties like good faith into long-term, complex contracts.
- Business literature focuses on identifying and managing the relational "norms" that foster successful long-term contract performance.
Broader Legal Context
- Contract law interacts with other bodies of law: equity (remedies beyond common law), tort (public law obligations), and unjust enrichment (basis for restitution).
- Contract A (the current unit) covers contract formation: intention, capacity, offer, acceptance, consideration, and terms (express and implied).
- Contract B (the sequel) examines problems after formation: vitiating factors, estoppel, illegality, discharge, breach, and available remedies.
Key Terms & Definitions
- Relational Contract Theory — Focuses on the social and ongoing relationship aspects of contracts, not just isolated transactions.
- Discrete Contract — A one-off transaction with minimal relationship or trust between parties.
- Spectrum/Continuum of Contract Behavior — Range from discrete to highly relational contracts based on the degree of ongoing interaction.
- Norms (in relational contracts) — Informal rules and expectations governing behavior in ongoing business relationships.
- Equity — Legal principles that provide remedies where strict application of common law would be unjust.
- Estoppel — Doctrine preventing a party from acting contrary to a promise or representation when another has relied on it.
Action Items / Next Steps
- Read the article by Macaulay for further context on empirical contract studies (optional).
- Complete assigned readings from Patterson on the role of equity in contract law.
- Prepare questions or topics for discussion in the upcoming Zoom session.