critique of the relational theory of contract

8/18/2019 CRITIQUE OF THE RELATIONAL THEORY OF CONTRACT

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C RITIQUE OF THE R ELATIONAL T HEORY OF C ONTRACT

METHODOLOGY

R ESEARCH P ROBLEM :

The validity of the reasons given by the Relational Theory of contract law for

criticising the Classical Theory of Contract Law.

R ESEARCH Q UESTIONS AND H YPOTHESIS :

Question 1: Whether Macneil in his theory has satisfactorily established the

new concept of relational contracts introduced by hi !

"ypothesis: #es$ Macneil has satisfactorily established in the Relational

theory of contract law the concept of relational contracts.

Question%: Whether Macneil hasn&t sufficiently substantiated his

opposition to the Classical Contract theory regarding role of

consent."ypothesis #es$ Macneil has sufficiently substantiated his opposition to the

Classical Contract theory regarding role of consent.Question': Whether Macneil has studied the role of (consent& with respect

to (tacit assu ptions&!"ypothesis )o$ Macneil&s study of consent with regard to (tacit

assu ptions& isn&t co prehensive.

Question*: Whether +an Macneil&s relational theory of contract is

influenced by his focus on e,change to the e,clusion of any

treat ent of its functional relationship to the conception of

property that e,change presupposes!

1


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"ypothesis #es$ the Relational theory is influenced by his e,clusive focus

on e,change to the e,clusion of any treat ent of its functional

relationship to the conception of property that e,change

presupposes.

Question-: Whether or not (relationalis & is the core concept contributing

to consent for ation in the contract theory propounded by

Macneil!

"ypothesis #es$ (relationalis & is the core concept affecting consent

for ation.

R ESEARCH METHODOLOGY FOLLOWED :

This pro ect report has been prepared using secondary sources of reference. Research

cards have been used for collecting data.

M ETHOD OF REFERENCE : ML/ 0heet has been used for ethod of reference

INTRODUCTION

The leading conte porary critic of the classical theory of contract law

has been +an Macneil. Macneil 1234$ *56*37 8rofessor +an Macneil is a strong

proponent of a hu ani9ed view of contracts is and often dee ed the “father”

f re!at" #a! $ #tra$t the r%& The rich social co ple,ities of his life

probably contributed to Macneil&s escape fro the narrow nuts of classical and

neo6classical contract into the openness of relational contract. There$ relativelydirect transactions are i portant but only as part of a broad landscape.

Macneil went through hundreds of / erican agree ent to agree; cases and

concluded that these agree ents to agree; a


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This e,perience led Macneil to realise that only a fully relational approach can

deal ade=uately with either relations or the relatively discrete transactions

e bedded in the . Ca pbell %441$ -7

T HE R ELATIONAL T HEORY OF C ONTRACTS 'S & THE C LASSICAL THEORY

Macneil accepted the fact that the classical law of contract has been of

enor ous and substantial value. >ut still he has sought to reveal the

shortco ings of the philosophy articulated by the classical law that produces

incoherence and e pirical irrelevance. >y doing so$ he has atte pted toconstruct a coherent and relevant rival law of contract.

Macneil sub its that the classical contract law is inefficient in dealing

with present day contracts li


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Macneil&s a or achieve ent has been stated by any to be the open

inded analysis of contracting by which he revealed a class of relational

contracts in which action predo inantly is so oriented in the inds of the

parties towards conscious co6operation that a contract of this class no longer

stands alone as in the discrete transaction$ but is part of a relational web;. /ll

the negotiating tactics adopted by the parties concerning for ation$

perfor ance$ variation$ ter ination and application of re edies can be

e,plained as being part of this co6operative attitude.

+n the process of developing his relational theory of contract law$Macneil has criticised the classical theory of contract law because of the

reasons given in brief below:

1. The /,io atic and ?eductive )ature of Classical Contract Law.

Classical contract law is a,io atic in nature i.e. it ta


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>AT$ +an Macneil proposes that law ust be ustified by social

propositions as a,io atic theories of law cannot be sustained$ and can&t be

ustified on the ground that it is self6evident. @or this$ he tried to bring to the

fore the distinction between the ustification of a doctrine and the ustification

for following a doctrine. The relational theorists have e,plained this as: Once

a doctrine has been adopted it may justifiably be followed, either in the

interest of stability, reliance, and the like, or because of social reasons for

following rules that have been adopted in a certain way. However, those

elements only justify following the doctrine; they do not justify the doctrine

itself.”

?eductive theories are no ore sustainable than a,io atic theories as all

doctrines are always sub ect to as6yet6unarticulated e,ceptions based on social

propositions$ which can be ade because the social propositions that support

the doctrine do not e,tend to a new fact pattern that is within the doctrineBs

scope. %444b$ 34-7

/ccordingly$ the applicability of a doctrine to a fact pattern that falls

within the doctrineBs stated scope is always dependent on a conclusion thatsocial propositions$ on balance$ do not ustify creating an e,ception for the fact

pattern. The concept$ i plicit and often e,plicit in classical contract law$ that

contract law can be developed a,io atically and deductively$ cannot be

sustained.

%. Many Rules of Contract Law 0hould be +ndividuali9ed$ 0ub ective$ or

>oth. The basic principle that should deter ine the content of contract law is

that the law should effectuate the ob ectives of parties to a pro issorytransaction if appropriate conditions are satisfied and sub ect to appropriate

constraints. >ecause the ob ective of contract law should be to further the

interests of the contracting parties$ the rules of contract law ust often be

for ulated so that their application will turn on the particular circu stances of

the partiesB transactions and$ in certain cases$ on the partiesB sub ective

intentions. Whether a given rule of contract law should be ob ective or

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sub ective$ and whether it should be standardi9ed or individuali9ed$ are

atters that ust be decided on a rule6by6rule basis. The overriding preference

of classical contract law for ob ective$ standardi9ed rules was incorrect.

'. Contract Law 0hould Taecause pro issory transactions

seldo occur in an instant of ti e$ contract law$ if it is to effectuate the

ob ectives of parties to pro issory transactions$ ust reflect the reality of

contracting by adopting dyna ic rules that parallel that reality$ rather than

static rules that deny that reality.

*. Classical Contract Law assu es the e,istence of contracts which have

been called as discrete contracts; by Macneil. +t is i plicitly based on a paradig of bargains ade between strangers transacting in a perfect ar


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ongoing relationship$ and often in a bilateral onopoly. Classical contract law

was static relational contract theory is dyna ic.

This re ection of the basic approaches and assu ptions of classical

contract law even if considered to be true and ustified however$ what is

re=uired is constructing a body of relational contract law that involves ore

than ust re ecting the approaches and assu ptions of classical contract law.

There needs to be a new body of legal rules for ulated$ based on approaches

and assu ptions that are ustified by orality$ policy$ and e,perience. This is

so ething which the (Relational theory of contract law& doesn&t do or

probably cannot.

Dne of the ain things that haven&t been given discussed in this theory is a

proper definition of relational contracts; which would in clearly establish the

difference between relational and non6relational contracts 66that is$ in a way

that carves out a set of special and well6specified relational contracts for

treat ent under a body of special and well6specified rules.

0ince Macneil has placed discrete; and relational; contracts at the two

opposite sides of the continuu $ it ight be said that the definition of relational contracts as those contracts that are not discrete.; Eic Foldberg has

defined a discrete contract as a contract in which no duties e,ist between the

parties prior to the contract for ation . . . .; 125G$ *27 "owever$ even in the

case of a relational contract no duties can e,ist under the contract prior to its

for ation. Df course$ the parties ay be under other duties to each other prior

to for ation$ but that is true whether the contract is relational or discrete.7

0i ilarly$ although a duty ay arise$ prior to the for ation of a contract$ tonegotiate the ter s of a contract in good faith$ that duty arises as a result of a

preli inary co it ent$ or on the basis of preli inary actions taesides$ Macneil treats (discreteness& as an end of a spectru rather than

as a definition of a body of contracts. Contract lying at the discrete end of the

spectru have the characteristics66for e,a ple$ less duration$ less personal

7


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interaction$ less future cooperative burdens$ less in the way of units of

e,change that are difficult to easure66and as lying at the relational end of the

spectru if it has ore of the relevant characteristics. / spectru approach is

certainly acceptable if we view relational contracts #!% fro a sociological

and econo ic perspective.

"owever$ the enterprise of contract law entails the for ulation of rules$

and a spectru approach is inade=uate to that enterprise$ because it cannot be

operationali9ed. Ander such an approach$ any or ost contracts will have

both relational and discrete ele ents. /ccordingly$ e,cept for the relatively

few cases that lie at one end of the spectru $ or that satisfy or fail to satisfy

every ite on the chec


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contracts on perfect spot ar


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M ACNEIL (S 'IEW ON C ONSENT (Consent& is an essential co ponent of contract for ation. +t belongs at

the heart of contract law. >arnett 123*$ 1%%'7 Contractual obligationordinarily occurs i.e. an agree ent beco es a contract only when one person

anifests an intention to create legal relations or an intention to be legally

bound to fulfill a co it ent.

Macneil distinguishes consent fro either choice or voluntariness.

+ndeed$ he views the binding =uality of contract as potentially choice6

restricting$ even choice6destroying. "e however uses different concepts of

consent when critici9ing the traditional contract theory and another when

developing his own. When critici9ing traditional contract theories$ Macneil

i plicitly assu es that the only actual or real consent is sub ective or

conscious consent;. "e repeatedly disparages the theory of ob ective assent

adopted by nearly all classical and neoclassical contracts theorists as fictitious.

+n su $ acneil thought that the only true consent is )*e$"f"$ *r +")e

,e#-"#e!% $ ++-#"$ate.& /ll else is fiction.

While developing his own theory$ Macneil a


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relations or consent6to6be6legally6bound and those that are not consented to in

this anner cannot be dis issed by hi as eaningless$ or ore i portantly$

functionless. >arnett 122%c$ 11357

Macneil in his theory does not lay enough stress on the i portance of

showing consent when the all pervasive i plied assu ptions of the planning

conte,t are to be applied in the conte,t of consent. Macneil is of the opinion

that one i portant aspect of inco plete planning in relations is the ta$"t

a))-+*t" #& ; Macneil 125*$ 5157

)ow$ the =uestion to be as


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tacit assu ptions can be used to also affect the eaning of consent$ especially

when the parties have not consciously ta


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Macneil discusses the scope of consent as follows: Since virtually any

contract has far more comple conse!uences than anyone can possibly have

in mind at once, one of two things must happen. "ither the scope of the power

created is beyond the realm of conscious consent, or important aspects of the

contract remain subject to free e ercise of further choice by the consenting

party.

Tacit assu ptions need not be e,isting on every corner or eventuality

during the ti e of contract for ation but what has to be seen here is that when

actual consent conscious consent7 e braces all the tacit assu ptions which

again e brace the consciously ade assu ptions this creates a vast do ain of

the actual consent far beyond what Macneil could ac


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theory that includes consent6to6default6rules and the non conscious tacit

assu ptions that pervade contract as part of its conception of consent.

MacneilBs argu ents against consent$ then$ apply only within a

particular conte,t. "e offers nothing to refute the i portance of a conception

of consent that lies outside that conte,t. >ecause a consent theory of the sort

we favour is co patible conceptually with either highly discrete and

presentiated or highly intertwined contracts$ argu ents effective against

theories identifying consent e,clusively with fully specified$ conscious

consent at the o ent of for ation are inapplicable to our approach.

Hnhancing discreteness re=uires the ignoring of the identity of partners

to a transaction lest relations begin to barge in. /lso ?iscretion calls for

avoiding ultiple parties. 0ince the ideal sub ects of discretion transaction are

oney on the one hand and an easily easured co odity on the other$

discreteness is enhanced by treating the sub ect of e,change as uch li


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largely apart fro the function played by the liberal concept of several

property.

+n one passage$ Macneil considers$ and then isses$ the


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any principled distinction between enforceable and unenforceable

co it ents.

Second $ MacneilBs relational theory taegin contractual 0earch Ter Hnd solidarity$ 57 the lin


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houses and thereby contribute to a ore


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MacneilBs uncharacteristic silence on the nature and scope of the

property rights that$ he concedes$ underlie legally enforceable contracts

significantly affects his treat ent of contractual freedo . )otwithstanding

that his earliest contract writings distinguished between freedo fro and

freedo to contract$ fro then to the present$ Macneil has consistently

aintained that freedo of contract is a isleading isno er that is better

called the power of contract$ which corresponds to freedo to contract. With

rare e,ceptions$ he has focused e,clusively on this aspect of contractual

freedo whenever the sub ect arose.

"is neglect of freedo fro contract is directly related to his neglect

of property and its functional relation to contract. @or Macneil considers

freedo fro contract to be an aspect$ not of contract theory$ but of what he

ter s basic property and liberty rights :

The basis for the right not to contract is so obvious6and one would thin<

especially to those trained in econo ics6that it hardly see ed necessary at the

ti e to e,plain it or to e,plain that the basis is not to be found in the power of

contract. +t arises out of the basic property and liberty rights underlying the

institution of contract. 8roperty rights are rights to have others not interfere

with possession$ use$ etc.$ and nor ally these include rights not to have to

contract with others wishing to deprive the rights holder of those rights by

agree ent.

MacneilBs relational theory of contract$ therefore$ ignores the vital

social functions perfor ed by freedo fro contract because it ignores thesocial functions of property rights as well as the functional relationship

between property and contract.

observation to this specific conte,t. Moreover$ because he generally ac


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More specifically$ it ay be a ista


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relations that they re=uire the protection of the entitle ents provided by

several property and freedo of contract and also the protection of the rule of

law7. The ore all6enco passing$ and potentially stifling$ a society really is$

the ore that individualistic rights >arnett 122%c$ 1%4-7 are needed to

protect the e bers of a society fro each other. >y bending against the

potentially overpowering social tide$ the liberal conception of ustice and the

rule of law of which consent is a crucial part that shelters very fragile

individuals and associations. /to istic individuals would need no such

protection.

There is no o ent while contractual negotiation is being done$ at

which ti e every right and obligation of contracting parties is una biguously

e,pressed. "ence$ so e principle is needed to help parties to an e,change$ as

well as third parties charged with law enforce ent$ assess whether

reinforce ent to use MacneilBs ter 7 of the e,change by legal coercion is or

is not warranted. This social function$ which is as relational as any other$ is

best perfor ed by consent. >arnett 122%a$ 3-265'7 When consent is tacit or

non6conscious$ it&s not easy to discern consent6to6create6legal6relations

>arnett 122%a$ 35-633-7 and thus$ this principle can be abused. "owever$ this

principle can be ustified if it is shown to be the best way of dealing with a

social proble . Consent can be ustified as enabling contracting parties and

others to distinguish enforceable fro unenforceable co it ents in a

anner that addresses the serious social proble s of arnett 122%c$ 1%4*7

The liberal principles of contract aarnett 122%b$ G-7. Macneil&s view on pairing

co unitarianis with liberalis renders uncertain the i portance of his

concept of relationalis $ because if we accept his ideas of co unitarianis

and its role in deciding consent$ then i portance of (relationalis & with regard

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to consent beco es =uestionable. Macneil hasn&t e,plained his stand on the

relative i portance of co unitarianis and relatinoalis . This eans that

(relationalis & ight not be the core aspect of his theory.

C ONCLUSION

Relational contract theory has helped bring to the fore two of the funda ental

weaecause there is no significant difference between

contracts as a class and relational contracts$ or virtually all contracts are

relational7 relational contracts ust be governed by the general principles of

contract law. Macneil in his theory hasn&t elucidated the definition of

relational contracts and its distinction fro the so6called discrete contracts

Thus$ our f"r)t hypothesis$ that Macneil in his theory has satisfactorily

established the new concept of relational contracts introduced by hi $ is

incorrect. The conclusion with respect to the )e$ #. research =uestions is that

his conception of consent when critici9ing traditional contract theorists is

sub ective$ however$ it is under ined by his broader$ ore realistic$

conception of consent when developing his own theory. "ence$ our hypothesis

was wrong because Macneil hasn&t sufficiently substantiated his opposition to

the Classical Contract theory regarding role of consent. Th"r.!%/ when

MacneilBs ac


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in a way discounts the i portance of the concept of (relationalis & introduced

by hi . Thus$ the hypothesis of the fourth =uestion is incorrect. "owever$ this

is only stated$ it hasn&t been established sufficiently.

22


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WDRN0 C+TH?:

125*7 Macneil$ +an R. The Many @utures of Contracts. 0. Cal. L. Rev. *5125*7: G34

125G7 Foldberg$ Eictor Towards an H,panded Hcono ic Theory of

Contract; 14 O. Hcon. +ssues 125G7 :*-

1253a7 Macneil$ +an R. Contracts: H,change Transactions and Relations;

1%61' %d ed. 12537

1253b7Macneil$ +an. R. Contracts: /d ust ent of Long6Ter Relations

Ander Classical$ )eoclassical$ and Relational Contract Law; 5% )w. A.L. Rev. 3-*$

12527 H. Willia son$ Dliver. Transaction6Cost Hcono ics: The Fovernance

of Contractual Relations. O.L. P Hcon. %% 12527: %''6%'G

12347 Macneil$ +an R. The )ew 0ocial Contract: /n +n=uiry into Modern

Contractual Relations; Mod. L. Rev. ** 12347: %46G-

123*7 >arnett$ Randy H. Contract 0cholarship and the Ree ergence of

Legal 8hilosophy. "arv. L. Rev. 25 123*7: 1%%'.

123*63-7 Macneil$ +an R. . The )ew 0ocial >ureaucracy$ Liberalis $ and

Co unity6/ erican 0tyle. )w. A. L. Rev. 52 123*7: 24462*G.

123-7 Macneil$ +an R. Relational Contract: What We ?o and ?o )ot

Nnow; Wis. L. Rev. 123-7: *3'6-%*

122%a7 H. >arnett$ Randy The 0ound of 0ilence: ?efault Rules and

Contractual Consent. Ea. L. Rev. 53 122%7: 3%16335

122%b7 H. >arnett$ Randy The @unction of 0everal 8roperty and @reedo of

Contract. 0oc. 8hil. P 8olBy 2 122%7: G%.

122%c7 >arnet$ Randy H. Conflicting Eisions: / Criti=ue of +an MacneilBs

Relational Theory of Contract. Eirginia Law Review 53.)o. - 122%7:

115-61%4G.

%444a7 Macneil$ +an. Relational contract theory: challenges and =ueries.

)orthwestern Aniversity law Review$ 2* %4447: '.

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%444b7 Hisenberg$ Melvin /. Relational Contract Theory: Ananswered

Questions; 2* )w. A. L. Rev. 34- %4447

%4417 Ca pbell$ ?avid . the relational theory of contract: selected wor

critique of the relational theory of contract

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