CONTRACT'S COVERT MEDDLERS.

• Author: Winsberg, Sarah

INTRODUCTION 1266 I. CONCEPTS FOR LOCATING THIRD-PARTY INFLUENCE 1271 A. Toward a New History of Contract 1272 B. "Of the Subject-Matter of Contracts" 1275 II. PRECURSORS 1278 A. Local-Level Contract Law in Early America 1279 1. The Domain of Justices' Law 1279 2. Formal Local-Level Contracts 1283 3. Unwritten Contracts and Default Rules 1286 4. "Partner Wanted" 1287 B. The Mercantile Law of Contracts for Partnership 1290 III. CLASH OF Two LEGAL FRAMEWORKS 1294 A. Enabling Local Difference 1296 B. Commercial Law's Takeover 1299 C. A Bright-Line Test 1302 D. Beyond the Bright-Line Test 1305 E. Local Small-Business Norms as Eraucl and Mistake 1312 IV. GRAPPLING WITH THIRD-PARTY PRESSURE IN MODERN CONTRACT LAW 1316 A. Third-Party Preference in Contract's Background Rules 1317 B. Legislative Remedies for Third-Party Pressure on Individual Contracts 1321 CONCLUSION 1326 INTRODUCTION

Every contract exists within a larger world. It meddles in the interests of a wide variety of other actors: the parties' customers and suppliers, their investors and employees, their creditors and debtors, and more. (1) Some of these third parties, in turn, want to meddle back. (2) They ask courts to enforce their own understandings of the contract, if it is disputed, over those of the parties. They seek default rules favoring their interests, and they may even try to limit which kinds of contract will be legally enforced. When third parties--often creditors--succeed in shaping doctrine, they constrain or replace parties' power to form relationships on their own terms.

This Article recounts a troubling historical example of creditor influence on contract doctrine. In the early nineteenth century, creditors argued strenuously for new rules governing partnership contracts within the small stores and workshops that owed them money. These contracts were, at the time, small businesses' most important tool to organize their own internal structure. By revisiting long-forgotten state court cases and contemporaneous legal literature, I show how this litigation ultimately erased an alternate system of norms and legal dispute resolution within American small business in favor of a rigid distinction between partnership and employment. Setting aside and even criticizing parties' actual intentions, courts, at the behest of creditors, imposed new limitations on the ways these businesses could mix relationships of labor, ownership, control, and liability. The undesired transformation of these small businesses, and the lost promise of their now-vanished contractual norms, demonstrate the dangers of unexamined third-party influence on contract doctrine.

Hiland Barton's hotel in Eagle Bridge, New York was one of those small businesses, unwillingly transformed in 1864. (3) Hiland ran his hotel with the periodic assistance of his brother Eli, who lived at the hotel with his own wife and children and also operated a small store nearby. (4) The hotel relied on liquor dealer John Conklin for its libations--and it was the hotel's running debt to Conklin that would soon bring the brothers onto unexpected legal terrain. When Conklin's agent arrived to check in on the hotel's needs, he found Eli on the job. Eli told the agent, "[W]e are out of Bourbon, and I guess you had better send it up," busying himself with the hotel's daily chores as Conklin's agent observed. (5)

No intentionally formed contract bound the Barton brothers' relationship of mutual aid. But Conklin, suing the hotel for its outstanding balance on the liquor, asked the court to read one in. Conklin argued that Eli's words had implied that he was Hiland's partner. (6) That implication, in turn, would make Eli as liable for the hotel's liquor debts as Hiland was--even if they had never intended to form a partnership and would not be held partners for other purposes. (7) The New York Supreme Court sided with Conklin, placing responsibility for the miscommunication squarely on the Bartons' shoulders. (8) To the court, Eli's loose language of familial entrepreneurial cooperation ought, instead, to have matched the precise business norm of the merchant he was dealing with: "[H]e should have said, with frankness, that he was not a partner, and have repudiated the idea that he had any connection with his brother's business." (9) Of course, it would have been difficult for Eli to repudiate any connection with his brother's business while simultaneously assisting with its liquor purchases. But to the judges considering the case, the Bartons held the responsibility to arrange their own relationship on terms familiar to potential third parties like Conklin--or risk having a court do it for them.

A century earlier, in eighteenth-century Anglo-America, sophisticated merchants and local small entrepreneurs like the Bartons would have lived in essentially separate worlds. Back then, each group resolved disputes in its own kind of legal forum, and each held estahlished, shared norms that shaped and limited the terms of the contracts made within the community. (10) In the early decades of the nineteenth century, however, merchants with cosmopolitan ties hegan to take a greater interest in local enterprises." When their loans to and investments in these concerns went had, requiring retrospective inquiry into authority and liability within these small businesses, merchant third parties asked courts to reread small business contracts according to merchant norms and background rides, even if those readings went against the parties' actual intentions. (12) Courts responded to their concerns, reshaping doctrine and rewriting contracts to oblige third-party creditor litigants.

In cases like Conklin v. Barton, creditors of small businesses disputed with their borrowers over the kind of participation that would mark someone as "partner" within the enterprise, a key question that determined who could be liable for debts, among other related issues. (13) Litigants debated what should be assumed about a business's ownership, control, and labor, and whether contracting parties deserved to be penalized if they had not rendered their relationships legible to the sophisticated commercial world. Small businesses and their creditors brought different expectations to the contracts they formed. Each group relied on a robust set of background rules, generally known within the community and enforced by law, to fill out the terms of their contracts beyond those specified. Creditors, however, conducted a successful campaign to force small businesses into a choice between two business forms, neither of which precisely matched their intentions. (14)

Just as in the nineteenth century, today's courts regularly adjudicate between third-party interests and parties' own interests--even though they frequently fail to recognize it. Indeed, substantial parts of present-day contract doctrine, particularly in substantive areas like partnership law, likely reflect third-party advocacy for default and interpretive rules that favor their interests. (15) This allocation of interpretive priority may well have advantages in some instances. In other instances, however, it is harmful, as my historical research shows. What is striking is that the balance of third-party and contracting-party interests often goes unexamined as a matter of doctrinal principle and substantive fairness. The tension between third-party and contracting-party expectations is an invisible element of contract's background rules requiring further analysis across the substantive contexts in which it appears. By continuing to let it go unexamined, courts perpetuate burdens on contracting parties ill-positioned to avoid them.

The pattern of unseen, yet influential third-party influence extends beyond doctrine to individual contracts. Third-party pressure evades regulation meant to improve fairness in vulnerable contractual contexts like employment, tenancy, and consumer credit and sales. Landmark twentieth-century legislation, from the Fair Labor Standards Act to the Fair Housing Act, aimed to remediate inequalities of bargaining power in contexts where one party may be particularly disadvantaged in negotiation. These efforts, however, have important loopholes because they do not consider third-party pressure.

In Part I of this Article, I discuss conceptual strategies this Article employs to better reveal third-party creditor influence on the law. First, drawing on "history of capitalism" historical methodology, I focus on multi-party financial networks rather than on the binary, hierarchical relationships that often characterized earlier economic and labor histories. Second, I conceive the terrain of contract doctrine as broad in subject matter--including substantively specific areas like partnership contract. This approach allows me to observe how courts form default and interpretive rules across varied substantive contexts.

In Part II, I then analyze two separate early American worlds of contract law, and of partnership, showing how they relied on differing assumptions and contract background rules. In early American small business, partnership functioned importantly as a labor relationship, linking labor with capital. For more sophisticated merchants, it mainly united multiple sources of capital and then divided the profits between contributors.

In Part III, I show how pressure from third-party creditors produced a clash between these legal systems. Although American higher courts were initially content to let local courts resolve disputes over business structure according to the expectations of local economic actors, creditors protested. American lawyers, urged on by merchants extending credit more and more broadly, began to expand the realm of commercial law to include ordinary trade and the labor enabling it. Creditors, and lawyers supporting their agenda, wanted to apply commercial law's bright-line rules for identifying partnership even to small businesses. They...