Contracts and Friendship

• Publication year: 2010

Contracts and Friendship

Ethan J. Leib

CONTRACTS AND FRIENDSHIPS

Ethan J. Leib^*

ABSTRACT

This Article aims to give the relational theory of contractnew life, sharpening some of its claims against its competitors by refracting its theory of relational contracts through an analogy to friendship. In drawing the analogy between friendships and relational contracts and revealing their morphological similarities, this Article offers a provocative window into friendship's contractual structure—and into relational contracts' approximation of friendships. The analogy developed here is poised to replace the "relational contract as marriage" model prevalent among relationalists. This new model is more honest to relational contract theory and to marriage—and helps relational contract theory produce some new insights, support old ones, and revise some of its normative agenda.

INTRODUCTION..............................................................................................651

I. RELATIONAL CONTRACT THEORY: A SYMPATHETIC RECONSTRUCTION..............................................................................653

A. The Empirical Claim ..................................................................654
B. The Analytic Claim for a Paradigm Shift in Contract Theory.... 655
C. The Normative Claim About Contract Law................................661

II. FRIENDSHIP AS RELATIONAL CONTRACT...........................................673

A. Friendship's Similarity to Relational Contracts.........................674
B. Some Cognitive Dissonance Managed.......................................680

1. Value.....................................................................................680
2. Exchange..............................................................................684
3. Unity of Interests ..................................................................687

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4. Natural Persons, Friendship, and Organizations ................689

III. RELATIONAL CONTRACT AS FRIENDSHIP...........................................690

A. De-centering Marriage ............................................................... 690
B. Exit Costs....................................................................................692
C. Exclusivity..................................................................................693
D. Common Ownership...................................................................694
E. Default Rules..............................................................................694
F. Formalities ................................................................................. 695
G. Enforceability of Intra-relational Promises ...............................697
H. A Caveat or Three ...................................................................... 698

IV. FRIENDSHIP, LEGALITY, FORMALITY, AND SOCIAL NORMS...............702

A. The Legal Enforceability of Friendship? .................................... 702
B. Revisiting Relational Contract Law...........................................713
C. The Debasement/Crowding Thesis: Social Norms and Legal Norms Playing Nicely Together.................................................717
D The Under-compensatory Nature of Contractual Remedies ......722

CONCLUSION..................................................................................................725

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INTRODUCTION

It is likely true that marriages are types of contracts.¹ But contracts are not generally like marriages. Friendships are also, in part, types of contracts. Yet many contracts are also like friendships. At the least, it is more illuminating to think of contracts as friendships than as marriages. Let me explain.

For some time, so-called "relational" contract theorists² —theorists who urge us to focus on "relational" elements in contracts in order to devise a theory and law of contracts³ —have sought to convince us that the majority of contracts, particularly the most relational ones, are types of marriages.⁴ More

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modestly, perhaps, they suggest that marriage is a good analogy for relational contracting. Even those sympathetic to the law and economics movement have suggested the equivalence between relational contracts and marriages.⁵

The core idea of "relational contract as marriage" is that most contracts, like marriages, share the following properties: (1) they ensnare parties into—and control party compliance through—a thick set of social norms; (2) they generally give parties autonomy in resolving internal disputes through those social norms; (3) they are very costly to exit; (4) they leave many terms open; (5) they tend to be incomplete in specifying obligations, especially on the issue of how the parties will cooperate over time; (6) parties tend to presume good faith and best efforts in performance and tend to allow for easy modifications for changed circumstances; and (7) they establish interdependence, partiality, and solidarity. Indeed, some have even examined the equivalence between marriages and relational contracts to determine what the content of marital law ought to be.⁶ The purchase of the analogy for relationalists, however, is tied up with their most general point—that discrete, one-shot transactions between strangers have occupied the center of "classical" contract law and contract theory to its detriment. In reality, as relationalists have demonstrated since the 1960s, contracts involve thicker relationships than those among strangers. Indeed, we cannot understand the social or legal practice of contracting as a practice among strangers; this insight alone has dramatic implications for our entire market economy and our effort to regulate it through contract law and otherwise.

This Article makes an effort to replace the marriage analogy in relational contract thinking with a story that ties contracts and friendships closer together. Part I is a brief overview of relational contract theory (as it is conceptualized by contracts scholars in law schools). Part II highlights how friendships are very much like relational contracts and how friendship can be illuminated by exposing its morphological similarity to relational contracts. Part III argues that friendship rather than marriage should be viewed as the paradigmatic relational contract. And Part IV explores some of the legal and theoretical ramifications for contract law and theory in light of the view that friendships are types of relational contracts and relational contracts are types of friendships. Ultimately, this window into relational contracts and friendships furnishes a few important lessons. First, it supports the legal enforceability of

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some contracts, both explicit and implicit, between friends. Second, it supports and revises certain prescriptions of relational contract theory. Third, it helps us better understand the relationship between social norms and legal norms. Finally, understanding relational contracts as friendships helps us make better sense of the under-compensatory nature of contractual remedies.

Let me not overstate the thesis here: I am not building a general theory of friendship or contract. This Article only suggests that putting these social practices side-by-side and exposing their morphological similarities can help illuminate each practice. Certainly, if pressed, some relationalists might concede that the place of marriage in relational contract theory is only as a suggestive analogy. This Article proposes that friendship offers a better and more illuminating analogy that can do some modest work in advancing our understanding of contract doctrine and theory.

I. RELATIONAL CONTRACT THEORY: A SYMPATHETIC RECONSTRUCTION

As many have observed, it is a difficult business to summarize relational contract theory.⁷ There are many "relationalists" and even some who view themselves as critics of relational contract theory concede that "we are all relationalists now."⁸ For my purposes, a quick sketch of relational contract theory should be sufficient.

At the center of relational contract theory is an empirical observation about the real world of contracting, a related effort to reorient the paradigm under which contract theory is organized and analyzed, and a set of normative and doctrinal prescriptions for how to apply contract law to disputing parties. It is probably fair to say that it is only the empirical observation (and a moderate form of it, to boot) that the critics of relational contract theory are willing to concede. The other dimensions of the theory are embraced by those I describe as "relationalists"—adherents of relational contract theory.

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A. The Empirical Claim

The empirical observation that commands consensus is that many contracts in the real world involve long-term, complex relationships and are not merely "one-shot," discrete transactions. In these "relational contracts," social norms often seem to play a larger role in controlling the parties' conduct than the threat of legal sanctions.⁹ Trust and social solidarity tend to underwrite and support (and, in turn, tend to be underwritten and supported by) these types of contracts, and informal cooperation, coordination, and collaboration are typical in contractual relations. In these types of relationships, parties expect some form of loyalty.

Although contracts between strangers are, of course, possible, relational contract theory emphasizes that many contracts do not show this pattern of "strangership." In contrast, relationalists highlight just how often contracts are formed between parties who are otherwise connected in pre-existing and ongoing relationships.¹⁰ Moreover, relationalists observe that when parties

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find themselves in such ongoing relationships, contractual behavior tends to be driven by informal and implicit dimensions of their mutual understandings¹¹ within the relationship, rather than "paper" deals and strict adherence to formalities.¹²

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