What’s Theory Got To Do With It? Contract Social Responsibility (Part 5)

Prior posts have developed the claim that contract is being used to achieve “social responsibility,” e.g., protecting labor-rights and the environment in supply chain contracts, and preventing racial discrimination in “inclusion riders.”  Assuming parties contract for social responsibility (“KSR”), what might legal theory say about it?

An important strain of contract scholars (“contractualists”) would start from a micro-economic analysis, and ask whether KSR should qualify as “rational” market behavior.  Consider, for example, Schwartz and Scott’s influential statement of contract theory.  Their “affirmative claim” is that “contract law should facilitate the efforts of contracting parties to maximize the joint gains (the “contractual surplus”) from transactions.”

I confess at the outset that I think this mode of analysis can be powerful.  But I am not sure how well it works with KSR, which is what I want to talk about here.

Contractualists, per S&S, might argue that KSR “maximizes joint gains” because it cashes in good publicity, avoids losses, or both.  As observed in prior posts, “doing good” apparently has market appeal, leading to “fair trade,” “green sourcing,” and so on.  Moreover, at least in the supply chain context, it appears that buyers may contractually shift losses to parties that violate KSR terms.  These and similar features of KSR might well maximize welfare.  To this extent, contractualist analysis would account for KSR.

So far, so good.  But there’s a problem.  Schwartz and Scott continue:

The[ir] theory’s negative claim is that contract law should do nothing else. . . . [T]he state should choose the rules that regulate commercial transactions according to the criterion of welfare maximization. . . . A simple categorization of the universe of bargaining transactions will clarify the domain of our theory. A transaction involves a seller (whether of goods or services) and a buyer.

That is, contractualism assumes that contract is private, pre-political, and bilateral (that is, between two parties).  But KSR challenges each of those assumptions.

Private.  First, it is hard to say that KSR is “private” in the way that a contract for, say, the purchase and sale of widgets by non-state actors is private.  For example, the scope of problems that KSR terms address are social in some basic sense, and to that extent “public.”

Slavery, climate change, and racial and gender discrimination have not been problems which private ordering was thought to solve.  Rather, until the mid-19th Century, there were markets for slaves in the United States—not markets against slavery.  To get to this point required significant public (state) intervention (e.g., the Civil War, etc).  Contract is simply one of many mechanisms through which this new market sensibility may operate.  But it is hard to characterize this as “private” in the ordinary contractualist sense.

Not surprisingly, the risks that KSR contracts seek to shift derive not from failures of private expectations—the widgets didn’t work—but from public commands: thou shalt not use slaves.

Moreover, these laws operate on suppliers not merely by creating “private” penalties—fines—but through publicity:  they often require suppliers to disclose their social responsibility (or not).  In order to challenge the constitutionality of Dodd-Frank’s “conflict minerals” disclosure rules, for example, the plaintiffs had to establish that requiring disclosure was state action that offended the First Amendment.  Whether or not it works, the state has chosen public shaming as a central enforcement mechanism.  That doesn’t seem very private.

Political.  Second, the very nature of the problems in question, and the rapid response of public law, suggest that KSR terms are self-consciously political.  It is hard to see Frances McDormand’s call for “inclusion riders” as anything other than an effort to change political outcomes through private ordering.  As U.S. banks have recently learned, Congressional Republicans now believe that protecting access to guns is more important than protecting free markets.

Bilateral.  Third, KSR terms seem intentionally directed at potentially broad classes of third parties or, in the case of environmental protections, humanity in general. Contract theory has long struggled with efforts to recognize third-party beneficiary doctrines in their simple form—that is, when the parties to the contract expressly identify an intended beneficiary.  The point of KSR, by contrast, seems to be to benefit classes or types of beneficiaries, without having particular ones in mind.

Academic literature is strewn with efforts to attack the contractualist’s economic citadel, and I am ambivalent about whether it is worth the fight here.  The foregoing suggests that this analysis may hit some bumps when assessing KSR.  But, it packs plenty of punch, and those committed to the methodology have been resilient and resourceful when thinking of ways to advance and defend that mode of analysis. Moreover, there is lots of good contracts scholarship that looks beyond the conventional model (e.g., here and here), even as it assumes that micro-economics plays some important role in understanding contract law and behavior.

The most collegial assessment would probably be that contractualism matters to KSR, but cannot fully explain it.  KSR’s socio-political, other-regarding features move it beyond the ordinary, bilateral business contracts that occupy most contractualists, even as these are, decidedly, business contracts.

Nor is contractualism necessarily socially irresponsible.  Like center-right economics generally, contractualism would probably say (after Friedman and Sen) that its normative goal is an important kind of freedom:  the freedom to improve material conditions through private ordering.

But by focusing so intently on the private, contractualism renders itself insensible to the larger social implications of KSR.  Having intentionally incorporated social goals into contract, KSR presents a choice:  do we adjust our view of contract theory, or do we think that KSR does not matter?


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