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. Read More