Contract Law Takes Proper Account of Commercial Realty - Essay Example

Should legal scholars help public decision makers to ensure that contract law takes proper account of commercial reality? Contents …………………………………………………………………………………2 2. Introduction………………………………………………………………………………3 3. Discussion & Analysis…………………………………………………………………..5 3.1. Changing Commercial law…………………………………………………….5 3.2. Role of courts in developing market friendly law…………………………...8 3.3. Instrumental desires & commercial law……………………………………..9 3.4. Role of law in market reach………………………………………………….10 4. Schools of thoughts…………………………………………………………..............12 5. Methods to be used by the judiciary in commercial situations…………………14 6. Academic (legal) theory and policy objectives…………………………...............16 7. Conclusion……………………………………………………………………………17 Bibliography…………………………………………………………………………18 1. Abstract The process of law making as practiced by both the judiciary as well as the legislative bodies assume certain inherent assimilations regarding the status of society as well as the implications of legal doctrines in general. The act of resolution of all conflicts involves hypothecating a theory about the nature of such law/s. Although there do exist several alternative schools of thoughts that propose to resolve such legal matters, the implementation and fair settlement of judicial matters aspires for a liberal choice of legal theory which in entirety represents and exudes the overall essence of the legal system. This paper discusses whether the legal scholars should help the public decision makers in ensuring that the contract law takes commercial reality into consideration. For the purpose of this study various other aspects of contract law in conjunction with commercial situations has been analyzed and discussed in the ensuing paragraphs. Section one discusses the whether the commercial law can be changed to suit the market needs. Section two ponders over the issue of the appropriateness of courts as institutions for devising and framing market friendly laws. The subsequent sections discusses and analyzes the role of law in expanding and contracting market reach as well as the impact of instrumental desires and legalistic regimes on the markets. A detailed discussion on various schools of thoughts, impact of inclusion of academic (legal) theory and objectives etc have been included in the essay to lend credibility to the discussions and conclusions arrived there from. 1. Introduction The Law is framed to serve the primary objective of establishing order and justice within a given society1. The Commercial Law proposes a legal framework which accelerates the process of trade by elevating effectiveness, faith and dependency and dissuading fraudulence and immorality by implementing effective laws such as contract law and trade practices legislation. It is imperative that the markets would either recede into disarray leading to commotion and anarchy or into self regulation in the absence of an efficient and impartial legal system. Although what outcomes the markets might be subjected to is a disputable issue, the advocates of the formalist perspective – an ideal which propagates the existence of a formal universal legal system suggest that such a legal system would offer ultimate benefit to the market. However, Posner2 (1996) contends that the law would hold relatively more significance “under a variety of plausible conditions, the state – in particular, its legislatures and courts – produces rules that are more efficient than group norms and, furthermore, that help correct the deficiencies of group norms”. The legislatures rely on committees in order to accumulate material evidence and establish voting rules while the courts depend on rules of evidence, appeal and precedent in order to establish fair judgments, settlement of disputes and fair trade practices on the basis of information so gathered. However, although none of these legal structures and procedures might be efficient they are an improvement over the system of establishing legal structures in an anarchical norm production environment. Such a system which reaffirms the superiority of law and legal bodies in establishing laws has been largely supported by several researchers and academic scholars3. This paper seeks to analyze, discuss and investigate various aspects of contract law particularly as regards to commercial situations and discuss its impact on expanding or contracting of markets, the significance and relevance as well as need for the interference of legal scholars as well as public decision makers in assisting in the development and implementation of market friendly laws as it pertains to commercial situations. 3. Discussion & Analysis: This section discusses various aspects with regards to commercial law and the steps that the judiciary in conjunction with the legal scholars and public decision makers could take to bring about a reform in the system which is favorable both to the market as well as the market players. The following sections describe various issues such as the probable changes that might be initiated in the commercial law, the role of courts / legal bodies in developing a market friendly law; investigate whether a formal legalistic regime of commercial law is favored by the market, whether it should be driven by instrumental desires to make it more useful to the market players, and whether the law has a role in expanding or contracting the reach of the market. 3.1. Changing Commercial law A stable and efficient market oriented economy requires the adoption and implementation of equally efficient and supportive business as well as commercial laws. Several primary factors such as laws governing establishment of property rights or governing business enterprises have a significant impact on shaping a productive market economy. Whereas factors such as uncoordinated decisions of the market participants regarding the nature and terms of contractual transactions that they willingly enter into, play a significant role in defining the manner in which a market economy functions. However, the functionality of a market economy is also dependent, to a considerable extent, on the legal systems which support such markets. Thus it is of utmost significance to the market participants to implement and adopt commercial laws which are best suited for their economy as well as themselves. The countries, in the light of technological changes taking place in the modern day economy, should adopt certain reformative measures to revive their commercial laws which are currently largely influenced by contract law. However, prior to bringing about such reforms the countries practicing market economy should ensure the availability of human resources including lawyers, and other professionals who would be entrusted with the responsibility of resolving conflicts arising out of such reformed contractual laws. The responsibility of drafting and setting up of new reforms should be delegated to established lawyers and academic scholars with a subtle participation and scope for the interest groups to present their views and concerns. However, one of the key advantages of a competitive commercial law regime is the success or failure of the offerings made by judiciary would either succeed or fail in accordance with its relative significance and extent to which the needs of the market are satisfied as well as the values of the products are able to justify their costs4. An alternative option would be to establish appropriate models whereby the existing laws could be reframed and modernized considering the present concerns in the market economy. This would further help the countries by abolishing laws which are obsolete and hence hold no relevance or significance in modern times. The old laws should be diligently reviewed and appropriately amended especially in the light of contemporary developments and those which are unusable should be promptly abandoned or abolished. The regulating bodies in charge of framing the new laws may also consider adopting models of foreign nations and appropriately weave them in the fabric of their nations’ legal system. All these laws should be framed considering the maximum benefit to the market participants as well as for the betterment of the nation as a whole5. 3.2. Role of courts in developing market friendly law According to the comments made by Sir George Jessel6, on the role of courts in conjunction with the market behavior / economics: “You have this paramount public policy to consider in that you are not lightly to interfere with this freedom of contract” Similar thoughts were shared by Henry Sidgwick7, in his book The Elements of Politics, who argued that: “Suppose contracts freely made and effectively sanctioned, and the most elaborate social organization becomes possible, at least in a society of such human beings as the individualistic theory contemplates – gifted with mature reason and governed by enlightened self interest” He further argued that if the judicial power in conjunction with the legislative, the life, liberty and property of the subjects would ultimately fall in the hands of arbitrary judges whose decisions would be regulated only by their opinions as opposed to the fundamental principles of law. The basic function of any contract is to facilitate smooth trade and hence the earlier laws designed in this regard largely concentrated on the binding nature of reciprocal promises8. The significance of role of courts in such decisive matters as the exercise of executor contracts lies in the fact that it allows the business community to plan ahead for instance if the parties to a contract are aware of the fact that they can rely on the judgment of courts to enforce fair judgment such clear recognition of ones rights and duties under predictable circumstances further goes on to prove the potential for planning as well as risk allocation in the marketplace, making it more approachable and market friendly9. 3.3. Instrumental desires & Commercial Law According to Benson10 the law shares a symbiotic relationship with customs whereby the commercial law is parallel to the price system since it accelerates communication and establishes norms for a smoother exchange of information. With the evolution of business practices and customs, the commercial law develops directly from the process of market exchange. According to a popular school of thought, the market is largely driven by instrumental desires hence the impact of commercial law on them is relatively insignificant11. According to Macaulay contract law is unnecessary in several situations since its use is believed to have caused undesirable circumstances12. 3.4. Role of Law in Market Reach The role of formal contract law as well the institutions that enforce its implementation on the overall economic development of a nation is a critical issue that requires an in depth analysis and debate. In order to expand market reach and aim for full fledged economic development, the acceptance of neo classical economic approach as well as its inadequacies is crucial. In order to ensure wider market reach the law must ensure the development and protection of contractual rights of the parties to a contract. Stringent practices to ensure contract enforcement should be implemented along with the adoption of an efficient dispute resolution system. Issues such as securing committal between the contracting parties, timely and efficient settlement of disputes and easy accessibility to all investors concerned should be given due significance. Apart from such strict enforcement of laws and approachability factors, measures should be taken to prohibit unfair trade practices and ensuring transparency in all its decision making processes. One of the major reasons why markets fail to deliver and succeed is their increasing reliance on laws of the state which governs contract enforcement which is highly technical and complex. Since certain transactions requiring substantial financial investment are prone to risk it needs stable and efficient laws which ensure protection and compliance assurances from the legal authorities such as courts of law. There is evidence which suggests the degree of efficiency and effectiveness of nations’ contract, security, bankruptcy, as well as company laws which ensures its effective enforcement plays a major role in securing fundamental rights of the market players such as security holders and establishes a basis that facilitates sound performance of its financial systems, ultimately widening the market reach and enabling economic development in the process13. Another significant factor is the assessment of performance of the associated legal institutions which involves assessing such factors as the technical expertise of the panel of judiciaries, their integrity as regards the degree of impartiality in decision making, case management practices, as well as the ability of the courts of law to enforce contractual agreements and settlements in cases in their jurisdiction. All such factors would ensure a wide market reach and contribute greatly to the overall economic development of the nations14. 4. Schools of Thoughts: The contract law may be studied in the light of formalist and realist perspectives in order to gain a broader understanding of the implications and outcomes of such laws on the economic development of a nation and its reach in the market. A growing number of legal scholars have often argued about the relevancy and legitimacy of the crisis in which the law finds itself in present times. The various theoretical models of contract law help in understanding their relative strengths as well as the manner in which the contract law is executed in day to day life. According to the work done by a host of intellectual jurists in the past, the law assumed social relevance particular post the nineteenth century which marked the beginning of a sociological movement in law which strived to focus on the relevance and significance of its rules. The theory of Legal formalism primarily aimed to focus on how things ought to be and inspired the inauthentic idea of law being an autonomous object as opposed to the belief of it being a social order. The realists sought to perceive things in terms of relationships – between law, the legal system as well as the society as a whole and at the same time encouraged debates and discussions as to its effects, functions and efficiency of rules. The realists were often found to argue about the fact that there needs to be a proper connection between law and the standards of everyday life in order to enable law to retain its legitimacy15. Another significant element which influences the law of contract in terms of its method of reasoning is the formalist perspective. The courts observe precedents, apply statutes and distinguish various cases on the basis of their facts. Such classification adds to the complexity of the court’s decision making process which facilitates differentiated treatment for diverse contractual relations. In such a situation, the formalism of law of contract assists the legal authorities by simplifying the process by contributing towards its certainty and predictability factors which are highly suitable for the law especially while governing an expanding market economy16. The theory of formalism does not prevent the inclusion of moral and political values into law and encourages the technical rules to be submerged in the principles of law which further expresses the governing ideologies of its legal control over the market order. The courts, while applying such rules may however, manipulate the results for instrumental purposes. This theory largely propagates the idea that the legal bodies such as the legal scholars are restricted in their duties only to ensure proper execution of the law of contract and are not entitled to create it. 5. Methods to be used by the judiciary in commercial situations: The various schools of thoughts discussed above – i.e., formative and realist, dictate the methods that the judiciary should use in commercial situations. Various researches have been initiated in the field of law to assess the role of formal legal systems in incorporating customary norms as well as certain inherent understandings in the law of contract. The role of new formalism in the law of contract is supported by its approach towards interpretation of contracts and the legal system. The commercial law is largely influenced by the globalization agenda which is evident from the inclusion of such topics as the development of secured credit regimes, individual as well as corporate bankruptcy, as well as other issues such as rules governing the contribution of such contract laws towards in terms of availability of secured credit for the purpose of economic development. A considerable portion of data concerning commercial and contract law is held by the private institutions such as credit companies which help in providing a meaningful insight into the markets and market players17. The theory of formalism perceives law as a set of principles and rules which are independent of all institutions – political as well as social whereby it can be concluded from the general theory of statues and principles irrespective of the circumstances and consequences of the real world18. The prominence of formative theory is apparent in terms of constitutional law as well as statutory interpretations whereby formalism is connected with originalism which suggests that the constitution should be construed in terms of originality of meaning. The revival of formalist perspective is partially credited to political ideologies. In order to ensure safe business practices the common law courts should place adequate emphasis on developing a balance between the between the literal as well broad interpretations of business contracts. The judiciary should enforce stringent measures to ensure strict implementation and enforcement of performance clauses prior to establishing practices which aim at achieving flexibility in techniques as well as construction. The liberal methods of interpretations should be adopted and implemented only in cases or situations where the establishment of express (written) contracts lead to injustice or amount to ambiguity19. The judiciary should consider diligent analysis of the past dealings of the parties involved and execute an in depth scrutiny of the cases involved. The evolution of legal pragmatism could be expected only in case the judiciary succeeds in deliberately avoiding the abstract rules of law and frame laws purely based on an amalgamation of legal practices and the corresponding business demand20. 6. Academic (legal) theory & Policy Objectives: This section seeks to analyze the negative consequences which might arise in case of failure to consider legal theory. In order to ensure smooth functioning of the markets it is essential to enforce contracts which aim at resolving disputes since such an enforcement further ensures sufficient predictability in commercial relationships and contribute significantly in relegating ambiguity by ensuring the prompt upholding of the contractual rights of the investors by the courts of law. Although the prominent role of law in facilitating developmental thinking is significant and commendable, the role of legal academics and political scientists in contributing towards the development of a robust legal framework is yet to be established. The perception of law as being an inevitable contributor to political as well as economic development was relatively undermined by the academic scholars until recently who have disregarded the relevance of law as an important contributor towards the facilitating a developmental process. The use of trade laws have often been faced with severe criticisms which is mainly directed towards the inability and inefficiency of the courts of law to properly define and implement the laws in such a manner which are consistent with the commercial understandings of the parties involved21. 7. Conclusion: Modern commercial law in modern times enforces obligations which reflect the pragmatic existence of relationship between contracting parties. The gracious acknowledgment of waiver and alterations and the ensuing security that the code harmonizes towards the course of – performance, dealings as well as the characteristic trade usages efficiently allow the unwritten commercial practices to differ and corrode specific contractual provisions22. The academic arguments over the inclusion of transactional efficiency which facilitate incorporation of trade practices are supported by the bona fide assertion by all the known academic and legal scholars23. Bibliography Alan Watson, (1991). Legal Change: Sources of Law and Legal Culture, Commercial Law and the Market Course Reader, Pp.31. Eric Posner, (1996). Law, Economics and Inefficient Norms, University of Pennsylvania Law Review David Charny, (1999). The New Formalism in Contract, University of Chicago Law Review, 842 Gillian Hadfield, Privatizing Commercial Law, Regulation, Spring 2001, Pp.41 Byrne, P. J., 2008. Business and Commercial Laws: Basic Principles, viewed: November 7, 2008, from: http://usinfo.state.gov/products/pubs/archive/prosper/prosper6.ht Buckley, F. J, (1999). The Fall and Rise of Freedom of Contract, Duke University Press, Pp.58. Sidgwick, H. (2000). The Elements of Politics, Adamant Media Corporation, Pp.316 Francis, H. Buckley, (1999). The Fall and Rise of Freedom of Contract, Duke University Press, Pp.11 Mulcahy, L., Tillotson, J. (2004). Contract Law in Perspective, Routledge Cavendish, Pp.34 Carol Rose, (1995). Trust in the Mirror of Betrayal, 75 Boston University Law Review 531. John Gava, (2001). Is Privity Worth Defending? Privity: Private Justice of Public Regulation, Commercial Law and Market Course Reader, Pp.772, 786 Steward Macaulay, (1963). Non Contractual Relations in Business: A preliminary study, 28 American Sociological Review, 55. Trebilcock, M., Leng, J. (2006). The Role of Formal Contract Law and Enforcement in Economic Development. OECD, Organization of Economic Co-operation and Development, Policy Framework for Investment, www.oecd.org Mulcahy, L., Tillotson, J. (2004). Contract Law in Perspective, Routledge Cavendish, Pp. 44. Collins, H., (2003). The Law of Contract, Cambridge University Press, Pp.35. Ramsay, I. (2008). Empirism, Globalization and Commercial Law, viewed November 7, 2008, from: http://www.aals.org/2005midyear/commercial/IainRamseyOutline.pdf United Nations Convention on Contracts for the International Sale of Goods, April 11, 1980, 1489 U.N.T.S. 3, 19 I.L.M. 671. Johnston, J. (2001) Should Law Ignore Commercial Norms? A comment on the Bernstein Conjecture and Its relevance for Contract Law Theory and Reform, Michigan Law Review. Trakman, L. E. (1983). The Law Merchant: The Evolution of Commercial Law, Wm. S. Hein Publishing, Pp. 95. Gregory Walker, (2005). Trade Usages: Defending the Appropriateness of Incorporating Custom into International Commercial Contracts, Journal of Law and Commerce, Pp. 263 – 280. Omri Bin Shahar, (1999). The Tentative Case Against Flexibility in Commercial Law, University of Chicago Law Review. Richard Epstein, (1999). Confusion about Custom: Disentangling Informal Customs from Standard Contractual Provisions, University of Chicago Law Review. Read More