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94 Nw. U. L. Rev. 847 (1999-2000)
The Case for Formalism in Relational Contract

handle is hein.journals/illlr94 and id is 857 raw text is: Copyright 2000 by Northwestern University School of Law Printed in U.S.A. Northwestern University Law Review Vol. 94, No. 3 THE CASE FOR FORMALISM IN RELATIONAL CONTRACT Robert E. Scott* INTRODUCTION The distinguished scholars who gathered last year to honor Ian Macneil and to reflect on his contributions to the understanding of contract and con- tract law represent diverse methodologies, and they approach the vexing problems raised by relational contracts from different normative perspec- tives. But on one point, I daresay, they all agree: the central task in devel- oping a plausible normative theory of contract law is to specify the appropriate role of the state in regulating incomplete contracts. Complete contracts (to the extent that they exist in the real world) are rarely, if ever, breached since by definition the payoffs for every relevant action and the corresponding sanctions for nonperformance are prescribed in the contract. In the case of incomplete (or relational) contracts, however, parties have in- centives to breach by exploiting gaps in the contract. Making the verifiable terms of the contract legally enforceable and regulating incompleteness in a consistent manner reduces, but does not eliminate, these incentives to breach. There still remains the fundamental question: should the law seek to complete the contract for the parties? And, if so, from what vantage point should the contractual gaps be filled? Determining the answers to these questions has preoccupied contract law scholars for the past twenty- five years.' In this Article, I review the academic debate and outline the core ar- guments for (and difficulties with) three alternative strategies for interpret- Dean and Lewis F. Powell, Jr. Professor of Law, University of Virginia. This Article is a version of a paper presented at Relational Contract Theory: Unanswered Questions, a symposium held at Northwestern University School of Law on January 29, 1999. 1 The revival of interest in contract theory among academic lawyers most likely began in the 1960s with Stewart Macaulay's foundational study of the sociology of contract and Robert Birmingham's clas- sic work on the law and economics of contract. See Stewart Macaulay, Non-Contractual Relations in Business, 28 AM. Soc. REv. 555 (1963) [hereinafter Macaulay, Non-Contractual Relations]; Robert Birmingham, Damage Measures and Economic Rationality: The Geometry of Contract Law, 1969 DUKE L. J. 50. But as this Symposium is a tribute to the contributions of Ian Macneil, it seems most ap- propriate to date contemporary contract theory from Macneil's own classic work. See Ian R. Macneil, The Many Futures of Contracts, 47 S. CAL. L. REV. 691 (1974). Dick Speidel also helped to turn the tide. See Richard E. Speidel, An Essay on the Reported Death and Continued Vitality of Contract, 27 STAN. L. REv. 1161 (1975).