New Private Law Theory: A Pluralist Approach 1108486509, 9781108486507

Table of contents :
Cover
Half-title page
Title page
Copyright page
Contents
Preface
New Private Law Theory: The Core Ideas
Part I Methods and Disciplines
1 The Inside and the Outside of Law?
2 Private Law and Sociology
3 Economics and Private Law Institutions
4 Private Law and Theories of Communication
5 Comparative Law and Legal History
Part II Social Ordering, Constitutionalism and Private Law
6 Societal Order and Private Law
7 Values in Private Law
8 Constitutionalization, Regulation and Private Law
9 Democracy and Private Law
10 Formalism, Substantive and Procedural Justice
Part III Transactions and Risk: Private Law and the Market
11 Negotiation, the Function of Contract and the ‘Justice of Consensus’
12 Knowledge and Information
13 Private Power
14 Non-discrimination
15 Risk, Tort and Liability
16 Digital Architecture of Private Law Relations
17 Between Market and Hierarchy
Part IV Persons and Organizations
18 Person, Civil Status and Private Law
19 Theory of the Corporation
20 Actors in Organizations
21 The Principal’s Decision: Exit, Voice and Loyalty
22 Organizations and Public Goods
Part V Private Law (Rule-Setting) beyond the State
23 Law as a Product
24 Multilevel Governance and Economic Constitution
25 Transnational Law
26 Private Ordering
27 The Shadow of the Law and Social Embeddedness
Index

Citation preview

new private law theory New Private Law Theory opens a new pathway to private law theory through a plural approach. Such a theory needs a broad and stable foundation, which the authors have built through a canon of nearly seventy texts of reference. This book brings these texts from different disciplines into conversation with each other, grouping them around central questions of private law and at the same time integrating them with the legal doctrinal analysis of example cases. This book will be accessible to both experienced and early-career scholars working on private law. Stefan Grundmann is Professor of Private and Business Law at Humboldt University, Berlin, and at the European University Institute, Florence. He co-founded SECOLA (the Society of European Contract Law) and is president of the European Law School (Berlin/London/Paris/ Rome/Amsterdam/Athens/Lisbon). His research focus is on contract, banking and company law, on regulation, governance and theory. Hans-W. Micklitz is Professor of Economic Law at the Robert Schuman Centre for Advanced Studies, European University Institute, Florence, and Finland Distinguished Professor at the University of Helsinki. His research interests focus on private law, European and international economic law and private law theory. Moritz Renner is Professor of Civil Law, International and European Commercial Law at the University of Mannheim. His research focuses on transnational financial law and the economic sociology of law. Before joining the Law Department in Mannheim, he held a Lichtenberg Professorship at the University of Bremen.

New Private Law Theory a pluralist approach STEFAN GRUNDMANN Humboldt University and European University Institute

HANS-W. MICKLITZ European University Institute and University of Helsinki

MORITZ RENNER University of Mannheim

University Printing House, Cambridge cb2 8bs, United Kingdom One Liberty Plaza, 20th Floor, New York, ny 10006, USA 477 Williamstown Road, Port Melbourne, vic 3207, Australia 314–321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi – 110025, India 79 Anson Road, #06–04/06, Singapore 079906 Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning, and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781108486507 doi: 10.1017/9781108760089 © Stefan Grundmann, Hans-W. Micklitz and Moritz Renner 2021 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2021 A catalogue record for this publication is available from the British Library. isbn 978-1-108-48650-7 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication and does not guarantee that any content on such websites is, or will remain accurate or appropriate.

Contents

page ix

Preface New Private Law Theory: The Core Ideas part i

methods and disciplines

1 33

1

The Inside and the Outside of Law? Stefan Grundmann

35

2

Private Law and Sociology Moritz Renner

59

3

Economics and Private Law Institutions Stefan Grundmann

71

4

Private Law and Theories of Communication Moritz Renner

95

5

Comparative Law and Legal History Hans-W. Micklitz

110

part ii

129

social ordering, constitutionalism and private law

6

Societal Order and Private Law Stefan Grundmann

131

7

Values in Private Law Moritz Renner

156

8

Constitutionalization, Regulation and Private Law Hans-W. Micklitz

166

v

vi

9

10

Contents

Democracy and Private Law Hans-W. Micklitz

180

Formalism, Substantive and Procedural Justice Moritz Renner

193

part iii

205

transactions and risk: private law and the market

11

Negotiation, the Function of Contract and the ‘Justice of Consensus’ Stefan Grundmann

207

12

Knowledge and Information Stefan Grundmann

230

13

Private Power Moritz Renner

248

14

Non-discrimination Moritz Renner

261

15

Risk, Tort and Liability Hans-W. Micklitz

272

16

Digital Architecture of Private Law Relations Hans-W. Micklitz

298

17

Between Market and Hierarchy Stefan Grundmann

315

part iv

339

persons and organizations

18

Person, Civil Status and Private Law Hans-W. Micklitz

341

19

Theory of the Corporation Moritz Renner

360

20

Actors in Organizations Stefan Grundmann

369

21

The Principal’s Decision: Exit, Voice and Loyalty Stefan Grundmann

391

22

Organizations and Public Goods Hans-W. Micklitz

414

Contents

part v

private law (rule-setting) beyond the state

vii

435

23

Law as a Product Hans-W. Micklitz

437

24

Multilevel Governance and Economic Constitution Hans-W. Micklitz

454

25

Transnational Law Moritz Renner

472

26

Private Ordering Moritz Renner

484

27

The Shadow of the Law and Social Embeddedness Stefan Grundmann

495

Index

517

A list of the main reference text, links to full text resources and English translations of all texts originally written in other languages can be found at: http://newprivatelawtheory.net

Preface

In our New Private Law Theory there is one feature that we want to stress specifically: it is a pluralist approach. This book approaches two challenges of private law theory today – in a highly globalized world and equally global discourse, in a setting where social sciences increasingly interact – and combines two answers to them. First, it contains a survey on a large variety of theories and approaches across all the social sciences, including law, philosophy and beyond, behavioural sciences, psychology and so on. A large variety implies width in countries and traditions of thought on which we draw. A large variety also implies that we want to integrate as many insights as possible that might be relevant for legal thinking from all neighbouring disciplines. A large variety further implies that this aspiration is per se unattainable, and certainly so in one book and for three authors. This book can only constitute an attempt to set up a first map, to throw a stone into a pond, with a lot of terra incognita still to be discovered in response to this first approach. As such, this has to be a joint endeavour. To add as much objectivity as possible to a book that – with its limitations in authorship, in size, and as well in preconceptions of the authors – is bound to have a strongly subjective side as well, we chose one possible way of proceeding. With a view to bringing together the theoretical strands that matter for private law, we chose to start from those texts that – after long and broad discussions – we judged as seminal works for their discipline and discuss the discipline’s main thought on particular problems via these texts, their contexts, their later developments and discussions. Moreover, we added landmark cases to illustrate the interplay between theoretical approaches, texts and legal problems. As a survey on a large variety of theories and approaches across all the social sciences and beyond, and in a considerable variety of countries worldwide, the book aims to break new ground indeed. It should have the capacity to serve as a basis for teaching, reading and thinking about a broadly conceived interdisciplinary theory of (private) law. Different from many other theories, it also tries to put theory into applied practice and run through vast territories of private law – again, of course, not all. Second, while such a collection of the broad variety of approaches and theories may be interesting and helpful, in what respect does it constitute a new private law theory at all? What is new? Is it more than a mere collection of material? Is it a theory, and if so, what

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Preface

kind of theory is it? The answer given in the book starts from what law is: a powerful ordering mechanism and stabilizer of society, perhaps even its ‘social contract’. A theory of law, we think, has to reflect law. And not only for legal scholars and lawyers, but for society at large, there is at least one yardstick to which we adhere in societies based on the rule of law (and typically market economies), namely Western societies to which this book may speak in particular. This yardstick for legitimate order in society is made up of constitutions and democratically decided values, and not the individual predilection of the authors for approaches – from libertarian to communitarian and so on. Our new private law theory tries to take this yardstick seriously, tests its validity in the national and transnational arena and develops from this pluralist value basis a pluralist legal theory, establishing benchmarks and instruments to bring into the legal arena the ocean of knowledge that neighbouring disciplines have developed, but that requires to be linked to what constitutions say and what democracies decide in their established procedures. The interplay between the ocean of knowledge and the constitution of the legal system, its theoretical underpinnings as well as its systematization, in nation states and beyond nation states, is what distinguishes new private law theory and the theorizing of this interplay – under the shadow of constitution and democratically decided values – is the core of our book. Such a book would not have been possible – in its overall dimensions as well as in single chapters – without discussion and input of many friends, colleagues and discussion partners. We name them in alphabetical order and without affiliations – even though a number, perhaps most, of them would certainly have deserved long and special sentences and specifications. We warmly thank Marietta Auer, Anna Beckers, Dorothee Bohle, Gert Bru¨ggemeier, Youssef Cassis, Hugh Collins, Ro´na´n Condon, Simon Deakin, Michael Denga, Klaas Eller, Antonina Engelbrekt-Bakardjieva, Fabrizio Esposito, Muriel Fabre-Magnan, Fernando Go´mez Pomar, Philipp Hacker, Martijn Hesselink, Lorenz Ka¨hler, Duncan Kennedy, Torsten Kindt, Andreas Leidinger, Pia Letto-Vanamo, Liam McHugh-Russell, Florian Mo¨slein, Horatia Muir-Watt, Szymon Osmola, Przemyslaw Palka, Dennis Patterson, Giovanni Sartor, Mathias Siems, Eyal Zamir . . . and many classes of researchers at the European University Institute, Florence, and at Humboldt University, Berlin. We thank Thyssen Foundation for kindly and generously sponsoring acquisition of copyrights and translation of texts. Hans-W. Micklitz would like to thank the Finland Distinguished Professor Programme (FiDiPro) for the generous support in the finalisation process of the book and Moritz Renner the Volkswagen Foundation for generous support in the framework of the Lichtenberg Professorship Programme.

New Private Law Theory The Core Ideas

a new private law theory as applied social theory 1 Five Theses for a New Private Law Theory What is new about New Private Law Theory? We try to answer this question with five theses: Thesis 1: New Private Law Theory is pluralistic. The theory of private law must take into account the findings of different disciplines in order to develop an adequate description of society. It is therefore beyond question today that the findings of law and economics hold important insights for legislation and the application of law. The survey of a single neighbouring discipline, however, necessarily leads to a reduction in complexity. This reduction in complexity is helpful for developing theoretical models, but insufficient for adequately coping with legal problems. Law and economics today not only forms the ‘mainstream’ of private law thinking in the USA, but it increasingly gains ground also in Europe. Nevertheless – or precisely for this reason – private law theory must also open the view to other neighbouring disciplines, above all the other social sciences such as sociology, philosophy and history. We therefore understand private law theory in a very broad sense as a reflection of interdisciplinary findings in private law discourse. This concept appears to be unique so far.1 It is further justified and explained in Section B of this introduction. Disciplinary pluralism prevents private law jurisprudence from simply adopting the guiding paradigm of a single discipline. It is, at the same time, aware of the fact that a genuine legal evaluation is always necessary in order to integrate the findings of other disciplines and to use them appropriately in theory and practice. This approach not only corresponds to the ‘polytheism of modernity’ (Max Weber) in functionally

1

In a first answer to a prior edition of this book (in German), Marietta Auer terms this search for the use and the relative weight (and ‘order’) between answers found in diverging neighbouring disciplines as the core thrust of modern/future private law theory (or more generally legal theory), the main research path to follow now. See M. Auer, Erkenntnisziel der Rechtstheorie: Philosophische Grundlagen pluridisziplina¨rer Rechtswissenschaft (Baden-Baden: Nomos, 2018), especially pp. 43–56; more hesitant still her book review of the prior German edition in 216 Archiv fu¨r Civilistische Praxis 2016, 805–10.

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differentiated societies. It also corresponds to the normative model of value pluralism that characterizes the constitutional systems of modern democracies. The attempt to draw on this pluralist value base and reformulate it with a view to systemization and coherence could be called a mosaic theory. It is characterized by the fact that it is built from many single pieces of different colours, shapes and origins, yet the pieces that contribute to one design. There are three caveats. The first is about law and economics in areas of business and economic organization that occupy a considerable part in this book. Here, it would come to throwing out the baby with the bathwater not to rely on law and economics. The question is rather how other theoretical approaches can be combined with it, namely economic sociology, theories of political philosophy or constitutionalization. A radical view would have avoided economics altogether. The second caveat is about homogeneity of design. Combining a heterogeneous set of theories is bound to result in a certain syncretism – or, to put it more neutrally, in a ‘combination theory’. However, our approach proposes a clear set of steps – a methodology – of how to assess the heterogeneous material (see in detail in Section B.I). How it works can best be shown, and also be tested on the spot, with case studies. This is what we propose, and this justifies the rich set of twentyseven case studies in twenty-seven chapters – based on what are considered core, or even the key texts in the disciplines most concerned and on a seminal, illustrative case. The last caveat is that traditional private law theory, for instance contract theory, is, of course, not excluded. This relates, in contract theory, to such contributions as Charles Fried, Stephen Smith, Hanoch Dagan and Michael Heller, or Peter Benson.2 Social theory complements traditional private law theory most vigorously, breathes new life into the discussion, but does not substitute it. As the novelty of our approach lies, however, more on the side of the social sciences than on the side of traditional private law theory, the former is more thoroughly considered here than the latter (although traditional private law theory itself is particularly lively recently). Thus, our new private law theory is pluralist in method and values; at the same time, it proposes a structured methodology of assessing how and with which significance to integrate the heterogeneous and rich input. Thesis 2: New Private Law Theory is comparative. It takes into account different legal systems, but also different theoretical traditions. A pure functionalist understanding and use of comparative law is not enough (see Chapter 23). Rather, it has to be complemented by a reflection of legal culture and legal history that takes differences seriously (Chapter 5). In selecting texts of reference for our book, we place the European and US legal traditions at the centre. While ‘European’ does not include all of the EU’s 28, now 27, member states, the selected texts do draw on all the major (ex-)member state legal traditions – a far broader collection than has previously been attempted – namely the English common law, along 2

See, in the Anglo-American world, C. Fried, Contract as Promise: A Theory of Contractual Obligation (MA: Harvard University Press, 1981); S. Smith, Contract Theory (Oxford: Oxford University Press, 2004); in the last few years P. Benson, Justice in Transactions: A Theory of Contract Law (Cambridge / MA: Harvard University Press, 2020); H. Dagan / M. Heller, Choice Theory of Contracts (Cambridge: Cambridge University Press, 2017); and also P. Saprai, Contract Law Without Foundations: Toward a Republican Theory of Contract Law (Oxford: Oxford University Press, 2019).

New Private Law Theory: The Core Ideas

3

with the French, German and Italian civilian traditions. We are thus opening up a dialogue of private law theories that is not only bilateral but multilateral.3 The necessary limitations correspond both to the background of the authors and to the manifold connections of the traditions. The exclusion of other perspectives, in particular those of the Global South, but also from Eastern Europe, is not intended.4 If three scholars with European background, trained in Germany, propose such a path towards a new private law theory and are fully aware of certain preconceptions they carry, the hope would be that a hermeneutic circle of rich and diverging inputs is opened. The theory would then have to stand the test of acceptance by the relevant legal community – here a global legal community – as described in Chapter 1. Thesis 3: New Private Law Theory is application oriented. This book is not dedicated to the philosophy of law, but to the applied theory of private law. It is precisely the concrete problems of private law and the application of theoretical insights to these problems that makes it possible to fruitfully combine the findings of different disciplines and traditions. This book wants to counteract the disintegration of social science disciplines, which at the end of the nineteenth century had already come close in political science and economics. This approach is intended to fundamentally challenge the fragmentation of the social sciences, which, at that time were united under a single banner as Staatswissenschaften (in Germany) and Nationalo¨konomie (in Austria). The methodological touchstone for this merger of traditions of thought is hermeneutics, and its idea of constantly moving back and forth between text and preconception, between fact and norm – and thereby aiming to bring them increasingly in line with one another. Most discussions in the book – while using different sources and disciplines – will be organized around particular issues: the structure of negotiation, for example, the problems of contractual long-term relationships, transnational rule-setting. Each chapter will open and close the discourse with a particularly relevant example case in order to illustrate the added value of an application-oriented theory of private law. The methodology of the book is explained in more detail in Section C of this introduction. Thesis 4: New Private Law Theory is neither state centred nor exclusively national. It deals with private law wherever it exists – in the nation state, in the European Union and in transnational contexts. With this broadening of perspective, the methodology and subject 3

4

With this framing of the material (a plurality of both disciplines and legal traditions not found elsewhere in the current literature), the book follows an approach of ‘super-diversity’ – indeed, this constitutes its core feature. Super-diversity in the social sciences describes a situation characterized by the coincidence of several criteria of strong diversity, such as a university characterized both by a strongly international faculty and student body and by a strongly cross-disciplinary mixture – such as the European University Institute, Florence. For this concept, see for example, S. Vertovec, ‘Super-Diversity and Its Implications’, 29 Ethnic and Racial Studies 1024–54 (2007) (Director of the Max Planck Institute for the Study of Religious and Ethnic Diversity); J. Blommaert / B.Rampton, ‘Language and Superdiversity’, 13(2) Diversities 1–21(2011); T. Ramadan, On SuperDiversity (Berlin: Witte de With & Sternberg, 2011). V. V. Palmer (ed.), Mixed Jurisdictions Wordwide: The Third Legal Family (2nd ed., Cambridge: Cambridge University Press, 2012), and T. Duve, ‘Von der Europa¨ischen Rechtsgeschichte zu einer Rechtsgeschichte Europas in globalhistorischer Perspektive’, Max Planck Institute for European Legal History research paper series, No. 2012/01, abbreviated English version: European Legal History Global Perspectives Max Planck Institute for European Legal History, research paper series No. 2013–06.

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of private law thinking change. Beyond the recognized interpretation methods of national law, a European methodology has long been established. In the transnational area, state legislation has only a limited effect, whereas private rule-making is omnipresent. Especially in the transnational space, however, we see that theoretical concepts such as the paradigm of constitutionalization are not only adopted from national traditions and continued, but can even offer new orientation. The theme of transnational ordering is important for the book in several respects, not only in Chapters 25 and 8 (on transnational law and constitutionalization proper), but also for societal order more generally (Chapter 6) and private ordering in particular (Chapter 26). It constitutes, however, a core example rather than the primary theme of the whole monograph. A private law theory that is committed to these theses needs a broad and stable foundation. For us, the foundation is formed by a canon of almost seventy texts of reference5 which deal with private law from very different perspectives. This canon naturally represents a subjective selection of the three authors, all German but trained in looking beyond the legal discipline and into different legal orders in Europe and the world. The canon has developed over several years in intensive discussions, in exchanges with a multiplicity of younger and more senior colleagues from different legal traditions. Our book tries to bring the different texts from different disciplines into conversation with each other. To this end, it groups the reference texts around central questions of private law and at the same time integrates them with the legal doctrinal analysis of example cases. Overall, the selection of texts, let alone their analysis and presentation in the twenty-seven chapters, bears a European understanding of what private law theory stands for. An American selection of texts would look different, as would a selection of texts that would bring together the Global North and the Global South, or focus on the relationship between Western, Central and Eastern European countries. We understand this limitation as an opportunity and as an offer. Therefore, the book is only a beginning, which hopefully will be taken up by an entire scientific community. Only then it can really lead to success. Thesis 5: New Private Law Theory reflects critical approaches to private law. Both belong together. A pluralistic private law theory has to take critical approaches seriously and keep a certain distance from one-sided solutions to legal problems, whether they come from economics or from political and social sciences. This plea, of course, requires a clarification of what critical theory is and what kind of role is attributed to critical legal scholarship. The benchmark of critical approaches was the social question right from the early twentieth century on: how to deal with and how to integrate the new working class – or more generally, ‘the masses’ – into a legal order that is based on formal equality. O. von Gierke lamented the missing socialist oil in the drafting of the German Civil Code. A. Menger and H. Kantorowicz attacked the formalistic and positivistic concept of the German Civil Code upfront.6 In France, J. Carbonnier, L. Duguit and others fought about 5

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In fact, we go far beyond the seventy or so texts by recommending four to six texts in each chapter as further reading. O. von Gierke, Die Soziale Aufgabe des Privatrechts (Berlin: Springer, 1889), p.10; E. Kantorowicz, Was ist und Savigny? Recht und Wirtschaft, 47–58, 76–79; A. Menger, Das Bu¨rgerliche Recht und die Besitzlosen

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5

the pros and cons of legislative measures implementing social considerations into the Code civil. The 1968 revolt in many Continental European countries revitalized this critique and led to a politicization of private law (a good decade later followed by one at the EU level), as did the financial crisis of 2007/2008. Critical approaches have, in recent decades, taken up other pressing social issues, most importantly issues of race and gender discrimination (see Chapter 14). A relatively new strand of critical legal scholarship questions the way in which legal history and comparative law still follow an implicit European messianism through their focus on the Western European legal traditions7 and through the neglection of private law systems outside the rather narrow European or even EU–US perspective.8 Duncan Kennedy and others powerfully paved the way with an even more ‘critical’ theory, emphasizing that all legal practice decision-making is bound to be primarily politicized.9 What does this mean for new private law theory? In Critical Legal Thought, C. Joerges and D. Trubek10 highlighted the difference between theory of practice – theory as representation of the world as it is, where theory is expected to produce guidance for social action – and theory as practice, where theory’s goal is to change the way in which we think and not to contribute to change the world. Our approach may in fact not (fully) embrace either of these positions. However, what it argues for is a constant critical selfreflection of one’s own preconceptions and a more adequate and in fact rather representative reflection of the breadth of thinking about social order in private law. What follows in this introduction outlines – in its three sections successively – (i) what is meant and encompassed by the term ‘(new) private law theory’ (theoretical approach, see Section B), (ii) how this private law theory can be applied to specific core questions of private law (Sections B and C) and (iii) which questions of private law are covered in this way (Section D). 2 Applied Private Law Theory: Two Examples Legal theory allows for a reflection of law within the law itself.11 Unlike legal doctrine it can transcend the inside of the law and look outside – perceiving society as a whole. To do so,

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Volksklassen: Eine Kritik des Entwurfs eines Bu¨rgerlichen Gesetzbuches fu¨r das Deutsche Reich (Tu¨bingen: Laupp, 1890; 4th ed. 1908, Digitalisat). T. Duve, ‘European Legal History: Global Perspectives’, Max Planck Institute for European Legal History Research Paper Series no. 2013–06; O. More´teau / A. Masferrer / K. A. Mode´er, Comparative Legal History (Cheltenham: Edward Elgar, 2019). G. Frankenberg, Comparative Law as Critique (Cheltenham: Edward Elgar, 2016); J. Husa, A New Introduction to Comparative Law (Oxford: Hart, 2015); U. Kischel, Comparative Law (Oxford: Oxford University Press, 2019; M. Siems, Comparative Law (2nd ed., Cambridge: Cambridge University Press, 2014). See, for instance, D. Kennedy, ‘Critical Theory, Structuralism and Contemporary Legal Scholarship’, 21 New England Law Review 209–76 (1986); D. Kennedy, A Critique of Adjudication [Fin die Sie`cle] (Cambridge / MA: Harvard University Press, 1997); for a critical view by Hart, see H. L. A. Hart, The Concept of Law (2nd ed., Oxford: Clarendon Press, 1994), pp. 238–76. C. Joerges / D. Trubek (eds.), Critical Legal Thought: An American-German Debate (Bremen: Schriftenreihe des Zentrums fu¨r Europa¨ische Rechtspolitik, Volume 11, 1989), Introduction, p. 7. On the epistemological preconditions for this notion of legal theory see especially N. Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), pp. 55–6.

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legal theory must build on the insights of other disciplines. Legal theory translates these insights into the language of the law. Legal doctrine can benefit from the translation: with the help of legal theory, it can get a more adequate picture of the social contexts in which legal rules take effect (or not). What does this mean for private law? What is a contemporary private law theory and what is its purpose? The following examples will serve to illustrate our answers to these questions. a Case Example 1: Transnational Corporations and Human Rights

In May 2009 a US district court in Pasadena, California, had to decide a rather unusual case.12 The plaintiffs in this class action lawsuit on appeal were employed by suppliers of Wal-Mart in China, Bangladesh, Indonesia, Swaziland and Nicaragua. The plaintiffs, listed under the pseudonym Jane Doe et al., sued Wal-Mart for damages based on violations of labour protection. From the perspective of a district court in California, this claim is surprising: the plaintiffs are employed by foreign companies in foreign countries, where US and California labour law does not apply. There is no contract between the plaintiffs and the respondent, as the plaintiffs were hired by legally independent suppliers. However, the plaintiffs base their claims on the fact that Wal-Mart had its suppliers agree to a Code of Conduct containing certain minimum standards of labour protection. The district court discusses various doctrinal concepts under California law which might support the plaintiffs’ claims: a contract with third-party beneficiaries, WalMart being the plaintiffs’ joint employer, a negligent breach of a duty to monitor suppliers and an unjust enrichment of Wal-Mart by the mistreatment of the plaintiffs. In the end, the district court affirms the first instance’s dismissal of the claims. It argues that the claims cannot be based on any of the alleged doctrines under California law. This result shall not be put into question here. However, a legal decision is well-argued only if it fully reflects all pertinent facts and considers all the relevant arguments. And it is at this point that the use of a private law theory reflecting the social context of legal rules and decisions becomes apparent. What is the legal context of the Wal-Mart case? The first thing that stands out is WalMart being a retail giant and a large transnational corporation. Increasingly, such transnational corporations are publicly held accountable for the violation of human rights and environmental protection standards in their production processes (see Chapter 22 on corporate social responsibility). Following a private law theory approach does not mean that general policy considerations should simply be imported into legal discourse. Rather, it is about taking a deeper look, both with regard to the description of a social phenomenon and with regard to its translation into legal terms. 12

Doe v. Wal-Mart Stores Inc., 572 F.3d 677 (9th Cir. 2009), compare H. Revak, ‘Corporate Codes of Conduct: Binding Contract or Ideal Publicity?’, 63 Hastings Law Journal 1645–70 (2012); A. Beckers, ‘Globale Verhaltenskodizes. Rechtsvergleichende soziologische Jurisprudenz’, in B. Lomfeld (ed.), Die Fa¨lle der Gesellschaft: Eine neue Praxis soziologischen Jurisprudenz (Tu¨bingen: Mohr Siebeck, 2015), pp. 197–211 (‘Doe v. Wal-Mart’).

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In a first step, it will then become apparent what it actually means that Wal-Mart is a globally active corporation. Evidently, Wal-Mart has not integrated its global supply chain within a unified corporate structure; rather, Wal-Mart Inc. is connected to its suppliers solely on a contractual basis. However, the contracts between Wal-Mart Inc. and its suppliers expose a manifestly hierarchical structure. Through its Code of Conduct (and probably also by other means), Wal-Mart Inc. exerts a far-reaching influence on the daily business of its suppliers. Thereby, the supply chain of Wal-Mart Inc. is located in a grey area between the legal categories of either company law or contract law. For shedding light on this grey area, theories of institutional economics and economic sociology (see Chapters 3 and 17) seem most promising. Both disciplines can build on a long tradition of research on ‘hybrid’ forms of organization between hierarchical corporate structures on the one hand and horizontal market exchange on the other. They see corporation and contract not as categorically distinct, but rather as two positions in a large continuum of governance alternatives for organizing economic transactions. In between, endless variations of co-operation are conceivable: networks, so-called relational contracts, organized market places with their own trade rules (see Chapter 26). Such hybrid forms of co-operation are especially important in transnational constellations, where there is no unified company and no unified contract law and where traditional legal systems provide little legal certainty. This is the pathway to the deterritorialization of national contract law in global value chains.13 These considerations suggest that it is impossible to adequately grasp the doctrinal impact of Doe v. Wal-Mart Inc. when looking at it only through the lens of national contract law. In order to overcome this problematic methodical restraint theoretical legal sociology provides important insights: since public and private international law are not able to entirely govern cross-border constellations, economic actors have begun to make their own transnational law (see Chapter 25). A pertinent article on this phenomenon is tellingly titled ‘Wal-Mart as a Global Legislator’.14 When acknowledging the lawmaking function of transnational corporations, a normative follow-up question necessarily arises: how can such phenomena of private ordering be legitimized and what are their limits? Are these global legislators bound to respect human rights? What role is there for CSR? Here, the debate on transnational law can draw on the extensive discussions on the constitutionalization of private law that has 13

14

F. Cafaggi ‘New Foundations of Transnational Private Regulation’, 38 Journal of Law and Society, 20–49 (2011); D. Wielsch, ‘Global Law’s Tool Box: How Standards form Contracts’, in H. Eidenmu¨ller (ed.), Regulatory Competition in Contract Law and Dispute Resolution, (Munich: C. H. Beck, Oxford: Hart, BadenBaden: Nomos, 2013), pp. 71–112 at 72–3; J. Salminen / M. Rajavuori, ‘Transnational Sustainability Laws and the Regulation of Global Value Chains: Comparison and Framework for Analysis’, 26 Maastricht Journal of European and Comparative Law 602–27 (2019); K. H. Eller, ‘Private Governance of Global Value Chains from Within: Lessons from and for Transnational Law’ (2017) 8 Transnational Legal Theory 296–329; P. Paiement, Transnational Sustainability Laws (Cambridge: Cambridge University Press, 2017); B. Reinke / P. Zumbansen, ‘Transnational Liability Regimes in Contract, Tort and Corporate Law: Comparative Observations on “Global Supply Chain Liability”’, in S. Schiller (ed.), Le Devoir de la Vigilance (Paris: Lexis Nexis, 2019), pp. 157–83. L. C. Backer, ‘Economic Globalization and the Rise of Efficient Systems of Global Private Law Making: Wal-Mart as Global Legislator’, 39 Connecticut Law Review 1739–84 (2007).

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New Private Law Theory

been going on since the 1920s (Chapter 8). Thus, Doe v. Wal-Mart Inc. becomes a test case for a contemporary theory of human rights in private legal relations. The discussion on how to conceptualize such impact in a coherent doctrinal manner has only begun. b Case Example 2: The Mystery of Direct Discrimination

In a 2008 preliminary ruling procedure, the European Court of Justice had to answer the question whether there is direct discrimination within the meaning of Article 2(2)(a) of Council Directive 2000/43/EC of 29 June 2000 implementing the principle of equal treatment between persons irrespective of racial or ethnic origin where an employer, after putting up a conspicuous job vacancy notice, publicly states that he needs to comply with his customers’ requirements if they refuse to receive technicians of Moroccan origin.15 The court answers this question in the affirmative – and that seems intuitive. As the court rightly observes, such public statements can ‘strongly dissuade certain candidates from submitting their candidature and, accordingly, [. . .] hinder their access to the labor market’.16 Furthermore, it is obvious that the exclusion of certain candidates because of their ethnic origins is based on an irrational and thus per se inadmissible criterion. When taking a closer look, however, the situation turns out to be less clear. Just consider the case from the employer’s point of view. The employer will probably argue that they are not racist in any way and that the motivation to exclude Moroccan job applicants is not based on their origin as such. Instead they point to their clients’ preferences – and they might even be right when suspecting them of racist prejudice. From a merely economic standpoint, the employer acts most rationally when adapting their offer to their client’s ‘requirements’. If one puts all reasonable doubt regarding the accuracy of the employer’s evaluation of their client’s preferences aside and assumes that there are indeed such racist inclinations, the following question arises: can it be justified without further normative reasoning (‘categorically’) to dismiss their hiring policy by qualifying it as an act of direct discrimination? This change of perspective reveals a structural problem of anti-discrimination law. Philosophy and gender studies construe this problem as a question of diverging concepts of justice (see Chapter 14). Does anti-discrimination law aim at establishing an obligation to justify a private decision in a rational way, based on the paradigm of equal treatment (treating ‘like as like’ and ‘unlike as unlike’)? If that is so, the European Court of Justice’s decision seems questionable as soon as one considers the economically consistent argument of the employer. Or is anti-discrimination law about actual equality and the inclusion of disadvantaged social groups? Is non-discrimination the new value that the European legal order has generated and that forms part of a European identity?17 This 15

16 17

Centrum voor gelijkheid van kansen en voor racismebestrijding v. Firma Feryn NV, ECJ, C-54/07, 2008 I-5187. For a full reconstruction of the litigation through the lenses of the various participants, see, B. Kas, ‘Hybrid Legal Remedies in the EU Social Legal Order’, PhD EUI Florence 2017, https://cadmus.eui.eu/handle/1814/ 46964 (last accessed 15 December 2019). Ibid., section 25. R. Mu¨nch, Die Konstruktion der Europa¨ischen Gesellschaft: Zur Dialektik transnationaler Integration und nationaler Desintegration (Frankfurt am Main: Campus Verlag 2008).

New Private Law Theory: The Core Ideas

9

approach could justify the decision to the extent that the affected job applicants belong to a structurally disadvantaged social group. But even though this latter approach based on substantial equality seems very persuasive, it raises some unanswered questions.18 It seems hardly consistent with a liberal understanding of individual rights that one’s claims to a certain treatment depend on whether one belongs to a certain group that suffers from discrimination and exclusion. And how can group-related discriminations be reliably identified, ranked – and even legally qualified?19 A private law theory that builds on the insights of other social sciences can help to answer these questions. This is also indispensable for the further development of a coherent doctrine of non-discrimination in private law. Today, non-discrimination law forms an integral part of Western legal systems;20 at the same time, it reveals the limits of the traditional liberal legal thinking that is the foundation of Continental European private law codifications (see Chapter 10). As for now, it is still entirely unclear which paradigm could eventually replace the nineteenth-century model of a formalist private law – or if the growing complexity of social ties rather suggests a return to a renewed liberal model of private law.21

b application i: which theories, what reconstruction in law? Interdisciplinary insight has become such a self-evident objective of contemporary legal research that it seems almost redundant to explain its value, or the necessity of endeavours like the present one devoted to making such insights visible. The examples provided in the previous section should have already served to show the practical and concrete value of interdisciplinary engagement with legal issues. Nevertheless, the theories and texts of reference compared and contrasted in this book have previously been considered together in only a few cases, although they deal with shared questions of private law. Thus, many of the chapters in this book draw on texts of reference that have never before been analysed in conjunction. To elaborate: some of the analyses in the book admittedly draw on a prior pedigree of cross-disciplinary comparison/integration, but most prior research in this vein is limited to enhancing legal analysis with only one particular approach – institutional economics, for example – and without speaking to private law theory more generally. This book makes visible a number of previously unexamined theoretical connections relevant 18

19

20

21

A. Somek, Engineering Equality: An Essay on European Anti-Discrimination Law (Oxford: Oxford University Press, 2011). R. Xenidis, ‘Transforming EU Equality Law? On Disruptive Narratives and False Dichotomies’, 38 Yearbook of European Law (2019), available at https://doi.org/10.1093/yel/yey005. For an in-depth analysis, see C. Barnard, EU Employment Law (4th ed., Oxford: Oxford University Press, 2012); M. Gru¨nberger, Personale Gleichheit (Baden-Baden: Nomos, 2013); D. Schiek / L.Waddington / M. Bell (eds.), Cases, Materials and Text on National, Supranational and International NonDiscrimination Law (Oxford: Hart, 2007). With strong arguments for the latter position see K.-H. Ladeur, ‘Die rechtswissenschaftliche Methodendiskussion und die Bewa¨ltigung des gesellschaftlichen Wandels: Zugleich ein Beitrag zur Bedeutung der o¨konomischen Analyse des Rechts’, 64 RabelsZ 60–103 (2000) and also, albeit with a rather different theoretical approach, H. Dagan / M. Heller, The Choice Theory of Contracts (Cambridge: Cambridge University Press, 2017).

10

New Private Law Theory

to private law theory, in most cases by bringing together two or more influential neighbouring disciplines, or by putting topical national discourses in dialogue. Such comparisons have seldom been made, despite the fact that the texts of reference juxtaposed in every chapter are generally each a classic of their corresponding discipline. They speak to the same problem, for example, ‘negotiation’, the function of contracts and the ‘justice of consensus’ (see Chapter 11). This lacuna may be partially due to the fact that the texts of reference are taken not just from different disciplines – again, using Chapter 11 as an example, from legal scholarship, empirical behavioural research and game theory, and institutional economics, respectively – but may also result from their embeddedness in different linguistic traditions and scholarly debates. Our approach allows us to connect strands of thinking which all too often remain disconnected (see also Chapter 23 on the interaction between the functional method and law as a product). Therefore, we systematically try to overcome such boundaries in our broad, pluralistic new private law theory. 1 Broadly Comparative and Interdisciplinary Approach Proceeding in this manner – by combining different ways of integrating and combining sources of knowledge – the book develops a novel perspective on the ‘foundations of private law’.22 This is a two-fold approach which hitherto would seem not to exist, or at the least not in a consistent and systematic manner. The approach taken here is a broadly interdisciplinary effort to analyse and understand concrete questions of private law – such as negotiation and the justificatory power of consensus (Chapter 11), information rules and their justification (Chapter 12), the foundations of anti-discrimination law (Chapter 14), risk, tort and liability (Chapter 15), the digital architecture of private law relations (Chapter 16) or long-term contractual relationships (Chapter 17), etc. The first aspect of our approach is to integrate interdisciplinary perspectives on legal questions from ‘law and’ perspectives that draw on one discipline – such as the perspective of law and economics for instance – into a broader perspective of ‘law and (all) relevant neighbouring disciplines’ – thus combining law with pertinent insights from across the social and behavioural sciences. The idea motivating the arrangement around core questions – concrete, ‘substantive’ questions of private law – is precisely to make it possible to encompass not just one neighbouring discipline, but all those that meaningfully contribute to answering the question at stake. At the very least, our hope is to give the chosen approach a greater chance of success. Therefore, this first aspect of the new pluralist theory involves drawing on the insight and knowledge which exists in a whole range of disciplines beyond legal doctrine (legal and social theory), and applying it to concrete problems confronted in private law.23 22

23

See, R. Brownsword / H.-W. Micklitz / L. Niglia / St. Weatherill (eds.), Foundations of European Private Law (Oxford: Hart, 2011). On the centrality of this claim for the politics of science, particularly in Germany, also, however, in Europe as a whole, as well as on a global scale, see Council of Science and Humanities in its first report on the legal sciences in Germany: Wissenschaftsrat, Perspektiven der Rechtswissenschaften in Deutschland, Drs. 2558-12 of

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Second, as far as possible, the approach taken up here brings together the manifold strands of methodological and theoretical discussion rooted primarily in their own country or language tradition, in order to offer a perspective that is, if not quite global, at least European-wide and transatlantic. Such an approach is meant to replace bilateral approaches, which most often combine strands of thought rooted in one European country with those rooted in the United States, with a multilateral approach that encompasses all key jurisdictions in Europe and includes the United States. Most paradigmatic in this respect may be Chapter 5, in which texts written by F. Wieacker on European legal culture are confronted with the foundational text on legal origins written by R. La Porta, F. Lopez-de-Silanes, A. Schleifer and R. W. Vishny, or Chapter 6 in which ordo-liberal social theory (in F. Bo¨hm’s text on the so-called private law society) is confronted with J. Rawls’ A Theory of Justice, A. Sen’s The Idea of Justice and Mengonis Forma giuridica. 2 Comparison and Interdisciplinarity in Jurisprudence Again, there may be doubts that the proposed approach and theory – broadly comparative and broadly interdisciplinary – require any justification at all. This book may do little more than catalyse an understanding that such an approach or theory is both legitimate and fruitful. It may not even be necessary to show that such a theory is relevant for legal (including doctrinal) scholarship. Such acquiescence sits uncomfortably, however, with the fierce discussions during the 1990s, in quite a few European countries, about whether it might ever be appropriate for ‘efficiency’ to serve as a guiding principle in legal doctrinal thinking, and hence whether ‘law and economics’ was a legitimate method in questions of adjudication.24 Yet even the sharpest of the attacks on the legitimacy of integrating these perspectives seem to have since lost some of their ‘sting’, at least when it comes to perspectives on private law that transcend national frontiers like those concerning the ongoing development of European private law25 – a shift no doubt due to quite some extent to the overwhelming influence of US debates. Arguments based in law and economics – and increasingly in institutional economics – and organized around (corporate, market, contract) governance have been so influential in the United States that they have now become part of advanced doctrinal discourse, and even reached mainstream

24

25

9 September 2012, on this manifesto, see several comments by a good number of authors in: 68 Juristenzeitung 2013, 693 et seq. ¨ konomische Analyse und For the German debate, for example, see, on the one hand J. Taupitz, ‘O Haftungsrecht: eine Zwischenbilanz’, 196 Archiv fu¨r die civilistische Praxis 114–67 (1996), at 127 et seq., 135 et seq.; and to some extent even H. Eidenmu¨ller, Effizienz als Rechtsprinzip: Mo¨glichkeiten und Grenzen der o¨konomischen Analyse des Rechts (Tu¨bingen: Mohr Siebeck, 1999), pp. 451 et seq.; and, on the other hand S. Grundmann, ‘Methodenpluralismus als Aufgabe: zur Legalita¨t von o¨konomischen und rechtsethischen Argumenten in Auslegung und Rechtsanwendung’, 66 RabelsZ 423–53 (1997) at 430–443; see, generally, the survey in A. N. Hatzis (ed.), Economic Analysis of Law: A European Perspective (Northampton: Edward Elgar, 2003). On why European private law (as an evolving system of law) may be more open to interdisciplinary perspectives and adopt a particularly liberal approach to questions of theory, see, for example, M. Hesselink, The New European Legal Culture (Deventer: Kluwer, 2001), passim.

12

New Private Law Theory

private law on the European continent as well.26 What is somewhat lacking in contemporary theories on European private law is socio-legal research or much broader the role and function of social science.27 If the approach taken in this book thus needs little justification (but rather the approach as such needs broad discussion), and if, therefore, questions about the admissibility of this approach in adjudication, doctrine and legal thinking can be set aside, that does not render redundant a close consideration of the book’s methodology. The purpose of those considerations, however, is to further understanding of the adopted approach, not to justify it. Even if many will accept that such an approach is justified, rather little is done to put it into action in private law discourse. The value of this book will then mainly be to refine and apply a new private law theory that combines existing theoretical insights. In bringing its theoretical approach to application, the book draws on the hermeneutical tradition that may well be the dominant approach in contemporary communication theory and hence has clear importance in legal reasoning. Certainly in its philosophical foundations,28 but in our view also in its existing applications to legal theory,29 this is a highly appealing – perhaps even the most satisfactory – explanation of the communication process which takes place, and which should take place, in legal reasoning. At its core, the idea as applied to law is that communication is an ongoing process that develops out of the interplay between the parties to the communication – the parties to the contract as well as third parties – rather than a one-sided act that involves sending a message from the one party to the other (e.g., from the legislature or from the courts to private law subjects) and that in this process the various preconceptions of the parties are all relevant, to be brought together, to be altered and to be perfected over and again. With regard to law, the tension between fact and legal rule has to be at the core of communication and interpretation. All of this is captured in the famous image of the eye – the regard – which has to travel from one thing to the other and back again, from facts to rules and back again, over and over

26

27

28

29

See particularly K. Hopt / H. Kanda / M. Roe / E. Wymeersch / S. Prigge (eds.), Comparative Corporate Governance: The State of the Art and Emerging Research (Oxford: Oxford University Press, 1998); and for contract law issues, drawing, however, on a broader range of disciplines, including new economic sociology and behavioural science/psychology: S. Grundmann / F. Mo¨slein / K. Riesenhuber (eds.), Contract Governance: Dimensions in Law and Interdisciplinary Research (Oxford: Oxford University Press, 2015); S. Grundmann / P. Hacker (eds.), Theories of Choice: The Social Science and the Law of Individual, Collective and Organizational Decision Making (Oxford: Oxford University Press, 2020). H.-W. Micklitz, The Politics of Justice in European Private Law (Cambridge: Cambridge University Press, 2018); E. v. Schagen / S. Weatherill (eds.), Better Regulation in EU Contract Law: The Fitness Check and the New Deal for Consumers (Oxford: Hart, 2019). Path breaking: H.-G. Gadamer, Wahrheit und Methode (1st ed., Tu¨bingen: Mohr,1960); in English: Truth and Method (2nd ed., London: Sheed and Ward, 1989); on this work, see namely G. Figal (ed.), Hans-Georg Gadamer: Wahrheit und Methode (Berlin: Akademie-Verlag, 2007); P. C. Lang, ‘Hans-Georg Gadamer: Wahrheit und Methode – Grundzu¨ge einer philosophischen Hermeneutik’, in Hauptwerke der Philosophie: 20. Jahrhundert (Stuttgart: Reclam, 1992), pp. 256–82. Path breaking: J. Esser, Vorversta¨ndnis und Methodenwahl (Frankfurt am Main: Atha¨neum, 1972), namely pp. 116–41; in Italian, translated by Giuseppe Zaccaria / S. Patti under the title Precomprensione e scelta del metodo nel processo di individuazione del diritto (Naples: Edizioni Scientifiche Italiane, 1983); see in more detail in Chapter 1, ‘The Inside and the Outside of Law’.

New Private Law Theory: The Core Ideas

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again in the ‘hermeneutic circle’, with a view to inspiring the understanding of the one by the understanding of the other. A similar process can be seen to take place or to be required between theories of different disciplines or also with respect to their use in doctrinal legal thought. In this process, preconceptions, particularly in the eyes of J. Esser, are neither objective nor subjective, but rather identify the challenge of creating intersubjectively acceptable results despite the fact that the starting point for any understanding is always a particular position, and thus there cannot be any ‘neutral’, completely objective understanding and communication. In law, the challenge is to create and reason through a result which, given the value judgments of the legal community, can claim acceptance in that community even though interpretation is a creative act, influenced by the personality and the preconception(s) of the interpreter. In this act, written law, precedent, etc., but also convictions of what is legally justified, as embedded in society, are integrated and gradually merged. In this respect, a reformulation of what other social or behavioural sciences opine about a legal rule or issue – positions that often offer a more precise reformulation of important value judgments in society at large – can also be integrated into the process, ‘reformulated’ and indeed ‘reconstructed’. Through this reconstruction, adequacy to the domain of law and to the legal community is to be positively created and looked for, taking the core parameters of legal evaluation as the guiding framework – fundamental rights for example, or the fundamental principles of whatever field of (private) law is at stake – particularly when national law is to be applied.30 In private law beyond the state, human rights are a necessary point of reference, but also customary principles that guide private ordering in the transnational arena. If hermeneutics is understood in this sense, it should be able to relate to differing schools of thought. Even contemporary formulations of legal positivism, for example in the Oxford tradition, might agree with the essential statements of legal hermeneutics. Taking J. Raz’s most recent monograph as exemplary, a very similar methodological stance can be discerned.31 This will be explained in more detail later on.32 However, in the context of this introduction, it suffices to quote J. Raz when he concludes (with respect to interpretation) that ‘[t]he contingency of socially dependent meanings makes ample room for innovative interpretations which show new ways of understanding their objects, and in so

30

31

32

For a beautiful account of very similar reasoning, see G. Teubner, ‘Rechtswissenschaft und -praxis im Kontext der Sozialtheorie’, in S. Grundmann / J. Thiessen (eds.), Recht und Sozialtheorie im Rechtsvergleich – Law in the Context of Disciplines – Interdisziplina¨res Denken in Rechtswissenschaft und praxis (Tu¨bingen: Mohr Siebeck, 2015), pp.141–64, and an abridged version in G. Teubner, ‘Law and Social Theory: Three Problems’, Ancilla Iuris 183–221 (2014), available at www.anci.ch/articles/ancilla2014_183_ teubner.pdf. See J. Raz, Between Authority and Interpretation: On the Theory of Law and Practical Reason (Oxford, Oxford University Press, 2009), and particularly chapter 12 on interpretation; on positivism (also in the shape given to it by J. Raz), see, for instance: J. Gardner, ‘Positivism: 5 ½ Myths’, 46 American Journal of Jurisprudence 199–227 (2001), reprinted in: J. Gardner, Law as Leap to Faith: Essays on Law in General (Oxford,Oxford University Press, 2012), pp. 19–53; Leslie Green, ‘Legal Positivism’, in E. N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2009), http://plato.stanford.edu/archives/fall2009/entries/legal-positivism. For more on positivism generally, and as confronted with Esser’s hermeneutic approach see Chapter 1.

14

New Private Law Theory

doing establish new meanings for their objects’.33 This opens the door rather widely to arguments about society, change in society, new systems of value judgement accepted in society – particularly if social change over time is important, or if different societal settings are brought into dialogue, for instance across borders. Indeed, Raz explicitly stresses that good interpretations are ‘fragile and changeable’ and uses his text to ‘present some reasons for empowering the courts [and hence also doctrinal legal scholarship] to engage in innovative interpretation in [appropriate cases]’.34 3 The Benefit for Private Law Scholarship and Practice If hermeneutics and advanced positivist legal theory would both seem to allow for such innovative interpretation, the core question – following Raz – would seem to be whether innovations of the type advocated here, that is, those based in broad insights from across the social and behavioural sciences, can be expected to lead to good legal results; more soundly informed and more adequate to the issue at stake. Will drawing on these insights actually lead to progress in legal scholarship and understanding, can it make any useful contribution to ‘doctrinal’ interpretation? Given the growing consensus on the value of interdisciplinary work to legal thinking, however, there are two ways of framing the question, one which starts with the entire collection of disciplines potentially pertinent to law, and the other focused more narrowly on the role of law and economics. The two sides of the coin are (i) what is to be gained from including such a broad collection of disciplines; and (ii) (in practice, probably the more important formulation) why not, in particular, take the path of least resistance, and rely predominantly on an economic form of analysis which already seems so well designed for application when it comes to contexts of private and commercial law? As for the first question, where an issue or context is the object of legal rules, it seems beyond doubt that additional wisdom concerning underlying questions of structure and value cannot but help advance legal scholarship and practice. This would seem to imply that these questions require no further discussion, that there is instead at most a question of feasibility, along perhaps with some room for amazement that reference to the whole range of disciplinary perspectives on legal rules and issues is not the usual, or indeed the universally accepted approach to legal scholarship. As self-evident as the demand for interdisciplinarity may be today, it may perhaps become even more self-evident if one takes its epistemological background into account, especially in such central areas as economics, sociology and social psychology. What is important here is, first, insight into the decentralization of social knowledge35 – a concept with which F. von Hayek in 1945 (!) predicted such fundamental developments as the superiority of the decentralized capitalist 33

34 35

J. Raz, Between Authority and Interpretation: On the Theory of Law and Practical Reason (Oxford, Oxford University Press, 2009), pp. 311 et seq. Ibid., pp. 312 and 318. Groundbreaking: F. A. von Hayek, ‘The Use of Knowledge in Society’, 35 The American Economic Review 519–30 (1945). For ‘competition as a discovery device’ see, for example F. A. von Hayek, ‘Competition as a Discovery Procedure’, in New Studies in Philosophy, Politics, Economics and the History of Ideas (London: Routledge & Kegan Paul, 1978), pp. 179–90.

New Private Law Theory: The Core Ideas

15

system over any planned economy. Equally important is J. Surowiecki’s popular formula of the ‘wisdom of the crowds’ [or masses]. This formula is based on the finding that the aggregated insight and forecast of higher numbers of individuals is on average considerably more accurate than that of individuals alone, even of those individuals who are more expert than other members of the group.36 This approach goes beyond von Hayek above all in that it also explains in which situations the opposite is the case, namely when the masses act too homogeneously, which, with astonishing perspicacity, identifies one of the main causes of the far-reaching financial crisis of 2008, namely herd behaviour with its risktaking effect.37 Both approaches are of great interest for the question of the value of interdisciplinary knowledge. Both approaches emphasize that knowledge gains require diversity and diversification of knowledge (creation of much knowledge that also corrects each other) as well as mechanisms that mediate and correlate decentralized knowledge stocks, that is, a minimum of unity in diversity.38 This is precisely the aim of our book: interdisciplinary diversity brought together in the unity of private law theory. The second part of the answer concerns one particular kind of interdisciplinary collaboration, which is almost certainly dominant in US literature and practice in areas of private law related to markets and (business) organizations, and has a strong claim to dominance in Europe as well (economic analysis as a ‘fifth method of interpretation’).39 This is the method of law and economics, and in particular the use of institutional economics in the discussion of normative legal issues. While there is much to admire in economic theory’s successful reconstruction of other disciplines within economic theory (and in particular around the paradigm of ‘efficiency’) – law in the form of institutional economics, psychology and behavioural sciences in the form of behavioural economics, mathematics with game theory, rational choice approaches in political science, etc. – and 36

37 38

39

J. Surowiecki, The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations (New York: Random House, 2004). Ibid. Von Hayek, fn. 35, particularly 525–30; J. Surowiecki, The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations (New York: Random House, 2004), pp. 29–39. On von Hayek’s text as a key text for an information-based model of the economy and society, see Chapter 12: Knowledge and Information. On the possibilities post-Hayek in the digital economy, P. Palka, ‘Algorithmic Central Planning: Between Efficiency and Freedom’, Law & Contemporary Problems (2020) available at: http://ssrn.com/abstract=3542778. See especially the excellent account of the intellectual dominance of a law and economics approach, despite very severe shortcomings: E. Posner, ‘Economic Analysis of Contract Law after Three Decades: Success or Failure?’, 112 Yale Law Journal 829–80 (2003); for one Nobel laureate in economics clearly opposed to any claim of dominance by one discipline, see: A. Sen, The Idea of Justice (Cambridge / MA: Belknap Press of Harvard University Press, 2009); on economic analysis of law as a ‘fifth method of interpretation’, see H. Eidenmu¨ller, Effizienz als Rechtsprinzip (Tu¨bingen: Mohr Siebeck, 1995), 450–80; F. Ku¨bler, ¨ berlegungen zur rechtspraktischen Bedeutung der o¨konomischen Analyse’, in C. Ott / ‘Vergleichende U H.-B. Scha¨fer (eds.), Allokationseffizienz in der Rechtsordnung (Berlin and Heidelberg: Springer, 1989), pp. 293–305; C. Ott, ‘Allokationseffizienz, Rechtsdogmatik und Rechtsprechung: die immanente o¨konomische Rationalita¨t des Zivilrechts’, in C. Ott / H.-B. Scha¨fer (eds.), Allokationseffizienz in der Rechtsordnung (Berlin and Heidelberg: Springer, 1989), pp. 25–32; C. Kirchner / S. Koch, ‘Norminterpretation und o¨konomische Analyse des Rechts’, 11 Analyse und Kritik 111–33 (1989); S. Grundmann, ‘Methodenpluralismus als Aufgabe: zur Legalita¨t von o¨konomischen und rechtsethischen Argumenten in Auslegung und Rechtsanwendung’, 66 RabelsZ 423–53 (1997).

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while this may even have contributed to the status of economics as a leading social science, it does not dispense with the need for legal scholarship to examine the same type of reconstruction of neighbouring disciplines under the auspices of its own value system. What in economics was achieved under the auspices of the paradigm of efficiency, in legal scholarship must be achieved under the auspices of the ultimate foundations of legal legitimacy, which connects law to political and social science. While efficiency is spelt out as one of the core aims to be reached in certain areas, in some cases even as the core objective,40 and while such a role can be implied for efficiency in many other areas as well, it is equally true that efficiency is neither the sole relevant value nor even the supreme value in the hierarchy of legal architecture(s). Democratic legitimacy, justice and respect for fundamental rights (and the rule of law) are legal values of supreme importance and rank.41 In particular, the binding force which fundamental rights also have in private law constitutes a striking, irrefutable case, deeply rooted as they are both in societal beliefs about legitimacy and in the canon of legal sources. Such rights do not need to, and in fact seldom do, coincide with the paradigm of efficiency as conceptualized by economic theory. Therefore, as much as institutional economics may have a comparative advantage in producing ‘easy-to-apply’ results, and in having an outstandingly consistent analytical toolkit, it clearly cannot be regarded as the sole social science approach relevant to legal scholarship and legal thought more generally. When concrete cases are discussed, such as those introduced in Section A.2, other social sciences, from sociology to philosophy, are of crucial importance in addressing issues beyond the limits of economics. This is so irrespective of how well the assumptions – such as the assumption of rational decisionmaking – capture and describe real life, that is, irrespective of whether there are additional grounds for questioning the claim to exclusiveness which is typical of law and economicsbased inquiries. The degree to which the assumptions of economic or other social-scientific models are relevant for law at all – whether, for example, a legislature might want to create incentives for actors who make decisions rationally – can be decided only on the basis of the legally binding material in a case by cases analysis. This consists of the specific values promoted and the concepts relied on in the relevant area of the law (plus the constitution), for instance by consulting the recitals of EU Directives. This method, 40

41

See, for instance, the 2nd, 4th and 6rd as well as 56th, 60th and 65th recitals of Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and regulation (EU) No 1093/2010 and repealing Directive 2007/64/EC, OJEC 2015 L 337/35 (PSD II, and already PSD I 2007/64/EC); or 6th recital of Directive 2008/ 48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC, OJEC 2008 L 133/66. This is also the basis of J. Rawls’ distinction between political freedoms and rights to equality on the one hand and merely economic values in his treatise, on the other, no doubt the most important piece of moral philosophy of the twentieth century: J. Rawls, A Theory of Justice (Cambridge / MA: Belknap Press of Harvard University Press, 1971, revised ed. 1999), chapter 3: ‘The Original Position’, pp. 118–66. On this text and its philosophical (re-)construction of fundamental societal order, see Chapter 6: ‘Societal Order and Private Law’. More broadly on the normative superiority of a pluralist theory of interdisciplinary research – as compared to a ‘monist’ approach such as law and economics – S. Grundmann, ‘Pluralism and Private Law Theory’, manuscript 2020 (also more detail on the ‘value tracking’ method described in the text).

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which could be called a ‘value-tracking’ method, does seem normatively better grounded and also to foster legal certainty to a considerably higher extent than choosing the relevant sources of inspiration by recourse to philosophy as the prime source for such new legal theory.42 For such a value-tracking method, it is obvious how outstanding is the importance of the famous Lu¨th case decided by the German Constitutional Law in 1958. With clearly defining fundamental rights as an overarching value basis also for private law and its interpretation – and we say, for assessing the use of interdisciplinary theories – it may be just as foundational for a pluralist legal theory as Carroll Towing decided by the US Supreme Court in 1947 is often said to be for law and economics. This means, for example, that it is both possible and indeed legitimate to pay significant attention to what concepts of the European consumer prevail in legislation – in the sense that, if an image of the consumer as, for example, vulnerable is chosen by the legislator, that will entail preference for some theories over others (i.e., bounded rationality).43 If law is indeed pluralistic in its value foundations, an assessment conducted exclusively on the basis of one lead paradigm, though likely to produce highly consistent results, has to be excluded a limine as a starting point for a legal assessment. Therefore, while the models and assumptions of (institutional) economics are deployed throughout the book, this is typically done only in conjunction or even in competition with diverging approaches. Thus, rather than law and economics on its own, a ‘fifth method of interpretation’ might be understood to comprise all extra-legal knowledge as embedded and reconstructed in legal scholarship. Even rather concise questions, such as negotiation and the ‘justice of consensus’ or the position of third parties in networks of contracts, show the task of reconstructing social science approaches – all pertinent approaches – in legal terms to be a Herculean undertaking (see Section C.2). This book, in its entirety, represents but a first step in that much larger project. It does so in many, if not in the majority, of the chapters simply by confronting two or three pieces of theory which originate in different disciplines and which have not hitherto been brought into contact with one another (in a small number of chapters, the encounters are the more ‘traditional’ ones). Even if only some of these confrontations bring new insight, this should be enough to encourage further discussions. 4 Interdisciplinarity: Which Disciplines? This book is arranged around concrete problems arising in private law, including its constitutional dimension, and questions of rule setting. This logic determines the layout of Parts II–V, with Part II concentrating on the core question of autonomy and its

42 43

In this sense, see, however, M. Auer in fn. 1. See the two books recently published on ‘consumer images’ and on ‘Verbraucherleitbilder’: D. Leszykiewicz / S. Weatherill (eds.), The Images of the ‘Consumer’ in EU Law: Legislation, Free Movement and Competition Law (Oxford: Hart, 2016) and F. Klinck / K. Riesenhuber (eds.), Verbraucherleitbilder: Interdisziplina¨re und europa¨ische Perspektiven (Berlin: de Gruyter, 2016).

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limits – in our view the individual feature which most characterizes the development of law in the twentieth century;44 Parts III and IV then enter into specific areas of the law and Part V addresses the issue of rule-setting (see more specifically Section D.1). These four parts on ‘private law’ proper, however, require an (introductory) Part I devoted to the range of approaches and disciplines we consider, that is, the lead texts around which the discussion is arranged. This first Part is arranged into five chapters and the main approaches and disciplines on which we draw follow. The book starts out with methodology, that is, with the core question of how social theory in general and other disciplines in particular relate to law, doctrinal thinking, adjudication, etc. (Chapter 1). It then introduces two texts on law and society (or legal sociology), which was the first entry point by which, early in the twentieth century, legal scholarship opened up more systematically to social reality and empirical inquiries (Chapter 2). Based on three texts of reference on economics, the book then explores questions where the assumptions of neoclassic economic thinking are challenged and legal institutions are paramount: transaction costs economics, which challenges the idea of complete, freely available information; bounded rationality, which questions the paradigm of rational choice; and, more broadly, the governance approach (Chapter 3). Finally, Chapter 4 discusses systems and discourse theory as two of the most powerful explanations of the development of law and models of justice, while Chapter 5 discusses the theoretical and conceptual links between comparative law and legal history. Although there is already a long tradition of (intimately) integrating these two methods of comparison into the discourse of legal theory, and though they are not strictly trans-disciplinary, no contemporary private law theory seems possible without them. This survey in no way exhausts the range of relevant disciplines, but simply presents in more detail those which seem particularly relevant. Individual chapters give other disciplines more extensive coverage, with, for example, moral and political philosophy more prevalent in Chapter 6 on societal order and behavioural sciences given prominence in Chapter 11, which deals with ‘negotiation and the justice of consensus’. Part I is thus aimed at laying some foundations for the application of a broad range of disciplines to particular problems in the chapters devoted to private law proper, albeit it cannot hope to exhaust this endeavour.

c application ii: what ‘application of theory’ to private law? 1 The Core Problem: Between ‘Information Overkill’ and Irrelevance An interdisciplinary private law theory, aimed at applicability to private law questions in concrete cases, must address two issues: first, which interdisciplinary theory is important enough to make it worth reconstructing within the discipline of private law theory? 44

For more detail on the importance of autonomy and its limits, see S. Grundmann, ‘The Future of Contract Law’, 7 European Review of Contract Law 490–527 (2011); H. Dagan / M. Heller, The Choice Theory of Contracts (Cambridge: Cambridge University Press, 2017).

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Second, how can the insights derived from such a theory actually be reconstructed for private law doctrine? If a private law theory does not find an answer to the first question, the endeavour will be paralysed by ‘information overkill’. If it does not solve the second question, the result remains – and indeed, should remain – without real impact in the application of private law. These two core issues can be made more concrete by asking the following questions: (i) in the particular theory drawn upon, how relevant are the research questions to the problems addressed by legal scholarship and legal practice? In other words, does the theory have any relevance for questions which are asked (or should be asked) in law, specifically with regard to adjudication or legal ordering? Does the theory or text of reference address a question which law has any proper role in governing, or should the question at issue be left instead to the autonomous decision of a private party, or to negotiation between parties, without legal constraint? And (ii) how well can the theory be reconstructed in the realm of law – a question which depends on, among other things, the assumptions made by the particular theory, and specifically on how far those assumptions can also be accepted or used, albeit in a modified form, in the realm of law. Does the approach deal with the question in such a way that social or psychological reality is depicted well enough, that is, closely enough to allow this approach to govern, or at least influence, judgments on a situation taken from social or psychological reality? These two questions cannot be answered in an abstract way. They can be answered only in a hermeneutic process, letting the gaze track back and forth between the private law problem on the one hand, and the theoretical approach and the insights it proposes on the other. Our book, in its many chapters addressed to concrete problems and private law issues, via the combination of our texts of reference – representing a variety of theories – tries to lay the foundations for a meaningful discussion of the two questions. What these two questions may mean for legal scholarship and practice is best clarified by three examples taken from this book – the first closest to classical private law, the second discussing the relationship between the constitutional perspective and private law, and the third then reaching into the transnational arena. 2 Three Quintessential Questions on Private Law a Negotiation and the ‘Justice of Consensus’

For this first example, the two questions asked in Section 1 are taken up with respect to the use of game theory and bounded rationality research as applied to questions of negotiation and the ‘justice of consensus’. The two questions asked above are exemplified with respect to one of the three texts chosen as texts of reference and commented on in Chapter 11 below. In many of the individual chapters, similar questions are asked and reconstructions are proposed for those texts of reference chosen, albeit often only implicitly.

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The area of negotiation and justice of consensus is paradigmatic of the difficulties of choosing relevant perspectives, given the huge range of texts and theories that focus on the questions of how ‘negotiations’ and decision-making within them, really function, and what value such negotiation has. Negotiation and bargaining are often used synonymously. Game theory is often seen in mathematics, where it has its roots, as the dominant theory on issues of bargaining. This view is equally strongly held in economic theory, one of its core fields of application.45 This should not be astonishing given the object of game theory, namely the modelling and forecasting of interdependent decision-making. This is decision-making in situations where the choice takes the form not of trying to find a position or parameter in a mechanically responding (‘passive’) world, but must also take into account the potential and most likely decision of one or several other player(s). And, of course, bargaining is paradigmatic of these latter (‘non-parametric’) situations.46 There is, however, a second reason that game theory could be seen as the dominant theory of bargaining. This reason is related to the field’s history and evolution – namely, that after J. von Neumann and O. Morgenstern made the foundational step in formalizing the decision-making process in interdependent decision-making situations, the analytical framework as applied to bargaining was first formally worked out by J. Nash.47 This

45

46

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H. Raiffa, The Art and Science of Negotiation (Cambridge / MA: Harvard University Press, 1982)(recognizing the value of game theory as a theoretical tool, but also its limits); H. P. Young, Negotiation Analysis (Ann Arbor: University of Michigan Press, 1991), p. 2 (‘principle theoretical tool for analyzing negotiations’); also R. J. Aumann / S. Hart (eds.), Handbook of Game Theory with Economic Applications, vol. I (Amsterdam: North-Holland, 1992); D. Ross, ‘Game Theory’, in E. N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2016), http://plato.stanford.edu/archives/spr2016/entries/game-theory (‘since at least the late 1970s it has been possible to say with confidence that game theory is the most important and useful tool in the analyst’s kit whenever she confronts situations in which what counts as one agent’s best action (for her) depends on expectations about what one or more other agents will do . . . ’). Widely recognized as core concept, as can easily be inferred from the award of so many Nobel Prizes, first to John Forbes Nash Jr., John Harsanyi and Reinhard Selten (1994), and later to William Vickrey (1996), Robert Aumann and Thomas Schelling (2005), and Alvin Roth and Lloyd S. Shapley (2012), but also to those developing the branch of bounded rationality, namely Herbert A. Simon (1978) and Daniel Kahneman (2002) (besides, to a certain extent, also Reinhard Selten). On this core characteristic, which distinguishes game theory from other decision theory (and which is also central to the development of game theory), see, for instance, D. Ross, ‘Game Theory’, in E. N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2016), http://plato.stanford.edu/archives/spr2016/entries/gametheory. In game theory ‘interdependent decision making’ is nowadays mostly used to refer to non-cooperative games: see R. J. Aumann / S. Hart (eds.), Handbook of Game Theory with Economic Applications, vol. I (Amsterdam: North-Holland, 1992), preface: ‘Another such “bridge” between the noncooperative and the cooperative is bargaining theory. Until the early eighties, most of bargaining theory had belonged to the cooperative area. After the publication, in 1982, of Rubinstein’s seminal paper on the subject, much of the emphasis shifted to the relation of non-cooperative models of bargaining to the older cooperative models’; A. Rubinstein, ‘Perfect Equilibrium in a Bargaining Model’, 50 Econometrica 97–109 (1982); see generally R. B. Myerson, Game Theory: Analysis of Conflict (Cambridge / MA: Harvard University Press, 1997), chapter 8. J. von Neumann / O. Morgenstern, Theory of Games and Economic Behavior (Princeton / NJ: Princeton University Press, 1944); J. Nash, ‘The Bargaining Problem’, 18 Econometrica 155–62 (1950); then J. Nash, ‘Non-cooperative Games’, 54 The Annals of Mathematics 286–95 (1951).

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is, however, not the place to go over the details of game theory,48 but rather to see an application to the two core questions that interest us.49 The first question is to show how the (core) research question asked by the theory – one of such eminence and universal importance as game theory – might contribute to the resolution of legal questions by reconstructing the theory under the auspices of legal values. This question would seem to be logically prior even to the issue raised much more often: the concern over the appropriateness of the assumptions game theory makes (on this second question, see below). Thus, the first question concerns the core problematic at the centre of game theory, which defines the main aim which the theory wants to achieve. This aim can be described as: ‘A set of strategies is a Nash Equilibrium just in case no player could improve her payoff, given the strategies of all other players in the game, by changing her strategy.’50 Game theory is concerned with understanding the decision-making in bargaining processes and, on this basis, with identifying the single optimum – or the several optima – which the parties can reach in the absence of cooperation (or in some cases, via co-operation), with the so-called ‘equilibria’ of the bargaining situation. In other words, better co-operation could improve the outcome, therefore enhancing co-operation being a main goal to achieve, but still striving for optima. Outcomes that do not represent the aggregate optimum and even more outcomes that make each of the parties worse off (like in the prisoner’s dilemma) should be made transparent and thus best avoided. In particular, defection as a dominant strategy that triggers these outcomes should be made transparent and avoided. As central as this issue may be for negotiation, the question is whether and where it can offer important insight for legal prescriptions (also default rules) on the problem of negotiation and the justice of consensus. The answer turns on the history of the search for a iustum pretium – which, mutatis mutandis, is just another word for a situation in which ‘no player could improve their payoff, given the strategies of all other players in the game, by changing their strategy’. It seems obvious that long experience and consideration of countervailing arguments have led legal scholarship (and practice) rather unanimously to the perspective that law should consciously remain silent in the players’ efforts to reach the iustum pretium, that is, the optimum pay-offs which both parties might win from a bargain. The law should typically give the enabling rules for better collaboration and framework conditions, but not force such collaboration either. This focus is to be reflected in the choice of theory made for legal considerations. Even under current law regarding standard-term contracts with respect to consumers (i.e., even in an area of contract law where judicial scrutiny is 48

49

50

See especially S. N. Durlauf / L. E. Blume, Game Theory (Basingstoke / New York: Palgrave Macmillan, 2010); D. Fudenberg / J. Tirole, Game Theory (Cambridge /MA: MIT Press, 2002, 1st ed. 1991); R. B. Myerson (fn. 46). Nor is it really of importance whether in game theory, bargaining is dealt with today rather as a part of co-operative or of non-cooperative game theory (which is seen nowadays to dominate, see fn. 46). For the relevance of game theory for law (in other areas than negotiation), see, for instance, D. Baird / R. Gertner /R. Picker, Game Theory and the Law (Cambridge / MA: Harvard University Press, 1994). See, for instance, D. Ross, ‘Game Theory’, in E. N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2016), http://plato.stanford.edu/archives/spr2016/entries/game-theory, sub 2.5; D. Fudenberg / J. Tirole (fn. 48), sub 1.2; R. B. Myerson (fn. 46), sub 3.2.

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strictest), and even under the typically more protective European regime, the pay-offs as such are consciously excluded from any direct scrutiny or second-guessing in EU law although not in each and every member state.51 The countervailing arguments derive from questions such as the following: given imperfect information – an imperfection that can only be worse for those standing outside the bargain – how can a judge be better positioned to decide on the optimum pay-off? Can a market economy based on private initiative function at all if any and every outcome based on that private initiative can theoretically be second-guessed? Is there no longer such a thing as party autonomy based on fundamental rights? Could the autonomy of the parties have any meaning if judicial scrutiny could always be brought to bear, if judges could always second-guess the outcome, could always begin a search for some possible optimum beyond the solution found in the initial bargain? For all these reasons, only the outer limits are scrutinized, and this restraint has been a conscious choice, made in light of legal values – values very explicitly enshrined in rules fundamental to the legal architecture. If party autonomy, at its core, is indeed to be guaranteed as a fundamental right, as a constitutional cornerstone of the legal value system, then only one consequence seems possible, that if one requires that any theory developed within other disciplines is to be reconstructed under the auspices of the legal value system- (rather than simply being taken as-is, and integrated into law’s methodological repertoire without further filtering), then determining what the optimal bargain may be in a given situation – just as game theory defines its aim – does not constitute a proper goal for judges and their decisions. It therefore forms no suitable part of doctrinal legal thinking. Indeed, there are only two situations where legal ordering has stepped in with respect to negotiation and the justice of consensus, both of which are at odds with the structure and nature of the issue addressed by game theory. These situations are namely (i) where there is need to address the effect of the bargain on those (i.e., third parties) who cannot influence the bargain (and who therefore literally do not ‘count’ in the game theory calculations)52 and (ii) where a ‘weaker’ party is to be protected – a weaker party who, in most constructions, cannot meet the standard assumptions of full rationality on which classic game theory is founded. In practice, classical game theory struggles to model versions of the bargaining problem where one party is not behaving rationally, even when it comes to understanding the structure of the 51

52

For consumer contracts, see, for instance, Art. 4(2) of (European) Council Directive 93/13/EEC of 5 April on unfair terms in consumer contracts, EC OJ 1993 L 95/29 and ECJ Case C-484/04 Caja de Ahorros (2019) ECR I-4785 at 28–9. Among the texts discussed in this book, see the beautiful account by L. Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, Festschrift Deutscher Juristentag 101–31 (1960), at 130; for the current state of the discussion, see A. Pedone, ‘The Just Price Doctrine and Contemporary Contract Law: Some Introductory Remarks’, 10 Rivista Internazionale di Scienze Sociali 217–36 (2014) (taking the – highly minoritarian – view that there may nevertheless be a rest of rationale for a iustum pretium doctrine, but only in theory, not really in the examples). How little this is a concern from ‘inside’ game theory can be inferred from the account of how to solve the prisoner’s dilemma – by making them co-operate in not confessing despite the surrounding adverse conditions – in D. Ross, ‘Game Theory’, in E. N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2016), http:// plato.stanford.edu/archives/spr2016/entries/game-theory/, sub 2.7. It is no concern for Ross that – for justice reasons advanced for a principle of retaliation, but also in service of the aim of general deterrence in criminal rules – the legal order actually wants to prevent co-operation.

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problem for a counterparty that is rational (since classic game theory predicts actions of each party in light of the foreseeable rational behaviour of the other side).53 This leads to the second question that needs to be answered: how to reconstruct a theory – if doing so is at all meaningful, given the core question it asks – for doctrinal legal thinking. This second question would have to be addressed by all those (still rather few) who hold that game theory, with its search for iustum pretium, is in fact relevant for law, because there should be such oversight. This second question typically turns around the assumptions made by this theory and how realistic they are, that is, how well-suited they are to real life. The typical criticism made when it comes to applying game theory to real-world negotiations, including when it comes to its relevance for law, is that the rationality assumption is so unrealistic that the predictions it produces are not reliable. Indeed, most empirical research points to considerable deviations from the results predicted by classical game theory, both with respect to simple, one-shot games like the prisoner’s dilemma,54 and also when it comes to such fundamental conceptual instruments as backwards induction in the case of repeated games with multiple, but less than infinite, shot structure.55 Even in repeated games without a known end, which game theory sees as fundamentally different,56 it is admitted that the ‘rational’ strategy of ‘tit for tat’ is by no means always the most promising.57 Thus, game theory that reflects these biases has to take into account that it might give some rough forecast, for instance that tit for tat situations lead more to collaboration than one-shot games or games with a definite 53

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Groundbreaking in this respect is the so-called trembling hand problem: R. Selten, ‘Re-examination of the Perfectness Concept for Equilibrium Points in Extensive Games’, 4 International Journal of Game Theory 22–55 (1975) (parties must forecast that the other side may commit mistakes when deciding on their ‘shot’, i.e., that the other side may have a trembling hand); for a good recent account, see H. Gintis, The Bounds of Reason: Game Theory and the Unification of the Behavioral Sciences (Princeton / NJ: Princeton University Press, 2009). C. Vogt, Kooperation im Gefangenen-Dilemma durch endogenes Lernen: ein evolutiona¨r spieltheoretischer Ansatz (Magdeburg: VDM Verlag Mu¨ller, 2001) reports 21 per cent co-operation in laboratory cases designed to reproduce the simple prisoner’s dilemma – where classic game theory would expect 0 per cent. Developed first by R. Selten, ‘Spieltheoretische Behandlung eines Oligopolmodells mit Nachfragetra¨gheit’, 121 Zeitschrift fu¨r die Gesamte Staatswissenschaft 301–24 (1965). For a recent description, see R. J. Aumann, ‘Backward Induction and Common Knowledge of Rationality’, 8 Games and Economic Behavior 6–19 (1995); see generally D. Fudenberg / J. Tirole (fn. 48), sub 3.5. In simple terms, the concept says that, if the number of ‘shots’ is not unlimited (or if the end is not unknown), rational parties can calculate how they (both!) should behave at the last shot and from there infer how they should behave at the second-to-last shot, and so on down the chain to the first shot. For empirical studies considerably belying this mechanism: R. McKelvey / T. Palfrey, ‘An experimental study of the centipede game’, 60 Econometrica 803–36 (1992); R. Nagel / F. F. Tang, ‘An Experimental Study on the Centipede Game in Normal Form: An Investigation on Learning’, 42 Journal of Mathematical Psychology 356–84 (1998). On this question (and also on the assumption that probabilities are correctly computed by decision-makers under the paradigm of rational choice), see: C. F. Camerer, Behavioral Game Theory Experiments in Strategic Interaction (Princeton / NJ, Princeton University Press, 2003), p. 2 (‘Important steps in the 1960s were the realization that behavior in repeated sequences of one shot games could differ substantially from behavior in one shot games, and theories in which a player can have private information about her values (or “type”), provided all the players know the probabilities of what those types might be’); see also R. B. Myerson (fn. 46), sub 1.1. H. Gintis, Game Theory Evolving (Princeton / NJ, Princeton University Press, 2000); D. Ross, ‘Game Theory’, in E. N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2016), http://plato.stanford.edu/archives/ spr2016/entries/game-theory/, sub 4; see also D. Fudenberg / J. Tirole (fn. 48), sub 5.3.

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end and may even be ‘evolutionary stable’, but that this situation calls for plausibility checks from other strands of theory. Completely rational computation – with probabilities taken as given, and the calculations exercised in a mechanical way which avoids all those biases addressed in what follows – cannot be taken as a starting point for legal practice and theory of law, assumed to exist whenever rational decision-making is being modelled. It is therefore far from surprising – rather promising, in fact – that an entire alternative game theory, based on more realistic assumptions for bargaining situations, has been developed under the name of ‘mutual aspiration approximation theory’.58 This strand of literature is based on H. Simon’s fundamental finding that people generally look to achieve a satisfactory level of gain, including from co-operation, rather than seeking to maximize – that they are thus best understood as ‘satisficers’ rather than as ‘maximizers’.59 For legal scholarship and practice, therefore, the task is to correct deviations from the possible optimum which can no longer be tolerated, not by any means to find the ideal solution (i.e., the optimum that would be achieved were all players to act in a completely rational way). The latter is consciously left to negotiation – not to (generalized) ‘ordering’, be it public or private. This leads to another narrowing of the choice of theories that deserves careful consideration: namely, alternatives other than mainstream, classical game theory. At least for issues of negotiation and justice of consensus, classic game theory is unlikely to be a very promising approach when it comes to addressing questions of legal scholarship – though it may well be more promising when it comes to bargaining theory itself. Research on bounded rationality, on the other hand, is likely to prove much more fruitful. Interdisciplinary legal scholarship will be more useful where it draws on research based on bounded rationality than where it draws on (classic) game theory – and as of late, it has done so more and more. Hence the choice made in this book to discuss in some depth as theory and texts of reference the work done by D. Kahneman and A. Tversky.60 b Private Law and Constitutional Law

The second example deals with the tension between private law and constitutional law. In recent decades this charged relationship has gained more and more theoretical but also practical importance. For a long time the two fields were considered to be strictly separate. Today the reciprocal relationship both determines private law theory and, increasingly, governs the daily routine of national and especially European courts. A short reconstruction of the relationship between the fields is essential to understand the lines of discussion. 58

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Groundbreaking: H. Sauermann / R. Selten, ‘Anspruchsanpassungstheorie der Unternehmung’, 118 Zeitschrift fu¨r die Gesamte Staatswissenschaft 557–97 (1962); for recent work, see, for example, M. Ahlert / I. Lajtos, 60 Years after Nash’s Bargaining Solution: Trends in Bargaining Theory (Working Paper, Halle/ Saale, Martin-Luther-University, Faculty of Law and Economics, 2011). H. Simon, ‘A Behavioral Model of Rational Choice’, 69 The Quarterly Journal of Economics 99–118 (1955); H. Simon, ‘Theories of Decision-Making in Economics and Behavioral Science’, 49 The American Economic Review 253–83 (1959). D. Kahneman /A. Tversky, ‘Judgment under Uncertainty: Heuristics and Biases’, 185 Science 1124–31 (1974); for more detail, see, Chapter 11: Negotiation and the ‘Justice of Consensus’.

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The quintessence of that relationship can be located in the nearly complete reversal of the pecking order between private law and constitutional law over the last 200 years. In the nineteenth century, private law, which was perceived as ius commune, dominated the jurisprudential and legal-theoretical debate in public law, even criminal law.61 The text chosen for Chapter 5 represents this school of thought paradigmatically. Towards the end of the twentieth century, however, constitutional law came to claim supremacy over private law, and increasingly over private law theory as well. This reversal is reflected in Chapter 5, in particular by the text written by M. Kumm, with the provocative title ‘Who is Afraid of the Total Constitution?’62 The key idea is that of a constitutionalization of private law, a term which fully captures the different lines of discussion and patterns of interpretation of the reciprocal relationship. From a historical point of view, the discussion about the relationship between private law and constitutional law finds its point of departure in the Freiburg school and the concept of ordo-liberalism. Behind the social theory of an economic constitution developed by F. Bo¨hm63 is the idea of a private law society (Privatrechtsgesellschaft) which is constituted by and dependent for its development on a competitive order created by the state, guaranteed by the constitution, and which itself has a constitutional character (see also Chapter 6 on the meaning of private law society). For Bo¨hm, the influence of constitutional law on private law remains limited. Constitutional law serves to secure the private law society in its self-constitution. The focus lies on the individual’s autonomy to act, in harmony with Kant’s philosophy.64 Constitutional law is politically instrumentalized by being called upon to safeguard the autonomy of the individual to act via an economic order in which the risks of an economically and socio-politically problematic concentration of power are reduced via a competition order anchored in constitutional law. E. Mestma¨cker65 made the ordo-liberal construct of ideas fruitful for the creation of a European Economic Constitution, of which the European private law society and the European competition order form an essential part and which has come to an end with the adoption of the Single European Act in 1986 (see Chapter 24). With the rise and triumph of ordo-liberalism, the debate on a reordering of the relationship between private law and constitutional law was opened. In retrospect, it comes as no surprise that subsequent political and theoretical currents would take the question of the relationship between constitutional law and private law onto a new battlefield. 61

62 63 64

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F. Wieacker, A History of Private Law in Europe: With Particular Reference to Germany, trans. T. Weir (Oxford: Clarendon Press, 1996), in German Privatrechtsgeschichte der Neuzeit unter besonderer Beru¨cksichtigung der deutschen Entwicklung (1st ed., Go¨ttingen: Vandenhoeck & Ruprecht, 1952, 2nd ed. 1967). M. Kumm, ‘Who is Afraid of the Total Constitution?’, 7(4) German Law Journal 341–70 (2006). F. Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, 17 ORDO 75–151 (1966). E. Mestma¨cker, A Legal Theory without Law, Posner v. Hayek on Economic Analysis of Law (Eine Rechtstheorie ohne Recht. Posner v. Hayek zur o¨konomischen Analyse des Rechts) (Tu¨bingen: Mohr Siebeck, 2007). E. Mestma¨cker, ‘Auf dem Wege zu einer Ordnungspolitik fu¨r Europa’, in E. J. Mestma¨cker / H. Mo¨ller / H. P. Schwartz (eds.), Eine Ordnungspolitik fu¨r Europa: Commemorative Publication for Hans v.d. Groeben (Baden-Baden: Nomos, 1987), pp. 9–49.

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The first current, which is closely linked to the concept of ordo-liberalism, consists of attempts to justify the existence and necessity of a socio-economic constitution, that is, of an economic constitution which is not limited to setting up a (legal/institutional) framework, but which empowers state regulation to actively intervene in the private law society in order to guarantee freedom not only formally, but also substantively.66 H. Sinzheimer67 laid the ground in his plea for a ‘labour constitution’ meant to provide for a legal constitutional framework to govern the industrial relations between the employer and the employee. From the 1960s on, most of the Western democracies have undergone a process of what F. Scharpf forcefully termed ‘social-democratization’,68 the rise (and later the decline) of the welfare state. In Germany, the pivot of this transition is the socalled Social State Principle69 (Sozialstaatsprinzip) rooted in Article 20 of the Basic Law. In the European Union the debate is turning around the question of whether there is a ‘social’ European Constitution70 at all, and respectively, whether there should be a Labour Constitution71. Such a debate not only breaks the boundaries between private and public law, but the search for an appropriate answer requires input from economics, political philosophy, sociology and political science (Chapters 2, 3 and 4). The second current relates to the materialization of private freedom through statutory regulation, which goes back to Max Weber72 (see Chapters 2 and 10). In essence it is a debate about private law and the different patterns of justice. In discussions of the social element of the economic constitution, there is a breaking point for constitutional law in the shape of fundamental rights. Constitutional law and constitutional theory are thereby put to work for the ‘materialization’ of private law. The well-known Surety decision of the German Federal Constitutional Court represents another milestone with regard to the second current of the constitutionalization of private law. While the Lu¨th decision opened the constitution towards private law, the Surety decision73 recognized for the first time ever that the constitution limits the autonomy of action, in that case the autonomy of lending banks in order to safeguard the autonomy of the consumer guarantor (see Chapter 8). Engaging with political theory allows for deepening the link between fundamental and human rights and justice. Oftentimes the constitutionalization of private law through fundamental and human rights is welcomed as conducive to the promotion of social

66 67

68 69

70 71

72

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N. Reich, Markt und Recht (Neuwied: Luchterhand, 1976). H. Sinzheimer, Ein Arbeitstrarifgesetz: Die Idee der sozialen Selbstbestimmung im Recht (Munich, Leipzig: Duncker & Humblot, 1916); H. Sinzheimer, ‘The Development of Labor Legislation in Germany’ 40 The Annals of the American Academy of Political and Social Science 35–40 (1920), trans. D. B. Shumway. F. Scharpf, Crisis and Choice in European Social Democracy (Ithaca / NY: Cornell University Press, 1991). H. Hartwig, Sozialstaatspostulat und gesellschaftlicher Status quo (2nd ed. Opladen: Westdeutscher Verlag, 1977). K. Tuori, The Many Constitutions of Europe (Oxford: Oxford University Press, 2016). R. Dukes, The Labour Constitution: The Enduring Idea of Labour Law (Oxford: Oxford University Press, 2014). M. Weber, Wirtschaft und Gesellschaft (Tu¨bingen: Mohr, 1922), English translation: Economy and Society (New York: Bedminster, 1968). BVerfGE (official reports) 89, 214. There is no official translation into English available, discussed in Chapter 8.

New Private Law Theory: The Core Ideas

27

justice. However, it is highly debatable whether and to what extent the ‘materialization’ of private law can be achieved through fundamental and human rights.74 A real wave of constitutionalization started with the increasing instrumentalization of fundamental and human rights in order to protect the weaker party in the consumer society. Such instrumentalization of constitutional rights to the benefit of individual parties goes hand in hand with the idea of a social constitution which is not only composed of enforceable rights but an institutional counterpart to the economic constitution.75 Here different developments converge. Constitutions, which contain a catalogue of fundamental rights, give their national constitutional courts a pioneering role.76 In fact, the basic elements of a constitutionally materialized private law can already be identified, especially with regard to labour law.77 There is more at stake than the relationship between public and private law. The much deeper question refers to the concept of autonomy in private law relations, of what H. Dagan and M. Heller call interpersonal justice.78 Nowadays it is not only the national constitutional courts, but also the European Court of Human Rights and, since the adoption of the Charter of Fundamental Rights in 2000,79 the European Court of Justice in Luxembourg, that have taken over the pioneering role. These European courts are relied upon by holders of fundamental and human rights who hope to gain protection and compensation through European institutions against the (possibly weaker) social protection offered by their respective nation state; or who hope – in the meaning of institutional choice80 – to have legal issues that are controversial at the national context resolved at the European level to their benefit. The latter especially applies to the comprehensive litigation on the reach and scope of non-discrimination law. In their farreaching decisions, Strasbourg and Luxembourg have reshaped both national and 74

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78 79

80

A. Somek, ‘The Preoccupation with Rights and the Embrace of Inclusion: A Critique’, in D. Kochenov / G. de Burca / A. Williams (eds.), Europe’s Justice Deficit? (Oxford: Hart, 2015), pp. 295–310. K. Tuori, The Many Constitutions of Europe (Oxford: Oxford University Press, 2016); K. Tuori, ‘European Social Constitution between Solidarity and Access Justice’, in K. Purnhagen / Peter Rott (eds.), Varieties of European Economic Law and Regulation, Liber Amicorum for Hans Micklitz (New York: Springer International Publishing 2014), pp. 371–400. O. Dawn / J. Fedtke (eds.), Human Rights and the Private Sphere: A Comparative Study (London: Routledge, 2007); C. Mak, Fundamental Rights in European Contract Law: A Comparison of the Impact of Fundamental Rights on Contractual Relationships in Germany, the Netherlands, Italy and England (The Netherlands: Wolters Kluwer, 2008); S. Grundmann (ed.), Constitutional Values and European Contract Law (The Netherlands: Kluwer Law International, 2008); G. Bruggermeier / A. Columbi Ciacchi / G. Comande (eds.), Fundamental Rights and Private Law in the European Union, Vol. I, A Comparative Overview (Cambridge: Cambridge University Press, 2010); O. Cherednychenko, Fundamental Rights, Contract Law and the Protection of the Weaker Party (Munich: Sellier, European Law Publishers, 2007); D. Hoffman (ed.), The Impact of the UK Human Rights Act on Private Law (Cambridge: Cambridge University Press, 2011); C. Busch / H. Schulte-No¨lke (eds.), Fundamental Rights and Private Law (Munich, Sellier, 2011). M. Bell, ‘Constitutionalisation and EU Employment Law’, in H.-W. Micklitz (ed.), Constitutionalisation of European Private Law (Oxford: Oxford University Press,2014), 137–69. H. Dagan / M. Heller, The Choice Theory of Contracts (Cambridge: Cambridge University Press, 2017). J. Zglinski, ‘Doing Too Little or Too Much? Private Law Before the European Court of Human Rights’, 37 Yearbook of European Law, 98–129 (2018). N. Komesar, ‘The Logic of the Law and the Essence of Economics: Reflections on Forty Years in the Wilderness’, 93 Wisconsin Law Review 266–338 (2013).

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European private law. European courts have turned into social managers, exercising a creative power which increasingly irritates the established institutional balance between the democratic powers. H. Collins has described the discussion on the relationship between private law and constitutional law by means of the following metaphor: On one view . . . private law and constitutional law resemble semi-detached houses: independent homes, but joined by a common wall. The two houses of public and private law lean on each other for support, but can be inhabited entirely separately. . . . On another view . . . constitutional laws, or at least the basic constitutional principles such as the fundamental rights, provide the common foundations for what is ultimately a single structure. The foundational rights support both the edifice of public law and private law.81

The third, most recent, dimension of constitutionalization can be demonstrated in the debate on private law beyond the state, particularly in the construction of a transnational playing field for negotiation and contracting, which is discussed more deeply in the following example on private law and private ordering. Here the emphasis is put on transnational private ordering as a form of self-constitutionalization. On the one hand lie theoretical approaches, like those of G. Teubner,82 and G. Calliess and P. Zumbansen,83 which try to justify a self-constitutionalization of private law beyond the state. In such a perspective private law itself has to produce possible corrective mechanisms against the abuse of power and safeguard the plurality of values necessary to its existence. On the other hand are approaches which, under the heading of global constitutionalism, elaborate an international constitutional order that delimits private rights under reference to human rights.84 While the American Supreme Court gave these attempts short shrift in its Kiobel decision,85 the UK Supreme Court seems more inclined to consider social responsibilities of private actors operating outside UK territory86 (see Chapter 22). Stronger co-ordination both amongst national courts and between national and international courts will be indispensable. It remains to be seen, however, whether the ‘dialogue’87 between the 81

82

83 84

85 86

87

H. Collins, ‘The Constitutionalisation of Private Law a Path to Social Justice’, in H.-W. Micklitz (ed.), The Many Faces of Social Justice in Private Law (Cheltenham: Edward Elgar, 2011), pp. 133–66. G. Teubner, ‘Global Bukowina: Legal Pluralism in the World-Society’, in G. Teubner (ed.), Global Law Without a State (Aldershot: Dartmouth, 1997), 3–28; G. Teubner, Constitutional Fragments: Societal Constitutionalism and Globalization (Oxford: Oxford University Press, 2012). G.-P. Calliess / P. Zumbansen, Rough Consensus and Running Code (Oxford: Hart, 2010). P. Shiff Berman, Global Legal Pluralism: A Jurisprudence of Law Beyond Borders (Cambridge: Cambridge University Press, 2012); M. Kumm, ‘The Moral Point on Constitutional Pluralism: Defining the Domain of Legitimate Constitutional Civil Disobedience and Conscientious Objections’, in J. Dickson / P. Eleftheriadis (eds.), The Philosophical Foundations of European Union Law, Yearbook of European Law (Oxford: Oxford University Press, 2013,), pp. 216–46. Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct. 1659 (2013), discussed in Chapter 22. UK Supreme Court Vedanta Resources PLC and another (Appellants) v. Lungowe and others (Respondents) before Lady Hale, President Lord Wilson, Lord Hodge, Lady Black, Lord Briggs (2019), available at: www .supremecourt.uk/cases/docs/uksc-2017-0185-judgment.pdf; AAA v. Unilever (2018) EWCA Civ 1532, and Okpabi v. Royal Dutch Shell Plc (2018) EWCA Civ 191. A. M. Slaughter, ‘A Global Community of Courts’ (2003) 44 Harvard International Law Journal 191–220; A. T. Pe´rez,Conflicts of Rights in the European Union: A Theory of Supranational Adjudication (Oxford, Oxford University Press, 2009), Chapter 5; A. Arnull, ‘Judicial Dialogue in the European Union’, in J. Dickson / P. Eleftheriadis (eds.), Philosophical Foundations of European Union Law (Oxford, Oxford

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courts and private autonomy of action beyond the state not only opens new possibilities for private legislation, but may also encourage the parties to undertake social and – to a certain extent – political responsibility. c Private Law and Private Ordering

In recent years the relationship between state-made law and private ordering has received much attention in private law scholarship.88 However, legal scholars would never have identified private rule-making as a field of research if it had not been for the interdisciplinary dialogue with the social sciences. While legal theorists were largely blind to societal rule-making,89 sociologists and economists have been analysing mechanisms of private ordering since the beginning of the twentieth century. Sociologists in the tradition of M. Weber and E. Durkheim (see Chapter 2) have mostly focused on the emergence of social norms and their transformation into the formal law of the nation state.90 Others have been less interested in such evolutionary processes, and have instead analysed the multi-layered structures of competing normative orders within and beyond the nation state. As early as 1912 one of the masterminds of legal sociology, E. Ehrlich, demonstrated that the ‘living law’ of the Bukovina more effectively governed the people living in this region than the officially applicable law of the Austro-Hungarian empire.91 From the 1960s onwards, such sociological approaches have been revived by the US law and society movement and a growing number of Continental European legal sociologists, but their influence on mainstream legal thinking has remained marginal. It is therefore somewhat surprising that roughly a decade ago private lawmaking started to attract the attention of mainstream legal discourse. This is mainly due to two reasons. First, an ever-accelerating globalization has given rise to a number of private rule-making regimes that are of undeniable empirical relevance, be it with regard to the regulation of financial markets or with regard to the emergence of transnationally applicable technical standards.92 Second, law and economics has started to focus on private rule-making. There is a touch of irony to this, since in the 1970s law and economics was initially

88

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University Press, 2012), pp. 109–36; see also the Centre for Judicial Cooperation at the European University Institute www.eui.eu/Projects/CentreForJudicialCooperation. For example, R. C. Ellickson, Order Without Law (Cambridge / MA: Harvard University Press, 1991); A. K. Dixit, Lawlessness and Economics (Princeton / NJ: Princeton University Press, 2004); G. Bachmann, Private Ordnung: Grundlagen ziviler Regelsetzung (Tu¨bingen: Mohr Siebeck, 2006). For an engaged critique of this paradigm see A. Fischer-Lescano and G. Teubner, ‘Regime-Collisions: The Vain Search for Legal Unity in the Fragmentation of Global Law’, 25 Michigan Journal of International Law 999 (2004). M. Weber, Wirtschaft und Gesellschaft (Tu¨bingen: Mohr, 1922) English translation: Economy and Society (New York: Bedminster, 1968); E´. Durkheim, De la division du travail social (Paris: Alcan, 1893) English translation: The Division of Labour in Society (New York: Macmillan, 1933). E. Ehrlich, Das lebende Recht der Vo¨lker der Bukowina (1912), in M. Rehbinder (ed.), Recht und Leben (Berlin: Duncker und Humblot, 1967), 43–60. For examples see J. Ko¨ndgen, ‘Privatisierung des Rechts: Private Governance zwischen Deregulierung und Rekonstitutionalisierung’, 206 Archiv fu¨r die Civilistische Praxis 477–525 (2006).

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designed – with considerable financial support from the John M. Olin Foundation – as a conservative counter-project to the left-liberal law and society movement. In spite of this traditional opposition, law and economics and legal sociology are not entirely alien to each other. Especially certain strands of institutional economics bear resemblances to sociological traditions both with regard to their research objects and with regard to their methods and rhetoric. The rediscovery of Ehrlich’s ‘living law’ in the guise of ‘private governance’ (see Chapter 26) is a good example for this unlikely alliance. L. Bernstein’s famous work on the institutions of the international diamond trade, which is the first reference text for that chapter, implicitly follows the tradition of Ehrlich, when Bernstein depicts the customs, rules and mechanisms of dispute resolution for an industry that has developed largely unaffected by public regulation for centuries.93 The same is true for R. Ellickson’s research on ‘order without law’.94 Based on a detailed empirical examination of the customs among ranchers in Shasta County, Ellickson develops an encompassing taxonomy of private ordering that in its rigour is remindful of N. Luhmann’s95 early works on legal sociology (see Chapter 4). The fact that private law discourse took up the torch in analysing the problem of private ordering not from sociologists, but from law and economics, has quite a momentous impact on today’s debates. Since R. Coase, law and economics has been inextricably linked to the normative concepts of the Chicago School, which argues for a significant cutback of state intervention especially in antitrust law.96 Even though new institutional economics scholars such as O. Williamson tend to formulate their positions in a more nuanced manner, the ‘antitrust ramifications’ of private ordering remain a major concern of theirs.97 Thus, it comes as no surprise that representatives of law and economics are usually very welcoming towards private ordering regardless of its side effects. Private norms are seen as governance mechanisms that are more efficient than government intervention in terms of transaction costs. Spheres that are regulated by private norm-setting should, in their view, be exempted from public intervention for the good of general economic welfare. The intricate relationship between private ordering and the concentration of economic power is often neglected. This becomes apparent in Bernstein’s study on the diamond trade, a market controlled by a small group of persons with opaque price-fixing and high access barriers. The power problem is even more striking with regard to private ordering by dominant market actors on the internet.98 93

94

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97 98

L. Bernstein, ‘Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry’, 21 Journal of Legal Studies 115–57 (1992); see also the follow-up study on the cotton industry, L. Bernstein, ‘Private Commercial Law in the Cotton Industry: Creating Cooperation through Rules, Norms, and Institutions’, 99 Michigan Law Review 1724–90 (2001). R. C. Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge / MA: Harvard University Press, 1991). N. Luhmann, Rechtssoziologie (Reinbek: Rowohlt, 1972) English translation: A Sociological Theory of Law (London: Routledge, 1985). For a critical overview see H. Hovenkamp, ‘Antitrust Policy after Chicago’, 84 Michigan Law Review 213–84 (1985). O. E. Williamson, The Economic Institutions of Capitalism (New York: The Free Press, 1985), chapter 14. See V. Karavas, Digitale Grundrechte: Elemente einer Verfassung des Informationsflusses im Internet (BadenBaden: Nomos, 2007), pp. 102 et seq.

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31

A critical view of the major influence of law and economics on the private governance debate should not deny the merits of economic analyses. On the contrary, it should aim at demonstrating the hidden potential of a more encompassing interdisciplinarity. The insights provided by institutional economics and law and economics approaches such as Bernstein’s are necessary cornerstones of an informed debate about private ordering. If their findings are to be applied to concrete problems of private law, however, they need to be complemented by normative considerations such as those founded on sociological or ordo-liberal analyses of the problem of private power (see Chapter 13) or philosophical debates on legitimacy, participation and distributive justice (see Chapters 8 and 9). Only an integrated view of the observations made through various disciplinary lenses makes it possible to develop convincing normative models for the interplay between law and social norms, nation state legislation and private autonomy. An example of such a normative model that could be applicable beyond the framework of nation state institutions is Franz Bo¨hm’s model of a private law society (Privatrechtsgesellschaft) (see Chapter 6), where the law creates and guarantees equal freedom of individuals by preventing an accumulation of either private or public power.99 Such guiding models are even more essential when phenomena of private ordering pose concrete legal problems: Is the practice of certain branches compatible with state legislation on terms and conditions?100 Can norms made by private standard-setters or the lex mercatoria be chosen as the applicable law under the conflicts of law?101 Do reputation management mechanisms in online marketplaces constitute an abuse of a dominant position under antitrust law?102 What follows from the network structures of franchise distribution with regard to the respective rights and duties of franchisor and franchisee?103 The theoretical texts referred to in this book do not provide conclusive answers. They help to ask the right questions – not just in terms of legal theory, but also when facing concrete challenges in the application of private law.

d structure of the book 1 The Individual Areas and Issues The structure of the book both from its interdisciplinary stance and from a private law logic is as follows. Part I is devoted to a core of the considered range of approaches and 99

100

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102 103

See F. Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, 17 ORDO 75–151 (1966); on the applicability to transnational constellations see M. Renner, ‘Transnationale Wirtschaftsverfassung’, 78 RabelsZ 750–83 (2014). For German law see M. Renner, ‘Die “Natur des Vertrags” nach § 307 Abs. 2 Nr. 2 BGB’, 213 Archiv fu¨r die Civilistische Praxis 677–717 (2013), with further references. For a summary of the debate and further readings see G.-P. Calliess (ed.), The Rome Regulations (Alphen aan den Rijn: Kluwer, 2nd ed. 2015) Art. 3, para. 33. For a (rejecting) court ruling see KG 5.8.2005 NJW-RR 2005, 1630, 1631 et seq. For a thorough discussion of the concept of network contracts see the contributions to M. Amstutz / G. Teubner (eds.), Networks: Legal Issues of Multilateral Co-operation (Oxford: Hart, 2009); on the doctrinal implications under German law see S. Grundmann, ‘Die Dogmatik der Vertragsnetze’, 207 Archiv fu¨r die Civilistische Praxis 708–67 (2007) and S. Grundmann, ‘Contractual Networks in German Private Law’, in F. Cafaggi (ed.), Contractual Networks, Inter-Firm Cooperation and Economic Growth (Cheltenham: Edward Elgar, 2011), pp. 111–62.

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disciplines, from which most of the lead texts are chosen around which the discussion is arranged. This is a sample of disciplines – chosen as those that are practically seen as the most relevant. The range, however, is considerably larger (but impossible to grasp in one monograph). In Part II, private law at large and its place and its ordering function in society are discussed, concentrating on the core question of autonomy and its limits, of market freedom and market order for example – in our view the individual feature which most characterizes the development of law in the twentieth century. On this basis, Parts III and IV then enter into specific areas of the law, the first addressing markets, contracts and torts, and some (digital) property, and the other addressing hierarchies, organizations (firms) and persons. Finally, Part V discusses questions of rule-setting, so important nowadays, given phenomena such as competition between legislatures, transnational legal order, public and private ordering, legal and social norms, etc. 2 What’s Next? With these themes, this book sketches a broad interdisciplinary research agenda, across the social sciences (and beyond) – all this from the perspective of the most important jurisdictions and traditions of thought and language. The agenda aims to make the wealth of interdisciplinary knowledge relevant to (private) law fruitful for it and to reconstruct interdisciplinary knowledge as knowledge of private law. This research agenda is addressed to the whole legal community. Our book can only be the starting point for discussions that have yet to take place – and to which we look forward.

part i

Methods and Disciplines

1 The Inside and the Outside of Law? Stefan Grundmann

a topic and materials I When this book seeks to encompass the theoretical foundations of recent private law theory (private law understood in a broad sense, encompassing questions of regulation and rule-setting in particular), it takes a stance on legal theory that draws heavily on broad social theory (i.e. on theory developed for the most part outside legal scholarship). It seeks to combine it with legal theory in the narrow (traditional) sense, looking at law (in its changing structure) namely with tools of legal philosophy such as logic or ethics and from within legal scholarship.1 In this, ‘The Inside and the Outside of Law?’ as a title refers to a topic for discussion rather than making a statement. Private law theory as proposed by legal scholars will be combined with concepts drawn from law and economics, legal philosophy, sociology and the behavioural sciences; constitutionalism combined with considerations of consensus and its intrinsic justification – all in relation to markets, risks, persons and organizations. A preliminary question confronted by this project is whether and when such considerations are inside or outside the law; when in other words they are relevant to the interpretation and development of the law and may be used in these contexts. This book, while also answering that question, primarily aims at reaching out further, taking the second step. The bulk of the book aims at also sketching the different answers given in substantive terms, the many theories in the broad arena of private law theory and thus establishing a certain architectural frame, a fundus, a landscape. While the second step is left to the book overall, our answer to the first question (‘first step’), addressed now in the first chapter, is this: we welcome and advocate the broad inclusion of social theory – in combination with traditional legal theory – when it comes both to addressing doctrinal questions and to applying and further developing the law, but only such theories that have been ‘reconstructed’ from a legal value perspective. This cannot be other than a strongly pluralist approach and theory, as the legal value basis 1

See, for instance, P. Cane, ‘The Anatomy of Private Law Theory: A 25th Anniversary Essay’, 25 Oxford Journal of Legal Studies 203–17 (2005).

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to which we thereby refer is intrinsically pluralist.2 With this approach, we see ourselves in agreement with the most relevant of recent theoretical developments – of course nested in a long tradition, for instance of positivism – as exemplified by the two texts chosen. We choose positivism, as it would seem to be the most restrictive traditional legal theory with respect to excluding influence from ‘outside’, and hermeneutics as it constitutes a wellstructured and indeed core communication theory in the twentieth century that would most probably go directly in the opposite direction. See Box 1.1 for a case in point. The decision is one of the most well known in US common law, decided by Judge Learned Hand (and his colleagues) at the US Federal Court of the 2nd Circuit.3 The core question asked was whether it was negligent not to have a bargee on the barge at all or at least at certain times (in the busy port of New York in wartime). Judge Learned Hand first made it abundantly clear that case law was split (and he therefore was not bound by precedent) and then stated with his famous formula that negligence should be assumed whenever the prevention costs (staying on the barge) (B) were smaller than the probability of accident multiplied by the amount of loss (PL): negligence = B < PL. In hindsight, the law and economics movement hailed this case and the formula as the first instance of utilitarian reasoning/theory in legal practice, in 1947 – long before R. Coase wrote his seminal text on the ‘Problem of Social Cost’ in 1960, triggering law and economics research (see Chapter 3). The question is: how had Judge Learned Hand read the paradigm of economic efficiency into US tort law? II This question – more generally, how to define whether theories from social sciences and beyond are relevant and legitimate sources in the discussion of legal issues – is discussed, albeit indirectly, by the two texts chosen (Box 1.2). They reflect core approaches (lead-texts): stemming (i) from a leading scholar on hermeneutics in Continental European law, Josef Esser (hermeneutics that many see as probably the most promising communication theory for law and the one applying very directly to legal issues); stemming (ii) from the legal scholar who is seen as the leading last offspring of the positivist approach to law in the 2

3

For more detail see S. Grundmann, ‘Pluralism and Private Law Theory’, manuscript 2020 (normative pluralism in European contract law needed to reflect Europe’s normative pluralism); for further pluralistic approaches to private legal theory, with different emphasis, see for example, M. Hesselink, ‘Contract Theory and EU Contract Law’, in C. Twigg-Flesner (ed.), Research Handbook on EU Consumer and Contract Law (Cheltenham: Edward Elgar, 2016) and R. Wietho¨lter, ‘Social Science Models in Economic Law’, in T. Daintith / G. Teubner (eds.), Contract and Organisation: Legal Analysis in the Light of Economic and Social Theory (Berlin / New York: de Gruyter, 1986), pp. 52–67 (plural set of social theories to be used in legal analysis reflecting pluralism of society). On this case, see, for instance: P. Grossman / R. Cearley / D. Cole, ‘Uncertainty, Insurance and the Learned Hand Formula’, 5 Law, Probability and Risk 1–18 (2006) (on how the data relevant for the application of the Learned Hand formula can (only) be retrieved from insurance practice); A. Feldman / J. Kim, ‘The Hand Rule and United States v. Carroll Towing Co. Reconsidered’, 7 American Law and Economics Review 523–43 (2005) (on the difference between the original shape of the formula and its shape in modern law and economics); W. M. Landes / R. A. Posner, The Economic Structure of Tort Law (Cambridge/MA: Harvard University Press, 1987), 85–8. On Judge Learned Hand, see G. Gunther, Learned Hand: The Man and the Judge (Oxford: Oxford University Press, 2010), noting that Hand’s decisions stood out not for ‘dramatic overturning of majoritarian sentiments’ but for their ‘superior craftmanship and . . . creative performance within the confines set’.

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BOX 1.1 CASE STUDY

United States et al. v. Carroll Towing Co., Inc., 159 F.2d 169 [1947] This case turned around an accident and involved two barges, each having two parties, owner and lessee. On the side of Carroll barge (owned by Carroll Towing), an employee of this company acted, but also an employee of the lessee, Grace Line. Carroll was not part of the collision, but was involved insofar as the said two employees on the side of this barge, during a ‘parking’ manoeuvre (‘drilling out and drilling in of barges’), released the Anna C. barge from a pier where it had been properly attached, but then did not properly reattach it. On the side of the Anna C., two parties were also involved, the owner (Connors Company) and the lessee (Pennsylvania Railroads), which had placed cargo of flour owned by the United States on the barge. The Anna C. broke away from the pier, was hit by the propeller of a much larger ship, and, because the damage was not detected quickly, sank, taking the cargo with it. This was during working hours in the afternoon, and no bargee was on the Anna C. (he had left the barge the day before). The case was not directly about negligence (that was assumed at equal parts for both employees of Carroll Towing and Grace Line), but about contributory negligence on the side of Connors Company. The court thought that the presence of a bargee on the Anna C. would not have changed anything with respect to the (negligent) way of reattaching the barge and hence not to the collision either (‘collision damages’), but would have avoided the sinking of the ship or at least saved the cargo (‘sinking damages’).

BOX 1.2

Josef Esser, Vorversta¨ndnis und Methodenwahl in der Rechtsfindung: Rationalita¨tsgrundlagen richterlicher Entscheidungspraxis (Frankfurt: Athena¨um, 1972), pp. 7–9, 116–41 (English translation available on the book website) Joseph Raz, Between Authority and Interpretation: On the Theory of Law and Practical Reason (Oxford: Oxford University Press, 2009), namely Chapter 12 on interpretation common law world, Josef Raz (from Oxford, which should probably be seen as the home of such approach over the last half century). Positivism was always stronger in Oxford than in Harvard or elsewhere – and the famous Fuller–Hart debate gives testimony of this. In fact, US law then developed in a direction where law was analysed against its factual background and outcomes (legal realism) and later with a view to the effects it produces (consequentialist theories, such as eventually law and economics). Independent from positivism and realism, somehow mid-way like Esser in Germany, stands Ronald Dworkin, probably the leading American legal theorist of those

New Private Law Theory

38 BOX 1.3

R. Dworkin, Taking Rights Seriously (Cambridge / MA: Harvard University Press, 1977) L. Fuller, ‘Positivism and Fidelity to Law: A Reply to Professor Hart’, 71 Harvard Law Review (1958), 630–72 K. Grechening / M. Gelter, ‘Divergente Evolution des Rechtsdenkens: Von amerikanischer Rechtso¨konomie und deutscher Dogmatik’, 72 RabelsZ (2008), 513–61 H. L. A. Hart, The Concept of Law (Oxford: Oxford University Press, 1961, 2nd ed., 1994) V. Nourse / G. Shaffer, ‘Varieties of New Legal Realism: Can a New World Order Prompt a New Legal Theory?’ 95 Cornell Law Review 61–138 (2009) G. Ripert, Aspects juridiques du capitalisme moderne (2nd ed., Paris: Librairie Ge´ne´rale de Droit et de Jurisprudence, 1951) decades (see Chapter 7). In Europe, theoretical considerations often remained strongly linked to doctrinal thinking, particularly in France. These ramifications of the issue raised and discussed here can be traced in the supplementary readings listed in Box 1.3.

b theories, context and discussion I Hermeneutics and positivism – anybody would see them as core legal theory, while much of the rest of the book, with social sciences as prime input, asks questions no less relevant for theoretical discourses around law – are, however, dealt with scarcely in traditional legal theory.4 This, of course, hinges largely on the understanding of the discipline of (private) legal theory, which was long dominated by analytical jurisprudence5 before being reinvigorated under this very denomination, both in US6 and European contexts,7 with a more plural set of approaches.8 4

5

6

7

8

One example in this sense can, however, be found recently with S. Grundmann / H. Micklitz / M. Renner, Privatrechtstheorie (Tu¨bingen: Mohr Siebeck, 2015) (German forerunner version of this monograph); soon followed in an extended lecture by M. Auer, Erkenntnisziel der Rechtstheorie: Philosophische Grundlagen pluridisziplina¨rer Rechtswissenschaft (Baden-Baden: Nomos, 2018), especially pp. 43–56. For the birth and development of modern legal theory – as an application of legal philosophy tools, and for a long time mostly analytical tools – to the changing target of existing laws, see the contributions of M. Auer and P. Cane (n. 4 and n. 1 respectively). See, importantly, the Harvard Law Review symposium issue ‘New Private Law’ (published in Harvard Law Review 125 (2012)). For a discussion of major recent German monographs in the field see M. Gru¨nberger / N. Jansen (eds.), Privatrechtstheorie heute: Perspektiven deutscher Privatrechtstheorie (Tu¨bingen: Mohr Siebeck, 2017), especially R. Michaels, ‘Zugangsschranken: Zur Nichtrezeption der Systemtheorie in den USA’, 238–67 (comparing the landscape of private law discourses in the United States and Germany). See the global network ‘Private Law Theory (PLT)’, www.privatelawtheory.net and the blog ‘Private Law Theory’ (http://private-law-theory.org) for an illustration of the broad spectrum of approaches and topics. For

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39

The first text discussed is written by Josef Esser. It develops perhaps the single most powerful concept coined for the problem under discussion, ‘preconception’ or ‘pre-understanding’ (Vorversta¨ndnis). His text, written in the aftermath of National Socialist Germany, discusses not only how judges behave, but also how they should behave. Though many cited the text for suggesting that judges or other ‘law authorities’ have their preconceptions, reach their results irrespective of what the law says and use legal tools only afterwards for justification, this is not the answer actually given (though Esser does seem to propose this hypothesis in his preface). Thus, preconception is not prejudice. The concept is more subtle: while Esser accepts that no authority elaborating the law can work without preconceptions, nor reach total impartiality towards value judgements, his core problem sits at a slight remove from this insight. Esser wants to know how this partiality can be made transparent and be reconciled with a judgement that can nevertheless gain inter-subjective legitimacy in a community of law. His answer is a procedural one, proposing hermeneutics (as Gadamer had deployed the term) as a method of step-by-step approximation to a result or understanding which can be broadly shared and generally accepted. Esser’s text thus describes a procedure that may account for how much of what has been named above as (potentially) ‘outside’ the law comes to reside ‘inside’ the law, if filtered by and infiltrated into legal doctrinal thinking. The second text, written by Joseph Raz, offers a highly revealing perspective on positivism as perceived by this modern-day protagonist of positivist thinking, in the form of a discussion of the limits to an open canon of interpretation. Again, the fallout of National Socialist Germany can be taken as a starting point, because the single most powerful case on this issue had this era as its background. The case served as the crux of the famous dispute about positivism between H. L. A. Hart (Oxford) and Lon Fuller (Harvard) about the relationship between law and morality, beginning in the Harvard Law Review of 1958, and becoming, perhaps, the most famous dispute on the problem of inside and outside the law in the Anglo-American world.9 The spectacular case concerned a German wife who had denounced her husband to the Nazi secret service (Gestapo) for having criticized Hitler; she was subsequently sued by her husband after the war, in a claim for compensation for serious harm and suffering she had caused (death penalty, ultimately commuted into forced service at the Russian front). The question raised by the case was whether the wife had acted illegally when she reported him, given that this was the duty imposed on her

9

a synopsis of interdisciplinary connections of legal research see C. Tomlins, ‘Framing the Field of Law’s Disciplinary Encounters: A Historical Narrative’, 34 Law and Society Review 911–72 (2000). H. L. A. Hart, ‘Positivism and the Separation of Law and Morals’, 71 Harvard Law Review 593–629 (1958); L. Fuller, ‘Positivism and Fidelity to Law: A Reply to Professor Hart’, 71 Harvard Law Review 630–72 (1958); later continued in H. L. A. Hart, The Concept of Law (1st ed., Oxford: Oxford University Press, 1961), pp. 203–7 and Fuller’s reply in L. Fuller, The Morality of Law (1st ed., New Haven / CT: Yale University Press, 1964), pp. 133–45; and once again H. L. A. Hart, ‘The Morality of Law by Lon L. Fuller. Review by H. L. A. Hart’, 78 Harvard Law Review 1281–96 (1965); L. Fuller, The Morality of Law (2nd ed., New Haven / CT: Yale University Press, 1969), pp. 184–242. In Germany, G. Radbruch, probably the most prominent legal philosopher of the twentieth century, transitions from strict legal positivism – in the surroundings of H. Kelsen’s – to a position close to that adopted by L. Fuller, largely under the influence of National Socialist atrocities: see namely G. Radbruch, ‘Gesetzliches Unrecht und u¨bergesetzliches Recht’, Su¨ddeutsche Juristen-Zeitung 105–8 (1946). Conversely, H. Kelsen, not aligning with Fuller’s position even after emigration, even though he was the mastermind behind the modern system of constitutional court review in Germany and Austria, lost his position at Harvard (and transferred to Berkeley).

40

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by then-German law (determinative to Hart), but was quite obviously violating natural rights and morality (the determinative issue for Fuller). As important as the case and debate may be, the interplay between natural law and posited (or positive) law – that is, of morals and posited law as a particular case discussed as outside and inside the law – has moved away from the centre of debates in this arena. Due to the proliferation of constitutional rights protections and human rights, charters, treaties and resolutions, statutory lawlessness and supra-statutory law no longer serves as the core arena for conflicts over what counts as inside or outside of law.10 Instead, these questions today primarily play out in discussions in two sets of questions, either about the influence of the whole range of social sciences ‘on the law’ – on the interpretation and development of the law – or about the legitimacy and legal characterization of private ordering (see Chapter 26). This does not imply that the debate so fiercely waged by Hart and Fuller does not remain fundamental. In fact even today, the most influential legal US scholarship answers to questions about the inside and the outside of the law are probably closest, in principle, to Richard Posner’s very outspoken position (in the case of Posner, however, restricted to one other discipline). This is a position very much in favour of situating other disciplines well inside the law, potentially even postulating another discipline’s paradigm as the ultimate benchmark, thus questioning its very autonomy as a discipline.11 Conversely, the predominant legal scholarship in the UK still struggles with this question. Indeed, in the English context, it seems as if the original position and conception of the problem, as developed in the natural law era in the seventeenth and eighteenth centuries, remains dominant. That period was the first in modern times in which the relationship between morality (i.e., the firm conviction in every human being of what is good) and written or judge-made law really came into question. And, of course, ‘the good’ could just as easily be natural law, fundamental human rights or, as we see today, overall welfare,12 that is, a normative concept elaborated within the approaches of other social sciences (and moral philosophy) and without starting from the legal value basis when developing the theory – legal value basis standing for constitutional rules and principles and those developed in legally accepted processes. The second text selected therefore discusses how this old question 10

11

12

The terminology here follows the English translation of Radbruch’s seminal article (n. 9) in G. Radbruch, ‘Statutory Lawlessness and Supra-Statutory Law (1946)’ 26(1) Oxford J Legal Studies 1–11 (2006). See R. Posner, ‘The Decline of Law as an Autonomous Discipline’, 100 Harvard Law Review 761–80 (1987) arguing that welfare economics is self-evidently ‘inside’ the law, and even the dominant concept and method within the realm of legal scholarship and legal doctrinal (case law) evolution. For opposition to this claim of hegemony among key writers in political philosophy and regulation theory in both the United States and Germany, see in particular (among a good number of others) A. Sen, An Idea of Justice (Cambridge / MA: Belknap Press, 2009); E.-J. Mestma¨cker, A Legal Theory without Law: Posner v. Hayek on Economic Analysis of Law (Tu¨bingen: Mohr Siebeck, 2007). On the founding fathers of utilitarian thought, see references in fn. 41; on the utilitarian roots of welfare economics today, see J. R. Hicks, ‘The Foundations of Welfare Economics’, 49 Economic Journal 696–712 (1939); N. Kaldor, ‘Welfare Propositions of Economics and Inter-personal Comparisons of Utility’, 49 Economic Journal 549–52 (1939); T. Scitovsky, ‘A Note on Welfare Propositions in Economics’, 9 Review of Economic Studies 77–88 (1941); and, as the starting point of institutional economics, also R. H. Coase, ‘The Problem of Social Cost’, 3 Journal of Law and Economics 1–44 (1960); O. E. Williamson, ‘Transaction-Cost Economics: The Governance of Contractual Relations’, 22 Journal of Law and Economics 233–61 (1979); See chapter 3.

The Inside and the Outside of Law?

41

can be dealt with in the present. It may well be that across the Atlantic it has lost some of its influence and that elsewhere, namely in Continental Europe, it has been largely superseded by the concept of a constitutionalism reigning over all areas of the law and thereby serving as the ‘incarnation’ of natural law ideas.13 In either case, the question as originally asked in this book about the inside and the outside of the law persists. Joseph Raz, Hart’s foremost disciple at Oxford, offers an illuminating contribution to that line of thought in a 2009 text which returns to the questions of interpretation already addressed by Esser and, of course, by Hart, Fuller and others in this debate, including Ronald Dworkin. What that text reveals most strikingly is just how open today’s ‘Oxford positivism’ can be to modern (societal and social sciences) developments. To take a shortcut, Raz is treated here as a proxy for the developments of Kelsen’s concept of the Grundnorm, so important in the history of positivism in legal scholarship (see notes 40 and 43), which have occurred after Hart (who is likely the twentieth century’s most prominent protagonist of positivism). Dworkin, in his position between positivism and critical legal thought, will be discussed separately and in more detail in Chapter 7. Esser, on the other hand, is the main exponent in legal scholarship of what is probably the leading (philosophical) communication theory in the twentieth century. The selection of texts is therefore motivated by one core idea: from the perspective of legal theory, it is today primarily between positivism and hermeneutics that the dispute over the inside or outside of private law can be elucidated and furthered. II Published in 1970, Josef Esser’s text on Preconception and Methodology (Vorversta¨ndnis und Methodenwahl) is his masterpiece and the last of his texts on methodology.14 This piece is discussed before Raz’s not so much for reasons of chronology (discussion of positivism itself in law is much older than of hermeneutics), but because hermeneutics can be seen as the broader and more general (communication) theory. Today, it would be seen as a core variant of constructivist epistemology (but older than this approach, already originating in Schleiermacher etc.), reaching well beyond the law and even arising in a philosophical context. Legal positivism, by contrast, developed from its beginnings relatively independently from social theory. The idea is to start from the more general platform (hermeneutics) and then – with the findings of this fundamental communication 13

14

See namely H. Dreier, Dimensionen der Grundrechte: Von der Wertungsordnungsjudikatur zu den objektivrechtlichen Grundrechtsgehalten (Hanover: Schriftenreihe der Juristischen Studiengesellschaft Hannover, 1993), pp. 20–5 et passim; and especially chapter 7 on values in private law, and chapter 8 on constitutionalization. J. Esser, Vorversta¨ndnis und Methodenwahl in der Rechtsfindung: Rationalita¨tsgrundlagen richterlicher Entscheidungspraxis (Frankfurt: Athena¨um, 1970); now also translated in the parts discussed here, see www .European_Law_School/Theory/New_Private_Law_Theory; before his second seminal monograph: J. Esser, Grundsatz und Norm in der richterlichen Rechtsfortbildung (1st ed., Tu¨bingen: Mohr Siebeck, 1956); and earlier, J. Esser, Einfu¨hrung in die Grundbegriffe des Rechtes und Staates (Vienna: Springer, 1949). The best short summary of the development of Esser’s methodological writings, with considerable detail on the sources of influence over the two decades in which he was particularly active, can be found in J. Ko¨ndgen, ‘Josef Esser (1910–1989)’, in S. Grundmann / K. Riesenhuber (eds.), Private Law Development in Context: German Private Law and Scholarship in the 20th Century (Cambridge: Intersentia, 2018), pp. 179–203.

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theory (see also Chapters 4 and 10) – to consider what ‘criticism’ of these findings from the perspective of (legal) positivism would look like and whether such criticism poses any limitation to the theory. Esser’s text was written in the late 1960s, a period dominated in Germany by so-called critical theory (the ‘Frankfurt School’), the socio-philosophical undercurrent of the 1968 generation – not only there, but to a greater or lesser extent (and certainly with a considerable range of variety) worldwide.15 Led by Max Horkheimer and Theodor Adorno in Germany, and centred at the Horkheimer-founded Institute for Social Sciences (Institut fu¨r Sozialforschung, Frankfurt, 1931), which had continued in exile during World War II, the main thrust of this movement was one of fundamental societal critique. Based on Marxist socio-economic thought and Freud’s psychoanalytical insights, the main idea was that society had increasingly alienated man from himself insofar as the concept of reason, understood in the age of Enlightenment as a strong catalyst of individualism and human rights, had transformed into an instrumentalist version, rationalist in a highly bureaucrat sense that reduced man to his utility function.16 Politically, the movement was strongly opposed to conservative politics (often also seen as being still dominated by a National Socialist heritage). More on the methodological side, the movement sought to attribute to law a strongly political role, with a view to social engineering, in opposition to the traditional view that legal practice and scholarship were above all neutral, and subordinate to legislative decision-making. The longer tradition against which the development should be seen is, of course, now on the side of methodology, the line that runs from the age of Enlightenment (or reason) where the idea was to extract interpretation from rules (sensus non inferendus sed eferendus) to today’s communication theory. This path leads via Schleiermacher and also Dilthey where, under the influence of romantic religious, then psychological, images the active role of the interpreter was stressed (non eferendus sed inferendus) to Gadamer’s more cyclical perception. Esser’s treatise has to be read against the background of the controversy named – politically as well as methodologically – but also against this longer historical development. In the highly controversial and even antagonistic arena of his 15

16

For the relationship of this movement and legal scholarship in Germany, see O. Kirchheimer / F. Neumann, Social Democracy and the Rule of Law, edited by K. Tribe, (London/Boston: Allen & Unwin, 1987); more in general R. Cotterrell, Law’s Community: Legal Theory in Sociological Perspective (1st ed., Oxford/New York: Clarendon Press/Oxford University Press, 1995), p. 204–16. For the impact in France (and also on French legal scholarship), albeit of a different ‘colour’, see J. Derrida, Force de loi: le ‘Fondement mystique de l’autorite´’ (1st ed., Paris: Galile´e, 1994). For the relationship with critical legal studies (at Harvard in particular and in the USA more generally), see mainly D. Kennedy, ‘Critical Theory, Structuralism and Contemporary Legal Scholarship’, 21 New England Law Review 209–76 (1986), describing the influence of the Frankfurt School on critical legal studies; see also A. Hunt, Explorations in Law and Society: Toward a Constitutive Theory of Law (New York: Routledge, 1993), p. 159. See, for good surveys, D. Held, Introduction to Critical Theory: Horkheimer to Habermas (Berkeley: University of California Press, 1980); R. Geuss, The Idea of a Critical Theory: Habermas and the Frankfurt School (Cambridge/New York: Cambridge University Press, 1981); R. Wiggershaus, Die Frankfurter Schule (Reinbek bei Hamburg, Rowohlt, 2010). The movement continues to have an impact; for instance, on Somek’s view of what he calls ‘authoritarian liberalism’, see A. Somek, Engineering Equality: An Essay on European AntiDiscrimination Law (Oxford: Oxford University Press, 2011). For similar criticism in the EU today, see – among a good number of authors – contributions to D. Kochenov / G. de Bu´rca / A. Williams (eds.), Europe’s Justice Deficit? (Oxford: Hart, 2015).

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times, it seems that Esser intentionally placed his considerations right in the middle between the two sides.17 While this controversy provided the overall background for the text, the overriding influence – more directly related to the question raised in this chapter – is modern hermeneutics as developed in the immediately preceding decades, especially by HansGeorg Gadamer. Since its beginnings in Aristotle, hermeneutics had mainly developed as a branch of logic, that is, as the question of how to understand documents and manifestations of life around them (Dilthey), particularly in the humanities and social sciences where understanding and perceiving were sensed to be a more acute problem than in the objective natural sciences. But modern hermeneutics started only with Kantian scepticism about the reliability of man’s re-construction of truth, of the outside world and of being (ontology). Certainly, Schleiermacher’s and Dilthey’s hermeneutics already provided an answer to this scepticism. They had placed the focus not on defining the content of documents or more generally, of truth itself, but on the process of how content (or truth) can be perceived (and thereby created) by man. In the nineteenth century, however, the main idea still prevailed that this process can lead to objective results (hermeneutical optimism).18 Gadamer’s reputation as the twentieth century’s outstanding philosopher of hermeneutics, particularly in his Wahrheit und Methode (Truth and Method) of 1960,19 is that he introduced a much more dynamic and relational concept of what happens during an individual’s reconstruction of documents, utterances and the world around them. For Gadamer, there can be no single reconstruction of the outside world which remains changeless over time; the process of reconstruction itself (and not only its object) changes along with changes of values in society – and, for Gadamer, this is all to the good. Moreover, Gadamer, here heavily influenced by Heidegger, no longer even accepts that there is a relationship of a subject to the object of the reconstruction, but holds instead that the reconstruction as such, the relationship between the two, the interplay, is the only 17

18

19

In fact, critical theory criticized him for being too apolitical, while conservatives blamed him for opening legal concepts to an influx of unfiltered political content. For examples of criticism from both sides, see J. Ko¨ndgen (fn. 14), at p. 191–4 (with further references) and, particularly severely, E. Picker, ‘Richterrecht oder Rechtsdogmatik: Alternativen der Rechtsgewinnung?’, 38 Juristenzeitung 1–8 (1988), at 5 et seq. Helpful surveys on the history of hermeneutics are found in G. L. Ormiston / A. D. Schrift (eds.), The Hermeneutic Tradition: From Ast to Ricoeur (New York: State University of New York Press, 1990); G. Bruns, Hermeneutics: Ancient and Modern (New Haven: Yale University Press, 1992); J. Grondin, Einfu¨hrung in die philosophische Hermeneutik (3rd ed., Darmstadt: Wissenschaftliche Buchgesellschaft, 2012); W. Getel, Geist und Verstehen: historische Grundlagen einer modernen Hermeneutik (Frankfurt: Klostermann, 2011). H.-G. Gadamer, Wahrheit und Methode [Truth and Method] (1st ed., Tu¨bingen, Mohr Siebeck, 1960); on this work, see namely P. C. Lang‚ ‘Hans-Georg Gadamer: Wahrheit und Methode – Grundzu¨ge einer philosophischen Hermeneutik’ in Hauptwerke der Philosophie. 20. Jahrhundert (Stuttgart: Reclam, 1992), pp. 256–82; on Gadamer, see, for instance L. E. Hahn (ed.), The Philosophy of Hans-Georg Gadamer, The Library of Living Philosophers Vol. XXIV (Chicago / IL: Open Court, 1997); R. J. Dostal (ed.), The Cambridge Companion to Gadamer (Cambridge: Cambridge University Press, 2002); J. Malpas / U. Arnswald /J. Kertscher (eds.), Gadamer’s Century: Essays in Honor of Hans-Georg Gadamer (Cambridge / MA: MIT Press, 2002); Grondin (fn. 18), 152–70; D. Teichert, Erfahrung, Erinnerung, Erkenntnis: Untersuchungen zum Wahrheitsbegriff der Hermeneutik Gadamers (Stuttgart: Metzler, 1991). Others discuss hermeneutics from a legal perspective in a way similar to the Esser paper, see S. Fisch / H. Bude (eds.), Das Recht mo¨chte formal sein (Frankfurt: Suhrkamp, 2008).

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reality which matters; that man is thus part of his perception of the outside world.20 In this way, communication theory becomes utterly recursive. It is obvious – merely from the title alone – that Josef Esser, in Preconception and Methodology, brings ‘truth and method’ to decision-making by legal authorities, and by judges in particular. Esser’s text can only properly be appreciated under the auspices of hermeneutics and the dynamic and the relational view is stressed again. The same law cannot be perceived in the same way at all times – how simple the explanation in Esser’s theory for this core finding! The judge is not simply an observer (subject) but is an intrinsic part of the relationship of law’s construction. But Esser also goes considerably further. The text begins with a shocking provocation. Esser’s overall conclusion – in the short preface – from an analysis of private law case law (in Germany) is that: ‘Legal practice . . . does not proceed using doctrinal “methods” of legal determination, but rather uses these methods only to justify in an accepted way a decision it has already reached using its general legal and factual understanding.’ Anything goes: judges can, it seems, find a doctrinal path to justify any result which they deem ‘adequate’.21 The text is thus about how judges and other legal authorities really behave, but also about when and under what circumstances their behaviour is legitimate. If Esser’s overall conclusion is correct and no determinate outcome results from the application of the available canon of methods, then there is no certainty in the question of what material, what methods and disciplines may influence decision-making and to what extent. But is this really the overall result and is this modern hermeneutics? Although Esser’s first chapter, which defines the theme and serves as starting point, and the last (VIII), which contains the overall conclusions on ‘freedom and limits’ of legitimate decision-making by legal authorities, are also highly important, the key to the text is really in Chapter V.22 The treatise’s 200 pages ultimately boil down to the considerations on ‘interpretation’. The ‘freedom and limits’ of decision-making by judges, the main theme, are particularly at stake when they interpret the legal sources on the basis of which they have to justify their decisions. In Esser’s own words, interpretation is ‘the arena in which the possibilities and possible routes are assessed, by which adjudication can be rationalized in a non-subjective way taking into account the opinions and intentions expressed’. Not ‘subjective’ and yet just an ‘assessment’! How rational and intersubjective can judicial decision-making be, and what responsibilities and what kind of obligation towards the law and society do judges have? This is not only the question raised by the title of the first subsection, but the topic of the whole 20

21

22

From Truth and Method, namely p. 282 (interpretation as a never-ending process, continuously eliminating misunderstandings, creating new sources of understanding, not definite in time) and p. 98 (interpretation, however, not as subjectivity of the person experiencing the text/piece of art, but the latter in its relationship to the interpreter; this (interpretation) game has its own reality, the interpreters only make it visible). Still more radical, de-constructivist approaches that see no given meaning in any term – outside the relationship of sender and addressee – for instance S. Fish. See, for a similarly sceptic view by a deputy Chief Justice of the German Constitutional Court, W. Hassemer, ‘Juristische Methodenlehre und richterliche Pragmatik’, 39 Rechtstheorie 1–22 (2008). J. Esser, Vorversta¨ndnis und Methodenwahl in der Rechtsfindung. Rationalita¨gsgrundlagen richterlicher Entscheidungspraxis (Frankfurt: Athena¨um, 1972), pp. 116–41, the quotations in this and in the next paragraph are from pp. 116 and 141.

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chapter (and legal adjudication more generally). Right from the beginning, Esser sets out his framework and his credo. He neither wants to opt, on the one hand, for theories which want to detach and isolate law from other systems in society and from their value judgements (such as, as least in principle Luhmann’s system theory, also despite the fact that it purports to give only descriptive, not normative insight). Nor does he advocate, on the other hand, an unrestricted use of ‘interpretation’ to bring any political aim or agenda into scope, without limits set by a system of overarching, higher-level values rooted in the legal system. Such approach is dismissed right at the beginning of the chapter, and later also with its criticism of the natural law, Freirechtsschule, whatever may be the relationship between traditional natural law thinking and this school. In Esser’s words: ‘They who do not want to come to terms with this have a choice between a strictly doctrinal and a fully ideological legal system. Both lead to the instrumental denaturing of justice.’ With this position, Esser implicitly returns to a theme from his earlier monograph, Grundsatz und Norm (Principle and Norm) of 1956, where general standards played an important role. He advocates, in principle, the same approach both for such standards and for norms/rules with (more) precisely defined prerequisites, and does not want to distinguish between open-textured and more narrowly defined norms. In both cases, he would not opt for complete foreclosure against other value judgements in society at large, but sees them moderated at the same time by a respect for the values vested in law, that is, those which are distilled from the legal system. Neither complete foreclosure against societal beliefs nor floodgates widely opened to them – this is the first core aspect of the first subsection. The role of the judge is the second. Esser pleads for an active – if not activist – role for the judge. At least three reasons are obvious from the text. First, only the judge is close enough to the fact pattern to learn its concrete value implications (this is a plea for the use of all, also decentralized, knowledge, and thus for constantly developing the legal order as a whole, not only at the legislative level).23 Interestingly enough, this position also speaks in favour of giving Supreme Courts and even the European Court of Justice a greater involvement in the factual basis of cases (though perhaps not in concrete fact-finding). Method thus would seem to be the ‘adapter’ between facts that have one pattern and norms/rules that have another one – with a view to making them fit (Figure 1.1). Second, only the judge can take into consideration changes in time, update the value judgement once made by the legislature, understand it then and now, again with a view to keeping the legal order in line with today’s views.24 Both ideas lead to Esser’s conclusion that the judge must understand the underlying rationale of a law and then fit it accordingly to the concrete case as it exists at a specific time. Third, and finally, only the judge can assess the overall adequacy of the decision reached, in consideration 23

24

Ibid., ‘The process of interpretation, which already operates selectively in one’s perception of the facts’ (p. 134, and passim); see also Chapter 12, B.I. Ibid., p. 119 (quotes in the text in this paragraph) and p. 120 et seq., then p. 138 et passim. The judge translates from then to now, considering the underlying rationale. Therefore: ‘Understanding is not the simple recognition that something “is the way it is”, but recognition of the reason and meaning of “being the way it is” [So-Sein]’, p. 121.

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figure 1.1 From hermeneutic circle to hermeneutic propeller

of all the value parameters that have to enter the concrete decision process, and this becomes particularly clear in extreme situations. Esser can refer to history when he states: ‘This alleged value neutrality of legal thinking is necessarily more prone to ideology than the freedom of the judge to make value judgements.’ This overarching value review, the constant double-checking with an (intersubjective) standard of reason (‘is this compatible with all value judgements in society?’), rather than the rote application of the single methods, Esser characterizes as the decisive factor standing over the whole hermeneutic process: ‘Therefore the control of correctness that accompanies interpretive thinking in the determination of the law . . . is not merely a natural part, but an essential part of interpretation, indeed its rational core.’ Over and again, the judge is depicted as a mediator who has to find a good equilibrium – the Aristotelian mesotes – between ‘obedience’ and ‘autonomy’: ‘The “application of law” must be understood as the execution of a regulatory task, while not only understanding the reach and regulatory concept of the available models, but also recognizing the judge’s own independence in reaching a decision.’25 The Carroll Towing case illustrates core findings discussed here. The facts, namely the plurality of parties contributing to the causation of loss – their somehow similar way of contributing, all breaching good shipmen’s customs – apparently led Judge Learned Hand to not even doubt the rule that contributory negligence should be relevant at all (no analysis of case law for this point). This is, however, rather astonishing given that the majority view in US common law at that time was ‘all or nothing’ – without contributory 25

These last two quotes are from ibid., at pp. 121 and 125 et seq. (emphasis added).

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negligence being taken into consideration26 – and given that, with respect to the standard of negligence as the other main item, Learned Hand is so meticulous in running through an abundantly rich case law (as precedent). The logic of the fact pattern seemed to fit much better with a rule of contributory fault (and split responsibility), perhaps also Learned Hand just wanted to disregard case law to the contrary for this point. At the same time, when coming to negligence and applying the ‘Learned Hand formula’ – B < PL – the judge declares it a simple application of the negligence rule, as remaining within the standards established by the legal community (namely because precedent was described as being split). Only decades later was this judgment declared as being a change of paradigm,27 a true revolution. This is one of the (rare) examples where a theory (today) considered as an economic theory of the law has been developed with the legal value base in mind and even taking it as the prime point of reference. Coming back to Esser and namely to the idea that ‘control of correctness . . . [constitutes] indeed its rational core’, it should be clear that quite a few procedures of control exist – despite subjectivity of the preconception of each individual judge or legal decision taker as a point of departure. This starts with preconception itself. Clearly, by the fact that the experience of a judge contributes to forming his preconception, it is already in a large part not only subjective, but also a rather condensed perception formed by (parts of) the community (including legal education and other socialization processes). In a second step, method comes in – the ‘shadow of the opinion of the others’, the knowledge of each judge that they will have to justify, a constraint that will typically make them already look to acceptance standards of the community at this stage. Finally, even if preconceptions still remain different – obviously, as this reflects different views in society – discussion in the courts of higher instance and in legislative or scientific circles is always between a number of participants and this discourse thus forms a third important filter. So while the first impetus for a decision may not be method driven, already the second consideration and certainly the ‘control of correctness’ are highly method driven in Esser’s theoretical approach and therefore the ‘shadow’ that method will cast reaches far into the beginnings of the decision-taking process. In Esser’s text, all of these points are developed further in subsections 2 (‘Methodological Canon and Methodological Pluralism’) and 3 (‘Objective and Subjective Elements’) and if the claims of the former have clearly become mainstream today, serious disputes remain concerning the claims of the latter. In subsection 2, Esser’s main point is that there is no clear system or hierarchy among the individual traditional grammatical, historical, systematic and teleological methods developed by von Savigny (the first three, nor had von Savigny ever postulated such a system and outside German and perhaps Continental law, this would clearly not be the case). Conversely, Esser holds that all these methods 26 27

See as a leading case Butterfield v. Forrester, 103 Eng. Rep. 926 (K.B. 1809). For this to happen, T. Kuhn, The Structure of Scientific Revolutions (5th ed., Chicago / IL: University of Chicago Press 1986) would have asked for a situation in which the traditional case law was so apparently flawed that it just could not be upheld. Conversely, R. Posner, ‘What do Judges and Justices Maximize? (The Same Thing Everybody Else Does)’, 3 Supreme Court Economic Review 1–41 (1994), just declares the old common law as being ‘efficient’, that is, already developed under the paradigm of economic theory and setting of benchmarks (therefore no revolution is needed).

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instead provide elements which should enter into an overall value judgement to be creatively formulated by the judge. ‘It is clear from all this that it is in no way the exception, but rather the rule, that judges guide their [seemingly arbitrary] choice of method through a teleological test of correctness, in terms of its acceptability within a given social system.’28 Esser speaks of a methodological pluralism in this respect and the overarching idea (that all relevant value judgements have to be brought into the hermeneutic process) justifies, and even imposes, what at first seemed paradoxical: that methods may indeed seem to be chosen ‘at random’ (see previous discussion of Esser’s introductory part). In subsection 3, Esser stresses that ‘recourse to historical tools of interpretation, in the sense of subjective theory, simply constitutes a complete abdication of law’s interpretive duty’, that is, of the hermeneutic search for an acceptable situation for this case and today.29 The core question, however, already broached in subsection 1 and taken up in more detail in subsections 4 and 5, is how such active decision-making by the judge can be brought in line with a principle of obedience to law and respect for precedent. These subsections deal with the limits that the judge has to respect and with the concept of preconception itself. There are answers to this core question both at the level of procedure and at the level of the final result, namely overall acceptability (adequacy). The procedural dimension is a matter 28

29

J. Esser, Vorversta¨ndnis und Methodenwahl in der Rechtsfindung. Rationalita¨gsgrundlagen richterlicher Entscheidungspraxis (Frankfurt: Athena¨um, 1972), p. 126. This view is clearly mainstream today also in Germany: K. Larenz / C.-W. Canaris, Methodenlehre der Rechtswissenschaft (3rd ed., Berlin: Springer, 2008); F. Bydlinski, Juristische Methodenlehre und Rechtsbegriff (2nd ed., Vienna: Springer, 1991), pp. 553–65; R. Zippelius, Juristische Methodenlehre (11th ed., Munich: Beck, 2012), pp. 50–1. For the EU level, see contributions to K. Riesenhuber (ed.), European Legal Methodology (Cambridge: Intersentia, 2017). For an extension, see text below. In comparison to von Savigny, Esser (and the twentieth-century methodology more generally speaking) would rather seem to be driven by a more intersubjective stance (admitting, at the same time, the all-pervasiveness of preconceptions). Not only does Esser call the methods ‘canons’ of interpretation, rather than just ‘elements’ of interpretation (as von Savigny had done), but as is well known, von Savigny had not yet included teleological methodology in his set of methods – certainly more intersubjective than others, even though often difficult to apply. J. Esser, Vorversta¨ndnis und Methodenwahl in der Rechtsfindung. Rationalita¨gsgrundlagen richterlicher Entscheidungspraxis (Frankfurt: Athena¨um, 1972), p. 129. This point is particularly disputed by those who hold that the historic will of the legislature, based on the principle of democracy, must prevail. For European law, see, on the one hand: J. Neuner, Privatrecht und Sozialstaat (Munich: Beck, 1999), p. 193 (democratic legitimacy only for the historical will theory); and on the other hand (because lawmaking and interpretation have a procedural character): H. Schulte-No¨lke, ‘Elf Amtssprachen, ein Recht? Folgen der Mehrsprachigkeit fu¨r die Auslegung von Verbraucherschutzrichtlinien’ in R. Schulze (ed.) Auslegung europa¨ischen Privatrechts und angeglichenen Rechts (Baden-Baden: Nomos, 1999), pp. 143–65, at p. 158 et seq.; for national law, discussed in much more detail: K. Larenz / C.-W. Canaris (fn. 28), p. 138; but see also Lord Diplock in Geelong Harbor Trust Comrs v. Gibbs Bright & Co. [1974] 2 WLR 507, 513. Also discussed in the United States with the so-called original intent theory, see, for instance, H. Powell, ‘The Original Meaning of Original Intent’, 98 Harvard Law Review 885–948 (1985); K. Wittington, Constitutional Interpretation: Textual Meaning, Original Intent, and Judicial Review (Lawrence: Kansas University Press, 1999); L. Levy, Original Intent and the Framers’ Constitution (New York: Macmillan, 1988). In all this, one should also not forget that this ‘subjective’ will of the legislature is by no means ‘monolithic’ (see J. Esser, Vorversta¨ndnis und Methodenwahl in der Rechtsfindung. Rationalita¨gsgrundlagen richterlicher Entscheidungspraxis (Frankfurt: Athena¨um, 1972) ‘conception of rule setting as a process of several steps of decision making’, p. 120). Esser is radical in that he not only negates the prevalence of historic interpretation, but rather condemns it altogether (‘abdication of proper adjudication’, see quote in text).

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of careful consideration (in the ‘hermeneutical circle’) and of attention to the need to justify: ‘In the judicial task, lawyers – just like the legislature – should certainly not merely work out the result for themselves, but make an effort to communicate and justify the solutions they have found.’30 But, first, consideration of all interpretative methods, of the peculiarities of the case, of the changes in time and of the value judgements elsewhere in the legal order and in society, along with a constant testing of the draft decision against the parameters of what is inter-subjectively acceptable. The final result, then, is what the double-checking aims at. This is not simply a judge’s personal feeling about what they find to be ‘just’, but the interpretation by the judge of what – given eternal moral standards and the shared value judgements of their time – would be intersubjectively acceptable, for the whole of society, taking the norm being interpreted as both starting point and decisive element. This, and not some personal prejudice cherished by the judge, is the concept of preconception: ‘It is the common perspective of those affected by a norm that lies at the core of the so-called preconception.’31 Thus, the law and the value judgements acceptable in the community of law actually form two filters on the results a judge can reach. Esser may not yet have had in mind the discussion, only seriously addressed in later legal scholarship, on whether judges should or may make consequentialist assessments when applying the law.32 Even this question, however, can be considered through the framework of this open-textured process. The procedure of constantly double-checking gives clearer sense to the image of the hermeneutic circle and, in line with Esser’s thinking, can also be further repurposed for the contemporary questions of methodology addressed in this book. Esser would seem to suggest that the judge’s eye repeatedly has to turn from the facts, to the text and meaning of the norm, and back again, as if in a circle. The judge would thereby come both to a better interpretation of the content of the norm that accounts for the facts at issue and to a deeper understanding of the facts in light of the content of the norm.33 The judge is always narrowing the gap between fact and norm, and also potentially overcoming a gap in time. Simultaneously, there seems to be not only one (hermeneutic) circle, between norms and facts, but at least one additional interpretive dynamic, and both seem to join in overall combination in the concrete decision to be elucidated. The other circle Esser alludes to is the ‘common level’ of understanding (and values) shared by the affected parties,34 that is, 30 31

32

33

34

Ibid., p. 134. Ibid., p. 118, et passim, for instance: ‘In order to overcome subjectivity and dependence on legislative intention, one undoubtedly requires arguments that are worthy of discussion and verifiable arguments of legal policy, until one reaches the point that the reasons for a decision and its consequences become clear [. . .] This horizon of expectations is not subjective, but common’ (pp. 133/140). On this question, see R. Posner, Economic Analysis of Law (9th ed., Austin / TX: Wolters Kluwer, 2014), 32–3; R. Posner, ‘The Ethical and Political Basis of the Efficiency Norm in Common Law Adjudication’, 8 Hofstra Law Review 487–507 (1980); R. Posner, ‘The Decline of Law as an Autonomous Discipline: 1962–1987’, 100 Harvard Law Review 761, 778 (1987); M. Deckert, Folgenorientierung in der Rechtsanwendung (Munich: Beck, 1995); P. Lassahn, ‘Rationalita¨t und Legitimita¨t der Folgenberu¨cksichtigung’, Archiv fu¨r Rechts- und Sozialphilosophie 99(3) (2013), 323–57. See in particular J. Esser, Vorversta¨ndnis und Methodenwahl in der Rechtsfindung. Rationalita¨gsgrundlagen richterlicher Entscheidungspraxis (Frankfurt: Athena¨um, 1972), pp. 134–40, with its many evocative images. See ibid., p. 118 for this concept, but as well for what follows. Esser’s judge would also seem to be rather ‘Herculean’, but in a different meaning from that attached to him by R. Dworkin (see fn. 45 et. seq.). Certainly, Esser would not think that there can be only one ‘correct’ solution in any law dispute.

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a shared societal understanding of values. If indeed the judge has to take responsibility for the link to acceptability in society, their eye not only has to oscillate between facts and norms, but must also travel the route that links these two with the overarching, socially accepted value system; between values which seem ‘eternal’ and those which belong to a particular time. Their real task then involves carefully co-ordinating these ‘elements’, and carefully reshaping the basis of the already existing decisions. For today’s purposes, Esser’s pluralism of methods (as in subsection 2) would refer not only to the different legal methods proposed by von Savigny, but would include an openness to insight offered by other widely trusted social sciences.35 Theories from other social sciences can arguably be seen as a good proxy or the condensation and more concise formulation of convictions which are otherwise prominent in society. On the other hand, and at the same time, it is clear that Esser would never advocate dependence on another discipline for its own sake, but would rather draw on other disciplines in service of the aim of reaching the most acceptable decision. Here, he comes close to the philosophers who, at the transition from the twentieth to the twenty-first century, have focused most carefully on the legitimacy of social and legal norms and the procedures required to reach them, namely Habermas, Rawls and Sen.36 The judge is hailed as a good and indispensable mediator because only their intervention makes it possible to keep the legal system in line with the needs of both changing circumstances and the shared value basis of society and, more generally, to keep the abstract in line with the needs of the concrete. The judge’s interpretative force is necessary to give life to multiple hermeneutic circles. In these points, Esser goes well beyond general hermeneutics, to bring together the abstract and the concrete, as well as the norm and the value judgements accepted in society, while emphasizing that these realms communicate fruitfully and dynamically. His method finds a compromise between the open-textured and the rigorous; it is open not only to the future but also, for instance, to multi-level or other ‘open’ systems (see Part V). Esser’s approach to methodology seems as fresh today as it was when it was written, even if on specific points new ground may have since been gained – for example, by the discussion on consequentialist views influencing judges’ decision taking (see fn. 32). Other important approaches, especially in Germany, owe something to Esser, among them Luhmann’s system theory or Habermas’ discourse 35

36

S. Grundmann, ‘Methodenpluralismus als Aufgabe: zur Legalita¨t von o¨konomischen und rechtsethischen Argumenten in Auslegung und Rechtsanwendung’, 66 RabelsZ 423–53 (1997). There is a parallel with Luhmann’s and Teubner’s systems theory insofar as they claim that any social system – such as law – is operationally closed (‘autopoetically’ reproducing itself only within the system), but at the same time it is (and its players are) cognitively open, taking information from other subsystems and integrating it, thus producing an evolutionary change (more broadly socially informed). See N. Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), passim; and more extensively Chapter 4 in this volume. For the idea of discourse (and negotiation) which, if the discourse partners can negotiate without undue pressure, reaches rational and good results, see J. Esser, Vorversta¨ndnis und Methodenwahl in der Rechtsfindung: Rationalita¨gsgrundlagen richterlicher Entscheidungspraxis (Frankfurt: Athena¨um, 1972), chapter 4 (J. Habermas) p. 134; and. In this respect, Habermas comes closer to Esser’s intermediate position than to his teachers’ in the critical theory school. For J. Rawls and A. Sen, see Chapter 6. For more recent efforts going in this same direction and coming from within legal scholarship, namely from G. Teubner, G.P. Calliess and M. Renner, see Chapter 25.

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theory, but they are discussed in other parts of this book.37 In the Anglo-American literature, however, Esser’s text has not received the attention it merits, even though the book itself is so heavily inspired by comparative law insight, namely from the United States. Never translated into English, the text has so far not been accessible to AngloAmerican readers. III The background against which the text written by Joseph Raz would be properly read is so broad, and so rich in ideas, that it would be pointless to attempt to summarize it. Moreover, John Gardner has already made a courageous effort to do so in his account of ‘5 ½ myths’ on positivism.38 Leslie Green has offered another, shorter summary in the following words: Whether a society has a legal system depends on the presence of certain structures of governance, not on the extent to which it satisfies ideals of justice, democracy, or the rule of law. What laws are in force in that system depends on what social standards its officials recognize as authoritative; for example, legislative enactments, judicial decisions, or social customs. The fact that a policy would be just, wise, efficient, or prudent is never sufficient reason for thinking that it is actually the law, and the fact that it is unjust, unwise, inefficient or imprudent is never sufficient reason for doubting it. According to positivism, law is a matter of what has been posited (ordered, decided, practiced, tolerated, etc.).39

While the Hart–Fuller debate, initiated in 1958 and continued long thereafter, certainly offered a pointed summary of positions, it also constituted a significant ‘leap’ towards contemporaneous thinking in this long dispute. Their texts once again raise the fundamental question as to whether morals (or natural law, etc.) are part of the law in some way; whether, for instance, the validity of the law might depend on whether it severely violates some higher-order norm (morality, natural law, etc.) – in which case, a law which violates such norms might cease to be law at all – or whether and to what extent the interpretation/ construction of the law may take into account moral preconceptions, or other value judgements from outside the law (such as overall efficiency). The negative answer to the first question is often seen as the very core of positivist thinking. In the words of Gardner: ‘In any legal system, whether a given norm is legally valid, and hence whether it forms part 37

38

39

See Chapter 4. On the relationship between Esser and system theory, see N. Luhmann, Das Recht der Gesellschaft (Frankfurt: Suhrkamp, 1995), pp. 362–72; Ko¨ndgen (fn. 12), 201 et seq.; on that between Esser and discourse theory, see F. Ku¨bler, ‘Juristisches Vorversta¨ndnis zwischen Ideologieverdacht und universaler Diskursverpflichtung’, in E. Schmidt / H.-L. Weyers (eds.) Liber Amicorum. Josef Esser zum 85. Geburtstag (Heidelberg: C. F. Mu¨ller, 1995), pp. 91–108; K.-H. Ladeur, ‘Die rechtswissenschaftliche Methodendiskussion und die Bewa¨ltigung des gesellschaftlichen Wandels’, in T. Vesting / I. Augsberg (eds.), Das Recht der Netzwerkgesellschaft (Tu¨bingen: Moehr Siebeck, 2013), pp. 163–205, particularly 175 et seq.; Ko¨ndgen (fn. 12), 199–201. J. Gardner, ‘Legal Positivism: 5 ½ Myths’, 46 American Journal of Jurisprudence 199–227 (2001), reproduced in J. Gardner, Law as Leap to Faith: Essays on Law in General (Oxford: Oxford University Press, 2012), pp. 19–53. L. Green, ‘Legal Positivism’, in E. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2009), http://plato .stanford.edu/archives/fall2009/entries/legal-positivism/.

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of the law of that system, depends on its sources, not its merits.’40 The core of positivism – the so-called separation hypothesis – reaches back to J. Bentham41 and his disciple J. Austin, and was summarized most pithily and possibly most prominently in J. Austin’s phrase that ‘[t]he existence of law is one thing, the merit or demerit is another’.42 Famous further steps were taken by H. Kelsen with his idea of a Grundnorm, a hypothetical norm (for instance, the expressed will of people when enacting their constitution) which serves as the basis for all other norms or legal decisions in a given jurisdiction – an idea which in turn influenced both Hart and Raz.43 The important step taken in the Hart–Fuller debate was to powerfully distinguish the pragmatic side of positivism from its ethical side – a distinction that has since been the standard of discussion. Positivism, by dissociating law from morals or other value judgements outside the legislative mechanism, may make the administration of the law easier and more easily foreseeable, but this dissociation may also entail some normative (‘ethical’) element. Strong among the values attributed to positivism is the claim that it is the core guarantee of freedom: by limiting the power to 40

41

42

43

According to Gardner, this is the sole phrase which really unites all positivist thinkers: see J. Gardner ‘Legal Positivism: 5 ½ Myths’, 46 American Journal of Jurisprudence 199–227 (2001), at 199 and 201 respectively. The question is indeed often raised whether positivism has anything to say about interpretation as well or is limited to speaking about validity. On this question, see extensively: B. Lahusen, Rechtspositivismus und juristische Methode (Weilerswist-Metternich: Velbru¨ck Wissenschaft, 2011). If, however, the law is not only about ‘black’ and ‘white’ – whether there is a valid command or not – but also about the ‘greys’ – the content of the command – this position would not seem to be very consistent. Bentham’s stance in the development is particularly interesting. On the one hand, he was a well-known critic of natural law approaches, to the point of criticizing even ‘positive’ emanations of this school, such as any pronouncement of human rights (‘nonsense on stilts’). On the other hand, he is the founding father of utilitarian philosophy, which is generally regarded as the precursor of the law and economics movement and which is accordingly rather the opposite of a strongly positivist approach. See, on his criticism of human rights, J. Bentham, ‘Anarchical Fallacies; Being an Examination of the Declarations of Rights Issued During the French Revolution’, in J. Bowring (ed.), The Works of Jeremy Bentham (Edinburgh: William Tait, 1843), Vol. 2, pp. 489–534. See, on Bentham as founding father of utilitarian thought, J. Driver, ‘The History of Utilitarianism’, in E. N. Zalta (ed.), The Stanford Encyclopedia of Philosophy (2014), http://plato.stanford.edu /archives/win2014/entries/utilitarianism-history/; J. Viner, ‘Bentham and J. S. Mill: The Utilitarian Background’, 39 The American Economic Review 360–82 (1949); H. Eidenmu¨ller, Effizienz als Rechtsprinzip (4th ed., Tu¨bingen: Mohr Siebeck, 2015), p. 22 et seqq. Utilitarian approaches to law can already be found in W. Blackstone, Commentaries on the Laws of England (Oxford: Clarendon Press, 1765–1769); on this, see R. Posner, ‘Blackstone and Bentham 1776: The Revolution in Social Thought’, 19 The Journal of Law and Economics 569–606 (1976), at 578. And for the beliefs of the law and economics movement that efficiency should be the core criterion, see R. Posner’s path-breaking book, Economic Analysis of Law (Boston / MA: Little, Brown, 1973), passim; also R. Posner, ‘The Decline of Law as an Autonomous Discipline’, 100 Harvard Law Review 761–80 (1987), especially at 766–80; particularly clear in R. Posner, ‘Utilitarianism, Economics, and Legal Theory’, 8 Journal of Legal Studies 103–40, (1979), 103–14 (and thereby also of positive law). J. Austin, The Province of Jurisprudence Determined (Cambridge: Rumble, 1995), p. 157. On the separation hypothesis, see, A. Marmor, ‘The Nature of Law’, in E. Zalta (ed.), Stanford Encyclopedia of Philosophy (2011), https://plato.stanford.edu/entries/lawphil-nature/ and H. L. A. Hart, ‘Positivism and the Separation of Law and Morals’, 71 Harvard Law Review 593–629 (1958). H. Kelsen, Reine Rechtslehre (1st ed., Leipzig: Deuticke, 1934), especially pp. 62–89; a translation of the second (revised and enlarged) edition is available in English: H. Kelsen, Pure Theory of Law (Berkeley: University of California Press, 1967), see especially pp. 193–278. Hart was professor of what – in German – would be called Allgemeine Rechtslehre. On Kelsen’s influence on Hart, see H. L. A. Hart, The Concept of Law (1st ed., Oxford: Oxford University Press, 1961), pp. 245–8; and for Raz’s view on Kelsen, see J. Raz, ‘Kelsen’s Theory of the Basic Norm’, 19 American Journal of Jurisprudence 94–111 (1974) at 94, arguing that Kelsen’s ‘attempt has failed, but that its failure is illuminating’.

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place limits on private freedom to the legislative mechanism (and demanding, in common law contexts, that precedent be binding), the power of restraint is thereby reserved to the sovereign alone – and any such encroachments are made more visible by being explicit.44 For clarity’s sake, a little detour on developments in positivism between Hart and Raz may be helpful. Probably the key figure in the interim – both in Oxford and in the United States – was Ronald Dworkin, the disciple of L. Fuller. Dworkin’s stance was generally seen as anti-positivist, but at the same time made him a key target of critical legal studies. This places him between positivism and its most prominent (fundamental) critique in the 1960s and later. While Dworkin’s core idea of ‘taking rights seriously’ is more principlebased than positivist approaches would typically allow, that does not lead him to accept the premise, associated with (at least some core strands of) critical legal studies, that adjudication can be reduced to an exercise of bare politics. His core idea is that the rights which need to be ‘taken seriously’ – namely, the fundamental rights of citizens – constitute higher-level principles from which all legal acts and adjudication have to start and derive their conclusions. Also important in his theory is the ideal of a judge – his famous hypothetical Herculean judge – who could actually derive all judgments from these basic principles, ideally enshrined in a charter of fundamental rights but, in practice, always also encompassing unwritten fundamental principles.45 Still, adjudication is always seen as an application of the legal principles and not (primarily) as a political act.46 Thus Dworkin would seem to lie at a position in the Anglo-American discourse similar to Esser’s position in the discourse on methodology in the German-speaking countries: attacked by those who see the legal decision mainly as an act of political engineering, but criticized as well by strictly positivist thinkers. Dworkin’s ideas will be taken up later when discussing rights and values in Chapter 7, but even Raz, whose text is discussed here, also seems to embrace intermediate solutions. Raz is slightly younger than Dworkin, and closer both to Hart and to what might be called the Oxford ‘mainstream’ (see later in this section). As the contemporary inheritor of the role of most prominent champion of positivism, he makes for a particularly interesting case. On the one hand, he has taken some particularly radical positivist positions: he argues, for instance, that the validity of a law can never depend on its morality (‘exclusive positivism’).47 On the other hand, the text on interpretation chosen here would seem to argue for a particularly creative and far-reaching approach to the role of the judge or interpreter. The topic is ‘interpretation: pluralism and innovation’. Indeed, Raz is a strong believer in an open society and argues that ‘positivism’ is not only eminently compatible 44

45

46

47

On the – suggested – role of positivism as a guarantee of freedom, see, for instance: J. Raz, The Authority of Law: Essays on Law and Morality (Oxford: Oxford University Press, 1979), pp. 220–3 (‘rule of law’). R. Dworkin, Taking Rights Seriously (Cambridge / MA: Harvard University Press, 1977), pp. 105–30 on the Herculean judge and pp. 279–90 on the single right solution of hard cases. On R. Dworkin and his relations to both positivism and critical legal studies, see, for example, D. Kennedy, A Critique of Adjudication [Fin die Sie`cle] (Cambridge / MA: Harvard University Press, 1997), p. 119–30 (recognizing his position as half-way between the two); for a critical view by Hart, see H. L. A. Hart, The Concept of Law (2nd ed., Oxford: Clarendon Press, 1994), pp. 238–76. J. Raz (fn. 42), pp. 47–50. Even Hart argues only that law does not necessarily depend on morality, although it could make this reference (‘inclusive positivism’), see H. L. A. Hart (fn. 46), p. 250.

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with an open society but the very prerequisite of its preservation.48 Popper, the main proponent of the open society concept, argued quite to the contrary that making the established sovereign power the sole source of rules in society would prevent forces within the open society from driving any gradual change capable of modifying the ‘sovereign’s command’.49 Raz, on the other hand, argued that freedom – including the parties’ freedom to draft their own solutions – requires a ‘stable, continuous legal framework’ within which ‘legal innovation and change’ could flourish.50 In England, with the Oxford school of legal thinking exercising a strong influence on doctrinal teaching, this may well be the predominant position. At first sight, it would seem then that Raz is a traditional positivist. In particular, his service concept of authority (i.e., limiting its exercise to what is strictly implied by the legal basis on which it is based) appears firmly opposed to extending public regulation via innovative interpretation; it appears, indeed, to advocate for rather narrow interpretation.51 However, the contrary is true if one looks at the part in which he wrote on interpretation proper. The text begins with the main tension discussed: it analyses what constitutes a ‘creative’ or ‘innovative’ interpretation, advocating on behalf of such forms of interpretation and even in favour of ‘legal innovation’, before proceeding to clarify the limits set for such interpretation.52 The Leitmotiv (epigram) is taken from Hans Sachs in Wagner’s Meistersinger: ‘If I teach you the rules, you must interpret them anew.’ Interpretation is a highly innovative and creative endeavour! If interpretation, as Raz indicates, is the uncovering of a meaning, it can nevertheless be good (successful) or bad, even though both are still interpretations. Uncovering meaning alone is not sufficient; uncovering meaning is interpretation only if it is less mechanical, and more creative, than the mere analysis of the meaning of single words, like a dictionary (semantics, ‘rendering only in one language what is said in another’). The first topic – innovative, good interpretation – is discussed at more length (sections I–VI); while the second – the limits to be placed on 48 49

50 51

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See J. Raz (fn. 42), p. 220–3. K. Popper, The Open Society and Its Enemies (3rd ed., London: Routledge & Kegan Paul, 1957), Volume I, pp. 60–73. On the other hand, Popper subjected the social sciences, including the interpretation of rules, to the same rules of logic as the natural sciences (and thus indirectly argued against unbounded activism by judges). This brought him into dispute with advocates of critical theory (the Frankfurt School) and, despite striking differences of approach, perhaps brings him rather closer to the position advocated by Esser (see Section II in this chapter). On this dispute – the so-called Positivismusstreit – mainly waged by Albert (on the side of Popper) and by Habermas (on the side of the Frankfurt School), see, for instance T. W. Adorno / H. Albert / R. Dahrendorf (eds), The Positivist Dispute in German Sociology (New York: Harper & Row, 1976); or in German: T. W. Adorno / R. Dahrendorf / H. Pilot / H. Albert / J. Habermas / K. Popper, Der Positivismusstreit in der deutschen Soziologie (6th ed., Munich: DTV, 1993); H. J. Dahms, Positivismusstreit: die Auseinandersetzungen der Frankfurter Schule mit dem logischen Positivismus, dem amerikanischen Pragmatismus und dem kritischen Rationalismus (Frankfurt: Suhrkamp, 1994). Popper withdrew because, to his mind, the Frankfurt School intentionally obscured their arguments (‘obscurantism’), and the dispute was therefore not fruitful. J. Raz, Between Authority and Interpretation (Oxford: Oxford University Press, 2009), p. 317. J. Raz, The Morality of Freedom (Oxford: University Press, 1986), especially p. 53 et passim; and again in ‘ J. Raz, The Problem of Authority: Revisiting the Service Conception’, 90 Minnesota Law Review 1003 (2006); see also the references in fn. 42 and 48. J. Raz, Between Authority and Interpretation (Oxford: Oxford University Press, 2009), pp. 299 et seq. (also for the rest of the quotes and ideas in this paragraph).

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interpretive creativity – is written in a more summary manner, clarifying boundaries and the relationship to the underlying positivist assumptions (sections VII, VIII and to some extent also IX). The first section, which sets out the ‘basic features’, begins by defining interpretation ((1)–(4)) as an explanation of something that has meaning, that is more or less successful (in the sense of making that meaning understandable), and then clarifies Raz’s main interests. These are: good interpretations which not only pass on knowledge, but feed understanding (5), pluralism in possible (good) interpretations (6) and interpretations that are strictly innovative, in that they discover something new in the text or object analysed (7). Raz argues that good rule-making facilitates each of these kinds of dynamic interpretation ((5)–(7)); a remarkable framework and programme for a rule-setting theory. The last two aspects – pluralism and innovation – are his core interest. Section II first clarifies Raz’s use of ‘pluralism’, by which he means not pluralism of methods or disciplines as applied in this book, but recognition of the plurality of valid interpretative results, all logically incompatible with one another, but nonetheless each acceptable readings of the given norm, and among which some may be ‘novel’ and others not.53 According to Raz, pluralism and innovation are thus closely linked to each other, but innovation is associated with the very essence of interpretation. The core question is: if innovative interpretation ‘explain(s) or reveal(s) a meaning which was not there all along’,54 how can it still be interpretation (i.e., an uncovering of meaning) at all? Is innovation not logically distinct from uncovering of meaning (and, therefore, not ‘true’)? Does not uncovering meaning, providing an explanation, imply that the meaning is already in the object of interpretation, and therefore excludes innovation? Raz explains his position using Hamlet, the Israeliborn philosopher relying on the Prince of Denmark, both united in British art (or thinking). Of course, Raz admits, when Freud attributes Hamlet’s courageousness in all matters except taking revenge on his uncle – the murderer of his father and the new husband of his mother – to Hamlet having himself had the repressed dream, the famous Oedipus complex, of dethroning his father and being with his mother, this interpretation was previously unheard of. And, one might add, Shakespeare himself had not understood his text this way, though he had apparently somehow sensed it as the deepest artistic truth. At the same time, in uncovering this truth, Freud – in Raz’s view – created nothing that was not already in the text (‘No interpretation, however innovative, changes its object’) – and so the ‘paradox’ remains. In a similar vein, one could say that Ronald Coase, in his analysis of nuisance cases, uncovered for the first time the decisive criterion that an injunction should only be granted if the loss resulting from a (usually economic) activity is greater than the benefit. Similarly and already before this, Judge Learned Hand uncovered in the Carroll Towing case that a definition of negligence whenever B < PL was the most useful synthesis 53

54

In sharp contrast to Dworkin’s belief in one and only one truly correct interpretation, and his image of the Herculean judge who is capable of finding it; see generally fn. 43; see especially R. Dworkin, Taking Rights Seriously (Cambridge / MA: Harvard University Press, 1977), pp. 105–30 (Herculean judge) and pp. 279–90 (one right answer). For the quotes and the ideas discussed in this paragraph, see J. Raz, Between Authority and Interpretation (Oxford: Oxford University Press, 2009), pp. 303 et seq.

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of a – so far apparently split – case live of precedents, certainly a highly innovative interpretation of the (long-established) requirement and standard of negligence. At this point, the three core categories – pluralism, innovation and good or bad interpretation – are tied together and at the same time the link back to positivist authority is stressed: the ‘heart of the matter [is], explanations can be good or bad, and they can be more or less good. Their success is determined by criteria, or rules for excellence in interpretations [and these rules] are independent of the interpretations’, that is, they lie within legal scholarship and the rules of interpretation (and, as Raz explicitly admits, they even change over time). For Raz, the key to solving the paradox – potential novelty in something that was already there – is that what is being interpreted in these cases is a ‘cultural’ object, a category which comprises both art and social relationships/institutions. Section III focuses on what distinguishes cultural objects: their use requires acquaintance with them (deep understanding) and engagement with them depends on the culture, that is, on the existence of the surrounding society.55 This state of affairs then leads Raz to two ‘inevitabilities’ (sections IV and V) which explain why an interpretation of such objects, under certain circumstances, cannot be good unless it is also innovative. The first inevitability is that the meanings of norms, like the meanings of pieces of art, are not only vague (as elaborated by Raz, though they ‘are often expressed in similar ways by many people . . . these statements are vague to a greater or lesser degree’) but, more strongly, can also be understood differently by different members of society, because of indeterminacies in the surrounding ‘field of meaning-norms’. The second inevitability starts out from the first, namely from the idea that societal knowledge itself establishes the range of meanings that are and can be attributed to a norm. Thus, even though the innovative meaning was already present (in Raz’s view), and particularly present in ‘features of the object which were there all along’, various understandings can be drawn from those features, including innovative ones. On this basis, the very basic argument is made – in my view pushing positivism beyond limits typically attributable to it – that ‘[t]he features which establish that an interpretation is a good one are features of its object, and its context, as well as general truths, for example about human psychology. They are not limited to those aspects of the object and the world which are generally known or thought to be important.’ And finally: ‘The contingency of socially dependent meanings makes ample room for innovative interpretations which show new ways of understanding their objects, and in so doing establish new meanings for their objects.’ This opens the argument to many inroads from society, changes in society or new systems of value judgement accepted in society, if such changes are indeed important. Indeed, Raz explicitly stresses that good interpretations are both ‘fragile and changeable’. In the remainder of the text, Raz explains at some length, partially with respect to arts and social relations but with a focus on law in particular, why we need interpretation: for plurality’s and innovation’s sake. Strangely enough, and borrowing from a very different thinker indeed, this sounds as if competition between the best (innovative) interpretation(s) might be understood by analogy to von Hayek’s ‘discovery device’ in the market of ideas. Raz 55

For the ideas and quotes discussed and reproduced in this paragraph, see J. Raz, Between Authority and Interpretation (Oxford: Oxford University Press, 2009), pp. 305 et seq., 309, 311 et seq. (emphasis added).

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even goes so far as to say that ‘there is the need to integrate law and morality’.56 Thus, Raz positions his text as ‘present[ing] some reasons for empowering the courts to engage in innovative interpretation in cases to which they apply’. In the rest of the text, Raz turns to a discussion of the limits of interpretation. The core argument on this issue is that law is different from art and informal social relationships insofar as it is an expression of authority, and that its interpretation, at least authoritative interpretation by courts, therefore aims at uniformity and stability. Raz, however, is far from a pure command theorist: ‘To fulfil their role courts’ decisions need not be acknowledged as justified or correct, they have to be acknowledged to be binding.’ And, while Raz still maintains that interpretation is limited to finding what is already in the object of interpretation (‘limits of interpretation’), he later continues that such constraints ‘are always shifting. It is sometimes assumed that if the object of interpretation must constrain the interpretation, it follows that the constraining features must be ones which belong to the object once and for all, and constrain the interpretation in the same way always. That is a mistake. The constraints include the meanings of the object and they can change over time.’ The result Raz reaches, which seems not so distant from what Esser proposes, is openness to innovative interpretation, provided that the result meets the standard of acceptability in a (changing and enlightened) community of legal experts. IV Two texts, two thoughtful answers to the question about the inside and the outside of law. Though rooted in two rather different theoretical traditions, both texts at their core deal with the same issue of innovative and dynamic interpretation, including, albeit only implicitly, interpretation inspired in large part by social theory in the broad sense. Moreover, and again despite drawing on disparate strands of theory, they come to strikingly similar proposals, at least for the core question of inside and outside the law. In summary, one could say that the more recent view on interpretation by a protagonist of positivist theory confirms, to a large extent, the findings on the processes and outcomes of (legal) interpretation made earlier in the much more open-textured general communication theory of hermeneutics. In a democratically structured political system with a rule of law (including the EU), the basic belief of the Enlightenment-era natural law approach seems almost naı¨ve, as if there were no filter mechanisms with respect to how and when value judgements (may) enter the legal arena. Such filter mechanisms are paramount if the importance of legitimacy and representation are to be sustained, and especially if an equilibrium is to be found between fact patterns and reality on the one hand, and normative conclusions on the other. Today, however, in stable democratic societies based on the rule of law, these concerns no longer seem to be directed primarily towards human rights, but rather to methodological approaches that ally themselves with the end of ‘law as an autonomous discipline’ (i.e., that identify the hegemony of other disciplines in law, in opposition to Mestma¨cker or Sen), or at least towards the less far-reaching claim 56

For the quotes and ideas discussed in this paragraph, see ibid., pp. 318–22.

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that other social sciences should be integrated in the process of interpretation as an element in the heuristic process. However, they are also directed towards such phenomena as rule-setting without democratic legitimacy. Both areas of study are by no means trivial today.57

57

For the former, see S. Grundmann, 66 RabelsZ 423–53 (1997); S. Grundmann, ‘Pluralism and Private Law Theory’ (see fn. 2); R. Posner, ‘The Decline of Law as an Autonomous Discipline’, 100 Harvard Law Review 761–80 (1987); for the latter, see Chapter 25.

2 Private Law and Sociology Moritz Renner

a topic and materials I This chapter addresses the role of sociological approaches in private law theory. Although the intellectual history of sociology is closely interwoven with that of modern jurisprudence, its impact on today’s debates in private law scholarship is rather limited. This holds true especially for the fields of commercial and corporate law, which are largely dominated by law and economics approaches. In this context, the chapter aims to identify those parts of the socio-legal tradition that can make a specific contribution to contemporary discussions. Box 2.1 exemplifies this contribution with a case that is deliberately taken from the field of commercial, more precisely banking, law. What can sociological insights contribute to the analysis of a case like this? As a matter of law, the case hinges on questioning whether the majority of lenders had a contractual or non-contractual duty towards Redwood that would have prevented it from making the restructuring decision.1 All doctrinal differences notwithstanding, both common law and civil law doctrine would tend to frame this as a question of fiduciary duties2 based on the ‘justified expectations’ of the parties.3 The term ‘justified expectations’, however, demands 1

2

3

For a discussion of the case and majority voting provisions in syndicated loans see Philip Wood, ‘Syndicated Credit Agreement: Majority Voting’, 62 Cambridge Law Journal 261–3 (2003); Agasha Mugasha, The Law of Multi-bank Financing: Syndicated Loans and the Secondary Loan Market (Oxford: Oxford University Press, 2007), paras. 5.119–23. On convergences and divergences between common law and civil law doctrines of fiduciary duties see Thilo Kuntz, ‘Das Recht der Interessenwahrungsverha¨ltnisse und Perspektiven von Fiduciary Law in Deutschland’, in Katharina Boele-Woelki / Florian Faust / Matthias Jacobs / Thilo Kuntz / Anne Ro¨thel / Karsten Thorn / Birgit Weitemeyer (eds.), Festschrift fu¨r Karsten Schmidt zum 80. Geburtstag, vol. I (Munich: C. H. Beck, 2019), pp. 761–81. For the common law see, paradigmatically, Deborah A. DeMott, ‘Breach of Fiduciary Duty: On Justifiable Expectations of Loyalty and their Consequences’, 48 Arizona Law Review 925–56 (2006) arguing that ‘the law applicable to fiduciary duty can best be understood as responsive to circumstances that justify the expectation that an actor’s conduct will be loyal to the interests of another’ (at 926). In civil law jurisdictions, this argument has a functional equivalent in the prohibition of ‘self-contradictory behavior’ as part of the abuse-of-rights doctrine. For the field of banking law see Claus-Wilhelm Canaris, ‘Kreditku¨ndigung und Kreditverweigerung’, 143 Zeitschrift fu¨r das gesamte Handels- und Wirtschaftsrecht 113–38 (1979), at 125.

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60 BOX 2.1 CASE STUDY

Redwood Master Fund Ltd v. TD Bank Europe Ltd [2006] 1 BCLC 149 The claimant in this case, a hedge fund, was part of a lending consortium that had provided financing to a telecoms company. The financing was supplied through two lines of credit (Facility A and Facility B). Claimant Redwood participated only in Facility B. After the telecoms company entered into financial difficulties, the majority of lenders decided to restructure the financing. Redwood voted against the restructuring, which particularly benefited Facility A creditors to the disadvantage of Facility B creditors such as Redwood. The majority decision was based on a majority-voting provision in the standard loan documentation under English law that all parties to the financing transaction had signed. Redwood argued that the majority of lenders had discriminated against minority lenders when taking the restructuring decision, and that the restructuring decision was therefore invalid.

BOX 2.2

Max Weber, Economy and Society: An Outline of Interpretive Sociology (Berkeley: University of California Press, 1978 [1921/22]), pp. 753–84 E´mile Durkheim, The Division of Labour in Society (New York: Free Press, 1933 [1893]), pp. 206–19 as much a sociological analysis of the circumstances of the case as it demands consideration as a legal concept. How did Redwood expect to be treated by the majority? And was this expectation justified, given both the circumstances of the case and the applicable law? Thus, the case can serve to demonstrate how the social background of a case can, will, and must inform its legal evaluation. These have been the leading considerations of the sociology of law, from the classics until today. II The chapter discusses two texts which can be considered the founding documents of the discipline of legal sociology (Box 2.2). Both texts stem from the Continental European tradition and they date back to the late nineteenth and early twentieth centuries. In the following decades, they have spurred a wider debate about the concept of law that confronted the legal positivism of Kelsen’s ‘pure theory of law’ with Ehrlich’s sociological ‘living law’. Around the same time, socio-legal approaches fell on fertile ground in the United States, where legal realists such as Pound and Llewellyn had successfully challenged the orthodoxies of ‘legal formalism’. Since its heyday in the 1960s and 1970s, the sociology of law has, in large fields of private law scholarship, been

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BOX 2.3

Eugen Ehrlich, Grundlegung der Soziologie des Rechts (Munich: Duncker & Humblot, 1913) Hans Kelsen, Pure Theory of Law (Berkeley: University of California Press, 1967) Karl Llewellyn, The Bramble Bush: On Our Law and Its Study (Dobbs Ferry: Oceana, 1930) Victor Nee / Richard Swedberg, ‘Economic Sociology and New Institutional Economics’, in Claude Menard / Mary M. Shirley (eds.), The Handbook of New Institutional Economics (Dordrecht: Springer, 2005), pp. 789–818 Karl Polanyi, The Great Transformation: The Political and Economic Origins of our Time (Boston: Beacon Press Books, 2001) Roscoe Pound, ‘Law in Books and Law in Action’, 44 American Law Review 12–36 (1910)

supplanted by law and economics (see Chapter 3). Socio-legal approaches, meanwhile, have often restricted themselves to an external critique of legal developments in the tradition of Polanyi and others. Only recently have socio-legal approaches been fruitfully combined with insights from other social sciences, including economics, to contribute to an ‘institutionalist’ analysis of law (see also Chapters 17 and 27). These ramifications of the debate can be traced in the supplementary readings listed in Box 2.3.

b theories, context and discussion I The relationship between law and sociology has always been as close as it has been uneasy. On the one hand, Max Weber, one of the founding fathers of the discipline of sociology, was a trained commercial lawyer.4 In his sociological studies he always placed a special emphasis on the analysis of legal rules. He is famous for his analysis of the formal character of modern private law (see Chapter 10). On the other hand, the legal discipline has often reacted with scepticism when confronted with sociological accounts of the law. Hans Kelsen, in a famous debate with legal sociologist Eugen Ehrlich between 1915 and 1917, had made clear that – from the standpoint of classical legal positivism – there was no room for sociological reflection on the ‘inside’ of private law (see Chapter 1).5 To think otherwise, Kelsen argued, would mean to confuse the fundamentally distinct categories of ‘is’ and ‘ought’. 4

5

His first books deal with the history of commercial law: Max Weber, Die Entwicklung des Solidarhaftprinzips und des Sondervermo¨gens der offenen Handelsgesellschaft aus den Haushalts- und Gewerbegemeinschaften in den italienischen Sta¨dten (Stuttgart: Kro¨ner, 1889); Max Weber, Die ro¨mische Agrargeschichte in ihrer Bedeutung fu¨r das Staats- und Privatrecht (Stuttgart: Enke, 1891). For this debate see Hans Kelsen, ‘Eine Grundlegung der Rechtssoziologie’, in Thomas Vormbaum (ed.), Rechtssoziologie und Rechtswissenschaft: Eine Kontroverse (1915/17) (Baden-Baden: Nomos, 2003), 2–54;

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The times of Kelsen’s pure theory of law,6 however, are long gone. In the second half of the twentieth century, mainstream legal thinking tried to become more responsive to social reality and began to reflect insights from the social sciences, particularly sociology and economics.7 In fact, already long before Kelsen, in 1887, Oliver Wendell Holmes had speculated that ‘for the rational study of the law the black-letter man may be the man of the present, but the man of the future is the man of statistics and the master of economics’.8 However, it was only in the 1960s and 1970s that legal sociology gained a certain relevance (and institutional support) in legal academia. At this time, legal sociology in Continental Europe benefited from the reformist agenda of social-democratic governments sponsoring empirical research on the effects of both existing laws and future legislation.9 Around the same time, in the United States the law and society movement set out to shift the perspective of legal research away from ‘law in books’ and towards ‘law in action’, that is, the social practices surrounding the making and the enforcement of legal rules.10 Much as in Continental Europe, the law and society movement in the United States was often perceived as driven by a reformist and left-liberal political agenda. It openly addressed not only the social effects of legal rules, but also the evasion of legal rules, the resistances against their enforcement and alternatives to governmental lawmaking in a pluralist society. It was mainly because of this perception – justified or not – that in the ambit of the Chicago School of neoclassical economics, the law and economics movement emerged as a libertarian alternative to the law and society movement (see Chapter 3).11 Today, the law and society approach risks being marginalized in private law scholarship, while law and economics provides the leading paradigm for large parts of legal research on both sides of the Atlantic. Ideological controversy and institutional history aside, the two reference texts discussed in this chapter show the rich intellectual tradition of the sociology of law as well as its continuing relevance for legal research. The first text is Max Weber’s Economy and Society, first published in 1922, which masterfully juxtaposes the development of modern private law with the emergence of societal division of labour and the industrial society. The main thrust of Weber’s argument, taken up by later functionalist approaches in sociology such as systems theory (see Chapter 4), is that societal division of labour has led to an increasing differentiation of social spheres, and thus the legal system has become an autonomous sphere, ‘dis-embedded’ from its social preconditions.12 This analytical

6 7

8 9

10

11

12

Eugen Ehrlich, ‘Entgegnung’ in ibid., 57–65; Hans Kelsen, ‘Replik’, in ibid., 67–72; Hans Kelsen, ‘Schlusswort’, in ibid., 77–8. Hans Kelsen, Pure Theory of Law (Berkeley: University of California Press, 1967). See, for example, especially Richard A. Posner, ‘The Decline of Law as an Autonomous Discipline: 1962–1987’, 100 Harvard Law Review 761–80 (1987) from the perspective of law and economics. Oliver Wendell Holmes, ‘The Path of the Law’, 10 Harvard Law Review 457–78. For example, the renowned Max Planck Institute for Comparative and International Private Law in Hamburg was in 1975, if only for a few years, supplemented by a social science research unit. The Law and Society Association was founded in 1964. The concept goes back to Roscoe Pund, ‘Law in Books and Law in Action’, 44 American Law Review 12–36. On these developments see Rob von Horn/Philip Mirowski, ‘The Rise of the Chicago School of Economics and the Birth of Neoliberalism’, in Philip Mirowski/Dieter Plehwe (eds.), The Road from Mont Pe´lerin (Cambridge: Harvard University Press, 2009). On the closely related notion of ‘dis-embeddedness’ compare, with regard to the economy, Karl Polanyi, The Great Transformation (New York: Farrar & Rinehart, 1944).

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approach has not much in common with the legal sociology of the 1960s and 1970s and its emancipatory impetus, which often took a decidedly normative perspective on the pressing social questions of its time.13 French sociologist E´mile Durkheim in 1893 told quite a different story in The Division of Labour in Society, the second reference text of this chapter. Although Durkheim shares Weber’s analysis of social differentiation to a certain extent, he argues that this process can never be complete, that a differentiated modern society cannot be based on individualism alone, but that society is always held together by a set of commonly shared values and norms (‘solidarity’). This idea directly translates into Durkheim’s concept of private law, which emphasizes the ‘non-contractual foundations of contract’.14 Both texts are open to contemporary applications and reinterpretations, Weber’s analysis of the formal qualities of private law as much as Durkheim’s analysis of what today would be termed ‘social norms’ or ‘relational contracts’ (see Chapters 10 and 17). Most interestingly, neither of the two texts can be enlisted for either a law and society or a law and economics approach to the law; rather, both texts show that the analysis of legal rules must always take their concrete institutional framework into account. This is the starting point for contemporary approaches in both new institutional economics (such as Williamson’s, see Chapters 3 and 17) and economic sociology (such as Granovetter’s, see Chapter 27), which promise to fruitfully employ social science methods for the analysis of concrete private law institutions. Applied to the Redwood example (Box 2.1), all these approaches would make the case for a contextual analysis of the legal questions raised. In particular, they would try to shed light on the social institutions that coexist, overlap and conflict with the formal legal rules that are applicable. II Max Weber’s magnum opus Economy and Society contains a full chapter on legal sociology in which the most famous passage is the analysis of formalized private law in modern societies. However, it is especially the preceding paragraphs on ‘the emergence of new legal norms’ that are worth reading for two reasons. The first reason relates to Weber’s method and style of argument. In these paragraphs, Weber shows that he is not only a trained commercial lawyer, but also a legal historian. Large parts of his argument are based on a historical account of legal developments since the times of Roman law. The second reason relates to the content of Weber’s argument. By analysing the emergence and creation of legal norms with a focus on customary law in premodern societies, Weber not only prepares the ground for his ensuing analysis of modern private law, he also forces himself to define the distinct criteria which lend modern private law its formal qualities. And incidentally, by showing how complex and precarious the evolution of modern private law has been, he also explains to what extent seemingly premodern forms of social ordering persist in modern societies. Here, the gap between Weber and Durkheim seems much smaller than is commonly perceived. 13

14

This is illustrated well by the choice of articles published in the first issues of the Law & Society Review, which often gravitate around topics such as criminal justice or law and poverty. E´mile Durkheim, The Division of Labour in Society (New York: Free Press, 1933 [1893]), p. 206.

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The passage starts with a rather abstract question: How do new legal rules arise? But this question is only Weber’s starting point for an analysis of the evolution of lawmaking throughout legal history. The aim of this historical endeavour is made clear from the outset; what Weber really is interested in is the concept of law in contemporary society, ‘in economically or socially complex and advanced societies’.15 Weber, writing from a German perspective, sees statutory law as the dominant form of law in such societies, but mentions English common law as a counterexample. Yet Weber finds Continental doctrine focusing on statutory lawmaking and English doctrine focusing on judicial lawmaking both insufficient for ‘discovering [the] empirical processes’16 in which legal norms are formed – before they are incorporated into either statutes or judicial decisions. Weber thus focuses on the generation of social norms and their transformation into legal rules and principles. He finds ample historical support for his thesis that legal norms are in the first place created by social practice, not legislators or judges – ubi societas, ibi ius, as the Roman legal maxim would have it. With this insight, Weber points to an issue that is prominent in contemporary research on transnational law (Chapter 25) and private governance (Chapter 26): legal norms are often made by private actors with only little or no state involvement. Looking back at the Redwood case (Box 2.1) this insight is of particular relevance. Market practices in transnational financial markets rely on standard documentation elaborated by private actors such as the London-based Loan Market Association (LMA), as did the lenders in our case. It is mostly the standard documentation, not state law, that structures cross-border financing transactions. In his text, Weber shows that this is not a novel phenomenon. Instead, his narrative follows the path that legal development has taken before the modern nation state even entered the stage as legislator and adjudicator. Weber’s starting point – shared by legal sociologists up to now17 – is that norms arise from ‘habituation’ to an individual behaviour, ‘consensus’ among certain groups and the formation of social ‘expectations’.18 But Weber does not stop here. He argues that existing theories of customary law focusing on consensus and tradition cannot explain legal innovation, the fact that there is change and often rapid development in the emergence of legal norms. Legal innovation, Weber continues, implies a process of norm selection – and this process in turn presupposes a certain degree of rationalization.19 At this point, adjudication and enforcement through state organs come into play. For Weber, it is the interplay of private rule-making and state enforcement which makes legal innovation possible, especially in ‘business affairs proper, that is, in the contracts of the market’ where ‘changes in the meaning of the prevailing law are . . . initiated by the parties and their professional counsels’.20 As parties are typically interested 15

16 17

18

19 20

Max Weber, Economy and Society: An Outline of Interpretive Sociology (Berkeley: University of California Press, 1978), p. 753. Ibid. Compare, for example, Luhmann’s concept of law as ‘stabilizing normative expectations’, Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), p. 152. Max Weber, Economy and Society: An Outline of Interpretive Sociology (Berkeley: University of California Press, 1978), p. 754. Ibid., pp. 755–6. Ibid., pp. 755–7.

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in judicial enforcement of their claims and positions, they may then bring their disputes to court – and the judicial ‘selection’ decides which rules ‘are to survive as law’.21 This interplay is continued across time through the mechanisms of judicial precedent. Weber thus paints a highly realistic picture of rule-making in private law, where contractual practice, lawyers, judges and arbitrators each contribute their share to the emergence of legal norms. This picture comes very close to later evolutionary approaches to the law and its development.22 At the same time, Weber analyses a division of labour between – in the words of Robert Cover23 – the ‘jurisgenerative’ practices of rule-making social actors and the ‘jurispathic’ power of the rule-selecting judge. In the Redwood case (Box 2.1), the jurisgenerative effect of the standard documentation for transnational financing transactions stands in conflict with the potential jurispathic role of the English High Court, which had to decide the case. In LMA standard documentation, voting-rights mechanisms and minority rights are expressly regulated by market participants. Imposing fiduciary duties on the parties to the transaction without regard to the actual practices of the field always risks destroying the existing dense fabric of social norms. Weber makes clear that the division of labour between society and judiciary can be considered a ‘rationalization’ of rule-making only to the extent that the judicial procedure itself is rational. Here, Weber points to ancient practices of adjudication by magicians and priests, but also to the inherent ‘irrationality’ of the jury system. But he does not simply juxtapose such irrational and seemingly premodern forms of decision-making with modern civil procedure. Instead, he wants to show that it is the very irrationality of judicial decision-making which, already in premodern times, went hand-in-hand with a ‘rigorous formalism of procedures’, for example in the actiones of Roman law.24 Although Weber himself does not raise this question, the dialectical relationship between formalism in procedure and irrationality in decision-making also remains an unresolved issue for adjudication in modern legal systems. Can the rules of both substantive and procedural law really determine the act of decision-making by individual judges? Might it not be that, behind the spectacle of the judicial procedure with all its formality and regulation, there lurks the same irrationality as in much earlier times? It is exactly this issue which is – much later – taken up by deconstructionist thinkers when they try to uncover the necessarily irrational nature of judicial decision-making which can never be fully bound by rational argument.25 21 22

23

24

25

Ibid., p. 758. See, for example, Martina Eckardt, ‘Evolutionary Approaches to Legal Change’, Thunen Series of Applied Economic Theory Working Paper No. 47, available at http://ssrn.com/abstract=655142, accessed 25 July 2020; and the contributions to Peer Zumbansen / Gralf-Peter Calliess (eds.), Law, Economics and Evolutionary Theory (Massachusetts: Edward Elgar, 2011). Robert M. Cover, ‘The Supreme Court 1982 Term – Foreword: Nomos and Narrative’, 97 Harvard Law Review 4–68 (1983). Max Weber, Economy and Society: An Outline of Interpretive Sociology (Berkeley: University of California Press, 1978), pp. 761–2. Compare, for example, Jacques Derrida, ‘Force de loi: le “fondement mystique de l’autorite´”’, 11 Cardozo Law Review 920–1045 (1990).

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A further step toward the rationalization of law lies in the introduction of legislation through apposite state bodies. Here, again, Weber traces back the roots of the concept to its premodern origin. For him, there is a ‘direct path of development . . . from the charismatic revelation of commandments over the imperium [of military leaders] to the conscious creation of law by compact or imposed enactment’.26 Weber acknowledges that ‘[c]haracteristics of the charismatic epoch of law-making and law-finding have persisted to a considerable extent’ in modern legal systems.27 What differentiates modern legal systems from their premodern predecessors is, as before, a question of division of labour: the division of labour between legislator and judge which implies a functional differentiation between lawmaking and law-finding. But even in modern legal systems, this differentiation remains a mere ideal – and is not even shared by all legal cultures. The rationalization of law, then, is a very gradual process – and not even a unidirectional one; it takes place in parallel to the rationalization of public authority in general, which becomes apparent when Weber uses concepts from his sociology of power, such as that of ‘charismatic authority’.28 Weber devotes the next section of his book to analysing the genesis of the differentiation between lawmaking and ‘law-finding’ with a view to the Germanic Assembly and other legal traditions.29 Not all of the particularities of these legal traditions are relevant to Weber’s argument. It is central, however, that Weber identifies already in premodern legal traditions a distinction between the formal qualities of law as ‘lawyers’ law’ and the content of law as ‘popular law’. Thus, it seems that the modern separation of powers between judiciary and legislature has been antedated by premodern equivalents such as the interplay between folk assembly and legal community in the Germanic tradition. In any case, Weber sees the emergence of a cast of trained specialists such as private counsellors and attorneys as a necessary prerequisite for the rationalization of law. This insight corroborates studies on the role of the legal profession in emerging transnational legal orders30 – in a legal sphere that apparently has not yet undergone the process of rationalization which has shaped the modern nation-state legal systems (see Chapter 25). III E´mile Durkheim wrote his masterpiece The Division of Labour in Society in 1893. The title makes clear that, just like Weber, Durkheim undertakes a comprehensive analysis of modern societies based on the division of labour and, also like Weber, he places special emphasis on the role of law as enabling social co-operation. Yet Durkheim’s narrative of the role of law is quite different from Weber’s. Both see private contracts as central to 26

27 28 29 30

Max Weber, Economy and Society: An Outline of Interpretive Sociology (Berkeley: University of California Press, 1978), p. 765. Ibid., p. 767. On this concept see ibid., pp. 241–5. Ibid., pp. 768–75. John Flood, ‘Lawyers as Sanctifiers: The Role of Elite Law Firms in International Business Transactions’, 14 Indiana Journal of Global Legal Studies 35–66 (2007).

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creating legal rules, but where Weber sees contracting practices as a form of societal selfordering, acknowledged or not by judges and state organs, Durkheim ascribes the contract a fundamentally public nature. For him, there is no private lawmaking proper, but only a ‘part of law which is improperly termed private’.31 His argument, developed in a dispute with liberal theorist Herbert Spencer, is that even in highly differentiated societies based on the division of labour, contractual relations are determined by the ‘non-contractual relations’ into which they are embedded. Durkheim seeks to demonstrate his thesis with a view to marriage and adoption. Here, he argues, there has been no move ‘from status to contract’ as the famous saying by Henry Maine – and much of liberal private law theory (see also Chapter 10) – would have it.32 Quite to the contrary, in modern societies, marriage and adoption have ceased to be an ‘entirely private affair’,33 as they used to be under Roman law, and have become contingent upon a ‘multiplied’ number of ‘restrictive conditions’,34 many of which are related to personal status. Thus, Durkheim’s argument goes on, ‘the structure of actual societies’35 must be such that it leaves not much room for private self-regulation, and instead regulates individual behaviour to a considerable extent through mechanisms of social control.36 And indeed, Durkheim’s example of the regulation of familial affairs is most convincing, even from today’s perspective. The family, he writes, cannot remain ‘an autonomous society alongside of the great society’, but it ‘becomes one of the organs [of society], charged with special functions’.37 This analysis is not only closely related to the organicist social visions of Durkheim’s contemporary Otto von Gierke (see Chapter 19), it also has a certain resemblance to the later attacks of feminist legal theory and the critical legal studies movement (see Chapter 7) on the allegedly private character of the family.38 These critical positions rightly point to the central role that societal conceptions of the family play for issues such as gender equality and the distribution of wealth (through inheritance and tax law). At the same time, the regulation of family affairs seems a rather obvious example in support of Durkheim’s thesis that matters of private law are of an inherently public nature. The argument is harder (but certainly not impossible) to make for business and corporate affairs (see Chapter 19). However, especially in the transnational arena, it is often not state law, but the market practice and the usages of the social field that determine the expectations and behaviour of private actors. The parties in the Redwood case (Box 2.1) all acted against the background of well-known trade usages and well-introduced standard contracts. 31 32 33 34 35 36

37 38

E´mile Durkheim, The Division of Labour in Society (New York: The Free Press, 1933 [1893]), p. 206. Henry S. Maine, Ancient Law (London: John Murray, 1861). E´mile Durkheim, The Division of Labour in Society (New York: The Free Press, 1933 [1893]), p. 207. Ibid., p. 208. Ibid., p. 209. This stands in stark contrast to the much more liberal stance taken by law and economics scholars such as Mnookin and Kornhauser as discussed in Chapter 27. Ibid., p. 210. For a short recapitulation of the debate see Duncan Kennedy, ‘The Stages of the Decline of the Public/ Private Distinction’, 130 University of Pennsylvania Law Review 1349–57 (1982).

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With these developments in mind, the notion of social and public affairs as used in Durkheim’s writing is not quite so easy to understand for today’s readers. When Durkheim writes that much of family affairs is actually ‘the work of society’, nowadays readers will most likely interpret this as a reference to social and moral norms. And at one point, Durkheim expressly refers to custom, moral and professional obligations;39 however, for the most part, he refers not to informal rules, but to ‘the dispositions of the law’ and legal ‘conditions of validity’ for private contracts.40 Thus, ‘the work of society’ in Durkheim’s analysis seems to be actually ‘the work’ of the state and its legal system. For him, the social framework for private action is equivalent to mandatory state law (‘obligations . . . which cannot be changed by any stipulation’41). The same is true for the ‘social action’ that manifests itself in ‘positive intervention’.42 Here, Durkheim refers to specific provisions of the French Code Civil on mandatory contractual obligations. In this context, Durkheim’s theory of ‘solidarity’ is very much a theory of the interplay between private autonomy and state legislation, but his thesis that there is a necessary ‘rivalry of interests present and their solidarity’ leads him to a highly interesting justification of default rules in private law.43 For Durkheim, default rules (contract law) strike a balance in this rivalry in that they express ‘the normal conditions of equilibrium’, building on ‘the average’, ‘society and tradition’.44 This justification comes close to more recent approaches in law and economics scholarship which see default rules as a proxy for the hypothetical consensus that lies in the best interests of the parties concerned.45 But Durkheim goes further and employs his insights for a more general argument. As ‘modifications [of default rules] are relatively rare’, he argues, the law of contracts does not just enhance our freedom, but it ‘exercises over us a regulative force of the greatest importance’.46 Here, he takes a position that is quite different from the liberal conception of contractual freedom. For Durkheim, state law does not only recognize and enforce private contracts (as Weber would suggest), but, through the mechanism of contract law, it regulates individual behaviour: ‘a contract is not sufficient unto itself, but it is possible only thanks to a regulation of the contract which is originally social’. This sentence seems, for today’s readers in the age of ‘regulatory private law’47 almost prescient as an analytical statement. But Durkheim ties his analysis to a normative argument when he claims that state intervention in private contracting is ‘of an eminently positive nature’, not only for

39 40 41 42 43 44 45

46 47

E´mile Durkheim, The Division of Labor in Society (New York: The Free Press, 1933 [1893]), p. 215. Ibid., p. 211. Ibid., p. 211. Ibid., p. 212. Ibid., p. 213. Ibid., p. 214. Groundbreaking Ian Ayres / Robert Gertner, ‘Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules’, 99 Yale Law Journal 87–130 (1989). E´mile Durkheim, The Division of Labor in Society (New York: The Free Press 1933 [1893]), pp. 214–15. Fabrizio Cafaggi / Horatia Muir Watt (eds.), The Regulatory Function of European Private Law (Cheltenham: Edward Elgar, 2009); Hans-W. Micklitz, The Politics of Justice in European Private Law (Cambridge: Cambridge University Press, 2018).

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avoiding ‘unjust contracts, unsocial by definition’, but also as a ‘first step towards cooperation’ in society as a whole.48 Durkheim’s optimistic account of the regulatory socialization of private law has not remained without challenges (see Chapter 10). Yet knowing what we know today, and given the ambivalence of Durkheim’s notion of ‘solidarity’ in private law, it is neither necessary nor conducive to read him as a mere advocate of state intervention. Instead, many parts of Durkheim’s writing can be read as supporting wholly different theories of a ‘socialization’ of private law. This becomes most apparent when Durkheim breaks down his concept of solidarity to the concrete expectations of the parties in a specific contractual relation – and within a specific social field (‘I have promised a service, . . . but more extensive relations necessarily result’49). Here, Durkheim’s approach comes very close to modern sociological theories of relational contracting and private governance (see Chapters 17 and 26). Looking back at the Redwood case (Box 2.1), it thus appears that Durkheim’s writing could be read in a particularly fruitful way if it were applied to the social practices that form the actors’ expectations. The socialization of private law could then be understood as opening the concepts of legal doctrine to the social realities of the field they regulate.50 The justified expectations of the claimant fund would have to be read as primarily referring to the expectations that were formed on the basis of well-established market practices including the standard documentation for transnational financing transactions. IV The texts by Weber and Durkheim both treat an eternal problem of the social sciences. Before and after Weber and Durkheim, thinkers as diverse as Hegel, Marx, Polanyi and Luhmann have analysed the ‘functional differentiation’ of modern societies, in which social fields such as the economy, politics and law begin to follow their own specific rationalities and ‘codes’ (Luhmann, see Chapter 4). On the law, the process of functional differentiation has had a particularly strong effect. In modern societies, the legal system has become complex, self-sufficient and ‘rationalized’ in a way that would have been unimaginable before. However, the rationalization, particularly of private law, which Weber masterfully depicts, is highly precarious. For all the advantages that a rationalized modern legal system offers, private law must always reflect the social practices in which the contracting of private individuals is grounded. Weber clearly sees this necessity when he analyses the intricate interplay between business practice, private counsel, judges and legislators. Durkheim makes the point even stronger when he points to the concept of solidarity as the necessary basis for every form of social interaction. Durkheim’s text is

48 49 50

E´mile Durkheim, The Division of Labor in Society (New York: The Free Press, 1933 [1893]), p. 217. Ibid. In a similar vein Gunther Teubner, ‘Substantive and Reflexive Elements in Modern Private Law’, 17 Law & Society Review 239–86 (1983), 277.

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particularly convincing – and fruitful to read – where it does not simply equate the norms of solidarity with codified state law. Where Durkheim concretely identifies the normative background of private actors in their contracting practices, his approach is not all that different from Weber’s description of the interplay between social norms and state law. Here, both authors contribute to a research agenda that has gained in importance in recent decades. The leading question is: How can the dis-embedded law of modern societies adapt to the needs of social actors? This question is of the utmost importance in the highly formalized legal systems of modern societies, which seem to leave only little room for private self-regulation at all. A converse question arises in settings which lack the formalization of state legal systems, above all in the realm of transnational law (see Chapter 25) and in other ambits of private governance (see Chapter 26). Here, it is still unclear whether and to what extent the rulemaking of private actors might achieve a degree of rationalization which is similar to that of state legal systems. As the Redwood case (Box 2.1) shows, the rationality of modern private law systems is a bounded rationality. It relies on being able to adequately reflect the often complex social practices outside the formal legal system. The expectations of private actors that might give rise to fiduciary duties under the applicable law, for example, are frequently shaped by informal practices and usages. This is not to say that the formal legal system must necessarily defer to social norms; in our case example, it is still up to the legal system to define whether claimant’s expectations regarding the majority’s actions were justified. Contemporary sociological approaches, however, would argue that the legal concept of justified expectations should reflect the inherent normativity of the social field concerned.51 For the Redwood case this would likely mean that the claim would have to be dismissed; if a representative body of market participants such as the LMA consensually established certain rules for majority voting, there is a strong presumption that their application does not violate an individual actor’s justified expectations and, thus, a fiduciary duty.52

51 52

Ibid. For details on this argument see Moritz Renner, ‘Treupflichten beim grenzu¨berschreitenden Konsortialkredit’, 30 Zeitschrift fu¨r Bankrecht und Bankwirtschaft 278–288 (2018).

3 Economics and Private Law Institutions Stefan Grundmann

a topic and materials I Is it possible to reduce the topic of ‘Economics and Private Law Institutions’ to three core ideas? This chapter cannot even summarize, let alone substitute for a treatise on law and economics or on new institutional economics (see fn. 15). Three developments – and their founding texts as well as their contexts – stand out, however, as the foundations of the relationship between economics and private law (theory). First would be the transaction cost approach, because transactions are governed by law, and the costs thereof are influenced – that is, avoided, reduced or raised – by legal rules and arrangements. These costs can be very high. Because of its capacity both to generate high transaction costs and to influence/reduce them, law is necessarily a core institution for economic theory and analysis. From the perspective of economics, law (should) serve(s) two core functions. It should reduce transaction costs and it should allocate rights and duties in an efficient way (so that a costly – perhaps even too costly – reallocation was not needed). The second development is the economic theory of institutions, institutional economics, applied to legal institutions such as contracts, firms, markets, etc. This development is intertwined with the transaction cost approach and indeed generalizes and refines it. In analysing the law’s influence on the amount of transaction costs, the comparison between different legal arrangements from the perspective of such costs becomes paramount. With the advent of governance research, this comparative concern is further deepened by attention to who can best provide such arrangements. These foundational concepts are taken up in this book in the context of numerous concrete questions, from torts and risk allocation (Chapter 15), to information economics and principal-agent theory – the two core concepts in the area of party autonomy – to drafting and governance (Chapters 12 and 20), finally also to long-term relations (Chapter 17). The third development which stands out in the relationship between law and economics is arguably the discussion of how rationally transactional partners actually act or, conversely, how limited their rationality may be (so-called bounded rationality). This third development establishes a triangular relationship between law, economics and behavioural sciences (including psychology). Discussion of bounded rationality is taken 71

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up in Chapter 11 for negotiation issues, but bounded rationality is important more generally. With respect to information retrieval and decision-making in general, that is, the core parts of behaviour addressed by economics and law (particularly private and business law), it stands for the trend of infusing more ‘realism’ into the neoclassical economic model.1 The neoclassical model was based on the image of a free exchange between autonomous parties, steered by the price mechanism and taking place under the following four assumptions:2 (i) fully informed players (ii) taking fully rational (exchange) decisions on (iii) fully competitive markets (on this, see Chapter 6), and all this (iv) in a situation of limited resources. The very existence of bounded rationality in this world raises the question of whether divergence from these assumptions in reality puts in question the model’s adequacy for any meaningful normative guidance. More generally, however, it is fair to say that all three developments discussed here share this trend of adding important bits of reality to the neoclassical model. Assessing and comparing costs is also the issue of two well-known German Supreme Court cases in the law and economics context – the second probably the best-known case and so important that protagonists of the approach exclaimed: ‘Judex calcula!’3 See box 3.1. In the Ice Hockey case discussed in parallel at that time (see fn. 3), a visitor to an ice hockey match sued the owner of the stadium and the club when a puck went astray and hit him in the face in the absence of shock-proof glass that would have been sufficient protection for all seats. In this case, contrary to how it decided in the Game Damage case, the same court awarded damages, stating that costs should typically not set limits in such cases. Both cases are about costs, comparison of arrangements, cost avoidance potential – and irrational behaviour. II Economic theory – contrary to sociology (Chapter 2) – has developed over cases such as Game Damage (see Box 3.1). Ronald Coase deals with the problem of efficient allocation of risks, Williamson with the comparison and calculus of different legal arrangements – the two core questions that law can influence in a cost-saving way. Both, in their own way, are therefore founding fathers of institutional economics, Coase more generally also of economic analysis of law (see Box 3.2). Coase’s foundational text opened an unprecedented dialogue between law and economics, (which had been unrelated disciplines until that moment) to such an extent that, at least in the United States, law and economics would become the dominant interdisciplinary perspective today for private and business law. 1

2

3

For a multidisciplinary analysis of decision-making – individually, collectively and in organized decision-making settings – see the contributions to S. Grundmann / P. Hacker (eds.), Theories of Choice: The Social Science and the Law of Individual, Collective and Organizational Decision Making (Oxford: Oxford University Press, 2020). For a concise description of the neoclassical model see: E. Furubotn / R. Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics (2nd ed., Ann Arbor: University of Michigan Press, 2005), pp. 1–14. On the price mechanism and the assumption of full information (challenged as of 1961) see Chapter 12 (G. Stigler). H. Ko¨tz / H.-B. Scha¨fer, ‘Judex calcula!’, 47 Juristenzeitung 355–6 (1992); and as a forerunner case – on ice hockey – Bundesgerichtshof of 29 November 1983, Neue Juristische Wochenschrift 801 (1984).

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BOX 3.1 CASE STUDY

Game Damage Case, Bundesgerichtshof (German Private Law Supreme Court) of 13 July 1989, BGHZ (Official Reports) 108, 273 The driver of a motorbike, on a secondary country road by night, with 1.7 per cent of alcohol in his blood, crossed a forest at the entrance of which a traffic sign was posted indicating frequent crossing of deer. The driver did not adapt his speed, ran into a deer, fell off the bike and suffered serious injury. This was not a single case. To the contrary, fifty to sixty such incidents had happened in 1984 and 1985, just before the accident in this case. The road ran through the forest for several kilometres. The driver sued the state (as owner of the road and of the forest) and argued that a fence should have been built. All court instances dismissed the claim, pointing to the fact that the proper warning sign had been posted and that not all forests in Germany with roads crossing them could be fenced in. Such investment was seen as being required only in cases of roads for fast, long-distance traffic such as motorways and other crosscountry federal roads.

BOX 3.2

Ronald Coase, ‘The Problem of Social Cost’, 3 Journal of Law and Economics 1–44 (1960) Oliver Williamson, The Economic Institutions of Capitalism – Firms, Markets, Relational Contracting (New York: Free Press, 1985), namely chapter 1: ‘Transaction Cost Economics’ Herbert Simon, ‘A Behavioural Model of Rational Choice’, 69 The Quarterly Journal of Economics 99–118 (1955)

Williamson not only started comparison and calculus but carried the approach into core private law – contracts, markets, organizations – and thereby also helped the emergence of the governance perspective and research. Finally, Simon cast doubt on the rational choice paradigm, introducing behavioural economics, an idea that came to fruition much later and continues to this day; again a foundational text. These texts of reference, listed in Box 3.2, will also be put in context in the overall development of theory. While these founding texts mapped out efficient allocation of goods and risks, comparative assessment of costs and rational choice versus bounded rationality, the big task for the future was twofold. First, to carry the ideas into all fields of law, first and most prominently into torts by Calabresi (see Chapter 15) – an attempt that, however, many saw as alien to legal thinking – then in the most subtle form probably by Mestma¨cker. Second, the germ of bounded rationality had to be further developed, both the strong sides

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Guido Calabresi, ‘Some Thoughts on Risk Distribution and the Law of Torts’, 70 The Yale Law Journal 499–553 (1961) Christine Jolls, Behavioral Economics and the Law (Boston / Delft: Now Publishers, 2011) Daniel Kahneman / Amos Tversky, ‘Prospect Theory: An Analysis of Decision under Risk’, 47 Econometrica 263–91 (1979) Ernst-Joachim Mestma¨cker, A Legal Theory without Law: Posner v. Hayek on Economic Analysis of Law (Tu¨bingen: Mohr Siebeck, 2007) Richard Thaler / Cass Sunstein, ‘Libertarian Paternalism’, 93 The American Economic Review 175–9 (2003) Amos Tversky / Daniel Kahneman, ‘Rational Choice and the Framing of Decisions’, 59 The Journal of Business 251–78 (1986) of it (heuristics) and the weaker ones (biases). These ramifications of the debate can be traced in the supplementary readings listed in Box 3.3.

b theories, context and discussion I The three reference texts are meant to map out the very ‘architecture’ of law and economics, hence a broader contextualization may help give a more coherent overall picture. (i) Historically, but also analytically, transaction costs as a basis of the economic analysis of law comes first. Coase’s article – first describing the phenomenon – might be the single most-quoted article on legal theory of the twentieth century,4 while the second text stems from the most influential monograph written by Williamson, the scholar who developed the theoretical framework (and term) of governance research, the now-dominant interdisciplinary, international research agenda. Originally it was focused on company law,5 later broadened to issues of public ordering6 and then brought back to contract law and other 4

5

6

F. R. Shapiro / M. Pearse, ‘The Most-Cited Law Review Articles of All Time’, 110 Michigan Law Review 1483–520 (2012), at 1503. For a good survey on the booming development of the approach – namely in the 1980s and 1990s: K. Hopt / H. Kanda / M. Roe / E. Wymeersch / S. Prigge (eds.), Comparative Corporate Governance: The State of the Art and Emerging Research (Oxford: Oxford University Press, 1998); J. McCahery / P. Moerland / T. Raaijmakers / L. Renneboog (eds.), Corporate Governance Regimes: Convergence and Diversity (Oxford: Oxford University Press, 2002); and (mainly US and economic theory) A. Shleifer / R. Vishny, ‘A Survey of Corporate Governance’, 52 Journal of Finance 737–83 (1997); then: K. Hopt, ‘Comparative Corporate Governance: The State of the Art and International Regulation’, 59 American Journal of Comparative Law 1–73 (2011). Groundbreaking, first for public international law: J. Rosenau / E.-O. Czempiel (eds.), Governance without Government: Order and Change in World Politics (Cambridge / MA: Harvard University Press, 1992). Then public law more generally: J. Freeman / M. Minow, Government by Contract: Outsourcing and American

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market relations as well,7 that is, to key areas of autonomous choice (see more in Chapters 17, 20 and 21 respectively). Both authors received the Nobel Memorial Prize in Economics (as did Kahneman and Thaler, whose writings relate to the third text discussed here). Coase’s text unquestionably merits the extraordinarily high regard it has attracted. The core idea had, however, already been formulated in his much less well-received article of 1937 on the theory of the firm, in which he first discussed markets and firms as alternative forms of economic organization (see Chapter 19). The academic community’s higher receptiveness in the 1960s (irrespective of how Coase himself wanted to position himself) may be explained by a then-booming economy, the paper’s underlying thrust being in favour of economic activity and in opposition to any hindrances – even those which might stem from a strong property right in the hands of neighbours. Milton Friedman had by 1960 become well established in Chicago, and Coase was part of the highly market-liberal movement that became known as the Chicago School and was typified by suspicion of paternalistic regulation.8 In 1937, under the shadow of the New Deal, the atmosphere would likely have been different. Coase’s text merits the high regard mentioned above not only because of the enormous practical importance of transaction costs (see Section II), but because it triggered two revolutions. The first was within economics. By introducing the concept of transaction costs, it made the first and most important step away from neoclassical economic theory, starting a broader theoretical migration away from the neoclassical image of perfect markets with its four assumptions named above, namely maximizing (absolutely selfish) players (REMM: Resourceful Evaluating Maximizing Model).9 By introducing or emphasizing the existence of transaction costs, Coase

7

8

9

Democracy (Cambridge / MA: Harvard University Press, 2009); P. Zumbansen, ‘The Law of Society: Governance Through Contract’, 14 Indiana Journal of Global Legal Studies 191–233 (2007) (and further contributions to the symposium ‘Governing Contracts: Public and Private Perspectives’, published in the same issue); A. Habel, Contract Governance: eine verfassungsrechtliche und rechtsdogmatische Analyse zu vertraglichen und vertragsrechtlichen Regelungsstrukturen in Belangen des Gemeinwohls (Baden-Baden, Nomos, 2012). See S. Grundmann / F. Mo¨slein / K. Riesenhuber (eds.), Contract Governance: Dimensions in Law and Interdisciplinary Research (Oxford: Oxford University Press, 2015); groundbreaking: O. Williamson, ‘Transaction-Cost Economics: The Governance of Contractual Relations’, 22 Journal of Law and Economics 233–61 (1979), discussed in Chapter 17; for close precursors in the English literature: R. Brownsword, Contract Law: Themes for the 21st Century (2nd ed., Oxford: Clarendon, 2006); H. Collins, Regulating Contracts (Oxford: Oxford University Press, 1999); see also A. Dixit, ‘Economic Governance’, in S. N. Durlauf / L. E. Blume (eds.), The New Palgrave Dictionary of Economics (2nd ed., New York: Palgrave Macmillan, 2008); S. Grundmann / F. Cafaggi / G. Vettori (eds.), The Organizational Contract: From Exchange to Long-Term Network Cooperation in European Contract Law (Farnham: Ashgate, 2013). For the Chicago School and the relationship between Coase and Friedman, see R. Posner, ‘The New Institutional Economics Meets Law and Economics’, 149 Journal of Institutional and Theoretical Economics 73–87 (1993); R. Coase, ‘Law and Economics at Chicago’, 36 Journal of Law and Economics 239–54 (1993). Coase had been explicit in his critique of regulatory agencies just one year earlier: R. Coase, ‘The Federal Communications Commission’, 2 Journal of Law and Economics 1–40 (1959). One other important instance, O. Williamson’s criticism of (vertical) antitrust regulation is discussed later in this chapter, while yet another one, the extreme scepticism about insider dealing regulation and – again – of antitrust regulation (limiting horizontal mergers), is discussed in Chapter 21 (H. Manne). This shows the broad support for the general thrust of the paper in the United States in the 1960s and 1970s. K. Brunner / W. H. Meckling, ‘The Perception of Man and the Conception of Government’, 9 Journal of Money, Credit and Banking, 70–85 (1977), at 71.

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moved away from the assumption of full information available for free, albeit without departing yet from the somehow related assumption of fully rational behaviour. These two lines will be taken up later.10 Second, however, the introduction of transaction costs also revolutionized the relationship between law and economics, and in fact marked the starting point of law and economics research (or, more accurately, as the influence flowed mainly in one direction, of the economic analysis of law). This has been the dominant interdisciplinary approach to legal research over the last five decades, at least in the United States. By introducing transaction costs as a core parameter in post-neoclassical economic theory, Coase also introduced law, or more precisely legal arrangements, as core objects of economic research. The article, with its intense discussion and analysis of case law, showcases this new focus nicely, even introducing the famous claim that US common law is economically efficient (in most cases).11 Neoclassical theory was a theory without law;12 post-neoclassical theory is one where law is highly relevant as a core institution. What law says ‘matters’, and the law should therefore be economically efficient – this is the axiomatic starting point of any economic analysis of the law. But what about Europe? It is striking that what was probably the most important European collaboration between economists and lawyers in the 1960s – within the socalled Freiburg School – developed in a considerably different direction (even though Europe, and Germany specifically, experienced a similar economic boom).13 In Europe, the direction was developing the idea of a constitution for markets, with a strong inclination to take the political order into account as well (Chapter 6), and certainly not focusing on microeconomic calculus. Conversely, in the United States, Coase’s text (not yet containing these features itself) would clearly trigger such calculus. In the decades leading up to the 1960s, legal realism in the United States had catalysed a break with the prior regime of highly doctrinal, sometimes even formalist, approaches by pointing strongly to legal facts and contexts and integrating them into the considerations; while these transformations had some parallels in European context,14 developments thereafter 10

11

12

13

14

For the paradigm of rational behaviour, see Section IV (bounded rationality), for the paradigm of full information for markets and for firms separately (as the information problems are quite diverse there), see Chapters 12 and 20. See R. Coase, ‘The Nature of the Firm’, 4 Economica 386–405 (1937). This claim was later made more explicit: see especially R. Posner, Economic Analysis of Law (Boston: Little, Brown, 1972), now Economic Analysis of Law (9th ed., New York: Aspen, 2014), p. 249; see also P. Rubin, ‘Why is the Common Law Efficient?’, 6 Journal of Legal Studies 51–63 (1977); G. Priest, ‘The Common Law Process and the Selection of Efficient Rules’, 6 Journal of Legal Studies 65–82 (1977); in tort law, for instance, W. Landes / R. Posner, The Economic Structure of Tort Law (Cambridge / MA: Harvard University Press, 1987), pp. 24 et seq.; today, this is increasingly disputed; early criticism in L. Kornhauser, ‘A Guide to the Perplexed Claims of Efficiency in the Law’, 80 Hofstra Law Review 591–639 (1979). For an extension of this verdict even to good parts of law and economics research: E.-J. Mestma¨cker, A Legal Theory without Law: Posner v. Hayek on Economic Analysis of Law (Tu¨bingen: Mohr Siebeck, 2007) (in confrontation particularly with R. Posner). Though already developed in the 1930s (including World War II), the Freiburg School movement had its heyday – practically speaking and in academic discussions – during the 1960s. For more detail on ordo-liberal thought, and Franz Bo¨hm in particular, see Chapters 6 and 13. See generally K. Grechening / M. Gelter, ‘The Transatlantic Divergence in Legal Thought: American Law and Economics vs. German Doctrinalism’, 31 Hastings International and Comparative Law Review 295–360 (2008) and translated, ‘ Divergente Evolution des Rechtsdenkens: Von amerikanischer Rechtso¨konomie und

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increasingly separated the United States from Europe. The dominant European approach to ‘law & economics’ was ultimately rooted in the ordo-liberal tradition, that is, one concerned with justifying and ensuring the function of market order, while in the United States transaction-cost oriented law and (micro-)economics supplanted not only traditional doctrinal perspectives, but other social-theory oriented approaches, as well. This included notable protagonists from law who soon entered the fray: with G. Calabresi in particular making important contributions to the economic analysis of risk and tort law (fn. 25 and Chapter 15) and R. Posner extending and propagating the approach like no other scholar (fn. 11). (ii) Taking Coase as a starting point, Williamson explored transaction costs more thoroughly. Coase had introduced the idea of transaction costs primarily to point to situations where they were so high that they could hinder the efficient allocation of resources by party arrangement alone. Whereas Coase therefore emphasized the importance of transaction costs before turning to a discussion of how law can efficiently allocate property rights (namely where doing so through party arrangements is impossible), Williamson enquired instead into transaction costs themselves, namely what determines their amount. Only with Williamson’s contribution do the two main functions of law with respect to transaction costs become fully differentiated: to reduce transaction costs by good legislation or contractual design (Williamson’s question), and to allocate rights in the first instance so as to achieve the highest overall welfare (Coase’s question). Williamson’s focus, namely the comparative advantage of different arrangements with respect to transaction costs, is much subtler. His key concern not only puts his work much closer to the design of real legal arrangements, but also opens up a completely new perspective, in which private party arrangements, rather than statutory or judge-made law, become the centre of attention. Through this refinement, Williamson begins an analysis of law in its entirety, of markets and firms,15 and brings the same perspective to various institutions beyond

15

deutscher Dogmatik’, 72 RabelsZ 513–61 (2008); and for parallel developments in Europe in particular, see the texts selected for Chapters 1 and 11. On law as the core institution: E. Furubotn / S. Pejovich, The Economics of Property Rights (Cambridge / MA: Ballinger, 1974); more generally see R. Posner, ‘The New Institutional Economics Meets Law and Economics’, 149 Journal of Institutional and Theoretical Economics 73–87 (1993). On institutional economics, see the following textbooks: E. Furubotn / R. Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics (2nd ed., Ann Arbor: University of Michigan Press, 2005); A. Gruchy, The Reconstruction of Economics: An Analysis of the Fundamentals of Institutional Economics (Westport / CT: Greenwood Press, 1987); J. Drobak / J. Nye, The Frontiers of the New Institutional Economics (San Diego / CA: Harcourt Brace Jovanovich, 1997); W. Kapp, The Foundations of Institutional Economics (eds. S. Berger / R. Steppacher) (New York: Routledge, 2011); C. Me´nard / M. Shirley (eds.) Handbook of New Institutional Economics (Berlin / Heidelberg: Springer, 2008); M. Erlei / M. Leschke / D. Sauerland, Neue Institutioneno¨konomik: eine Einfu¨hrung und kritische Wu¨rdigung (3rd ed., Stuttgart: Scha¨ffer-Poeschel, 2016); S. Voigt, Institutioneno¨konomik (2nd ed., Munich: Fink, 2009). For a beautiful concrete example of how legal arrangements can be designed for lowering transaction costs: R. J. Gilson, ‘Lawyers as Transaction Cost Engineers’, in P.Newman (ed.), Palgrave Dictionary of Economics and the Law (London: Palgrave Macmillan, 2002, vol. 2), pp. 509–13. The leading textbook on law and economics has been written by R. Posner (fn. 11); besides this treatise, see also R. Cooter / T. Ulen, Law and Economics (6th ed., Boston: Prentice Hall, 2016); H.-B. Scha¨fer / C. Ott, Lehrbuch der o¨konomischen Analyse des Zivilrechts (5th ed., Berlin : Springer, 2012).

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law.16 That by itself would have been an important contribution to legal thought. By refining the approach in this way, Williamson, however, also became the father of governance research, which connotes a world in which private ordering and arrangements made between private parties are paramount, and where statutory and judge-made law (government or also legal centralism) lose their monopoly on analytic attention. Even more strongly, it is a world in which private ordering is often seen as superior to centralized arrangements (private ordering can often draw on a fuller information set). Governance research has proven to be broad in its attention to, and much more subtle in its integration of, interdisciplinary research, integrating findings from many disciplines, albeit within an analytical framework based on the paradigm of ‘efficiency’.17 (iii) Another aspect analysed in Williamson’s text, bounded rationality, refers back to a concept developed in Herbert Simon’s writings from the 1950s, that is between the publication of Coase’s two texts. In texts published in 1955, 1957 and in 1959,18 Herbert Simon analyses approximate rationality or bounded rationality.19 Bounded rationality arises either when information is not fully available – at the extreme, is not available at all, as for future events or their probability – or available only at a prohibitively high cost (linking to transaction costs). Alternatively, it can arise where, even on the basis of correct information, decision-making can nevertheless be biased, in the sense of not being driven by the goal of maximizing (one’s own or overall) welfare. In practice many people when making decisions may as a result of such limitations not even aim to maximize at all, but aim instead only for some satisfactory level of outcome. Herbert Simon’s research approach thus runs parallel to the transaction costs approach, but at the same time has the potential to totally unsettle it. The two approaches run parallel insofar as each questions one core assumption of neoclassical theory: the transaction costs approach challenges the idea that exchange and the information needed to effect it come for free, and the bounded rationality approach challenges the idea of fully informed players and fully rational decision-making. The latter approach, however, also contains the potential to totally upend the transaction costs approach, since the elimination of the rationality assumption may render the underlying model entirely obsolete. Conversely, transaction costs might still be treated as a separate input, of information or services etc., and therefore 16

17

18

19

For the role of firms and the private sector in general see P. Hall / D. Soskice, ‘An Introduction to Varieties of Capitalism’, in P. Hall / D. Soskice (eds.), Varieties of Capitalism (Oxford: Oxford University Press, 2001), pp. 1–68; of market institutions, see D. North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990); of social institutions see A. Schotter, The Economic Theory of Social Institutions (Cambridge: Cambridge University Press, 1981). These issues are discussed, from different perspectives, namely in Chapters 22 and 26. See, for instance, S. Grundmann / F. Mo¨slein / K. Riesenhuber, ‘Contract Governance: Dimensions in Law and Interdisciplinary Research’, in Contract Governance: Dimensions in Law and Interdisciplinary Research (Oxford: Oxford University Press, 2015), pp. 3–57; see also references in fn. 7–9. H. Simon, ‘A Behavioral Model of Rational Choice’, 69 The Quarterly Journal of Economics, 99–118 (1955) (also H. Simon, Models of Man, Social and Rational: Mathematical Essays on Rational Human Behavior in a Social Setting (New York: Wiley, 1957), pp. 241–60); H. Simon, ‘Theories of Decision-Making in Economics and Behavioral Science’, 49 The American Economic Review, 253–83 (1959). The first term is used in the 1955 paper (previous footnote), for example, 114, the second one, even though not explicitly introduced by Simon in the two articles is now currently used.

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modelled in parallel to (or as part of) production costs of other products, hence modelled by neoclassical price theory.20 More importantly still for private law, bounded rationality may call for a completely different set of regulatory solutions (see Section IV and Chapter 11). II Coase’s article is not named the problem of ‘Transaction Costs’, but rather of ‘Social Cost’. Thus, Coase shares the view of neoclassical welfare economics that the main objective of economics is to inquire into the overall welfare effects of markets (or firms).21 He is not concerned with distributive justice, that is, with allocations that would be understood as fair, but rather with identifying allocations that increase or maximize overall welfare. This is both an advantage and a potential shortcoming of the transaction cost approach: it is restricted to one core criterion of measurement, namely overall (cost) welfare.22 Redistribution is simply not his concern – even though increasing the ‘size of the cake’ does allow for it.23 There is another question of surprisingly little importance to Coase: he in fact mentions only once, and rather briefly, what transaction costs might be,24 and does not really inquire into what determines their amount. The basic finding is only that they exist, and that they matter insofar as they render it more costly or even completely impracticable to establish efficient ex post allocations through party arrangement alone – a finding which is offered as reason enough for statutory or judge-made law to aim at efficiency. Though the overall efficiency of statutory and especially judge-made law (or the ‘social cost’ of inefficient law) is the core object of his analysis, the paper has nonetheless become famous primarily for having introduced transaction costs as a parameter of economic research. In analysing the efficiency of judge-made law, Coase runs through a whole range of cases on nuisance, from factory smoke affecting the neighbourhood and cattle invading adjoining land, to sparks from railway engines setting fire to forests, etc., with respect to 20

21 22

23

24

For the modelling of transactions costs, see E. Furubotn / R. Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics (2nd ed., Ann Arbor: University of Michigan Press, 2005), pp. 64–71; O. E. Williamson, The Economic Institutions of Capitalism (New York: The Free Press, 1985), pp. 21, 41 et seq. For the upheaval potentially caused by bounded rationality research see Section IV and also Chapter 11. For this alternative, see first R. Coase, ‘The Nature of the Firm’, 4 Economica 386–405 (1937) and Chapter 19. For lines of doubt about whether the calculus is really so clear, see R. Dworkin, ‘Is Wealth a Value?’, 9 Journal of Legal Studies 191–226 (1980). For broader discussion (and doubts) on the problems of such measuring, see H. Hovenkamp, ‘The First Great Law & Economics Movement’, 42 Stanford Law Review 993–1056 (1990) (claiming that a quest for exactitude of measurement can even reduce the relevance for policymaking); for alternative approaches, see also S. Grundmann, ‘Pluralism and Private Law Theory’, manuscript 2020, I. 2.b). For wealth maximization theory in particular R. Posner, ‘Utilitarianism, Economics, and Legal Theory’, 8 Journal of Legal Studies 103–40 (1979); for a combination of efficiency and distribution concerns see G. Calabresi, ‘About Law and Economics: A Letter to Ronald Dworkin’, 8 Hofstra Law Review 553–62 (1980). Given Coase’s focus on welfare maximization, it is no surprise that Pigou’s Economics of Welfare, probably the most influential late-neoclassical treatise on the subject, is not only the starting point (p. 1), but discussed at considerable length – for almost a third of the article (pp. 28–42). R. Coase, ‘The Problem of Social Cost’, 3 Journal of Law and Economics 1–44 (1960), at 15.

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potential liability in torts. Indeed, torts would soon become the first core area of law and economics research.25 Coase sets out his analytical framework right in the first phrases of the first substantive section (thereby also system building in the common law). The alternatives are liability or non-liability, the aim is not compensation (at all costs), the starting point is thus the reciprocal nature of the problem. More precisely: ‘[t]he problem is to avoid the more serious harm’,26 that is, to opt for liability only if the harm done to the party affected is higher than the gain derived from the activity and, vice versa, to opt for nonliability if the gain is higher than the harm. What is paramount here is the clear attention to opportunity costs (costs which result from opportunities forgone, having to give up on an existing factory or not building it). Later on, Coase beautifully explains that in nuisance cases both parties have a causal impact on the outcome (for example, whatever harm may result from a rancher’s cattle eating a farmer’s crop could have been avoided either by the rancher preventing the cattle from invading the farmer’s land, or by the farmer choosing not to grow his crop there). More importantly still, Coase also stresses that both parties have the opportunity to respond to the harm (to stop growing the crops on the one hand, or to build a fence on the other). The question for Coase is which of these possible responses will be less costly. The most important later development, primarily associated with Guido Calabresi (fn. 25 and Chapter 15), took precisely this question as its starting point. Calabresi succeeded in supplementing the leading criterion, the comparison of gains and harm (as in Coase), with such further important criteria as the cheapest cost avoider and the best risk bearer. He combined two issues: (i) may a harm, even if it is smaller than the gains, not be avoided at still less cost and (ii) may the redistribution of risk among a large number of potentially affected persons not increase utility for all. After all, large losses borne by only a few may be supra-proportionally harmful, and therefore more harmful overall, than the same or even a larger total amount of damages distributed among many (because of the decreasing marginal value of reaping or avoiding small gains or small losses). Coase then proceeds to analyse the reciprocal nature of the problem in two sections based on the traditional neoclassical perspective, in which transactions would be costless. He reaches the conclusion that, in such a scenario, a judge’s allocation will have no impact on either the actual allocation of resources, or on the overall wealth thereby produced. In fact, ‘given perfect competition [as in neoclassical theory] . . . the allocation of resources . . . will be optimal’. Because of the unrestricted possibility of contractually rearranging rights, this finding holds both where liability is assigned and where it is not: ‘the allocation of resources will be the same’. This equivalence is the famous Coase 25

26

See in particular G. Calabresi, ‘Some Thoughts on Risk Distribution and the Law of Torts’, 70 Yale Law Journal 499–553 (1961); G. Calabresi, The Cost of Accidents: A Legal and Economic Analysis (New Haven / CT: Yale University Press, 1970); G. Calabresi / D. Melamed, ‘Property Rules, Liability Rules and Inalienability: One View of the Cathedral’, 85 Harvard Law Review 1089–128 (1972) (also on the question of how far redistributive effects should be taken into consideration, particularly in designing the remedies); and, subsequently, R. Posner, Economic Analysis of Law (1st ed. 1972, now 6th ed., New York: Aspen, 2003), pp. 167 et seqq.; see generally below, Chapter 15: Risk, Tort and Liability (with a detailed discussion of the first text by G. Calabresi). Quotes from R. Coase, ‘The Problem of Social Cost’, 3 Journal of Law and Economics 1–44 (1960), at 2, references made later in the paragraph on pp. 2 and 13.

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theorem (that, for reaching an efficient allocation, the initial allocation does not matter if there are no costs of carrying out market transactions), and while Coase did take it as his starting point, he neither named it,27 nor really had much interest in it. In his seminal paper, he proceeds by noting that judges believe their decisions do matter – and rightly so, once transaction costs are taken into account. Coase’s main thrust therefore lies instead in the next section which is, in fact, about transaction costs.28 This is because the assumption underlying his theorem (that there are no costs of carrying out market transactions) ‘is, of course, a very unrealistic assumption’. Thus, the origin of transaction cost economics – which, recall, eventually led to institutional economics – was also the beginning of a search for a more realistic set of assumptions for the basic model of economic relations. Coase then identifies well-known examples of transaction costs and concludes that they can be ‘extremely costly’ – roughly the margin between production costs and resale prices attributable to (increasingly refined and extensive) division of labour. Credible statistics today indicate that overhead and marketing costs constitute up to 50 per cent or more of the retail price29 – and seem to increase proportionately due to the increasingly refined and extensive (also global) division of labour.30 Transaction costs in practice include the cost of monitoring, the provision of information and other co-ordination mechanisms between the links in distribution chains. Law may not influence all of these costs, but many of them: a significant part of the retail price of any product, for example, is due to legal costs (which can be influenced by 27

28

29

30

Ibid., quotes in this paragraph on pp. 5 and 6 respectively. Term coined by G. Stigler, The Theory of Price (3rd ed., New York: Macmillan, 1966), p. 113; see S. Medema, ‘A Case of Mistaken Identity: George Stigler, “The Problem of Social Cost”, and the Coase Theorem’, 31 European Journal of Law and Economics 11–38 (2011); for further description, see also, B. Hermalin / A. Katz / R. Craswell, ‘Contract Law’, in A. M. Polinsky / S. Shavell (eds.), Handbook of Law and Economics, vol. 1 (Amsterdam / London, Elsevier, 2007), pp. 24 et seq; also S. G. Medema, ‘The Coase Theorem’, in B. Bouckaert / G. De Geest (eds.), Encyclopedia of Law and Economics, Living edition (New York: Springer, 2013). Coase himself summarizes the ‘problem reformulated’ (pp. 8 et seqq.) in this way: ‘With costless market transactions, the decision of courts concerning liability for damage would be without effect on the allocation of resources’ (p. 10). The only reason adjudication would nevertheless be necessary is to define the ‘property rights’, that is, the rights which each person involved may exercise, about which parties can negotiate and for which they then can find the most efficient arrangement (p. 8). For the term (and theory of) property rights, see E. Furubotn / S. Pejovich, The Economics of Property Rights (Cambridge / MA: Ballinger, 1974), p. 4 (usefully distinguishing rights to use, make gains from, and change an asset); groundbreaking on property rights also A. Alchian, ‘Some Economics of Property Rights’, 30 Il Politico 816–29 (1965); H. Demsetz, ‘Toward a Theory of Property Rights’, 57 The American Economic Review 347–59 (1967); Y. Barzel, Economic Analysis of Property Rights (Cambridge / New York: Cambridge University Press, 1989). All three quotes in the following lines R. Coase, ‘The Problem of Social Cost’ 3 Journal of Law and Economics 1–44 (1960), at 15 et seq. For more elaborate lists and categories, see E. Furubotn / R. Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics (2nd ed., Ann Arbor: University of Michigan Press, 2005), pp. 47–63; J. Niehans, ‘Transaction Costs’, in J. Eatwell / M. Milgate / P. Newman (eds.), The New Palgrave Dictionary of Economics (1st ed., London: Palgrave Macmillan, 1987), pp. 676–9. For all these figures and developments, see, for instance: J. J. Wallis / D. C. North, ‘Measuring the Transaction Sector in the American Economy 1870–1970’, in S. L. Engerman / R. E. Gallman (eds.), Long-Term Factors in American Economic Growth (Chicago, IL / London: University of Chicago Press, 1986), pp. 95–162 (54.71 per cent of the GDP in 1970); E. Furubotn / R. Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics (2nd ed., Ann Arbor: University of Michigan Press, 2005), p. 60 (50 per cent of the price).

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legal institutions). This is the reason why economic analysis of the law cannot be neglected. The next section comes as a surprise. Coase turns to the legislature, which he calls a ‘super-firm’31 – as it has the power to mandate overall unilaterally (and, as Coase does realize as well, with shortcomings such as lobbying by pressure groups32 and absence of the need to compete33). At first sight, this strong role attributed to the state does seem to contradict Chicago School ideas. On a second view, however, the role Coase assigns to the state is only a facilitative one: ‘There is a long list of legalized nuisances . . . It is all a question of weighing up the gains that would accrue from these harmful effects against the gains that accrue from allowing them to continue.’34 In tort law, this latter idea of weighing had in fact already been rendered operational by Justice Learned Hand, who fixed the standard of care, and thus settled the question of liability or non-liability, on precisely this basis.35 Coase then states that, more often than was typically believed by his economist contemporaries (and by proponents of state intervention more generally), the benefits from permitting continuation outweigh the downsides. Conversely, his intention is to defend welfare-increasing business from the consequences of protecting private property too strictly: ‘nothing could be more “anti-social” than to oppose any action which causes any harm to anyone’.36 In other words, the state is called upon to allow/ legalize harm if it creates some larger gain, that is, to ensure liberty for business against barriers stemming from private property. And in more detail, if such harm is permitted because the gains it allows are greater than the losses, but the losses themselves can be avoided or minimized by additional measures, then the state is also called upon to find out whether these avoidance measures cost less than the gain stemming from the avoidance or minimization of harm. In this case, the state has to put the burden of these measures on the party who can arrange for these measures at the lowest cost (cheapest cost avoider). The Game Damage case nicely illustrates the development of these questions in the law and economics discussion, as well as the complexity of issues. The immediate answer 31

32

33 34

35

36

For all this sequence, see R. Coase, ‘The Problem of Social Cost’ 3 Journal of Law and Economics 1–44 (1960), at 15–17, for the legislature as a ‘super-firm’, p. 17. Nowadays discussed as ‘legislative capture’, see G. Stigler, ‘The Theory of Economic Regulation’, 2 Bell Journal of Economics and Management Science 3–21 (1971); and previously M. H. Bernstein, Regulating Business by Independent Commission (Princeton / NJ: Princeton University Press, 1955); S. Huntington, ‘The Marasmus of the ICC: The Commission, the Railroads, and the Public Interest’, 61 Yale Law Journal 467–509 (1952); subsequently developing the concept (and coining the term): J.-J. Laffont / J. Tirole, ‘The Politics of Government Decision Making: A Theory of Regulatory Capture’, 106 Quarterly Journal of Economics 1089–127 (1991); M. E. Levine / J. L. Forrence, ‘Regulatory Capture, Public Interest, and the Public Agenda: Toward a Synthesis’, 6 Journal of Law Economics & Organization 167–98 (1990); more recently, assessing the validity of Bernstein’s capture theory, J. Mintz, ‘Has Industry Captured the EPA? Appraising Marver Bernstein’s Captive Agency Theory After Fifty Years’, 17 Fordham Environmental Law Review 1–36 (2005). This, however, calls into being the theory of systems competition: see Chapter 23: ‘Law as a Product’. R. Coase, ‘The Problem of Social Cost’ 3 Journal of Law and Economics 1–44 (1960), at 24, 26. The following quote is also at p. 26. See US v. Carroll Towing, 159 F.2d 169, 173 (2d Cir. 1947) – also discussed in Chapter 1; cf. particularly p. 32 of Coase’s text; since the 1990s, the US Supreme Court has in principle adopted this standard as well: Carnival Cruise Lines Inc. v. Shute, 499 US 585 (1991). R. Coase, ‘The Problem of Social Cost’ 3 Journal of Law and Economics 1–44 (1960), at 35.

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would seem to be this. If losses (injuries) of fifty to sixty accidents a year (aggregate 1) outweigh the costs of the fence, the state should be seen as acting negligently when not erecting it. This is indeed how Ko¨tz and Scha¨fer apply Coase’s approach in their discussion of the case. If, however, the mechanism is refined by making exceptions if there is a cheaper cost avoider (let alone considerations of insurance of socialization of costs) the matter becomes more complicated. Under a rational choice paradigm, the cheapest solution might well be indeed just to put up a warning sign and then drivers adjusting appropriately and thus avoiding accidents – the warning being clearly cheaper than the fence. Unless the argument should then go that all drivers in the forest gain by speeding up every day and sufficiently gain (in time, hence also money) to thereby outweigh the costs of the fence (aggregate 2, not an easy calculus to make) only a new paradigm could help to shed a different light on the case. This is the paradigm of bounded rationality (Section IV). The argument would then be that constant non-conforming (irrational) action should also be taken into consideration (Ko¨tz and Scha¨fer hide this issue by arguing that one should take experience into consideration).37 This, however, then transcends transaction cost and institutional economics based on a rational choice calculus (speeding gains less than PL – probability multiplied by loss). One more aspect is that of the victim driving with 1.7 per cent of alcohol in his blood. This is a difficult issue to tackle for an institutional economics framework. Once transaction cost economics would see the costs of the fence as being outweighed by one of the two aggregates named, the full liability of the state should be beyond doubt. This, however, would not take into account at all an aspect that is much more theorized in sociological and social behaviour research – the aspect of how norms are internalized in a legal community.38 What are the repercussions on social perception of norms when the press reports that a driver with 1.7 per cent of alcohol in his blood, violating speed limits in the forest, is fully compensated at the cost of taxpayers? Alternatively, probably less harmful for compliance, the administration might have to explain why taxpayers should pay nevertheless for a fence protecting those that do not comply with a speed limit and disregard the traffic sign indicating frequent crossing of deer. Considering all these arguments, it becomes obvious that it constitutes a shortcut (at least on some legally and socially accepted values) only to rely on a calculus of the kind indicated. It may well be that both the deer accident and the ice hockey case were decided in a convincing way – though the results were in complete opposition – at least at the time when the court had to take the decision. Considering compliance, cheapest cost avoidance etc., it might well be that the rule that costs do not matter should apply only to victims that cannot care for themselves to avoid the danger imposed. The remainder of the article is an overly harsh attack on Pigou’s model of welfare economics. The main idea of Pigou’s model is to tax (or compensate) negative external 37

38

In the context of product liability, increased safety would seem to decrease accidents only for a certain time: groundbreaking W. K. Viscusi, Reforming Products Liability (Cambridge / MA: Harvard University Press, 1991). There is a short description of the theoretical architecture of this set of questions in: A. Etzioni, ‘Social Norms: Internalization, Persuasion, and History’, 34 Law and Society Review 157–78 (2000); F. Ewald, ‘Norms, Discipline, and the Law’, 30 Representations 138–61 (1990).

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effects, that is, to internalize harmful effects. Coase’s model advances a strong argument: does his model not better contribute to realizing the (higher) gains? However, it misses the dynamic perspective which would later be prominently emphasized by others.39 Taxing away (or compensating) negative external effects may increase overall welfare in the long run, rendering nuisance more costly and thus incentivizing alternative ways of avoiding the nuisance. The preferable equilibrium may be that law should aim to achieve changes with time and with market conditions. While it may well be that the railway company should be immune against liability for sparks when first laying down tracks (because of the potentially very high benefits of running trains for other market participants), it may be equally true, however, that liability should arise at a certain moment in time. This is the moment when competitors come in and technology advances (even when the gains made by the original railway company are still higher than the harm done). Liability would then be appropriately imposed, even in a gain > harm situation, because of the incentives for innovation created by such liability – despite the fact that, at least in the short term, the alternative would create higher overall gains for society. In any case, what remains the most valuable contribution is twofold. Coase (i) gives a convincing generalization of case law and restates the core problem as one of a reciprocal weighing of both actual and potential gains against the harms. Moreover, of course, (ii) he therewith invented and placed emphasis on transaction costs. Coase thus opened the path to modern institutional economics, to law and economics as a discipline (economic evaluation of law and legal drafting) and even to a particular branch of this field of research, the economic analysis of the law of torts. III Coase had applied the transaction cost approach primarily in the area of torts, and to nuisance cases in particular – where important subsequent developments go back to G. Calabresi mainly (see Chapter 15). Williamson used transaction cost analysis to analyse completely different fields, namely those related to party autonomy, design and governance. Significant progress in this area had already been made in the first two decades following the publication of ‘The Problem of Social Cost’.40 The Cartesian system of information economics was set out. Principal-agent theory was developed, as was the concept of the company as a network of contracts.41 Along with Williamson’s own contributions, these can be seen as the most important developments of the basic architecture of institutional economics since 1960. Williamson’s text created a bridge from the abstract consideration of relationships to the concrete analysis of various alternative 39

40

41

Groundbreaking A. Alchian, ‘Uncertainty, Evolution, and Economic Theory’, 58 The Journal of Political Economy 211–21 (1950); for the current analysis, see D. North, ‘Institutions and the Performance of Economies Over Time’, in C. Me´nard / M. Shirley (eds.), Handbook of New Institutional Economics (Berlin / Heidelberg: Springer, 2008). On important aspects in contract and in company law, see Chapters 17 and 20 respectively. From Williamson himself: ‘Transaction-Cost Economics: The Governance of Contractual Relations’, 22 Journal of Law & Economics 233–61 (1979). See Chapters 12, 20 and 19.

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arrangements, comprising hierarchies (firms), long-term collaborations, spot-contracts for mere exchange (‘discrete exchange’), and the whole spectrum of possible arrangements between these extremes. His analysis thus extended the path first laid down by Coase in 1937 when he framed the alternative between market and firm. Williamson’s text also marks the diminishing dominance of tort liability inquiries in law and economics, and the increasing prevalence of inquiries into arrangements based on party autonomy, namely in company law and contracts. Williamson’s text starts out with a triad of institutions (i.e., stable arrangements facilitating economic transactions): firms, markets (with spot-contracts for individual exchanges) and relational contracting. This latter category refers to contracts which establish a long-term relationship and thereby a stable organizational scheme between (often numerous) parties.42 While Coase had introduced the alternative between firm and market and while the economic theory of the firm had made important progress in the 1970s (namely with respect to the nexus of contracts and the principal-agent theories, see Chapters 19 and 20), contract itself forcefully reappears only now. In Williamson’s text (as well as in his 1979 article, see Chapter 17, also for the following) it becomes a distinct object of economic theory. It does so, however, in a fundamentally changed form: sociology in the 1960s had already made clear that long-term, relational contracts which establish ongoing co-operation are fundamentally different from traditional spot-contracts for one-time exchange. The main thrust of this earlier research, however, was that law does not play an important role in relational contracts – certainly less important than in other contracts. Williamson, on the other hand, focuses on what may serve as a substitute to (posited) law. For this purpose, he focuses on transaction costs and establishes an analytical framework for institutional economics and governance research.43 He analyses the institutional framework for relationships as actually established by the rule setters – who are for the most part the parties themselves – and thus returns the focus to the role of law, but law made by private parties themselves, not by public authority. Of course, the triad he relies on is only a set of ideal types. Between them, a whole range of variations exist, ‘with

42

43

See S. Grundmann / F. Cafaggi / G. Vettori (eds.), The Organizational Contract: From Exchange to LongTerm Network Cooperation in European Contract Law (Farnham: Ashgate, 2013); G. Teubner, ‘Beyond Contract and Organisation? The External Liability of Franchising Systems’, in C. Joerges (ed.), Franchising and the Law: Theoretical and Comparative Approaches in Europe and the United States (Baden-Baden: Nomos, 1991), pp. 105–32, at pp. 129–32; G. Teubner, ‘Coincidentia oppositorum: Hybrid Networks Beyond Contract and Organization’, in M. Amstutz / G. Teubner (eds.), Contractual Networks: Legal Issues of Multilateral Cooperation (Oxford: Hart, 2009), pp. 3–30, at p. 13 (‘controrgs’); and Chapter 17 in this volume. In 1979, Williamson was among the first to use this term in a well-defined way for private law: O. Williamson, ‘Transaction-Cost Economics: The Governance of Contractual Relations’, 22 The Journal of Law and Economics 233–61 (1979). It was in any case used extremely rarely during the 1970s and the first half of the 1980s – before the boom set in: see B. Cheffins, ‘The History of Corporate Governance’, in M. Wright et al. (eds.), The Oxford Handbook of Corporate Governance (Oxford: Oxford University Press, 2013), pp. 46–64. In this chapter, one core difference is first described with respect to the concept of the firm (O. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (New York: Free Press, 1985), pp. 15 et seq.). It is no longer seen as ‘black box’, as a whole reducible to a production function, but as a set of individual relationships, with many individual decision-makers, each with individual incentives to be taken into account. See also Chapter 19 in this volume.

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a myriad mixture of intermediate modes’44 – especially if party-made arrangements are the main object of analysis. Thus, Williamson is interested in the governance arrangement of non-market modes of organization, that is, in firms and relational contracting, but not spotcontracts. The decisive factors Williamson individualizes are typical only in these settings and not in spot-contracts. At the same time, this is a combination which runs counter to the traditional partition of areas of law, a partition represented in the organization of legal academia, where research on contracts and on organizations is typically conducted by different communities (and object of different legislative bodies). When analysing the ‘intermediate form’ – relational contracting – Williamson takes the view that it should primarily be assessed not from a sceptical standpoint, as a tool to circumvent regulation or as an anticompetitive practice, but as a mechanism for enhancing efficiency (reducing transaction costs in the best possible way).45 In a relational contract, it may be less costly not to regulate ex ante for all possible vicissitudes of the (still unknown) future, but to instead set up a scheme for ex post decision-making. Despite his critiques of the strict antitrust explanation, the antitrust and the efficiency branch of analysis are both given full attention in the remainder of the chapter. This new perspective on unusual arrangements – is no longer perceiving them primarily as anticompetitive practices, but as legitimate, efficiency-enhancing schemes – also had huge repercussions outside of contract law. In antitrust law, the new approach both motivated a more lenient perception of vertical integration, and inspired to the so-called more economic approach to antitrust, for which a mere restriction of competition should not per se give rise to a presumption of illegality. Under this approach, the antitrust authority potentially has to prove the impact of a practice on overall welfare (in the long run, and with full proof of causation).46 This attack on existing antitrust regulation was indeed a core thrust and motivation of Williamson’s text. The text’s introductory sequence gives a helpful list of the advantages of institutional economics over neoclassical theory: it puts the individual decision-maker at the centre, along with the institutions that simultaneously facilitate their decision, and influence decision-making in ways which enhance overall welfare (‘social cost calculus should govern if prescriptive treatments are attempted’).47 At numbers three and six, Williamson lists the most important contributions which his article really makes: asset specificity, and the view that ex post arrangements, mostly those of the parties themselves, are even more important than ex ante arrangements in long-term contracts. Williamson 44 45 46

47

Ibid., p. 16. Ibid., pp. 17 et seq. For the trend named first, namely for the application of less stringent standards to the restriction of intrabrand competition than to that of inter-brand competition, see, for instance, E.-J. Mestma¨cker / H. Schweitzer, Europa¨isches Wettbewerbsrecht (3rd ed., Munich: Beck, 2014), § 24. For the ‘more economic approach’, see S. Bishop / M. Walker, The Economics of EC Competition Law: Concepts. Application and Measurement (3rd ed., London: Sweet & Maxwell / Thomson Reuters, 2009), at para. 1–9, more detail in Chapters 6 and 7; D. Schmittchen / M. Albert / S. Voigt (eds.), The More Economic Approach to European Competition Law (Tu¨bingen: Mohr Siebeck, 2007). On Williamson’s strong interest and scholarship in antitrust issues, see more detail in Chapter 17. O. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (New York: Free Press, 1985), p. 23, quotes and ideas in the rest of the paragraph at pp. 18, 22 et seq.

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also stresses that institutional economics compares solutions within their institutional framework, and that governance is therefore about a broad inclusion of all factors and theories into the analysis, where different options are drawn from real life, seriously considered and modified to enhance them. Williamson’s advice, following Herbert Simon, is reassuring for legal scholars and practitioners: ‘such analyses can often be carried out without elaborate mathematical apparatus or marginal calculation’. In all this, the collaboration between individual players (with individual incentives), that is, the transaction, ‘is the basic unit of analysis and [the research approach] insists that organization form matters’. The section on transaction costs proper takes as its starting point Arrow’s famous phrase that transaction costs are the ‘costs of running the economic system’. After a summary of the neoclassical analytical framework (with Milton Friedman and even Coase), Williamson gives a more precise specification of the range of possible transaction costs. This specification is based primarily on two distinguishing factors. The first is the distinction between ex ante and ex post costs, both potentially interdependent, given that more care in advance potentially saves costs later on, but mainly that ex post investments into transactions, often neglected before, may well be more important in practice, at least in relational contracting. The second distinction is between private party ordering and ‘legal centralism’ (which treats one neutral decision-maker, namely the judge, as best-placed to resolve conflicts). Williamson advocates that private ordering often leads to a superior outcome – creating a fundamental break with two traditions. First, Williamson powerfully opens the door to private rule setting and brings (relational) contracting much closer to the organization-level thinking familiar from company law.48 Second, equally fundamental, while transaction cost economics in the sense of Coase is explicitly not concerned with (re) distribution, basing arrangements on private ordering has distributional effects as well. That is, if private ordering is used, the agreement reached will also take into account who has to carry the burdens and this distribution will aim at least in principle to be one acceptable to all concerned. The two-sided transaction, not a unilateral decision, is made the basic unit of analysis. Thus, the overall size of the cake is no longer the only concern, but – albeit only incidentally – the distribution of the cake is as well, in the drafting of the deal.49 These ideas are then developed in three theoretical sections and two sections dedicated to practical applications. Williamson first maps out the different variants of both the monopoly explanation and the efficiency explanation of non-standard forms of longterm arrangements – four potential explanations for each branch. According to 48

49

See S. Grundmann, ‘On the Unity of Private Law: From a Formal to a Substance Based Concept of Private Law’, 18 European Review of Private Law 1055–78 (2010); S. Grundmann / F. Cafaggi / G. Vettori (eds.), The Organizational Contract: From Exchange to Long-Term Network Cooperation in European Contract Law (Farnham: Ashgate, 2013), and the introduction therein; and Chapters 17 and 26 in this volume. The additional emphasis on distributive effects is much higher in so-called constitutional economics: see J. Buchanan, Constitutional Economics (Oxford: Blackwell, 1991); J. Buchanan/ G. Tullock, The Calculus of Consent (Ann Arbor: University of Michigan Press, 1962); J. Buchanan, The Limits of Liberty: Between Anarchy and Leviathan (Chicago / IL: University of Chicago Press, 1975); B. Frey/ G.Kirchga¨ssner, Demokratische Wirtschaftspolitik: Theorie und Anwendung (Munich: Vahlen, 2002), pp. 26–80.

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Williamson, most of the variants of monopoly explanation still only see the arrangement/ firm as a ‘black box’, as a production factor.50 The only exception is formed by the explanation that these arrangements might aim to enhance a firm’s strategic (monopoly) position for the future. Analysing a device with respect to the future – to enhance the governance of future problems – is all-dominant in the second, efficiency-focused branch, in all four variants of this explanation. One part of this branch is about properly allocating rights and incentives: to address the principal-agent relationship or to enhance the cumulative welfare effects for all parties affected via a proper allocation of property rights (rights to use, make gains from and change the asset). The other part of this branch is about governance in the narrow sense, that is, about how to arrange a proper scheme for ex post decision-making (only when problems arise). The focus is on ex post decision-making, because transaction costs would be too high to regulate all eventualities ex ante. In the second theoretical section (section 3), Williamson explains under what conditions a good ex post governance scheme is particularly needed, that is, when and why long-term contractual relationships require more than traditional contracting based on mutual consent. The basic idea is not easy to grasp, because Williamson begins by distinguishing two rather unproblematic cases. What he calls the two worlds of unbounded rationality and of non-opportunism are rather unlikely scenarios. The first describes situations in which the contract by itself is capable of specifying all vicissitudes of ongoing relationship (complete planning), the second those situations where the parties are so deeply linked by mutual trust (deep friendship) that opportunistic behaviour seems excluded (the world of reliable promise). The really revolutionary finding lies on lines three and four of the chart,51 where full planning for the future contingencies of a long-term relationship seems excluded (important in practice) and opportunistic behaviour is a meaningful possibility. In such situations, which are typical of open, long-term relationships, the core distinguishing factor according to Williamson is ‘asset specificity’. This is explained in the following way: where neither party makes an investment specific to the relationship, the disciplining effect of a world of ‘competition’ still works properly; where, however, assets are irretrievably sunk into the relationship, it makes the party making the investment highly vulnerable and, consequently, creates a high need for a governance scheme to address that vulnerability. This is a revolutionary finding, and Williamson explains it using very illustrative examples. It shows that competition may not be able to exercise its disciplining effect, even in the absence of monopoly or oligopoly, or information asymmetries.52 Particularly revolutionary, rather than the size of either party, that is, their market and financial power, being paramount (which had been and in many cases remains the dominant approach, especially in consumer law today), the vulnerability stems from the fact that investments have been 50

51

52

See PF line in the graph on p. 24 of O. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (New York: Free Press, 1985). See O. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (New York: Free Press, 1985), p. 31, the next quote on p. 42, the other ideas on pp. 35 et seqq. (namely examples). On information asymmetries (‘adverse selection’), see Chapter 12. For a striking case, the Volkswagen/Prevent group case where the much smaller enterprise managed to put much higher pressure on the much bigger one, see Chapter 17.

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made, and would be lost if the relationship is severed/terminated. This is powerfully evidenced, for instance, in the Schwinn case reported by Williamson where the player with much more market power was nevertheless the more vulnerable party. This criterion explains numerous important phenomena. They range from the fact that the reputation mechanism works for firms with high market power (which are well known on markets) much better than for smaller firms, to the statistically demonstrated less common use of unfair contract terms and trade practices by dominant firms. They also explain the relatively minimal concern clients/consumers typically have about their reputation by comparison to their (typically more powerful) counterparts (thus considerably restricting the danger of opportunistic behaviour on the firms’ side). In other words, competition law concerns (emphasizing market power) and protection within contractual arrangements (emphasizing vulnerability in the case of asset-specific investment) can point in quite divergent, or even diametrically opposed, directions. Overall, the aim of governance schemes is to ‘organize transactions so as to economize on bounded rationality while simultaneously safeguarding them against the hazards of opportunism’.53 Typical measures to meet this demand include realigning the incentives of both parties, establishing specialized schemes for ex post decision-making and mediation, and strengthening the parties’ signals of their willingness to continue the relationship and not to opportunistically (threaten to) sever it. At many instances, Williamson stresses two methodological aspects. Governance schemes change over time along with relevant factors, for instance technology (see explanations on the company town), and good governance schemes, made by the parties and thus tailored to the parties, have to take into account the concrete market structure and other possible incentives and theoretical approaches. Attention to dynamics and a broad, inclusive approach – this is exactly the world of governance research. IV The third text is one of several articles written by Herbert Simon on the same topic. The original, the earliest, is also the shortest and perhaps even the densest – though the mostquoted is likely the longer text published in 1959,54 which also gave the research approach its current name, bounded rationality. In the 1950s, while transaction costs had already been described, no ‘transaction cost approach’ properly speaking had yet been developed.55 So, contrary to what is often believed, bounded rationality could in no way have been originally intended as a counter-revolution against transaction cost. Rather, the two core premises underlying the neoclassical position both went largely unquestioned until the first decade after World War II and were challenged mostly in parallel. This refers to the neoclassical 53

54

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O. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (New York: Free Press, 1985), p. 32, then pp. 33 et seqq., examples from p. 34 et seq. H. Simon, ‘A Behavioural Model of Rational Choice’, 69 The Quarterly Journal of Economics, 99–118 (1955); H. Simon, ‘Theories of Decision-Making in Economics and Behavioral Science’, 49 The American Economic Review 253–83 (1959). The approach was fully developed only after publication of the ‘Problem of Social Cost’, see Section II, even though the problem had in fact already been formulated in the text on the ‘Nature of the Firm’ of 1937, see Chapter 19.

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conclusion that market exchange guaranteed the best allocation for all affected parties – namely that fully informed exchange occurs without cost, and that exchanges are based on fully rational decision-making by the parties involved. The first of these challenges was posed by the transaction costs approach, the other by bounded rationality research. While transaction costs render transactions more costly and thereby influence how many occur, bounded rationality inevitably changes the content of those transactions, since boundedly rational actors strive not for a maximum, but for a satisfactory level (i.e., they are satisficers).56 Herbert Simon can be seen as even more revolutionary for economic theory – and for the interplay between economic and legal theory – for two main reasons: first, with respect to disciplines, he openly proposes to depart from economics alone (which Coase does not do). What he proposes between the ‘psychological knowledge of the learning . . . processes and the kinds of knowledge needed for economic . . . theory, [is a] a marking stone placed halfway’.57 In fact, for the theoretical foundations of private law, this implies a triangle, involving economics, psychology/behavioural sciences and legal theory. Second, Simon is also more radical in content and plants the germ for complete upheaval, as will be seen. Simon, in his paper of 1955, uses a relatively simple structure. He starts from what rational choice is typically seen to mean (section I), then names the three essential ways of lowering that standard which can be detected in real life (‘simplifications’, section II), and finishes with two sections on why the solutions parties strive for (equilibria) cannot be unique and why they are also subject to high dynamics. In all this, however, Simon remained a genuine economist, still striving for ‘definitions of rational choice’ – albeit more realistic ones – not yet asking why economics so firmly adhered to the rational choice model at all and why it was so uninterested in behavioural sciences.58 Traditional theory had stressed that consumers aimed to maximize their utility function; Simon’s challenge was that the necessary computation of probabilities, even as an approximation, was ridiculously illusory.59 Euphemistically called simplifications, the three examples given carry the germ of a methodological revolution. First, the turn from 56

57

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59

E. Furubotn / R. Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics (2nd ed., Ann Arbor: University of Michigan Press, 2005), p. 79. H. Simon, ‘A Behavioural Model of Rational Choice’, 69 The Quarterly Journal of Economics 99–118 (1955), at 100. As Simon put it in his 1959 paper, ‘[i]nfluence will run both ways’, H. Simon, ‘Theories of Decision-Making in Economics and Behavioral Science’, 49 The American Economic Review 253–83 (1959), 253. See H. Simon, 69 ‘A Behavioural Model of Rational Choice’, 69 The Quarterly Journal of Economics 99–118 (1955), at 114 (also for the quote). In his 1959 paper, Simon explicitly raised these questions and identified a bias toward normative thinking in his economist contemporaries as the most likely culprit (H. Simon, ‘Theories of Decision-Making in Economics and Behavioral Science’, 49 The American Economic Review 253–83 (1959), 253–5) – the approach, however, changed with new areas of research such as labour relationships. Imperfect foresight would seem to be the most important aspect both for Simon (256 et seq.) and for the development of bounded rationality research more generally, as well as for incomplete contract theory later on. See, for instance, I. Hacking, The Emergence of Probability: A Philosophical Study of Early Ideas about Probability, Induction and Statistical Inference (Cambridge: Cambridge University Press, 1998). A colourful description of how demanding the conditions of rational choice really are is given by Simon in his 1959 paper. There, he characterizes ‘rational choice theory’ as logically impossible: ‘The central difficulty is that rationality requires one to outguess one’s opponent, but not to be outguessed by them, and this is clearly not a consistent requirement if applied to all the actors.’ (H. Simon, ‘Theories of Decision-Making in Economics and Behavioral Science’, 49 The American Economic Review, 253–83 (1959), 266.

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a concept of maximizers to one of satisficers. Market participants, including individuals but also firms, do not typically or even often strive for an optimum, but only for a satisfactory level.60 This is of great importance because the satisfactory level would seem to vary not only from one person (manager) to the next, but also through time in response to input from the outside world. No reliable point of reference – the ‘one’ optimum – and hence no general model can be founded on that basis. Second, information gathering. Similar to Coase, Simon asks how the decision-making process can be modelled ‘if the information gathering process is not costless’.61 The difference from neoclassical economics and Coase is that Simon no longer relies on a search for a maximum. Potentially the most fruitful single area for future research comes in sections III and IV – the element of learning. One of the core findings is that while actual equilibria may be static in some cases, dynamic equilibria may be more relevant to understanding the real world – and this justifies extensive comments on dynamics. One example of this is that actors can learn, that is, that they choose ‘to select a particular alternative and experience its consequences’, a second one that they ‘may change the pay-off function [preferences]’.62 This is an extremely fruitful path for future research: institutions – and namely rules – have to be considered not only in light of what result they produce now, in a static situation, but with a view to the dynamics of reactions that these institutions may produce in the future (see Section II). On the other hand, Simon does not yet clearly distinguish between cases in which rational behaviour according with the model conditions is only impossible because acquiring more information would be more costly than justified by returns (‘(rational) fool’ cases) and cases which result from true cognitive errors. In the latter case, the actor – irrespective of what information is available – is simply incapable of realizing which solution best serves their needs.63 Herbert Simon’s ideas have since been developed further, especially with respect to the range of true cognitive errors, particularly in so-called prospect theory.64 Prospect theory, developed by Kahneman and Tversky, is concerned with describing the actual behaviour 60

61

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63

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For the turn from a paradigm of ‘maximizer’ to one as ‘satisficer’, see H. Simon, ‘A Behavioural Model of Rational Choice’ 69 The Quarterly Journal of Economics, 99–118 (1955), at 103–6, for the specification of the persons concerned, see 99 et seq., 114. In his paper of 1959, Simon also devotes a whole section to how firms deviate – systematically – from the paradigm of ‘rational decision-making.’ H. Simon, ‘Theories of Decision-Making in Economics and Behavioral Science’, 49 The American Economic Review, 253–83 (1959), 262–5. H. Simon, ‘A Behavioural Model of Rational Choice’ 69 The Quarterly Journal of Economics, 99–118 (1955), at 106–8. For both examples, see ibid., at 113. In the 1959 paper, Simon points to areas of ‘innovation’ where this is particularly important: H. Simon, ‘Theories of Decision-Making in Economics and Behavioral Science’, 49 The American Economic Review, 253–83 (1959), 278. For a history on the evolution of the concept of bounded rationality see M. Klaes / E. M. Sent, ‘A Conceptual History of the Emergence of Bounded Rationality’, 37 History of Political Economy 27–59 (2005) as well as P. Cserne, ‘Behavioural Law and Economics as Litmus Test’, 7 Œconomia 305–29 (2017). For the three models in general see C. Camerer / G. Loewenstein, ‘Behavioral Economics: Past, Present, Future’, in C. Camerer / G. Loewenstein / M. Rabin (eds.), Advances in Behavioral Economics (Princeton, NJ / Oxford: Princeton University Press, 2004), pp. 3–53; for pattern finding analysis, see D. Fudenberg / D. Levine, The Theory of Learning in Games (Cambridge / MA: MIT Press, 1998). See the seminal article by D. Kahneman / A. Tversky, ‘Prospect Theory: An Analysis of Decision under Risk’, 47 Econometrica 263–91 (1979); discussed in Chapter 11.

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of decision-makers facing a choice between alternatives with probabilistic outcomes, for instance under risk. This is an alternative to the classical expected utility theory, insofar as the decisions are described as being based on the potential value of losses and gains in respect to a reference point which the parties find acceptable, rather than a comparison of the respective utility of the possible final states.65 The most important cognitive errors observed today are those connected to the ability of individuals to predict the intensity, duration and impact of their future feelings (impact biases) and to the tendency to view a future event in isolation (focalism), or to give present events more weight than future ones (time preference). Moreover, there are biases depending on the availability of or insensitivity to sample size and prior probability, or ultimately based on representativeness, anchoring or framing effects.66 Today, based particularly on the work of Sunstein, Thaler and Jolls, the following branches of bounded rationality problems and research are distinguished: (1) unavailability of sufficient information, for instance about the future; (2) cognitive limitations (biases)/bounded rationality in the narrow sense; (3) limited (bounded) willpower; (4) limitations in preference order/self-interest; and (5) information overload, particularly as an amalgam of (1) and (2).67 Coming briefly back to the Game Damage case described at the outset, the considerations made above show two things: how much a consideration of irrational behaviour may change the overall calculus and assessment (frequent irrational behaviour changes the cost calculus, a calculus in violation of the rational choice paradigm is accepted as governing the case) and how, long before the so-called behavioural turn, protagonists of law and economics – without disclosing it – have taken into account such considerations (under the umbrella of paying tribute to ‘sound experience’). If irrational behaviour is taken as a given and legislatures accept that they cannot effectively educate private parties by subjecting them to painful losses, building the fence would indeed have been the overall beneficial solution. Simon’s ideas can be developed along two broad lines. The dominant strand endeavours to integrate findings on bounded rationality into the analytical framework of institutional economics, carefully modifying the rationality assumption in certain narrowly targeted respects. The opposite path – today the less-travelled route – no longer seeks to base research and policy recommendations on the assumption of rational, maximizing players, but looks instead for a completely new paradigm – one that departs from the traditional economic theory of law.68 Simon, despite bold lines of ideas, adhered to the first path and 65

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For a more detailed description see S. Plous, The Psychology of Judgment and Decision Making (New York: McGraw-Hill, 1993), pp.95–8. See T. Gilovich / D. Griffin / D. Kahneman (eds.), Heuristics and Biases: The Psychology of Intuitive Judgment (Cambridge: Cambridge University Press, 2002). See C. Jolls / C. Sunstein / R. Thaler, ‘A Behavioral Approach to Law and Economics’ 50 Stanford Law Review 1471–550 (1998); see also C. Jolls, Behavioural Economics and the Law (Hanover / MA: Now Publishers, 2011), 29–64; D. Kahneman / P. Slovic / A. Tversky (eds.), Judgment under Uncertainty: Heuristics and Biases (Cambridge: Cambridge University Press, 1982) and for a concise recent overview P. Hacker, Verhaltenso¨konomik und Normativita¨t (Tu¨bingen: Mohr Siebeck, 2015), pp. 79–124. For both lines of development see C. Jolls / C. Sunstein / R. Thaler, ‘A Behavioral Approach to Law and Economics’ 50 Stanford Law Review 1471–550 (1998); T. Ulen, ‘The Growing Pains of Behavioral Law and Economics’, 51 Vanderbilt Law Review 1747–63 (1998); a radical critique in H.-W. Micklitz, ‘The Politics of

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aims ‘to construct definitions of “rational choice” that are modeled more closely upon the actual decision processes’ and thus to create a model ‘of “approximate” rationality’.69 If, however, we read the conclusions of the 1959 paper, they already sound quite different. First, Simon holds that the rational choice paradigm is unimportant in practice: ‘In simple, slow-moving situations, . . . the assumption of maximization relieves us of any need to construct a detailed picture of economic man [i.e., it can be safely used]. . . . As the complexity of the environment increases, . . . we need to know more and more about the mechanisms that economic man uses to relate himself to that environment.’70 Second, however, Simon does not see an alternative path either: ‘It seemed almost utopian to suppose that we could put together a model of adaptive man that would compare in completeness [for model building, not for depiction of the real world] with the simple model of classical economic man.’ Simon’s position as articulated in 1959 may give an explanation for why his work would not strongly influence mainstream economics for several decades (‘too revolutionary’ and ‘no alternative’) – while the proposition made in 1955 to ‘integrate’ some new findings into the neoclassical model would have met with more sympathy. Conversely, however, the more daring paper of 1959 became more famous – even though the 1955 one already contained all the important ingredients of the new world of ‘mere satisficing’. The 1959 paper could have easily spelled the end of a law and economics still based in principle on the rational man assumption. History tells us – irrespective of how convincing Simon’s arguments may have been – that such an upheaval was not to be. At the same time, the arguments advanced call for prudence when it comes to private law theory. Economic theory of law may help to understand human incentives and decision-making and its results. To venture into normative consequences on this basis is, however, possible only after having also reformulated all processes under the auspices of behavioural sciences and bounded rationality – and requires to do so for each question and area separately.71 V Taken together, the first two texts develop the potential of transaction cost analysis and thus of institutional economics more generally. From Coase, the major contribution is tied to the allocation of property rights by statutory and judge-made law, particularly with respect to nuisance and torts; from Williamson, the insight concerns the allocation of property rights by party arrangement, specifically through contract, relational contract and company charter (‘market and firm’, along with all the variations in between). While Coase only stresses the existence of transaction costs and the consequent need for an efficiency-

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Behavioural Economics of Law’, in H.-W. Micklitz / A.-L. Sibony / F. Esposito (eds), Research Methods in Consumer Law: A Handbook (Cheltenham: Edward Elgar, 2018), pp. 513–56. H. Simon, ‘A Behavioural Model of Rational Choice’, 69 The Quarterly Journal of Economics 99–118 (1955), at 114. In contrast, by 1959, Simon would state that bounded rationality is the dominant phenomenon even ‘in an extremely simple situation’ (H. Simon,‘Theories of Decision-Making in Economics and Behavioral Science’, 49 The American Economic Review 253–83 (1959), 261) and even in the business world (262–5). Ibid., at 279 – next quote at 280. See Chapter 11 (with a discussion of Kahneman / Tversky).

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driven adjudication of property rights in positive law, Williamson details the nature of those transaction costs and assesses them for different types of private party arrangements. The prevalence of such private party arrangements, however, raises a whole host of additional questions, ranging from the legitimacy and constraints to be placed on private regulators to the much sharper issues that are implied by bounded rationality, and the challenges of integrating it into economic theory. Bounded rationality, as described first by Simon, can be seen either as a sort of additional deviation to be integrated into the models demanded by attention to transaction costs, or as such a fundamental divergence that such models are disrupted entirely. In either case, the introduction of bounded rationality reflects the desire to locate economic model building and analysis closer to the actuality of decision-making as observed in the real world – namely with respect to legal ordering. Where bounded rationality is seen to have considerable salience, the potential need for regulation becomes a much more important issue. The case chosen as an illustration evidences how Coase’s opportunity costs rationale functions, but as well how it had to be supplemented by criteria developed by Calabresi (see Section II here and Chapter 15). In the Williamson set of questions, the case would seem to be less helpful, but it makes clear that a private party governance solution would have been preferable. It could have been in the form of collaboration and distribution of costs, for instance with payment of a toll on a private road through the forest that then could have financed a fence, potentially with a larger payment by those drivers that create higher risks. Conversely, Williamson would say, the public authority solution was slow to learn of the consequences – namely of the number of accidents and amount of damages. Finally, Simon’s insight would speak in favour of not relying blindly on the rationality of actors, namely not in a context of many actors being involved.

4 Private Law and Theories of Communication Moritz Renner

a topic and materials I This chapter deals with two different social theories, which can be subsumed under the concept of theories of communication. Both theories analyse the role of the legal system, and private law in particular, in the context of modern, functionally differentiated societies. Their focus is on explaining the rationality of the legal system as ‘a rationality apart’.1 At the same time, they try to analyse the ways in which the law necessarily interacts with other fields of society: politics, the economy, religion, etc. Thus, the theories discussed in this chapter can be seen as reformulations of the tension between the ‘inside and the outside’ of private law (see Chapter 1). As compared to more traditionally minded approaches such as those espoused by Raz and Hart, however, they take a much broader perspective. They see the development of the legal system as part of the wider phenomenon of the division of labour in modern societies. Thus, they owe much to the tradition of legal sociology in the spirit of Weber and Durkheim (see Chapter 2). Yet the theories discussed in this chapter should not be misunderstood as purely theoretical exercises in abstract philosophical concepts. They can and should contribute to our understanding of seemingly everyday cases of private law. This shall be demonstrated with the example given in Box 4.1. Mundane as the case might appear at first sight, it poses challenging questions of rulemaking in private law, relating to the respective roles of courts and legislation, individual contracts and standard terms. These questions shall be analysed against the background of the theories of communication presented in this chapter. II Two German theorists, Niklas Luhmann and Ju¨rgen Habermas, have written the leading texts on theories of communication and the law that will serve as the reference texts for this chapter. Both reference texts are chapters from books written in the 1990s and 1

Charles E. Fried, ‘The Artificial Reason of the Law or: What Lawyers Know’, 60 Texas Law Review 35 (1981), 58.

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96 BOX 4.1 CASE STUDY

Bundesgerichtshof XI ZR 562/15, BGHZ 215, 172 In Germany, as in other jurisdictions, it has been common practice that lenders, when granting loans, charged a one-off processing or arrangement fee. The default rule of sec. 488 of the German Civil Code (BGB), however, provides that, in a loan contract ‘[t]he borrower is obliged to pay interest owed . . . ’. While s. 488 is neither mandatory nor conclusive as to the structure of fee arrangements, sec. 307 BGB stipulates that ‘provisions in standard business terms . . . derogating from legal provisions’ are invalid to the extent that they ‘unreasonably disadvantage the other party’. In an earlier decision, the Federal Court of Justice had referred to these provisions and held that one-off fee clauses in standard consumer loan contracts were invalid.2 It had argued that standard terms on such fees disadvantaged consumer borrowers inasmuch as they departed from the default rule in s. 488 BGB, which provides that the lender is solely remunerated through the payment of interest. In the case at hand, the Federal Court of Justice had to decide whether the same held true for business-to-business loans. In this context, s. 310 BGB provides that ‘reasonable account must be taken of the practices and customs that apply in business dealings’. represent the sum of the work of two of the most influential social theorists in post-war Europe (Box 4.2). Both Luhmann’s and Habermas’ work on law and social theory must be read in the context of their respective philosophical traditions. They are heavily built on insights from different fields of philosophy and the social sciences. Authors such as Lomfeld, Teubner and Thornhill, who have also greatly contributed to making Luhmann and Habermas accessible to the Anglophone world, put the reference texts in context. The differences as well as the convergences between Luhmann and Habermas are analysed in the interpretations elaborated by Fischer-Lescano and Kjaer. (See Box 4.3.)

b theories, context, and discussion I Theorie der Gesellschaft oder Sozialtechnologie (Theory of Society or Social Technology) is the title of a 1971 book in which two of the most influential minds in Continental European social theory confront each other: Ju¨rgen Habermas and Niklas Luhmann.3 Outside Germany, only one of these names is widely known: Habermas is still one of the most-cited authors in the social sciences and the humanities globally. Luhmann’s work, 2 3

Bundesgerichtshof, XI ZR 405/12, BGHZ 201, 168. Ju¨rgen Habermas / Niklas Luhmann (eds.), Theorie der Gesellschaft oder Sozialtechnologie. Was leistet die Systemforschung? (Frankfurt: Suhrkamp, 1971).

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BOX 4.2

Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), pp. 88–120 Ju¨rgen Habermas, Between Facts and Norms: Contributions to a Discourse Theory of Law and Democracy (Cambridge / MA: MIT Press, 1996), pp. 84–104

BOX 4.3

Andreas Fischer-Lescano, ‘Critical Systems Theory’, 38 Philosophy & Social Criticism 3–23 (2012). Poul Kjaer, ‘Systems in Context: On the Outcome of the Habermas/Luhmanndebate’, Ancilla Iuris 66–77 (2006). Bertram Lomfeld, ‘Contract as Deliberation’, 76 Law and Contemporary Problems 1–18 (2013). Gunther Teubner, Law as an Autopoietic System (Oxford, UK / Cambridge, MA: Blackwell, 1993) Chris Thornhill, ‘Systems Theory and Legal Theory: Luhmann, Heidegger and the False Ends of Metaphysics’, 116 Radical Philosophy 7–20 (2002).

meanwhile, has only partially and lately been translated into other languages.4 Only since the 1990s have Luhmann’s ideas, especially through the writings of Gunther Teubner,5 begun to exert a certain influence on social and legal theorists in the English-speaking world.6 Over the course of several decades, Luhmann and Habermas have developed two seemingly contradictory theories, systems theory and discourse theory. Both authors, although in different ways, stand in the philosophical tradition of German idealism, trying 4

5

6

Most notably Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004); compare the book review by Peer Zumbansen, ‘Book Review: Law as a Social System’, 15 Social & Legal Studies 453–60 (2006) listing many of Luhmann’s monographs published in the English language. Gunther Teubner, Law as an Autopoietic System (Oxford, UK / Cambridge, MA: Blackwell, 1993); Gunther Teubner, Constitutional Fragments: Societal Constitutionalism in Globalization (Oxford: Oxford University Press, 2012). Systems theory, however, has close links with and is partly derived from the earlier work of Talcott Parsons, see, for example, Talcott Parsons, ‘The Superego and the Theory of Social Systems’, in Talcott Parsons et al. (eds.), Working Papers in the Theory of Action (Glencoe / IL: Free Press, 1953), pp. 13–29. The earlier strands of systems theory are also closely linked to related debates in cybernetics, for example, Norbert Wiener, Cybernetics or Control and Communication in the Animal and the Machine (Cambridge / MA: The MIT Press, 1948); Gordon Pask / Heinz Von Foerster, A Predictive Model for Self Organizing Systems (Illinois: University of Illinois, 1960). For more recent systems theory approaches to legal sociology in the anglophone world see, for example, Chris Thornhill, ‘Systems Theory and Legal Theory: Luhmann, Heidegger and the False Ends of Metaphysics’, 116 Radical Philosophy 7–20 (2002); Richard Nobles / David Schiff, Observing Law through Systems Theory (Oxford: Hart, 2013).

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to develop an all-encompassing theory of society.7 And both take up this tradition by stressing the central role of law in modern societies. Thus, both have become leading figures in contemporary discussions of legal theory. Much in the spirit of Max Weber (see Chapter 2), large parts of their law-related writings focus on the function of private law in market societies based on the division of labour (see Chapter 10). For both authors, the field of private law serves as an exemplification of the more general notions of their theories. In the same way, our case example on standard terms under German law (Box 4.1) may serve as exemplification of Luhmann’s and Habermas’ theories of private law. Both theories have an explanatory as well as a normative contribution to make to the study of private law. They analyse the conditions under which norms of private law are made and the conditions under which norms of private law can be considered legitimate. In the context of this book on the theoretical foundations of private law, Luhmann and Habermas – notwithstanding all their differences – stand for an approach which can be termed ‘law and theories of communication’. Both take up the tradition of Continental European social theory, but both do so by combining this tradition with contemporary theories of communication from the United States. In this respect, Luhmann’s theory owes much to Talcott Parsons’ functionalist social theory, while Habermas bases central tenets of his theory on the writings of philosophers of language J. L. Austin and John R. Searle.8 II When asked about his research projects as a young professor in 1968, Luhmann laconically replied: ‘A theory of society, duration: 30 years, costs: none.’9 By the time of his death in 1998, this enormous endeavour had been almost completed. The German sociologist has left innumerable books and articles on every aspect of modern society, most notably a series of monographs on the ‘functional subsystems’ of society – the economy,10 science,11 law,12 politics13 and religion14 – culminating in his magnum opus Die Gesellschaft der Gesellschaft15 – literally: The Society of Society. In spite of his aim of developing a grand theory of society based on Talcott Parsons’ theory of social systems, as a trained lawyer Luhmann always kept a special interest in legal theory.

7

8

9 10 11 12 13 14 15

For the theories’ respective links to the heritage of German idealism see Poul Kjaer, ‘Systems in Context: On the Outcome of the Habermas/Luhmann-Debate’, Ancilla Iuris 66 (2006). Compare John L. Austin, How to Do Things with Words (Cambridge / MA: Harvard University Press, 1962); John R. Searle, Speech Acts: An Essay in the Philosophy of Language (Cambridge: Cambridge University Press, 1969). Niklas Luhmann, Die Gesellschaft der Gesellschaft (Frankfurt: Suhrkamp, 1997), p. 11. Niklas Luhmann, Die Wirtschaft der Gesellschaft (Frankfurt: Suhrkamp, 1988). Niklas Luhmann, Die Wissenschaft der Gesellschaft (Frankfurt: Suhrkamp, 1990). Niklas Luhmann, Das Recht der Gesellschaft (Frankfurt: Suhrkamp, 1993). Niklas Luhmann, Die Politik der Gesellschaft (Frankfurt: Suhrkamp, 2000), published posthumously. Niklas Luhmann, Die Religion der Gesellschaft (Frankfurt: Suhrkamp, 2000), published posthumously. Published in 1997.

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His Sociology of Law, first published in 1972,16 soon became a standard reference in German jurisprudence, but it was not until 1993 that Luhmann’s late work Law as a Social System17, translated into English in 2004,18 set out to rebuild the foundations of legal sociology on the basis of systems theory. The excerpt discussed in this chapter demonstrates the unique analytical and epistemological rigour with which Luhmann undertook this endeavour. In unfolding the highly abstract terminology of systems theory, Luhmann seemingly in passing and almost effortlessly deals with central problems of private law theory: the function of contract, the relation between judges and legislators, and the concept of positive law. Reading Luhmann, however, is a challenge as systems theory employs a language which often seems hermetic and can hardly be understood without knowledge of at least some of the theory’s basic tenets. When Luhmann, in the reference text of this chapter, describes the ‘operative closure of the legal system’, he refers to a concept which is fundamental to his general theory of society. Luhmann describes society as a system of communication consisting of different subsystem such as the economy, politics, science and law.19 According to him, each of these subsystems serves a distinct function – and each of these subsystems follows its own logic, its own code of communication. Luhmann thus takes up the Weberian notion of the ‘modern polytheism’ of social rationalities20 and, at the same time, approaches postmodern theories in the spirit of Lyotard which analyse the incommensurability of social discourses after the end of all ‘metanarratives’.21 ‘Operative closure’ for Luhmann thus designates the historical fact that in modern society legal communication has become self-referential. The notion of self-referentiality is closely related to the concept of autopoiesis developed by the biologist Humberto Maturana.22 Autopoiesis, according to Maturana, means that a (biological) system can generate its operations only through the network of its own operations, which is, in turn, generated by the operations themselves.23 Therewith, drawing upon the Aristotelian notion of poiesis, Maturana seeks to describe the circular process of cells reproducing themselves ‘as their own work’.24 Transferred to legal theory, this concept ‘breaks a taboo in legal thinking – the taboo of circularity’, as Gunther Teubner, one of the most influential systems-theory-inspired legal theorists has argued.25 The circular relationship between legal acts and legal norms is to be 16 17 18 19 20

21 22

23

24 25

Niklas Luhmann, Rechtssoziologie (Reinbek: Rowohlt, 1972). Niklas Luhmann, Das Recht der Gesellschaft (Frankfurt: Suhrkamp, 1993). Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004). Ibid., p. 89. Max Weber, ‘Wissenschaft als Beruf’, in Johannes Winckelmann (ed.), Gesammelte Aufsa¨tze zur Wissenschaftslehre (Tu¨bingen: Mohr, 1973), p. 603. Jean-Franc¸ois Lyotard, La condition postmoderne: Rapport sur le savoir (Paris: Editions de Minuit, 1979). Niklas Luhmann, Einfu¨hrung in die Systemtheorie (Heidelberg: Carl-Auer-Systeme-Verlag, 2002), p. 109. Maturana’s work is expressly referred to at various points in Luhmann’s writings, for example in Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), p. 58, n. 16. Humberto Maturana, ‘Autopoiesis’, in Milan Zeleny (ed.), Autopoiesis: A Theory of Living Organizations (New York: North Holland 1981), pp. 21–32. Niklas Luhmann, Einfu¨hrung in die Systemtheorie (Heidelberg: Carl-Auer-Systeme-Verlag, 2002), pp. 110–11. Gunther Teubner, ‘Introduction to Autopoietic Law’, in Gunther Teubner (ed.), Autopoietic Law: A New Approach to Law and Society (Berlin: de Gruyter, 1988), pp. 1–11.

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understood as the foundation of the legal system.26 In Luhmann’s theory of ‘operative constructivism’27 it is the legal system – not politics and legislation – that, by its own operations, defines what law is.28 To perform this operation, the legal system relies on a binary code to distinguish between legal and illegal.29 The structure of the legal system, then, consists of conditional programmes for applying the code legal/illegal in different forms of communication, be they judgments, doctrinal writings or contracts.30 The conditions for applying the code, however, are redefined with every communicative act, with every decision that is made, and thus self-referentiality becomes a creative principle.31 Or, in Luhmann’s own words: ‘Law is . . . a historical machine in the sense that each autopoietic operation changes the system, changes the state of the machine, and so creates changed conditions for all further operations’.32 Here, although coming from a civil law background, Luhmann’s theory of law is heavily indebted to the sociological analysis of common law systems,33 where the fact that law is made within the legal system itself, by judicial decisions, is much less of a taboo than in civil law systems. The latter tend to idealize the lawmaking process in terms of a strict separation of powers between judge and legislator, with the judge as a mere ‘bouche de la loi’.34 With a view to our example case (Box 4.1), for a Luhmannian analysis it would not come as a surprise that the German Federal Court of Justice based its reasoning in large part on its earlier decision regarding standard fee clauses in consumer loan contracts. Even though made in a civil law context, the decision almost reads as if the court felt itself bound by the doctrine of stare decisis – which does not exist in German civil law. The court held that standard fee clauses were invalid in commercial contracts for much the same reasons that it had considered them invalid in consumer contracts. It thus turned against the prevailing opinion in legal scholarship,35 but also against the manifest intent of the legislator to differentiate between commercial and consumer contracts according to s. 310 BGB. Although the result thus seems highly

26 27 28 29

30

31 32 33

34

35

Ibid., p. 4. Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), p. 79. Ibid., p. 100. Niklas Luhmann, ‘The Unity of the Legal System’, in Gunther Teubner (ed.), Autopoietic Law: A New Approach to Law and Society (Berlin: de Gruyter, 1988), pp. 12–35, 25. Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), p. 111; see also Niklas Luhmann, ‘The Unity of the Legal System’, in Gunther Teubner (ed.), Autopoietic Law: A New Approach to Law and Society, (Berlin: de Gruyter, 1988), pp. 12–35, 24. Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), pp. 175–8. Ibid., p. 91. Luhmann specifically refers to Martin Shapiro, ‘Toward a Theory of “Stare Decisis”’, 1 Journal of Legal Studies 125–34 (1972); compare Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), pp. 316 et seq. As a matter of the history of ideas, it is questionable to what extent this maxim actually held sway over Continental European legal thought, see for example Franz Wieacker, Privatrechtsgeschichte der Neuzeit (Go¨ttingen: Vandenhoeck & Ruprecht, 1967), pp. 430–68. For an overview of the discussion see Moritz Renner, ‘Bankvertragsrecht. Vierter Teil’, in C.-W. Canaris et al. (eds.), Staub Großkommentar zum Handelsgesetzbuch, 5th ed. (Berlin: De Gruyter, 2014), para. 205.

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questionable, systems theory in its Luhmannian form would restrain itself to a purely analytical account of the problem.36 In this respect, Luhmann’s legal theory does not entirely break with the Continental European tradition of legal theory. As Luhmann himself indicates,37 his account of the legal system can also be seen as a sophisticated reformulation of Continental European legal positivism in that it focuses on the autonomy of the legal system (see also Chapter 1 on Joseph Raz). Luhmann’s legal theory is often compared with earlier positivist approaches such as Kelsen’s pure theory of law, in that ‘both give exaggerated significance to the role of official norms, a flaw, from an Anglo-American perspective, common to much of the German jurisprudential tradition’.38 This critique, however, seems rather misplaced, as our example case (Box 4.1) shows. Luhmann’s formulation of the boundary between the ‘inside and the outside of private law’ (see Chapter 1) can build on the refined concept of self-referentiality depicted above. For Luhmann, the autonomy of the legal system denotes not the ‘airtight construction’39 of a hermetically closed legal discourse, but the legal system’s capability to autonomously define its own boundaries; it means ‘that there is no other authority in society which can proclaim: this is legal and this is illegal’.40 This does not imply that social communication outside the legal systems is irrelevant to the law; the legal system is ‘normatively closed, but cognitively open’.41 While Luhmann states ‘The system cannot treat facts as non-facts if they are legally relevant. But the facts cannot change the norms,’42 the same is true for social practices and ‘customary law’.43 Here, Luhmann takes a much more hesitant – and less normative – position than authors from the field of law and society, who often make the case for a law that is more responsive towards its social environment.44 Moral and political communication may or may not be taken up in legal discourse, but this is decided according to the rules of the legal system itself. There is no ‘immediate validity of morals’ as there was ‘in many older legal orders’.45 While it is true that ‘ethical and legal reasoning can converge’ – as value-based theories of law (see Chapter 7) say they should – for Luhmann ‘the practical relevance of such convergence . . . should not be overestimated’.46 36

37 38

39 40 41 42 43 44

45 46

Other strands of systems theory, such as critical systems theory, however, might take a decidedly normative standpoint on legal issues, see Andreas Fischer-Lescano, ‘Critical Systems Theory’, 38 Philosophy & Social Criticism 3–23 (2012). Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), p. 76. James E. Herget, Contemporary German Legal Philosophy (Philadelphia: University of Pennsylvania Press, 1996), pp. 91–2. Ibid., p. 91. Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), p. 100. Ibid., pp. 106 and 109. Ibid., p. 113. Ibid., p. 115. Philippe Nonet/Philip Selznick, Law and Society in Transition: Toward Responsive Law (New York: Harper & Row, 1978); Gunther Teubner, ‘Substantive and Reflexive Elements in Modern Private Law’, 17 Law & Society Review 239–86 (1983). Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), pp. 107 and 112. Ibid., p. 108 (emphasis added).

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Instead, it is the law itself which ‘on its own initiative accounts for the change of . . . social structures’ in order to be ‘differentiated from the ever changing tidal flow of moral communication’.47 It does so by evaluating social communication on a level of secondorder observation, by attributing communicative events to either side of the binary code legal/illegal.48 And only in doing so can it fulfil its specific social function, which is defined as stabilizing normative expectations: the legal system decides which social expectations can be counter-factually upheld.49 Whether, for example, a contract is valid and enforceable is a decision that can solely be made within the legal system and through the applicable legal procedures. The self-referentiality of the legal system also determines the relationship between judge and legislator: it is the binary code of the legal system as an internal filtering which prevents that ‘all “motives” of the legislator can be turned into law’.50 Luhmann is highly sceptical of political influences on the legal system, which might ultimately endanger the legal system’s autonomy.51 Conceptually, in Luhmann’s theory of law, the courts stand at the centre of the legal system, as only the courts can make decisions that are legally binding; all other sources of law stand at the ‘periphery’ of the legal system.52 Even legislation is – quite surprisingly from a Continental European perspective – placed at the periphery of the legal system, as a ‘structural coupling’ between law and politics that can only punctually irritate the autonomous workings of the legal system53 – as our case example (Box 4.1) illustrates. The same theoretical construction is applied to contracts. Locating them at the periphery of the legal system implies that they are at the same time communicative events within the legal system and communicative events in other social spheres, especially in the economic system.54 Contract as ‘one of the most important evolutionary achievements in social history’ is a structural coupling between law and its different social contexts.55 For a theory of private law, this is especially interesting, because Luhmann thus places private lawmaking on the same footing with legislative acts, acknowledging that ‘massive amounts of positive law are . . . being produced . . . without any political control – namely through contracts’.56 Luhmann’s idea that the functional systems of society are effectively 47 48 49

50

51

52 53 54 55

56

Ibid., pp. 93 and 108 (emphasis added). Ibid., pp. 94 and 101. Compare also Gralf-Peter Calliess / Moritz Renner, ‘Between Law and Social Norms: The Evolution of Global Governance’, 22 Ratio Juris 260–80 (2009), 267–8. Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004). Here Luhmann expressly refers to the US debate about ‘original intent’ in legal interpretation; for an overview of the debate see Mark D. Greenberg / Harry Litman, ‘The Meaning of Original Meaning’, 86 The Georgetown Law Journal 569–619 (1998). Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), pp. 96 and 110. Compare Chris Thornhill, ‘Law as a Social System’, 52 The Sociological Review 601–4 (2004) who argues that Luhmann ‘strategically depoliticizes the legal system’. Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), pp. 292–6. Ibid., p. 293. Ibid., p. 459. Ibid., p. 459; compare also Gunther Teubner, ‘Contracting Worlds: The Many Autonomies of Private Law’, 9 Social and Legal Studies 399 (2000). Niklas Luhmann, Law as a Social System, (Oxford: Oxford University Press, 2004), p. 104. However, the structural coupling between law and economy may ultimately question the legal system’s ability of reducing social complexity (p. 94), compare Moritz Renner, ‘Death By Complexity: The Financial Crisis and the

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immune to political interventions has met with sharp criticism by Habermas and others, it was understood as the expression of a conservative political stance against critical post-1968 approaches to social theory.57 However, today more than ever, it seems that Luhmann’s sober analysis of society is nothing less than a necessary precondition for any meaningful critique of the social institutions of and beyond private law (see Section IV). Even Habermas has acknowledged in his recent writings that ‘[a]s economic globalization progresses, the picture that systems theory sketched of social modernization is acquiring ever sharper contours in reality’.58 From the perspective of private law theory, it is one of the main achievements of Luhmann’s legal theory that it represents one of the few approaches to legal positivism which do not necessarily rely on the institutions of the nation-state. It expressly acknowledges that ‘the legal system operates largely outside the organizational professional inner core’.59 Instead of focusing on the traditional nation state institutions of legal administration, the systems theoretical perspective defines functional preconditions for the emergence of legal communication in an abstract manner. This makes systems theory approaches especially valuable for the analysis of regulatory contexts in which the political institutions of the nation state are of limited effectiveness. On the one hand, settings of public-private co-regulation and private governance (see Chapter 26) come to mind. Here, processes of norm-setting and of norm-enforcement must take account of novel communicative settings with little or no involvement of nation state institutions. On the other hand, systems theory has proven extremely fruitful for the analysis of transnational legal processes (see Chapter 25).60 Here, systems theory explains why there are many alternatives to state-made law, specifically when it comes to regulating and enforcing cross-border business contracts.61 Also with a view to our case example (Box 4.1), a systems theory analysis provides important insights. It shows that the courts, placed at the centre of the legal system, effectively mediate between the different settings in which legal norms are made at the periphery of the system: legislation, contract, trade usages, etc. Normative expectations are generated in different social settings, but they become law only when they are confirmed and reconfirmed in court decisions. It is not state authority or sanction that makes law (as

57

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59 60

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Crisis of Law in World Society’, in Poul Kjaer et al. (eds.), The Financial Crisis in Constitutional Perspective: The Dark Side of Functional Differentiation (Oxford: Hart 2011), pp. 93–111. Ju¨rgen Habermas, ‘Theorie der Gesellschaft oder Sozialtechnologie? Eine Auseinandersetzung mit Niklas Luhmann’, in Ju¨rgen Habermas / Niklas Luhmann (eds.), Theorie der Gesellschaft oder Sozialtechnologie: Was leistet die Systemforschung, (Frankfurt: Suhrkamp, 1971), p. 142: ‘Apologie des Bestehenden um seiner Bestandserhaltung willen’ (‘apology for what already exists to keep it existing’). Ju¨rgen Habermas, ‘“The Political”: The Rational Meaning of a Questionable Inheritance of Political Theology’, in Eduardo Medieta / Jonathan Van Antwerpen (eds.), The Power of Religion in the Public Sphere (New York: Columbia University Press, 2011), pp. 15–33. Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), p. 99. Gralf-Peter Calliess/Moritz Renner, ‘Between Law and Social Norms: The Evolution of Global Governance’, 22 Ratio Juris 260–80 (2009). For an overview of the discussion with empirical applications see Gralf-Peter Calliess et al., ‘Transformations of Commercial Law: New Forms of Legal Certainty for Globalized Exchange Processes?’, in Achim Hurrelmann et al. (eds.), Transforming the Golden Age Nation State (Basingstoke: Palgrave Macmillan, 2007), pp. 83–108.

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classical legal positivism would have it), nor is it rightness or justification. Communication is all that matters. III As a theory of positive law, however, systems theory largely leaves open the question of the legitimacy conditions of the legal system. It is exactly this question which Habermas places at the centre of his discourse theory of law. Coming from the Frankfurt School tradition of critical theory, Habermas undertakes to reconstruct the normative structures underlying the positive legal systems of late modernity. However, his methodological approach departs from the early masterminds of the Frankfurt school, Horkheimer and Adorno, as well as from the Hegelian-Marxist tradition which characterized their approach. Like Luhmann, Habermas builds his social theory on the concept of communication, but his analysis does not partake in the postmodern scepticism of systems theory which holds that successful communication is ‘highly unlikely’.62 Instead, Habermas’ work heavily relies on insights from the philosophy of language which hold that social communication is always and necessarily based on a set of normative presuppositions.63 From this perspective, any communicative utterance which does not at least presuppose the recipient’s ability to understand such utterance would constitute a performative self-contradiction.64 Thus, Habermas argues, the functional subsystems of society that Luhmann so masterfully describes are necessarily embedded into a broader context of communicative rationality, which he terms ‘Lebenswelt’, that is, ‘lifeworld’.65 In Habermas’ discourse theory of law, the goal of bridging the gap between social facts and their normative context, between systemic rationality and life-world, appears already in the title, Faktizita¨t und Geltung – Between Facts and Norms.66 In this late work Habermas consequently applies his theoretical approach to the reality of modern nation states under the rule of law (Rechtsstaat). Within this account, he expressly awards the theory of private law a paradigmatic role (‘civil-law jurisprudence, which in Germany has been decisive for the understanding of law in general’67). In the reference text for this chapter, as in the whole of Between Facts and Norms, the relationship between individual (human) rights and popular sovereignty, between individual and collective autonomy, plays a central role. Habermas criticizes the Continental civil law tradition for being based on a reductionist understanding of subjective rights 62

63

64

65

66 67

Niklas Luhmann, Soziologische Aufkla¨rung 3: Soziales System, Gesellschaft, Organisation (Opladen: Westdeutscher Verlag, 1981), p. 25. John L. Austin, How to Do Things with Words (Cambridge / MA: Harvard University Press, 1962); John R. Searle, ‘Reiterating the Differences: A Reply to Derrida’, 2 Glyph 198–208 (1977). Ju¨rgen Habermas, Moralbewusstsein und kommunikatives Handeln, (Frankfurt: Suhrkamp, 1983), pp. 90–1; Karl-Otto Apel, Diskurs und Verantwortung (Frankfurt: Suhrkamp, 1988), pp. 354–5. Ju¨rgen Habermas, Between Facts and Norms: Contributions to a Discourse Theory of Law and Democracy (Cambridge / MA: MIT Press, 1996), pp. 21–3. Ibid. Ibid., p. 84.

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since the nineteenth century. He argues that, in contrast to Kant’s conception of private law, the connection between the moral autonomy of the individual and individual legal rights has been gradually lost in the tradition of legal positivism starting with von Savigny – and he expressly attacks Luhmann as the latest exponent of this tradition.68 In Habermas’ view, the nineteenth-century doctrine of subjective rights has two important shortcomings: on the one hand, it conceives rights as purely negative freedoms, on the other hand, it succumbs to the illusion of private law as an autonomous and inherently legitimate form of social order. For Habermas, both deficiencies shape the private law discourse of the nineteenth century. Even seemingly opposite positions within this discourse, such as Windscheid’s conceptual jurisprudence and Ihering’s purpose-oriented theory of private law, are portrayed as affected by these deficiencies.69 Quite surprisingly, Habermas also includes Hans Kelsen in this analysis. This is surprising as Kelsen was a constitutional lawyer – and as his famous Pure Theory of Law70 puts the Constitution and democratic legislation at the top of the hierarchical order of legal sources.71 Nevertheless, Habermas characterizes Kelsen as an heir to the private law tradition, which, in Habermas’ view, is responsible for the detachment of legal rights from any meaningful conception of moral autonomy. This tradition, Habermas argues, ‘hands on the baton to a systems theory that rids itself by methodological fiats of all normative considerations’.72 In terms of ideology, he sees connections between a depoliticized conception of private law and the ideas of German post-war ordo-liberalism rehabilitating the idea of a liberal private law society (on these ideas see also Chapters 6, 13 and 24).73 Yet discourse theory is not simply a critique of liberal conceptions of private law, and it does not simply confront the latter with a more ‘welfarist’ approach. For Habermas, the ‘material justice’ approach to private law as advocated by Ludwig Raiser and others (see Chapter 10) does not help to overcome the split between functional legal rationality and the morality of the life-world. Instead, the ‘materialization’ of private law is depicted as being itself part of a functional legal rationality disregarding the moral autonomy of the individual as well as the idea of the ‘reciprocal recognition of cooperating legal persons’.74 It is this idea of reciprocal recognition which forms the basis for Habermas’ discourse theory of law. For him, ‘it is not enough to append social rights additively’ to the existing structures of private law.75 Neither is it enough to simply subordinate subjective legal rights to the objective law promulgated by a democratic legislature, as this would mean be to take an essentially Hobbesian perspective by placing the value of authority above the 68 69 70 71

72

73 74 75

Ibid., pp. 85–7. Ibid., pp. 85–6. Hans Kelsen, Pure Theory of Law (Berkeley: University of California Press, 1967). Compare also Adolf Merkl, ‘Prolegomena einer Theorie des rechtlichen Stufenbaues’, in Alfred Verdross (ed.), Festschrift fu¨r Hans Kelsen zum 50. Geburtstag (Vienna: Springer, 1931), pp. 252–94. Ju¨rgen Habermas, Between Facts and Norms: Contributions to a Discourse Theory of Law and Democracy (Cambridge / MA: MIT Press, 1996), p. 87. Ibid., p. 87. Ibid., p. 88. Compare also Ju¨rgen Habermas, ‘Paradigms of Law’, 17 Cardozo Law Review 771 (1995–1996). Ju¨rgen Habermas, Between Facts and Norms: Contributions to a Discourse Theory of Law and Democracy (Cambridge / MA: MIT Press, 1996), p. 89.

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value of the legal form as such.76 Here, discourse theory forcefully takes up emancipatory critiques of the modern welfare state, which is depicted as degrading its citizens to mere recipients of paternalist care. What discourse theory of law instead aims at is a reconstruction of the intersubjective nexus between individual liberty and collective decision-making that Habermas identifies in the writings of Kant and Rousseau. It is this nexus where Habermas locates the potential for a reconciliation of the functional rationality of modern law with the shared notions of morality that are immanent to the ‘life-world’. Interestingly, however, Habermas sets out his argument with a reference to neither Kant nor Rousseau, but to the Hobbesian state of nature. For Habermas, the idea of a social contract, which is shared by all three Enlightenment thinkers, bears in itself a strong principle of intersubjectivity: it presupposes that the parties to the social contract reflect not only their first-person subjective perspective, but also the second-person perspective of the other and the first-person plural perspective of society.77 In other words, even a most liberal society can never be based on subjective rights alone. While Hobbes cannot account for this difficulty in his social theory premised on naturalism, for Habermas it is Kant who tries to fill this gap with a more sophisticated notion of the social contract as an institutionalization of the ‘right to equal liberties’.78 This institutionalization, for Habermas’ own approach more than for Kantian republicanism, necessarily takes on the form of a democratic state under the rule of law. Only here, he argues, the question of social legitimacy can be addressed within positive law itself, because only here are there procedures for defining individual rights in a collectively binding way.79 The nexus between individual liberty and collective decision-making is construed on a conceptual level, with a reference to ‘contemporary discussions in the United States’.80 Habermas rejects approaches which either argue that individual rights are necessarily prepolitical (liberal view) or, on the contrary, that all individual rights are constituted by and within a political collective (republican view). He argues, instead, that private and public autonomy are co-original in the sense that they are interdependent. This, again, is explained with a view to the traditional notion of the social contract, based on an interpretation of both Kant and Rousseau. Although Habermas finds support for his view on the co-originality of private and public autonomy in both Kant’s and Rousseau’s writings, he sees in ‘Kant more of a liberal reading of political autonomy, [in] Rousseau a republican reading’.81 Kant’s theory of law, according to Habermas, presupposes a system of natural and inalienable rights, so that any modification of these rights by legislative action must be seen as an infringement of individual liberties. Rousseau, on the contrary, starts from the notion of a general popular will, expressed through legislation, which ‘has directly inscribed in it the right of each person to equal liberties’.82 Thereby, he must 76 77 78 79 80 81 82

Ibid., pp. 89–90. Ibid., pp. 91–2. Ibid., pp. 92–3. Ibid., pp. 93–4. Ibid., p. 99. Ibid., p. 100. Ibid., p. 101.

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presuppose either a ‘more or less homogenous community integrated through shared values’ or a very strong political authority in order to overcome differences and conflicts between individual and collective self-determination.83 For Habermas, both approaches miss the crucial point in that they do not address the question of how either individual liberties or popular sovereignty can be legitimized in the first place. At this point, like any contract, Habermas explains, the social contract can only be concluded within a normative framework which specifies fundamental legal positions and procedures. Thus, the collective autonomy that is exercised in making the social contract necessarily presupposes individual rights. On the other hand Conversely, such individual rights can only be defined in collective processes of decision-making.84 This circular relation between individual and collective autonomy, Habermas argues, is both constituted and resolved in a ‘discursive process of opinion- and will-formation, in which the illocutionary binding forces of a use of language oriented toward mutual understanding serve to bring reason and will together’.85 Thus, it is not a shared set of values which legitimates private law, but a ‘communicative arrangement’ between ‘participants in rational discourses’.86 Here, discourse theory consciously crosses the boundaries of a purely positivist legal theory. It aims at integrating a ‘post-conventional’ conception of morality87 into the forms of positive law. At the same time, it transcends the simplifying dichotomy of private and public law conceptions of legitimacy, by reconstructing the normative premises that have given rise to the modern concept of subjective rights – and thus to private law itself. This is why discourse theory has been fruitfully employed in order to assess the legitimacy of lawmaking processes within and beyond the nation state.88 It has given also rise to a whole strand of legal theoretical literature exploring proceduralist conceptions of law and justice, specifically in the field of private law (see Chapter 10). Regrettably, however, Habermas himself in his later writings tends to equate the procedural legitimacy of law with the lawmaking procedures of the democratic nation state – and to transpose this model specifically to the European Union.89 His theory has a much broader range of application, especially with a view to private governance

83 84 85 86 87

88

89

Ibid., p. 102. As a figure of thought, this idea comes close to the hermeneutic circle discussed in Chapter 1. Ibid., p. 103. Ibid., p. 104. Lawrence Kohlberg, ‘The Claim to Moral Adequacy of a Highest Stage of Moral Judgment’, 70 The Journal of Philosophy 630–46 (1973). Most notably in R. Alexy’s legal theory, see Robert Alexy, Theorie der juristischen Argumentation: Die Theorie des rationalen Diskurses als Theorie der juristischen Begru¨ndung (Frankfurt: Suhrkamp, 1978). For further applications see Oliver Gerstenberg, ‘Grenzen vertraglicher Regulierung o¨konomischer Risiken’, in Dieter Hart (ed.), Privatrecht im ‘Risikostaat’ (Baden-Baden: Nomos, 1997), pp. 89–98; Harm Schepel, The Constitution of Private Governance (Oxford and Portland, OR: Hart, 2005); Bertram Lomfeld, ‘Contract as Deliberation’, 76 Law and Contemporary Problems 1–18 (2013). For example, in Ju¨rgen Habermas, Die postnationale Konstellation: Politische Essays (Frankfurt: Suhrkamp, 1998).

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arrangements and constellations of public-private co-regulation. It is in these settings that a theory of discursive rationality can show its true potential. In our case example on standard terms (Box 4.1) it would be most fruitful to ask: what are the settings and procedures in which the relevant legal norms have been made? Clearly, there are rules made by the democratic legislator that might determine the case: s. 488 BGB, on the one hand, and ss. 307, 310 BGB, on the other. These norms certainly enjoy a high degree of procedural legitimacy. Yet as the case shows, they are clearly not conclusive, and in part even contradictory. Should the default rule in s. 488 BGB determine the outcome of the case? Or should the differentiation between commercial and consumer contracts in s. 310 BGB trump the default rule on remuneration? The necessary second step in our case is to look at the procedural setting in which the relevant standard terms have been made. The fairness control of standard terms in s. 307 BGB implies that standard terms are less legitimate than terms which are individually negotiated. This is highly plausible as asymmetrical information might lead to suboptimal contracting in standardized contracts (see Chapter 12). At the same time, s. 310 BGB establishes a less strict standard of control for commercial contracts. This rule is based on the assumption that sophisticated commercial parties are well able to evaluate standard terms. Often, standard terms are made by industry associations with a broad membership base and in quasi-legislative procedures.90 Against this background, the German Federal Court of Justice in our example case should have reflected on the fact that there is a longstanding and widely accepted trade usage of remuneration agreements based on one-off fees rather than interest payments. This would have strongly suggested not to invalidate the fee clause in question. IV Theory of Society or Social Technology – the title of the 1971 book on the so-called Habermas/Luhmann debate – stresses the differences between systems theory and discourse theory. In the aftermath of the debate, Luhmann has often been depicted as the postmodern gravedigger of normative theories of society. Habermas, meanwhile, has been characterized as a – sometimes naı¨f – successor of the ‘old-European’ project of Enlightenment. Their take on the subject of modern private law, however, reveals convergences between systems theory and discourse theory that might be more fruitful to explore.91 Both theories start from a Weberian concept of modernization through and within positive law. Both theories depict this process as a continuing emancipation of functional rationality from conventional notions of social morality. In this respect, systems theory is surely more radical in revealing the self-referential nature of the legal process. This descriptive90

91

For the example of the International Financial Reporting Standards see Moritz Renner, ‘Occupy the System! Societal Constitutionalism and Transnational Corporate Accounting’, 20 Indiana Journal of Global Legal Studies 941–64 (2013), 952–63 with further references. Gunther Teubner, ‘Substantive and Reflexive Elements in Modern Private Law’, 17 Law & Society Review 239–86 (1983), 244.

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analytical approach, however, does not necessarily exclude normative perspectives on the issue of legitimizing private law. Thus, both approaches are increasingly treated as complementary in contemporary literature – both on a theoretical level92 and when it comes to analysing particular private law regimes, specifically in the transnational context (see Chapter 25). Read together, both approaches suggest an analysis of our case example (Box 4.1) that is different from the route the German Federal Court of Justice has taken in its decision. A systems theory analysis shows that the case deals with normative expectations generated in different settings: in the legislative process, on the one hand, and in commercial practice, on the other. A discourse theory take on this constellation would ask for the legitimacy of the different normative expectations. In this particular constellation, much is to be said for upholding the specific normative expectations formed in commercial practice against the applicable, much more general, default rule foreseen by the legislator.

92

Poul Kjaer, ‘Systems in Context: On the Outcome of the Habermas/Luhmann-Debate’, Ancilla Iuris 66 (2006); Andreas Fischer-Lescano, ‘Critical Systems Theory’, 38 Philosophy & Social Criticism 3–23 (2012).

5 Comparative Law and Legal History Hans-W. Micklitz

a topic and materials I Seventy years into its history, European integration is about to turn into a historical research project of its own. It rests on the premise that the nation states share a common heritage, as well as intellectual, economic, political and philosophical foundations which hold the European legal system together. Law and integration through law are the means to realize the ambitious project (Chapter 24). The European Court of Justice (ECJ) is regarded as the motor of integration. The Single European Act advocated the building of an internal market, no longer through the four market freedoms and competition law alone, but most prominently through secondary EU law. The belief in common foundations includes an element of comparison, as commonality requires a merger of different economic, political and intellectual foundations. These foundations inspired the Treaty of Rome, the building of a common market and of European institutions composed of citizens of the member states. In the ECJ, judges from different member states sit together and are legally bound to agree one single interpretation of EU law. The judges’ opinions are not coming from ‘nowhere’,1 they must constantly search for a common ground that can be shared by the entire court. The Single European Act paved the way to extensive EU lawmaking and the power to initiate the procedure lies with the European Commission. Whatever proposal is elaborated, it has to take the different legal origins of the member states into account. One might therefore argue that the whole European integration, whether promoted by the court or initiated by the European Commission and approved by the European Parliament and the European Council, is a constant exercise in legal comparison, in the search for the best and most appropriate solution. That is why EU law enshrines both dimensions of legal history and comparative law. Up to now, European integration has been, first and foremost, an exercise of market building. Through supremacy and direct effect, private parties, mostly businesses, are empowered to challenge national statutory restrictions to cross-border trade before the ECJ. 1

T. Nagel, The View from Nowhere (Oxford: Oxford University Press, 1989).

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111

BOX 5.1 CASE STUDY

Cassis de Dijon Case 102/78 Rewe Zentrale v. Bundesverwaltung fu¨r Branntwein (1979) ECR 649 The plaintiff applied to the Federal Monopoly Administration for Spirits for authorization to import the product in question. The German Authority informed the plaintiff that, because of its insufficient alcoholic strength, the said product did not have the characteristics required in order to be marketed within the Federal Republic of Germany. German law lays down that the marketing of fruit liqueurs such as Cassis de Dijon is conditional upon a minimum alcohol content of 25 per cent, whereas cassis, which is freely marketed in France, is between 15 and 20 per cent. The plaintiff takes the view that the fixing of a minimum alcohol content excluded well-known spirits products from other member states from being sold in Germany, therefore the said provision constitutes a restriction on the free movement of goods. In their view it is a measure having an effect equivalent to a quantitative restriction on imports contrary to Art. 30 of the EEC Treaty (today the EU Treaty).

Usually there is a contract between two parties which cannot be executed because national legislation of one member state sets boundaries to contractual agreements and prevents the parties from exporting or importing goods and services across the borders.2 On 20 February 1979, the ECJ decided the case that became famous as Cassis de Dijon (Box 5.1). What can legal history and comparative law contribute to a case which seems to be rather detached from this approach and is deeply rooted in the law on market freedoms? Cassis de Dijon triggered an endless flow of references to the ECJ. The key question in all these cases is whether and to what extent member states’ legislation legitimately bars free trade or should it give way to market freedoms. This is the essence of the so-called market rationality test: member states have to show that such restrictions are ‘reasonable’.3 Cassis de Dijon begs the question whether and to what extent market rationality forms part of the common foundations, whether all member states share the dominance of the market rationality or whether market rationality is part and parcel of a ‘new European legal culture’, one that the ECJ developed and which reached beyond the common foundations?4 This is the historical dimension. But where is the comparative dimension? Cassis de Dijon is a French-German case; the Advocate General Capotorti was Italian and the judges came from the then nine member states. The court reveals a particular understanding of the interaction between private 2

3

4

G. Davies, ‘Freedom of contract and the horizontal effect of free movement law’, in D. Leczykiewicz and S. Weatherill (eds.), The Involvement of EU Law in Private Law Relationships (Oxford: Hart, 2013), pp. 53–70. M. Bartl, ‘Internal market rationality, private law and the direction of the Union: resuscitating the market as the object of the political’ (2015) 21(5) European Law Journal 572–98. M. Hesselink, ‘The new European legal culture’, in M. Hesselink (ed.), The New European Private Law: Essays on the Future of Private Law in Europe (Alphen aan den Rijn: Kluwer Law International, 2002), pp. 11–75.

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112 BOX 5.2

F. Wieacker, Voraussetzungen europa¨ischer Rechtskultur (Go¨ttingen: Go¨ttinger Tageblatt, 1985) trans. by E. Bodenheimer as ‘Foundations of European legal culture’ (1990) 38 The American Journal of Comparative Law 1–29 R. La Porta, F. Lopez-de-Silanes, A. Shleifer and R. W. Vishny, ‘Law and finance’ (1998) 106(6) Journal of Political Economy 1113–55 R. La Porta, F. Lopez-de-Silanes, A. Shleifer, ‘The economic consequences of legal origins’ (2008) 46(2) Journal of Economic Literature 285–332

freedoms to conclude contracts and the legitimacy of regulatory intervention to limit freedom of contract. What about the differences between national laws on spirits, on the consumption of alcohol and what of their different habits, traditions and cultures? If the member states can maintain their laws legal diversity prevails; if they have to abolish them, European market rationality wins and competition will decide the availability of goods and services in the common market. Therefore, Cassis de Dijon embraces both dimensions: legal history and comparative law.5 Last but not least, the judgment is not only relevant for the European Union and European legal scholarship alone, but for the much broader discourse on transnational law.6 The European Union stands for a particular market model that is promoted through the bilateral agreements it concludes with non-member states. Underneath the promotion of free trade there is the implicit conviction that private law rules are the appropriate tools to execute the arrangements between private parties (Chapters 25–27). II The three texts to be discussed are classics in the field, although they do not seem to be connected to each other (Box 5.2). Franz Wieacker’s work ‘Foundations of European legal culture’7 sums up many decades of research on the history of private law in the modern age with a focus on European legal culture. Wieacker adheres to the tradition of ius commune, to a concept of law united in a European legal culture, which represents the deeper foundation of European integration. As counterpart to Wieacker’s large-scale project of a European legal culture, the esteemed reader might expect one of the classics of comparative law. Here I can only point to Chapter 23. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Schleifer and Robert W. Vishny (LLSV) 5

6

7

See contributions on Cassis de Dijon in M. Maduro and L. Azoulai (eds.), The Past and the Future of EU Law: The Classics of EU Law Revisited on the 50th Anniversary of the Rome Treaty (Oxford: Hart, 2010), pp. 433–74. R. Michaels, ‘Comparative law’, in J. Basedow, K. J. Hopt, R. Zimmermann and A. Stier (eds.), Max Planck Encyclopedia of European Private Law, vol. 1 (Oxford: Oxford University Press, 2012), pp. 297–301. F. Wieacker, Voraussetzungen europa¨ischer Rechtskultur (Go¨ttingen: Go¨ttinger Tageblatt, 1985); trans. by E. Bodenheimer as ‘Foundations of European legal culture’ (1990) 38 The American Journal of Comparative Law 1–29. The quotes of the text derive from the English and not from the German version.

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instead enclose and combine legal history and comparative law. The texts can be assigned to the line of research called LOT, i.e. legal origin theory, which revolutionized comparative law.8 The distinction between legal families is instrumentalized by LLSV, here between common law and Continental private law, for an economic analysis of legal orders. The historical origins of a legal system are claimed to shape the economic order and thereby influence the opportunities for future growth. This is the opposite of Marxist social theory.9 Whereas ius commune highlights European commonalities beyond the moats of Continental European private law and common law,10 LOT turns the proclaimed differences between Continental and common private law into the central parameter of analysis. This would mean there is not one but a number of different market rationalities. The political and academic discourse highlights the particular context of the two texts. The European-centred legal history, still dominant at the time Wieacker wrote his article, is no longer mainstream. There is an ongoing debate on putting the European legal history into a broader global context. Comparative law was revitalized by LOT which led to a broad range of approaches in search for a theory and a methodology that reaches beyond the functional method enshrined in the legal family thinking. Quite necessarily, this backfires to LOT. These ramifications can be traced in the subsequent writings listed in Box 5.3.

b theories, context and discussion I Comparative law and legal history are an unequal pair. Whereas comparative law benefits from the reference to legal history, even relies on it, the relationship cannot be seen as reciprocal. Serious comparative legal scholarship requires knowledge of the historical context of the private law system in question, background information on the legal, but also on the socio-economic environment, on the constitution and, last but not least, knowledge of the language of the relevant country. Reference to legal history is an intrinsic part of comparative law; every analysis remains lifeless without it. The founding fathers of modern comparative law, Ernst Rabel,11 Rene´ David,12 Konrad Zweigert and Hein Ko¨tz,13 the thinking in legal families and the 8

9

10

11 12

13

Presentation of the different currents of LOT with print of original texts, S. Deakin and K. Pistor (eds), Legal Origin Theory (Cheltenham: Edward Elgar, 2012); J. Lieder, ‘Legal Origins und empirische Rechtsvergleichung’ (2010) 109 Zeitschrift fu¨r Vergleichende Rechtswissenschaft 216–64. In that sense P. Lele and M. Siems, ‘Shareholder protection: a leximetric approach’ (2007) 7 Journal of Corporate Law Studies 17–50; Lieder, ‘Legal Origins’, at 256, but for an attempt to give law a position in Marxist theory E. Pashukanis, The General Theory of Law and Marxism (1924). R. Zimmermann, ‘“Heard melodies are sweet, but those unheard are sweeter. . . ”: condicio tacita, implied condition und die Fortbildung des europa¨ischen Vertragsrechts’ (1993) 193 Archiv fu¨r die civilistische Praxis 121–73. E. Rabel, Das Recht des Warenkaufs. Eine rechtsvergleichende Darstellung (Berlin: De Gruyter, 1936). R. David, Traite´ e´le´mentaire de droit civil compare´: introduction a` l’e´tude des droits e´trangers et a` la me´thode comparative (Paris: Librairie Ge´ne´rale de Droit et de Jurisprudence, 1950). K. Zweigert and H. Ko¨tz, Einfu¨hrung in die Rechtsvergleichung auf dem Gebiete des Privatrechts, 1st ed. (Heidelberg: Mohr Siebeck, 1971).

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114 BOX 5.3

B. R. Cheffins / S. A. Bank / H. Wells, ‘Law and history by numbers: use, but with care’ (2014) 5 University of Illinois Law Review 1739–64 T. Duve, ‘European Legal History: Global Perspectives’, Max Planck Institute for European Legal History Research Paper Series no. 2013–06 G. Frankenberg, Comparative Law as Critique (Cheltenham: Edward Elgar, 2016) J. Husa, A New Introduction to Comparative Law (Oxford: Hart, 2015) U. Kischel, Comparative Law (Oxford: Oxford University Press, 2019) R. Michaels, ‘Comparative law by numbers? Legal origins thesis, doing business reports, and the silence of traditional comparative law’ (2009) 57 American Journal of Comparative Law 765–95. O. More´teau / A. Masferrer / K. A. Mode´er, Comparative Legal History (Cheltenham: Edward Elgar, 2019) G. Schnyder / M. Siems / R. Aguilera, ‘Twenty Years of “Law and Finance”: Time to Take Law Seriously’, Centre for Business Research, University of Cambridge, Working Paper No. 501, 2018 M. Siems, Comparative Law (2nd ed., Cambridge: Cambridge University Press, 2014)

functional method, all bear witness to the necessity to include legal history.14 The critics of functionalism, however, put legal history, legal tradition and legal culture into a much more prominent position. Gunter Frankenberg15 attacks the political economy of the functional method as serving Western capitalist economies; Pierre Legrand16 insists on differences between legal cultures and challenges the feasibility of any comparison between legal systems. This principled critique has shifted the focus towards the search for an appropriate methodology that could cope with the tension between similarity and difference. Despite all the theoretical and conceptual differences, the ¨ ru¨cu¨, David Nelken, Geoffrey Samuel, Mathias Siems critique of Jaakko Husa, Esin O 17 and Jan Smits on the functional method ends in a strong plea for giving history, tradition, culture, as well as the economic and political context a much more prominent position. Such an approach takes difference seriously, but does not exclude legal transfer

14

15

16

17

On the emancipation of comparative law from legal history S. Vogenauer, ‘Rechtsgeschichte und Rechtsvergleichung um 1900. Die Geschichte einer anderen “Emanzipation durch Auseinanderdenken”’ (2012) 76(4) Rabels Zeitschrift fu¨r ausla¨ndisches und internationales Privatrecht 1122–54. G. Frankenberg, ‘Critical comparisons: re-thinking comparative law’ (1985) 26(2) Harvard International Law Journal 411–56; G. Frankenberg, Comparative Law as Critique (Cheltenham: Edward Elgar, 2016). P. Legrand, ‘The same and the different’, in P. Legrand and R. Munday (eds.), Comparative Legal Studies: Traditions and Transitions (Cambridge: Cambridge University Press, 2003), pp. 240–311. ¨ ru¨cu¨ and D. Nelken, Comparative J. Husa, A New Introduction to Comparative Law (Oxford: Hart, 2015); E. O Law: A Handbook (Oxford: Hart, 2007); G. Samuel, An Introduction to Comparative Law: Theory and Method (Oxford: Hart, 2014); M. Siems, Comparative Law, 2nd ed. (Cambridge: Cambridge University Press, 2014), pp. 11–94; J. Smits (ed.), Elgar Encyclopedia on Comparative Law, 2nd ed. (Cheltenham: Edward Elgar, 2012).

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(on legal transfer, see Chapter 23).18 Despite these commonalities, there seems to be a deep gulf between those who theorize about comparative law and those who practise private law.19 But is the opposite also true? How important is comparative law to legal history? Does legal history rely on comparative law? Are both fields inseparably linked with each other? Do they only illustrate different tasks, roles and functions of private law? Legal history investigates how legal rules were created and implemented. Comparative (private) law is to be located much more on the side of legal politics as a tool to prepare legislation rather than a method used by courts in the interpretation of national, European or international rules. This does not mean that the advocates general engage in a deeper comparative analysis of national legal orders in the preparation of their opinions, in particular when it comes to the interpretation of secondary EU law.20 If anything, comparative law helps to develop a general theory of law.21 The relationship between legal history and comparative law matters, as demonstrated by the discussion on the feasibility of a European Civil Code in the 1990s and the early 2000s. A European Civil Code would harmonize national contract laws and provide for common rules to govern transborder trade. Seen through the lens of Cassis de Dijon, a European Civil Code would need to comply with and mirror the market rationality doctrine. On the occasion of the 29th German Legal Historians’ Day (Deutscher Rechtshistorikertag) in Cologne, prior to the discussion on a European Civil Code, Reinhard Zimmermann made a powerful plea for ius commune as a basis and source of knowledge of European private law – Continental and common law – and argued vehemently against codification.22 His firm position has provoked determined resistance, both with regard to the revitalization of the ius commune23 and the proclaimed understanding of the relationship between legal history and comparative law.24

18

19

20

21 22

23

24

J. Husa, Advanced Introduction to Law and Globalisation (Cheltenham: Edward Elgar, 2018), section 3. Under reference to N. Walker, he argues that global trends can promote convergence or divergence. J. Vanderlinden, ‘An introduction to comparative law theory and method’ (2015) 8(1) Journal of Civil Studies 355–66, reviewing Samuel, An Introduction to Comparative Law. V. Trstenjak can certainly be granted the attribute of being the founding mother of European private law as her opinions are usually built on deep comparative analyses. Michaels, ‘Comparative law’. Zimmermann, ‘Heard melodies’. See also M. Reimann and R. Zimmermann (eds.), The Oxford Handbook of Comparative Law (Oxford: Oxford University Press, 2006, 2nd ed. 2019) and M. Schmoeckel, R. Zimmermann, J. Ru¨ckert and F. L. Scha¨fer, Historisch-kritischer Kommentar zum BGB (Historically Critical Commentary to the German Civil Code), vols. 1, 2 and 3 (Heidelberg:Mohr Siebeck, 2003, 2007, 2013); https://bit.ly/2DhcKjv. From the perspective of legal historians, as well as from the point of view of legal theory, see contributions in 12 Rechtshistorisches Journal (1993), from: W. Wiegand, ‘Back to the future?’ 277–84; A. Padoa Schioppa, ‘Storia e diritto europeo’ 285–91; A.-J. Arnaud, ‘L’e´ternel retour, ou les re´manences en droit de la paix romaine a` l’unite´ europe´enne’ 292–6; S. Simits, ‘Fu¨r eine europa¨ische Rechtskultur’ 297–306; F. Ku¨bler, ‘Traumpfade oder Holzwege nach Europa?’ 307–14; D. Simon, ‘Ro¨misches Europarecht’ 315–31; M. Stolleis, ‘Dienstleistungspflichten?’ 322–5; T. Giaro, ‘Europa und das Pandektenrecht’ 326–45. D. Heirbaut, ‘Comparative law and Zimmermann’s new ius commune: a life line or a death sentence for legal history? Some reflections on the use of legal history for comparative law and vice versa’ (2005) 1 Fundamina: A Journal of Legal History at 152:

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However, the political and academic discourse has changed dramatically since the early 1990s. The member states have never wholeheartedly supported the idea promoted by the European Parliament and later on pushed by the European Commission. In the end, six of them blocked the adoption of a Common European Sales Law (CESL – the remainder of the codification project), shortly after the two referenda in France and the Netherlands had put an end to the idea of a European Constitution.25 In comparative law, the academic discourse shifted from highlighting similarity (functionalism) to highlighting difference, from comparative private law (emphasis on private) to comparative law (emphasis on law, public and private, law and non-law).26 Research interests had moved on from the European to the international level, from a Western rather stable and uniform understanding to diversity between those who do comparative law in practice and the more theoretical-methodological debate. A similar development is about to take place in legal history. In 2009, members of comparative law and legal history networks established the European Society for Comparative Legal History ‘out of frustration with the narrow nationalism and geographical segregation of legal history in contemporary European scholarship’. These are the opening words in the preface to the journal of Comparative Legal History founded in 2013.27 T. Duve28 does not use such a strong language, but advocates a change in perspective; from Europe-centred legal history to Europe’s legal history in the world. Six years later Olivier More´teau, Aniceto Masferrer and Kjell A. Mode´er edited their handbook on comparative legal history.29 The critique against comparative law and legal history shares a common denominator: the explicit and implicit understanding that European history and European comparative law (emphasis on European) cannot serve as the core and starting point of the respective disciplines. It seems as if both legal communities were split into the traditionalists and their critics.

25

26

27 28

29

comparative law has nothing to offer to legal history, but the opposite is not true. Comparative lawyers are great consumers of legal history. In fact many leading comparatists started out as legal historians, but there are no comparative lawyers who later in their careers became legal historians and herein lies the danger of Zimmermann’s plea for comparative legal history. If legal history and comparative law were joined, the legal historians will give and the comparative lawyers will take. H.-W. Micklitz, ‘Failures or ideological preconceptions? Thoughts on two grand projects: the European Constitution and the European Civil Code’, in K. Tuori and S. Sankari (eds.), The Many Constitutions of Europe (Farnham: Ashgate, 2010), pp.109–42. The changing programme of the Max-Planck Institute for European Legal History in Frankfurt is paradigmatic: H. Coing put the emphasis on private law, M. Stolleis shifted the focus to public law. See T. Duve, ‘Von der Europa¨ischen Rechtsgeschichte zu einer Rechtsgeschichte Europas in globalhistorischer Perspektive’ (2012) Rechtsgeschichte 18–71, where he reconstructs the key role of H. Coing and his understanding of legal history as private law history; shortened English version: T. Duve, ‘European legal history – global perspectives’, Max Planck Institute for European Legal History Research Paper Series no. 2013–06. See also M. Bussani, ‘Strangers in the law: lawyer’s law and the other legal dimensions’ (2019) 40 Cardozo Law Review 3125–84, stressing the need to include non-law in the comparative analysis. S. P. Donlan and A. Masferrer, ‘Preface’ (2013) 1(1) Comparative Legal History, at iii. T. Duve, ‘European legal history’, at 23: ‘I believe that European legal history needs to deliberate on the way we construct the spatial framework for our research without denying our positionality.’ O. More´teau, A. Masferrer and K. A. Mode´er, Comparative Legal History (Cheltenham: Edward Elgar, 2019). The editors have laid down their credo in the introductory chapter ‘The emergence of comparative legal history’, pp. 1–28.

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The origins of LOT can be traced back to law and economics, which has its own origins in the 1960s/1970s.30 The collapse of communism and the fall of the Berlin Wall took political and academic attention away from the differences between communism and capitalism.31 After ‘the end of history’,32 the diverging forms of capitalism gained academic attention. The varieties of capitalism and the potential impact on private law theory are discussed in Chapter 22. The rather traditional classification of legal systems into legal families is taken for granted by LOT (David,33 Rabel, Zweigert and Ko¨tz), and it refers explicitly to the parameters that Zweigert and Ko¨tz (alongside others) have claimed to be essential for the assignment of a legal system to a legal family.34 In two respects, LOT differs from functional comparative law:35 first, the empirical/statistical method serves the elaboration of differences between the legal families, and second, the emphasis is laid on the country’s economic performance. The result produced an outcry in comparative law: common law countries were found to outperform Continental law countries; LOT had caught the representatives of traditional functional comparative law ‘red-handed’.36 The third edition of Zweigert and Ko¨tz was published in 1996, LLSV’s groundbreaking article two years later. Legal origin theory certainly contributed to the reorientation of comparative law theory and method and earned it international relevance. Some of the authors were involved in the World Bank study ‘Doing Business’. What is inherent to LOT is also openly instrumentalized in ‘Doing Business’ for political purposes. The common law system is said to be more efficient; economically it underpins neoliberalism, politically it provides arguments against state intervention; in EU language, LOT promotes the dominance of market integration over social regulation and thereby legitimizes the prominence of market rationality. Interestingly, there are efforts to rehabilitate the functional method, if not the thinking in terms of legal families, albeit in a modified form. Uwe Kischel37 discusses extensively the relationship between comparative law and comparative politics, the objections and limitations of comparative law; similarly to Siems, he pleads for ‘comparative law in context’.38 Beth Ahlering and Simon Deakin have demonstrated how a refined approach

30

31

32 33 34

35

36

37 38

A. T. F. Lang, ‘The legal construction of economic rationalities?’ (2013) 40(1) Journal of Law and Society 155–71. However, LOT does not integrate institutional economics which is why institutions are not comprehensively analysed, see Chapter 3 on the different strands in law and economics. On the link to ‘law and development’ see R. Michaels, ‘Make or buy: a public market for legal transplants?’, in H. Eidenmu¨ller (ed.), Regulatory Competition in Contract Law and Dispute Resolution (Oxford: Hart, 2013), p. 29. F. Fukuyama, The End of History and the Last Man (New York: Free Press, 1992). R. David, Les grands syste`mes de droit comtemporains (Paris: Dalloz, 1969). In the English version p. 68, quoted according to R. La Porta, F. Lopez-Silanes and A. Schleifer, ‘The economic consequences of legal origins’ (2008) 46(2) Journal of Economic Literature, at 287–8. J. Husa, ‘Comparative and economic approaches to law: a tale of willful misunderstanding?’ (2012) 1(1) Comparative Legal History 105–24, at 113. Husa, ‘Comparative and economic approaches’, at 112: ‘the novel use of age-old macro-constructs by LOT certainly caught legal comparatists and legal historians off-guard’. U. Kischel, Comparative Law (Oxford: Oxford University Press, 2019), in particular chapters 1–3, pp. 3–200. M. Siems, Book review of Rechtsvergleichung (U. Kischel) (2017) 65 American Journal of Comparative Law 462–5, at 464, fn. 10.

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leads to institutional complementarity.39 German legal doctrine welcomes Kischel’s book enthusiastically as the new gold standard,40 while the critics of the functional method would certainly disagree. Catherine Valcke41 advocates a three-part methodology sequentially addressing the start-up (identifying), dialectical (in comparison to others) reconstruction and overall proportional comparison ‘insofar as it involves the various systems under comparison being measured against their own standards, the standards each system sets for itself on the inside’. Her approach is that of all those comparative lawyers seeking a way out of the clash between traditionalists and theorists. II Franz Wieacker is one of the founders of the idea of a common European legal culture, which was meant to hold together the legal orders of the European state after World War II. To invoke the words of Kaius Tuori: these founders were ‘the exiles and the outcasts, those who were driven from their posts (Fritz Schulz, Fritz Pringsheim, Paul Koschacker) and the collaborators and bystanders, who either thrived in the new circumstances under the Nazis or managed to remain outside controversies (Franz Wieacker and Helmut Coing)’.42 The pillars of this legal culture, which was proclaimed after World War II, are seen, by Kaius Tuori, in ‘the rule of law’, ‘law as a science’ and ‘law independent from political power’.43 The exiles and the outcasts build a particular narrative of European legal history that combined the legacy of the Nazi regime with the post-war needs and desire to return to the historical commonalities of the European legal culture as a building block for the envisaged European integration. The look into the past to build Europe’s future out of World War II came under attack from various perspectives. Christian Joerges and Navraj Singh Ghaleigh point to the ‘darker legacy of law in Europe’,44 Thomas Duve45 to the debatable concept of European legal culture that sets aside the colonial past and the legal 39

40

41

42

43

44

45

B. Ahlering and S. Deakin, ‘Labor regulation, corporate governance, and legal origin: a case of institutional complementarity’ (2007) 41(4) Law and Society Review 865–908, at pp. 872 and 876 (table of complementarities). G. Frankenberg, ‘“Rechtsvergleichung”: A new gold standard?’ (2016) 76 Zeitschrift fu¨r ausla¨ndisches o¨ffentliches Recht und Vo¨lkerrecht 1001–21, referring to P. Mankowski, Book review of Rechtsvergleichung (U. Kischel) (2016) 69 Neue Juristische Wochenschrift 1644. C. Valcke, Comparing Law: Comparative Law as Reconstruction of Collective Commitments (Cambridge: Cambridge University Press, 2018), p. 190. Kaius Tuori, Reinventing the Foundations of European Legal Culture 1934–1964, ERC Start Grant 2013–2018. The quote derives from the contribution which Kaius Tuori kindly put at my disposal: http://blogs .helsinki.fi/found-law/researchers/kaius-tuori/; see also Kaius Tuori, Lawyers and Savages: Ancient History and Legal Realism in the Making of Legal Anthropology (New York: Routledge, 2015). Even more outspoken: Kaius Tuori, ‘Narratives and normativity’, at 632: ‘the true hero of the study is the autonomous legal science of jurists’; similar T. Duve, ‘European legal history’, at 4, under reference to P. Grossi. C. Joerges, ‘Europe a Großraum? Shifting legal conceptualisations of the integration project’, in C. Joerges and N. S. Ghaleigh, Darker Legacies of Law in Europe: The Shadow of National Socialism and Fascism over Europe and its Legal Traditions (Oxford: Hart, 2003), pp. 167–91. But see already J. Laughland, Tainted Source: The Undemocratic Origins of the European Idea (London: Little, Brown, 1998). T. Duve, ‘European legal history’, at 12–13, on F. Wieacker; at 14–19, on the arguments against the dominating Eurocentris; at 22, on the chances of cultural translation.

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and cultural exchange between the colonies and Europe. I am highlighting the limits of a concept that does not carry the idea of a European constitution or a European Civil Code.46 Wieacker initiates his analysis by denoting law as a social system of rules, which becomes valid by law enforcement, even by force, but which depends equally on the inner acceptance of the people to whom it is addressed.47 This does not mean that Wieacker is not open to transformations in the economy and the society (see in particular Chapter 10). He deviates from a formalist and positivist understanding of law that had provoked criticism on the other side of the Atlantic and that was the dominant position in private law doctrine when he wrote A History of Private Law in Europe in 1952/1967. Karl Llewellyn and Jerome Frank, as representatives of so-called American legal realism, had already opposed the excessive and exaggerated importance attached to written law in the application of the law. The harshest criticism had come from the critical legal studies (CLS) movement.48 Law is undetermined, often inconsistent and bent by ideological differences between judges. Duncan Kennedy has described the constantly changing attitude of American lawyers – and probably also of American society – towards law in the following colourful words: ‘American critical legalism is an odd combination of utter faith and utter distrust in law.’49 Wieacker’s book predates the CLS movement and he could not integrate this kind of critique into his broad intellectual panorama of the history of private law in Europe. Instead, he provides a definition of legal culture which will guide us through the following pages: ‘when we talk about a legal culture . . . we have nothing more in mind than an understanding of human affairs, an ability to deal with concepts, and fundamental value judgments that underlie, at a given time, the historical legal systems or groups of legal systems’.50 This apostrophized legal culture ranges to the Americas, to Australia, New Zealand and South Africa, to Russia, Turkey and the Balkans. It corresponds essentially to Judeo-Christian culture,51 as it was delivered and transplanted by the colonial powers to the world, co-opted by Peter the Great for the Russian Empire or integrated in former vassal states after the dissolution of the Ottoman Empire. The Schumann Declaration of 9 May 1950,52 on which the Treaty of Rome builds, breathes ‘European messianism’ (Joseph Weiler), the promotion of ‘the Enlightenment and 46

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H.-W. Micklitz, The Politics of Justice in European Private Law (Cambridge: Cambridge University Press, 2018), pp. 38–41, 251–8. Wieacker, ‘Foundations of European legal culture’, at 3–4, which resonates with the approach of H. L. A. Hart, The Concept of Law (Oxford: Oxford University Press, 1961). ‘Critical Legal Studies Symposium’ (1984) 36 (1/2) Stanford Law Review, in particular 206–7, 577–8; R. Unger, The Critical Legal Studied Movement (Cambridge, MA: Harvard University Press, 1986). D. Kennedy, ‘The paradox of American Critical Legalism’ (1997) 3(4) European Law Journal 359–77; a reprint from D. Kennedy, A Critique of Adjudication (Cambridge, MA: Harvard University Press, 1997), pp. 73–96. Wieacker, ‘Foundations of European legal culture’, at 4. Wieacker, ‘Foundations of European legal culture’, at 6; for such a broad understanding see, in particular, J. H. H. Weiler, Ein christliches Europa: Erkundungsga¨nge (Salzburg, Munich: Anton Pustet Verlag, 2004). The Schuman Declaration is available on the website of the Robert Schuman Foundation at: www.robertschuman.eu/en/declaration-of-9-may-1950; although there is no explicit reference to the common European culture.

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the heritage of the French Revolution and European Christian tradition’.53 The perspective is outward-looking, from the European Union to the rest of the world. It includes neither the degree to which the transplants were successfully integrated, nor the potential backflow from the colonies towards Europe. The underlying causes can be attributed to the common Roman and canon law, which combines Continental European law with common law and which manifested itself, even after the creation of the Anglican church by Henry VIII, in an extensive intellectual exchange of ideas by leading philosophers.54 This line of thought was underlined and supported by Zimmermann in his lecture at the Legal Historians’ Day.55 Wieacker even goes to such lengths as to suggest that the Marxist-Leninist October Revolution and the introduction of socialist law cannot erase the common origins of intellectual history (discussed more cautiously in Chapter 23), nor can Hegel, as the point of departure for thinking on dialectic materialism. This assessment is surprising insofar as it contains the implied suggestion that the export of law to the colonies succeeded seamlessly56 and that the extensive codifications of private law since the French Revolution have – despite all their differences – not changed the deeper layers of European legal culture. Such an understanding is diametrically opposite to the idea of legal families that LOT exploits. The elaboration of the European legal culture – Wieacker speaks of constants and invariables – is carried out in two steps. First, Wieacker provides the reader with a highly compressed and extremely dense summary of his modern history of private law – 500 pages merged into one single paper. Wieacker distinguishes four crucial periods. The early Middle Ages are characterized by the Latin church taking over a range of responsibilities from the Roman Empire: education, power and jurisdiction, the relationship between law and public (divine) authority, crucial for the development of a jus commune.57 The second, the high-medieval period, started with the thunderbolt of Pandect law, the revitalization of Roman law in the School of Bologna, the creation of a genuine European identity – Harold J. Berman speaks of a Western legal tradition58 – and the professionalization of the legal profession (lawyers’ commitment to legality). The third epoch is called the early-modern period, lasting until the end of the Ancien Re´gime in 1789. This epoch was characterized by the turning away from divine law and the change of direction towards natural law (Descartes) and empiricism. This natural law influenced and caused the Glorious Revolution in the seventeenth century in England and the enlightened absolutism of the Prussian tradition (Voltaire and Friedrich II) in the

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J. H. H. Weiler, ‘Deciphering the political and legal DNA of European integration: an exploratory essay’, in J. Dickson and P. Eleftheriadis (eds.), Philosophical Foundations of European Union Law (Oxford: Oxford University Press, 2012), pp. 137–58, at p. 147. Wieacker, ‘Foundations of European legal culture’, at 7. E. Bodenheimer agrees and refers in fn. 6 of his translation (at 6–7) to W. Holdsworth, A History of English Law, 4th ed. (London: Methuen, Sweet and Maxwell, 1936), pp. 140–1, 176–7, 202–6, 267–8. T. Duve draws a much more nuanced picture, pointing in particular to the mutual effects of the export of law. See T. Duve, ‘European legal history’. Wieacker, ‘Foundations of European legal culture’, at 11–12. H. J. Berman, Law and Revolution: The Formation of the Western Legal Tradition (Cambridge, MA: Harvard University Press, 1983), which is criticized by E. Bodenheimer for somewhat downplaying canon law’s influence, fn. 10 (at 9).

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eighteenth century.59 The modern age is said to have begun with the French Revolution and lasts to this day. In the mid-1980s, when the article was written, there were no mentions of the so-called postmodern age. The modern age entails the nation state, the codification of private law in Continental Europe, the division of responsibilities between state and economy which is shaped by the entrepreneurial bourgeoisie with the help of private law. In his reconstruction of legal history, Wieacker is not only interested in the deep cultural foundations of private law in Europe, he is also and in particular interested in the social transformations that occurred in the modern age (Chapter 10). It is only towards the end of the nineteenth century, with the phenomenon of the Industrial Age and the emergence of a working class, that the deficits of a private law which aims at formal equality, become visible. The social question (Kennedy)60 becomes more and more important and is tackled with completely different responses, by utilitarianism (Jeremy Bentham), by the ‘purpose in law’ (Rudolf von Jhering), by the theory of free law (Hermann Kantorowicz), by American and Scandinavian legal realism, finally by Marxist legal theory. Law becomes a question of justice; of redistribution. Social solidarity, in the sense of social rights designed to protect the weaker parts of society, is introduced into legislation, although usually not as part of extensive codification projects (see Chapters 6 and 9). This outline of nearly 2,000 years of European legal history can only be fully understood by a determined reading of the complete modern history of private law. Wieacker uses the look into the past to highlight the invariables of the historical development, which he considers to be represented by the three constants of European legal culture: personalism, legalism and intellectualism.61 Wieacker’s common European legal culture carries an ontological dimension.62 Personalism describes the separation of subject and object, the theoretical conception of the human relation in the ‘opposite’ and not in the ‘we’, which Wieacker traces back to Judaism and Christianity, in which the human knows only one God, and considers himself as ‘I’ towards the demanding and granting ‘you’. The religious experience is the birthplace of the ultimate liberty of the decision of the ‘I’, which correlates with personal responsibility as an answer to the demanding and granting ‘you’.63 Personalism manifests itself in the conception of law, particularly in private law, in the idea of liberty and self-determination instead of magic or collective compulsion. Here are the origins for the reason-based freedom of will, the autonomy of decision and private autonomy (Chapter 6). In ‘I vs. You’, in ‘Rights vs. Obligations’, and in ‘Autonomy vs. Responsibility’, there is a tension which has kept the European legal and political philosophy in suspense ever since. Edgar Bodenheimer’s comment on the conflictual relationship between republicanism and 59 60

61 62

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Wieacker, ‘Foundations of European legal culture’, at 16. D. Kennedy, ‘Three globalisations of law and legal thought: 1850–2000’, in D. M. Trubek and A. Santos (eds.), The New Law and Economic Development: A Critical Appraisal (Cambridge: Cambridge University Press, 2006), pp. 19–73. Wieacker, ‘Foundations of European legal culture’, at 20. T. Duve, ‘European legal history’, at 12–13 (ensemble of ideal types – M. Weber); see also M. Avenarius, ‘Verwissenschaftlichung als sinnhafter Kern der Rezeption: eine Konsequenz aus Wieackers rechtshistorischer Hermeneutik’, in O. Behrens and E. Schumann (eds.), Franz Wieacker: Historiker des modernen Privatrechts (Go¨ttingen: Wallstein Verlag, 2010), pp. 119–80. Wieacker, ‘Foundations of European legal culture’, at 20–1.

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liberalism, between ‘individual rights theory’ and ‘public interest thinking’,64 is instructive and illuminating; a debate which has been gaining ever more importance in the European integration process, since the increasingly strong orientation towards individual rights in Europe’s construction provokes counter-reactions which proclaim the priority of the public interest over individual rights65 (on the transformation of individual rights see Chapter 18). According to Wieacker, legalism, the second invariable of European legal culture, is easier to explain. Legalism is the conviction that decisions about social relations and conflicts have to be submitted to rules of law, the validity and acceptance of which does not depend on external moral, social and political values or purposes. Law and legal rules are separated from other social rules and values, among which feature religious convictions, moral imperatives, habits and customs. Wieacker traces this separation of law and morality back to the development of a dedicated professional administration in Ancient Rome. Thomasius and Kant have reshaped this tradition for the Modern Age. Legalism considers social obligations, rights and privileges as objectified legal rules, far away from any kind of arbitrariness. Legalism in private law manifests itself in the transition from ‘status to contract’.66 Wieacker is not out of touch with reality. He recognizes and broaches the issue of the downside of legalism, which sacrifices material moral concepts, social rights and, last but not least, justice for the sake of formal rationality of law. It is more in ‘A History of Private Law’ (Privatrechtgeschichte der Neuzeit) than in ‘Foundations of European Legal Culture’ (Voraussetzungen einer europa¨ischen Rechtskultur) that Wieacker deals thoroughly with such antinomies and justifies the necessity of correcting formal law with the help of general clauses, judicial interpretation of law by judges and the legislative corrections expected by the legal authority.67 In the private law beyond the nation state, legalism loses ground and private regulation as well as contract governance gains ground (Chapters 23, 25, 26). The third invariable in the shaping of European intellectualism refers to the particular way in which the phenomenon of law is understood and interpreted: as epistemological idealism, as European cognitive thinking aiming at focusing, conceptualization and unambiguous consistency of the empirical legal material.68 According to this line of thinking, codification of private law appears to be the crowning glory of European intellectualism.69 A lawyer from the common law system will have difficulties following Wieacker, even if common law is – despite all its differences – orientated towards inner consistency and systematic structures. The formal side of European intellectualism is balanced by the idea of justice. Wieacker considers Aristotle’s Nicomachean Ethics, the 64

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Wieacker, ‘Foundations of European legal culture’, at 22, fn. 27; M. Horwitz, ‘Republicanism and liberalism in American constitutional thought’ (1987) 29(1) William and Mary Law Review 57–74; ‘Symposium: the republican civic tradition’ (1988) 97(8) Yale Law Journal 1493–723. D. Keleman, Eurolegalism: The Transformation of Law and Regulation in the European Union (Cambridge, MA: Harvard University Press, 2011). H. Maine, Ancient Law: Its Connection with the Early History of Society, and Its Relation to Modern Ideas (Cambridge: Cambridge University Press, 2013), p. 170. F. Wieacker, A History of Private Law in Europe, trans. by T. Weir (Oxford:Clarendon Press, 1995), part 6, ‘Private law and positivism in crisis’, in particular chapter 30, ‘The search for justice’, pp. 409–83. Wieacker, ‘Foundations of European legal culture’, at 25. Wieacker, ‘Foundations of European legal culture’, at 26 on its ‘ultimate triumph’.

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distinction between corrective and distributive justice, to be the cornerstone of European intellectualism. In his modern history of private law, Wieacker analyses the necessity of social justice in modern private law, along the lines of the Greek ideal of justice (on justice and private law see Chapter 11). Despite all the reservations against the origins and the political context brought forward against Wieacker’s trias, the three ideal types still unfold a considerable explanatory power. Whilst ‘common’, I argue that their importance varies with regard to the national private law order investigated. Personalism dominates the common law, just as legalism governs German private law and intellectualism directs French private law. The European private law, however, is more than an amalgam of the three. The common heritage does not suffice to build a European private law;70 Cassis de Dijon demonstrates a deep gulf. On the one hand, the judgment seems to go along with the values that are mostly associated with common law – market freedoms and personal autonomy; on the other hand, Cassis de Dijon shows that market rationality alone can legitimately guide neither the European integration process, nor the making and building of European private law. There is no market integration through market freedoms without social regulation. The Single European Act pays tribute to this insight, granting the European Union the competences to provide the internal market with a social face through labour, non-discrimination, consumer and environmental law. However, neither the Single European Act, nor the following Treaty Amendments empowered the European Union explicitly to adopt a European Civil Code. That is why European private law comes first and foremost in the form of social regulation. III The two texts concerning legal origins were written within ten years of each other. The first was published in the Journal of Political Economy71 in 1998 by LLSV under the soon-to-be classic title ‘Law and Finance’, the second in the Journal of Economic Literature in 2008 without participation of Vishny under the heading ‘The Economic Consequences of Legal Origins’.72 They introduced a now famous index of six shareholder protection rules, the ‘anti-director rights index’. The focus on ‘law and finance’ goes along with the changing economic and political circumstances over the last decades of the twentieth century. The catchword is financialization, the uncoupling of the financial sector from the rest of the economy.73 In order to contrast LLSV and Wieacker, however, the reader’s attention should be drawn to the rather universal methodology. Not only does the chosen method clearly show the convergences with, and differences from, traditional comparative law, but also, and in particular, to the idea of a common European legal culture. The 70 71

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Micklitz, The Politics of Justice, p. 168 R. La Porta, F. Lopez-de-Silanes, A. Shleifer and R. W. Vishny, ‘Law and finance’ (1998) 106(6) Journal of Political Economy 1113–55. R. La Porta, F. Lopez-de-Silanes and A. Shleifer, ‘The economic consequences of legal origins’ (2008) 46(2) Journal of Economic Literature 285–332. R. J. Shiller, Irrational Exuberance, 3rd ed. (Princeton, NJ: Princeton University Press, 2015); and J. Vogl, The Specter of Capital (Stanford, CA: Stanford University Press, 2015).

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differences between the common and the civil law are stressed by LLSV; Wieacker highlights the commonalities. In ‘Law and Finance’ LLSV seek explanations for the differences in shareholder protection rights. Why do Italian companies not go public, that is, on the stock market? Why has Germany got a relatively small stock market but huge and powerful banks (at least at the time of writing their article)? Why is the price difference between shares with a high proportion of voting rights and shares with a low voting interest small in Sweden and the United States, but much bigger in Italy and Israel? Why are the property shares of US and British businesses distributed at such lengths? LLSV aim at defining an analytical framework which explains these differences, which they find in comparative statistical analysis of the legal bases for business financing. They examine the differences in shareholder protection rules in forty-nine countries, how the quality of enforcement of these rights varies and whether these variations have an impact on business ownership. The starting point is the insight that laws in different countries are not crafted from scratch, but are the result of a complex transfer taking place, voluntarily through adaptation or involuntarily through conquest and colonialization, between legal orders. In their own words of 1998:74 ‘In general, commercial laws come from two broad traditions, common law which is English in tradition and Civil Law which derives from Roman Law’, adding later in 2008: ‘Legal Origin Theory traces the different strategies of common and civil law to different ideas about law and its purpose that England and France developed centuries ago.’75 This is exactly the opposite of what Wieacker and Zimmermann are arguing. A data record is defined by LLSV which allows a comparison of individual rules76 and they developed the anti-director rights index for coding legal orders:77 origin, one share-one vote, proxy by mail allowed, shares not blocked before meeting, cumulative voting or proportional representation, oppressed minority mechanism, preemptive rights, percentage of share capital to call an extraordinary shareholder meeting, anti-director rights, mandatory dividend, restriction for going into reorganization, no automatic stay on secured assets, secured creditors first, management does not stay, creditor rights, legal reserve, efficiency of judicial system, rule of law, corruption, risk of expropriation, repudiation of contracts for government, accounting standards, ownership of 10 largest private firms, GNP and GNP per capita, Gini coefficient.

On the basis of this data record, they analyse the rights of shareholders, the creditors’ rights, the enforcement of these rights, the ownership (owner). Their analysis concludes that common law countries provide for the strongest protection of shareholder rights, while civil law countries offer the weakest protection. Minority shareholders in Australia can vote via mail, can trade their shares at a shareholders’ meeting, 74 75 76

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La Porta, Lopez-de-Silanes, Shleifer and Vishny, ‘Law and finance’, at 1115. La Porta, Lopez-de-Silanes, Shleifer, ‘The economic consequences’, at 286. It is controversial among legal theorists whether such a comparison is plausible. Kelsen, for instance, famously argued that every legal norm is necessarily part of a larger legal system and it cannot be assessed in isolation; see H. Kelsen, Pure Theory of Law (Clark, NJ: The Lawbook Exchange, 2009), chapter 1. La Porta, Lopez-de-Silanes, Shleifer and Vishny, ‘Law and finance’, at 1122–5; see also Lieder, ‘Legal origins’, at 221.

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are protected against expropriation by the directors and need only 5 per cent of the votes to convene an extraordinary shareholders’ meeting. Minority shareholders in Belgium face the opposite situation with regard to these variables and LLSV trace these differences back to the respective affiliation to a legal family. In countries with a lower level of shareholder protection, a higher concentration of shares is in the hands of only a few people. The highest concentration can be found in Roman law countries, the lowest in Germanic countries. There is a correlation regarding the size of the economies; the bigger the economy, the smaller the concentration. LLSV conclude that highly concentrated ownership structures compensate for less pronounced protection of shareholders. Although LLSV refrain from assessing and ranking individual countries and economies, nevertheless, the analysis demonstrates a clear preference for the common law system compared to the Roman civil law countries. Their work paved way for many research projects, partly with the participation of other authors. Simon Deakin and Katharina Pistor, as well as Gerhard Schnyder, Mathias Siems and Ruth Aguilera provide for an impressive list of subject areas in which the developed method had been applied: rules about market access, labour market,78 media ownership structures, formal requirements for judicial procedures, level of independence of courts, public administration regimes, the informal sector and institutional trust.79 In the eyes of LOT, the findings sharpen overall the 1998 results and reinforce the superiority of common law:80 In all these spheres Civil Law is associated with a heavier hand of government ownership and regulation than Common Law. Many of these indicators of government ownership and regulation are associated with adverse impacts on markets, such as greater corruption, larger unofficial economy, and higher unemployment . . . in strong form we argue that Common Law stands for a strategy of social control that seeks to support private market outcomes, whereas Civil Law seeks to replace such outcomes with state-desired allocations. Civil Law is ‘policy implementing’ while Common Law is ‘dispute resolving’ (Mirjan R. Damsˇka, 1986). In the words of another, French Civil Law embraces ‘socially-conditioned private contracting’, in contrast to Common Law’s support for ‘unconditional private contracting’ (Katerina Pistor, 2006).

The preference for the common law is obvious as is the political message behind it. Increasing market freedoms and downgrading state intervention is the only way to promote economic growth. This seems to be in line with the rationale behind Cassis de Dijon. Member states are put under legal and political pressure to abolish statutory barriers to trade so as to increase the market freedoms of private actors. State intervention has to be 78

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Juan C. Botero, S. Djankov, R. La Porta, F. Lopez-de-Silanes and A. Shleifer, ‘The regulation of labour’ (2004) 119(4) Quarterly Journal of Economics 1339–82, but see the critique by Ahlering and Siems ‘Labor regulation, corporate governance, and legal origin’ at 880. References and overview S. Deakin and K. Pistor, ‘Introduction’, in Deakin and Pistor, Legal Origin Theory, pp. ix–xx; G. Schnyder, M. Siems and R. Aguilera, ‘Twenty years of “law and finance”: time to take law seriously’, Centre for Business Research, University of Cambridge, Working Paper No. 501, 2018, at 4 with a table of the major research projects. La Porta, Lopez-de-Silanes, Shleifer, ‘The economic consequences’, at 286 .

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the exception to the rule. If anything, the barriers need to be justifiable most prominently by reference to national social policy goals. Despite some overlap, the critique against LLSV can be broken down into three lines, first the choice and selection of variables, second the downgrading of legal culture, history and politics, third the lack of law. The first strand, speaking against the choice and selection of the variables started early81 and has not stopped yet. Siems and Deakin82 and Holger Spamann, both in 2010,83 and Brian Cheffins, Steven Banks and Harwell Wells in 2014,84 highlighted the methodological weaknesses of LLSV, which once corrected would lead to more nuanced results on the relationship between common law and Roman civil law. The second critique was voiced even earlier and is more suitable for highlighting the differences between Wieacker and LOT. There was criticism of LLSV for using the distinction between legal families and the feasibility of legal transfer in quite a crude way. In their 1998 article they neither show much consideration for the significance of legal culture and its transferability, nor for the critique and the re-invigoration of legal families.85 The implantation of foreign law into a legal culture is presented as a straightforward process.86 They do not pay attention to the interaction between law export and law import.87 The 2008 text claims to deal with the voiced criticism.88 The authors place the emphasis on the criticism raised by political science and legal history. Political science argues that, in the middle of the twentieth century, left-wing alliances between states arose in Continental Europe which controlled companies and organized work, in reaction to the

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J. Coffee, ‘The future as history: the prospects of global convergence in corporate governance and its implications’ (1999) 93 Northwestern University Law Review 641–707; for references from the US literature see Lieder, ‘Legal origins’, at 251, fn. 72; from German literature see H. Eidenmu¨ller, ‘Forschungsperspektiven im Unternehmensrecht’ (2007) 36(4) Zeitschrift fu¨r Unternehmens- und Gesellschaftsrecht 484–97, at 492; also Lele and Siems, ‘Shareholder protection’, cutting across various legal orders. M. Siems and S. Deakin, ‘Comparative law and finance: past, present and future research’ (2010) 166(1) Journal of Institutional and Theoretical Economics 120–40, at 128 explain the background of the project ‘Law, Finance, and Development’ based at the Centre for Business Research of the University of Cambridge, aiming at overcoming methodological deficits of law and finance; see also Lele and Siems, ‘Shareholder protection’, at 18–21. H. Spamann, ‘The “Antidirector Rights Index” revisited’ (2010) 23(2) Review of Financial Studies 467–86. B. R. Cheffins, S. A. Bank and H. Wells, ‘Law and history by numbers: use, but with care’ (2014) 5 University of Illinois Law Review 1739–64. Critical C. Joerges, ‘Europeanization as process: thoughts on the Europeanization of private law’ (2005) 11(1) ¨ ru¨cu¨, The Enigma of Comparative Law: Variations on a Theme European Public Law 63–84; in defence E. O ¨ ru¨cu¨, ‘Family trees for legal systems: towards for the Twenty-first Century (Dordrecht: Springer, 2004); E. O a contemporary approach’, in M. von Hoecke (ed.), Epistemology and Methodology of Comparative Law (Oxford: Hart, 2004), pp. 359–76. On the difficulties of legal transfers see the broad range of contributions in G. Helleringer and K. Purnhagen (eds.), Towards a European Legal Culture (Oxford: Hart, 2014). Both V. V. Palmer (ed.), Mixed Jurisdictions Wordwide: The Third Legal Family, 2nd ed. (Cambridge: Cambridge University Press, 2012), and T. Duve, ‘European legal history’, refer extensively to debates long before LLSV developed their approach. La Porta, Lopez-de-Silanes, Shleifer, ‘The economic consequences’, at 310–26.

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world economic crisis, or to both World Wars. LLSV concede that Continental European civil law reacts more appropriately to crises than the common law system. However, on the basis of their data, they insist that states hit by a crisis rely on the respective traditions within their respective legal family to enforce necessary reforms. Historical arguments weigh most heavily against LLSV’s assumption according to which legal origins determine economic development.89 Cheffins, Bank and Wells would probably agree, but also highlight the historical continuity (Chapter 23 with regard to the Delaware effect). Ultimately, LLSV reject the objection that history creates reasons for the reversal of the claimed hierarchy between common law and Roman law.90 Under reference to Raghuram Rajan and Luigi Zingales, they underline that, between 1913 and 2003, common law countries have clearly distanced themselves from civil law countries with regard to their economic development. A deeper analysis of England’s evolutionary and France’s revolutionary development path does not confirm their findings.91 Ahlering and Deakin point to the importance of timing in the industrial age in relation to the emergence of legal institutions.92 The third line of critique is perhaps the most powerful one. Jan Lieder and Ralf Michaels were already wondering whether LOT, or maybe ‘law and finance’ as would be more fitting, whilst claiming to use law to explain economic developments, is standing as a substitute for something else, namely culture, politics and history.93 Schnyder, Siems and Aguilera94 have analysed the research which claims to be based on LLSV in order to find out how the authors define law, what primary function law plays in the economy, what criterion makes law “valid” law and what mechanisms links law to actors’ behaviour’. They come to the conclusion that, under scrutiny, the authors employ a rather thin theory of law, which even contradicts itself, as the substantive criteria come close to Friedrich von Hayek whereas linking law to actors’ behaviour relates to John Austin and Olivier Wendell Holmes. The bold statement ‘law matters’ has not been answered by clarifying ‘how does law matter?’ but by shifting the focus from law to ‘regulatory style’. Schnyder, Siems and Aguilera do not reject the idea of comparison by numbers. Their recommendation is in line with L. Ripstein, ‘The empirical bubble has encouraged scholars to go right to the data, sometimes without developing the theory adequately for a good empirical test.’95 In line with this kind of argument, Cassis de Dijon must be understood as a placeholder for a new European culture, for market rationality and for a particular type of politics that the judgment promotes.

89

90 91 92 93

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On the instrumental use of legal history Husa, ‘Comparative and economic approaches’, at 115, referring to D. Klerman and P. G. Mahoney, ‘Legal origins?’ (2007) 31 Journal of Comparative Economics 278. La Porta, Lopez-de-Silanes, Shleifer, ‘The economic consequences’, at 321. Lieder, ‘Legal origins’, rejects this kind of interpretation of legal history convincingly. Ahlering and Deakin, ‘Labor regulation, corporate governance, and legal origin’. J. Lieder, ‘Legal origins’, at 260–1; R. Michaels, ‘Comparative law by numbers? Legal origins thesis, Doing Business reports, and the silence of traditional comparative law’ (2009) 57 American Journal of Comparative Law 765–95. Schnyder, Siems and Aguilera, ‘Twenty years of “law and finance”’, at 28. As quoted in Cheffins, Bank and Wells, ‘Law and history by numbers’, at 1740.

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IV The final part of Wieacker’s ‘Voraussetzungen’ proves the fragility of European legal culture considered as a continuum. Thomas Duve argues for a different concept which deals with the reciprocal effects between cultures, in particular with regard to the relationship between the colonialized world periphery and the metropole. This direction of research corresponds to Deakin and Pistor’s plea:96 ‘legal borrowing should take place either from a country with similar legal heritage or substantive investments should be made in legal information and training prior to adoption of a law . . . ’. Private law theory has to integrate both approaches – European legal culture (here presented through Wieacker) and LOT (presented through LLSV and followers). So far there is only a limited willingness of legal theory and practice to seriously engage with LOT. In his review essay, Husa97 provides for a rather optimistic account of comparative legal research. Aguilera, Amour, Coffee, Deakin, Lele, Lieder, Siems, Schnyder and Spamann engage with LOT giving space to statistical methods, emphasizing the key role of economics and politics in comparative law despite all the methodological and theoretical weaknesses. It remains to be seen whether and to what extent LOT ‘Law and Finance’ is ready to engage with the critique that there is not enough law in law and finance. How does the final conclusion relate to the Cassis de Dijon case mentioned in the introduction? Three possible interpretations come to mind: (1) Cassis de Dijon demonstrates that British pragmatism and personalism outweighs German legalism and French intellectualism. Therefore, Cassis de Dijon supports LLSV’s conclusions on the advantage of (pragmatic) common law over (more ideological) civil law in a transnational, multicultural setting.98 However, Brexit demonstrates the shaky construct of a market rationality that is based mainly on one legal culture and does not take the different European legal cultures into account; (2) the controversies behind the case show that there is no point in talking about a common European legal culture. For LOT the conflict might be understood as one between the two legal families, common law is promoting market freedoms (the ECJ judgment), civil law countries advocate statutory social regulation. Again, Brexit could be read to confirm LOT and that the distinction between common law and Continental private law matters and (3) Cassis de Dijon shows that the new European legal culture is based on market rationality. This then requires a deeper look into what market rationality means, in particular whether the common law understanding might remain dominant after Brexit. It should be recalled that post-Cassis de Dijon the ECJ gradually loosened the judicial control of member states’ legislation as barriers to trade, thereby granting member states more leeway in justifying diversity.99

96 97 98

99

Deakin and Pistor, Legal Origin Theory, p. 417. Husa, ‘Comparative and economic approaches’, at 123. Micklitz, Politics of Justice, Part I, pp. 45–160, which reconstructs the intellectual history of English, French and German law. J. Zglinski, Europe’s Passive Virtues, Deference to National Authorities in EU Free Movement Law (Oxford: Oxford University Press, 2020).

p ar t i i

Social Ordering, Constitutionalism and Private Law

6 Societal Order and Private Law Stefan Grundmann

a topic and materials I The second part of this book is the first one in which substantive problems of private law are scrutinized, not primarily disciplines – all chapters deal with the ‘constitutionalization’ of private law, understood in a broad sense. This first chapter focuses on societal order and private law; that is, on social ordering. Its concern is the ‘justified’ distribution of rights, duties and opportunities (particularly via law) and, more specifically, the role of private law in bringing about such a distribution. The decision to address these issues first recognizes an idea which has been expressed most prominently by Bo¨ckenfo¨rde, who proposes that no constitution can create its own preconditions of continued existence – and therefore, a convincing private law practice, inspired by constitutional values, that is, their effectiveness in daily life, may well contribute to bringing about these preconditions. Any functioning constitution must be – and is – grounded in an implicit societal arrangement, conviction and continued commitment of that society.1 This chapter could, of course, have been based on classic texts on the contrat social (social contract).2 However, both because the social contract theory increasingly adds concrete ‘justice’ content to mere formal contract (as still with Hobbes) and in faith with this book’s general approach to prefers contemporary theories of private law over classical ones, more modern (or postmodern) reformulations of such fundamental concepts – reformulations 1

2

E.-W. Bo¨ckenfo¨rde, Staat, Gesellschaft, Freiheit (Frankfurt: Suhrkamp, 1976), p. 60 – published in English as State, Society and Liberty (New York: Berg, 1991). This problem was already adressed in a seminal way by E. Durkheim (see chapter 2) and is also relevant to J. Rawls when he discusses the ideal of public reason, in his Political Liberalism of 1993 (New York: Columbia University Press, 1993) pp. 212–16. In his view, core political values have to be publicly stated over and again, but the citizen’s commitment to them belongs to the private sphere in a liberal state (education and the formative process of growing up in a well-ordered society might help, see pp. 140–4). Similar also Bo¨hm’s essay, discussed here, at pp. 100 et seq., and E. Cassirer already in 1946: ‘Written constitutions or charters have no real binding force, if they are not the expression of a constitution that is written in the citizens’ minds.’ The Myth of the State (New Haven / CT: Yale University Press, 1946), at p. 76. T. Hobbes, Leviathan or The Matter, Forme and Power of a Common Wealth Ecclesiasticall and Civil (London: Crooke, 1651); J. Locke, Two Treatises of Government (London: Churchill, 1689), Second Treatise; J.-J. Rousseau, Du contrat social ou Principes du droit politique (Amsterdam: Rey, 1762). On the history of social contract theory, see W. Kersting, Die politische Philosophie des Gesellschaftsvertrages (Darmstadt: Wissenschaftliche Buchgesellschaft, 1994).

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BOX 6.1 CASE STUDY

Bundesverfassungsgericht (BVerfG, German Constitutional Court), BVerfGE (official reports) 7, 198 This case involved Erich Lu¨th, a journalist holding an official position in the press department of the city of Hamburg in Germany, and Veit Harlan, the director of propaganda movies of the Nazi period such as the highly anti-Semitic movie Jud Su¨ß. Harlan, together with the producer of his first movie after World War II, sued Lu¨th for injunctive relief. Acting outside his official role, the latter had publicly pronounced the opinion that Harlan was not an appropriate exponent to give German movie production a new future after the horrors under the Nazi regime and had ‘urged’ owners of movie theatres to boycott the movie. He had invited them to show ‘character’ and instead bear potential losses. with concrete content for the form of society wished for – were preferred. This bundle of questions can be exemplified by the case that first powerfully brought together constitutional order in the technical sense and private law (Box 6.1). In the German private law courts, Harlan and his producer prevailed – the District Court in Hamburg granting Harlan’s suit injunctive relief (for ‘immoral boycotting’) and ordering that Lu¨th forbear from making such public announcements and the Court of Appeals upholding the judgment. The German Constitutional Court eventually decided differently. This is the first lead case in which the court held that fundamental rights in the constitution not only give rights of protection against state action, but as well form a value basis for all German law, including private law issues, the so-called Lu¨th judgment.3 The case was then followed by an impressive line of cases further specifying the argument4 and found counterparts in other member states of the European Union, most prominently in Italy,5 and also in, and well beyond, the European Union itself,6 very strongly, for instance

3

4

5

6

The first holding states: ‘1. While fundamental rights serve primarily as rights of protection against state, in the provisions on such fundamental rights, is present as well an overarching general objective architecture of values binding as constitutional order all parts of law.’ See namely BVerfG, BVerfGE (official reports) 89, 214 (Bu¨rgschaftsfall – Surety Case); BVerfG, BVerfGE (official reports) 81, 242 (Handelsvertreterfall – Commercial Agent Case); BVerfG, BVerfGE (official reports) 148, 267 (Stadionverbotsfall – Ban on Entry to Stadium Case). In Italy, courts of different branches and levels often use general clauses such as good faith that themselves are seen to be grounded in constitutional law and fundamental rights. For a comprehensive overview see G. Comande´ (ed.), Diritto Privato Europeo e Diritti Fondamentali: Saggi a ricerche (Turin: Giappichelli, 2004); P. Laghi, L’Incidenza dei Diritti Fondamentali Sull’Autonomia Negoziale (Padua: Cedam, 2012); F. Macario, ‘L’autonomia privata nella cornice costituzionale: per una giurisprudenza evolutiva e coraggiosa’, 35 Questione Giustizia 52–76 (2016); see also S. Grundmann / G. Bru¨ggemeier / A. Colombi Ciacchi / G. Comande´ (eds.), Fundamental Rights and Private Law in the European Union (Cambridge: Cambridge University Press, 2012); S. Grundmann (ed.), Constitutional Values and European Contract Law (Alphen: Kluwer International, 2008). See only the EuGH judgment of 26.2.2013 – case C-617/10 – A˚kerberg Fransson, ECLI:EU:C:2013:105.

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in Brazil.7 The core argument for the German court to decide in favour of Lu¨th was that freedom of opinion (protected under Article 5 of the German Constitution) needed to be taken into consideration also in private law disputes. This freedom – according to the court the ‘most direct expression of human personality’ – was stressed in its importance both for the individual and for society and political discourse. The court invoked that Lu¨th had not used his public position (letterhead etc.), that citizens holding office also needed to have the possibility to pronounce their opinion, that Lu¨th had not misstated facts and that Lu¨th had not used means of economic power, just moral persuasion. This constituted a turning point in German private law insofar as, from then on, the clause on nullity for immorality (s. 138 of the German Civil Code (BGB)) was used more prominently for bringing to bear constitutional values or economic rationales than for striking down cases of ‘immorality’ in the traditional sense (Chapter 8). Henceforth, the provision was no longer shaped by nineteenth-century morals, but by twentieth-century values and market rationales. The Lu¨th case relates to questions of economic power, moral power, freedom of opinion and their relationship to each other – hence societal and moral order in a community. Typically, it is put in contrast to a later case – Blinkfu¨er – in which Springer Press, the initiator of the boycott, used its market power for the same purpose and where the Constitutional Court decided to the opposite.8 II With respect to societal order, three texts of the late 1960s and early 1970s, published within five years of each other, are particularly salient – with one answer from 2009. In these years, particularly in Europe, the foundations of the societal order were (re) formulated in terms still strongly present today, the further ‘waves’ of (re)considerations of societal order that have followed more recently concern the view of a more pluralist and global society (of private law).9 In the texts mainly discussed, the leading ordo-liberal (legal) thinker and the leading political philosopher formulating a theory of justice in the twentieth century come together. They are put in context with two writers – supplementing their ideas and texts – who give broader, more constitutional values, a more pluralist and globally conceived view on societal order, writers who are equally eminent in their times and countries. The four texts listed in Box 6.2 are from four countries of origin, with distinct views that still collapse into one rather systematic picture. For John Rawls and his text, which is on how to develop basic substance of justice and not primarily on private law, a supplement is particularly helpful that is based on largely the same moral assumptions as Rawls, but at the same time ties these questions to 7

8 9

Constitutional Court (Supreˆmo Tribunal Federal), RE (Recurso Extraordina´rio) 201.819-8 (2nd senate) (reporter Gilmar Mendes), of 11.10.2005 (‘due process’); RE 161.243-6 (2nd senate) (reporter Carlos Veloso), of 29.10.1996 (non-discrimination of Brazilian nationals); ADI (Ac¸a˜o Direta de Inconstitucionalidade) 4815 (grand chamber) (reporter Carmen Lucia) of 10.06.2015 (privacy and personality) – all available at www.stf.gov.br. BVerfG, BVerfGE (official reports) 25, 256 (Blinkfu¨er). See A. Sen B.III; S. Grundmann, ‘Pluralism and Private Law Theory’, manuscript 2020; and more specifically on globalization Chapter 25 (situated in Part V where the more general perspective is that of legitimacy of rulesetting).

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134 BOX 6.2

Franz Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, 17 ORDO 75–151 (1966) (English translation available on the book website) John Rawls, A Theory of Justice (Cambridge / MA: Belknap Press of Harvard University Press, 1971 (quoted here, revised ed. 1999), mainly chapter 3: ‘The Original Position’ Amartya Sen, The Idea of Justice (Cambridge / MA: Allen Lane & Harvard University Press, 2009) Luigi Mengoni, ‘Forma giuridica e materia economica’, in Diritto e Valori (Bologna, Mulino, 1985, first published in two articles of 1963 and 1966) (English translation available on the book website)

BOX 6.3

P. Benson, Justice in Transactions (Cambridge / MA: Harvard University Press, 2019) E. J. Mestma¨cker, ‘Macht – Recht – Wirtschaftsverfassung’, 137 Zeitschrift fu¨r Handelsrecht 97–111 (1973). E. J. Mestma¨cker, ‘Auf dem Wege zu einer Ordnungspolitik fu¨r Europa’, in E. J. Mestma¨cker / H. Mo¨ller / H.P. Schwartz (eds.), Eine Ordnungspolitik fu¨r Europa: Festschrift fu¨r Hans v.d. Groeben (Baden-Baden: Nomos, 1987), pp. 9–49 transactions, hence to the heart of private law. Conversely, for Bo¨hm, it is particularly interesting how his ideas were developed for the scheme that (if ordo-liberal thought has really been a blueprint for it) was by far its most successful emanation – Europe (see Chapter 24). These further forms of concretization can be traced in the supplementary readings listed in Box 6.3.10

b theories, context and discussion I This chapter has a wide scope and its two main texts explore two of the most influential ‘orders’ – that is, normative and binding frameworks that are seen as being ‘constitutional’ for the area. Franz Bo¨hm, in a paper based on economic theory, describes the interplay between market freedom and legal order. His paper could therefore be perceived as close to utilitarian thinking in core respects, though it is also 10

Both pieces by E. J. Mestma¨cker seem not to have been translated into English. For a related article in English see E. J. Mestma¨cker, ‘The Role of Competition in a Liberal Society’, in P. Koslowski (ed.)‚ The Social Market Economy: Theory and Ethics of the Economic Order (Heidelberg/New York: Springer Verlag, 1998), pp. 329–50; see as well one translation available on the book website.

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heavily influenced by Protestant social ethics. In the second text, A Theory of Justice, John Rawls presents perhaps the only true masterpiece of political philosophy in the twentieth century that endeavoured to define substantive principles of justice – then answered by Amartya Sen’s The Idea of Justice. These two (and a half) texts are, for their respective fields, one, if not the most, influential piece(s) of their time. Thus, the chapter might appear like an exercise in contrasting utilitarian thinking with fairness-oriented thinking – and, indeed, Rawls himself takes these as the two most meaningful potential alternatives! On the other hand, the texts are less in tension with one another than it appears at first sight. They share very fundamental convictions and stylistic features; both seek to formulate a new version of the social contract, that is, principles of the right societal order based on (presumptive) consensus – what is new, is how much substance is now put into such a contract. Moreover, Rawls, despite contrasting his approach with utilitarian thinking, is much concerned with parallel approaches in economic (and, more generally, social) theory, while Bo¨hm stresses the moral superiority of a private law society along with its instrumental benefits. It is therefore helpful to contrast these two texts in light of the fundamental question of modern private law: to what degree are ‘justice’ and ‘efficiency’, the two leading paradigms, radically opposed, and where do they instead coincide? Interestingly enough, the text which appears to be more efficiency-driven and ‘liberal’ is written by a Continental European lawyer, who experienced the (re)construction of Germany and the establishment of the European Union after World War II, while the pleading for more risk-averse, protective solutions is written by an American thinker – more precisely a philosopher (Amartya Sen then opens up to a global and pluralist view). Mengoni – in the much shorter, nearly contemporaneous last text – addresses this tension between ‘law and values’ or between ‘legal form and economic activity’. His clear message is that economic activity both requires exacting guidance by legal values, and is so guided in practice. Moreover, on at least three points, Mengoni reaches beyond both Bo¨hm and Rawls. He holds that any societal theory has to be reassessed under the auspices of the constitution (‘reconstruction’ of any theory under the umbrella of the canon of legal values accepted or acceptable within a particular society); and he indicates how market order (which Bo¨hm aims to secure) can be shaped in a legitimate way through a democratic process (without recourse to the ideal decision environment imagined by Rawls). Finally, the market order that Mengoni advocates is general and reaches well beyond antitrust law, on which Bo¨hm’s analysis focuses. Mengoni therefore anticipates the development of private law in subsequent decades11 across consumer law, capital market law (novel in Europe) and antitrust law. 11

The scholar in German academia that comes closest to L. Mengoni in all these respects would seem to be R. Wietho¨lter, see namely R. Wietho¨lter, ‘Thesen zum Wirtschaftsverfassungsrecht’, in P. Ro¨mer (ed.), Der Kampf um das Grundgesetz. U¨ber die politische Bedeutung der Verfassungsinterpretation (Frankfurt: Syndikat, 1977), 158–69; R. Wietho¨lter, ‘Privatrecht als Gesellschaftstheorie? Bemerkungen zur Logik der ordnungspolitischen Rechtslehre’, in F. Baur et al. (eds.), Funktionswandel der Privatrechtsinstitutionen: Festschrift fu¨r Ludwig Raiser zum 70. Geburtstag (Tu¨bingen: Mohr Siebeck, 1974), pp. 645–95; overview in: D. Wielsch (ed.), Rechtsbru¨che: Spiegelungen der Rechtskritik Rudolf Wietho¨lters (Baden-Baden: Nomos, 2019), Separatum of Kritische Justiz 4/2019.

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II Franz Bo¨hm’s text is to be seen in a long tradition of ordo-liberal thought, developed unaffected by but within the period of the National Socialists.12 Bo¨hm’s colleague in the (ordo-liberal) Freiburg School, the political economist W. Eucken, developed and advocated ordo-liberal thought via his fundamental critique of centrally planned economies (of totalitarian states – already during World War II),13 but also contrasting a liberal market economy (labelled, quite deprecatingly, as laissez faire market economy) and an ‘ordo-liberal’ market economy. Although the two types of economy diverge sharply, both also stand in contrast to the centrally planned economy as the third type discussed.14 In their rebuttal of laissez-faire, and thereby also of libertarian thought, Eucken and Bo¨hm stand at a distance from the mainstream of utilitarian thinking in the second half of the twentieth century. As a lawyer, Bo¨hm added the final cornerstone to the concept of an ordo-liberal market economy by reformulating economic theory in terms of law. He analyses which part of the legal order has dominated over time, or should dominate, leading to the core concept of a ‘private law’ society (which will be explained below). He examines which parts of the overall mechanism should lie in whose competence, that is, what falls within the competence of private law subjects (or ‘society’) and what falls within that of the state, or, more typical as a distinction in the United States, of the ‘people’ and of ‘government’ – a truly fundamental question of societal order. The paper begins by locating the concept of the private law society between private law and market economy. While the latter two are well-known concepts, respectively, of law and of economics (each paramount in its field), Bo¨hm coins a new concept that combines the two and reformulates pieces of economic theory as legal concepts. He starts with history and tracks a radical transition in the dominant forms of social order, away from 12

13 14

On (in large part, assumed) National Socialist tendencies of F. Bo¨hm himself, see A. Somma, I giuristi e l’asse culturale Roma-Berlino (Frankfurt: Klostermann, 2005), pp. 222 et seq., pp. 748 et seq. Eucken was clearly opposed to National Socialist thinking. He founded the so-called Freiburg School in 1930 with F. Bo¨hm and H. Großmann-Doerth, and kept this school as a prominent home of freedom, openly opposing the principal of Freiburg University (M. Heidegger, who notoriously adhered to National Socialist ideology) by organizing a lecture series on the freedom of science (Der Kampf der Wissenschaft). He also remained faithful to his wife’s partly Jewish family. See N. Goldschmidt, ‘Die Rolle Walter Euckens im Widerstand: Freiheit, Ordnung und Wahrhaftigkeit als Handlungsmaximen’, in N. Goldschmidt (ed.), Wirtschaft, Politik und Freiheit (Tu¨bingen, Mohr, 2005), pp. 289–314. See W. Eucken, Grundlagen der Nationalo¨konomie (Jena: Fischer, 1940). W. Eucken, Grundsa¨tze der Wirtschaftspolitik (first published Tu¨bingen: Mohr, 1952, written in 1942), pp. 26 et seqq. on laissez faire, pp. 61 et seqq. on the centrally planned economy, pp. 241 et seqq. on the ordo-liberal market economy; excerpts from this work in W. Eucken, ‘A Policy for Establishing a System of Free Enterprise’, in W. Stu¨tzel (ed.), Standard Texts on the Social Market Economy (Stuttgart:Fischer, 1982), pp. 115–31; on Eucken’s work V. Vanberg, ‘The Freiburg School: Walter Eucken and Ordoliberalism’ Freiburg discussion papers on institutional economics 4/11; H. G. Grossekettler, ‘On Designing an Economic Order: The Contributions of the Freiburg School’, in D. A. Walker (ed.), Perspectives on the History of Economic Thought (Aldershot: Edward Elgar, 1989) Vol. II, pp. 38–84; L. Gerken (ed.), Walter Eucken und sein Werk: Ru¨ckblick auf den Vordenker der sozialen Marktwirtschaft (Tu¨bingen: Mohr, 2000); J. Petersen, Rechtsordnung und Wirtschaftsordnung nach Eucken (Berlin: de Gruyter, 2019) – stressing the interplay, as also in F. Bo¨hm, B.II and L. Mengoni, B.IV.

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hierarchy and status and toward relations based in formal equality15 (with namely the French Revolution breaking away from hierarchical orders exercised by state, guilds or church that also dominated economic activities). In the new mode of organization, consensus and autoregulation (autonomy) were to form the core apparatus. Bo¨hm describes the development as ‘pro co-ordination’ rather than as ‘contra subordination’ – as had done protagonists of the French Revolution and most subsequent analysts. Completely novel is Bo¨hm’s idea to combine positive – historical – analysis with a normative analysis of the advantages that stem from ordering society as a private law society. For a book on private law theory, this move towards normative analysis is crucial.16 The core development is that equality (abolishing the three estates) and autonomy were introduced as the prevailing apparatus of social order. Bo¨hm sees the distinction between state and society as being of the essence, but typical of ordo-liberal thought is correspondence between societal and constitutional order. Thus, as feudalism is linked to a nondemocratic regime, a private law society is linked to a democratic regime. In such private law society, the ‘three most important’ instruments of communication are seen in a common language, private law and the pricing system (on the concept of the pricing system, see also Chapters 12 and 24). Their characteristics are non-prescriptive use and participation, and the conveyance of core information through a system of signals – autoregulative in essence, establishing the volonte´ de tous, in this superior to any other information conveyance system.17 At this point, Bo¨hm turns to normative analysis and distinguishes between establishing the rules of the game and conducting the game itself.18 The first of these tasks – the purview of the state – receives more of Bo¨hm’s attention, although he characterizes it as the less important of the two. The second task he attributes to private law subjects – both clearly separated with a view that the framework should be ostensibly impartial (as Bo¨hm puts it, ‘private law autonomy may not contain any coercive power to command or tax’). Public ordering – rule-setting based on public authority – and private ordering – rule-setting beyond (direct) public authority – should always be kept separated. Thus, while recognizing the presumptive superiority of dispersed knowledge (see Chapter 12), Bo¨hm does not consider the potential implications of such superior knowledge when it comes to identifying or choosing the best forms of regulation. For him, there is no trade-off between the 15

16

17

18

The first instance of this idea (‘from status to contract’) is in H. Maine, Ancient Law (London: H. S. M., 1885), p. 170. For an abridged reproduction of the full text, see F. Bo¨hm, ‘Rule of Law in a Market Economy’, in A. Peacock / H. Willgerodt (eds.), Germany’s Social Market Economy: Origins and Evolution (London: Macmillan, 1989), pp. 46–67. On the historical account (since Roman times, private law first serves as a gap filler for a dominant state; after the French Revolution the state was limited to Lasalle’s night watchman state (Nachtwa¨chterstaat)), J. Hien/ C. Joerges, ‘Dead Man Walking: Current European Interest in the Ordoliberal Tradition’, EUI Working Paper LAW 2018/03, pp. 3–9. See Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, pp. 91–8 and for the following also p. 102. In this respect, F. Bo¨hm is indebted to the account of his friend in the Freiburg School, F. von Hayek, on the strengths of decentralized knowledge distribution. See Chapter 12. The distinction is also significant later for institutional economics, see O. E. Williamson, ‘The New Institutional Economics: Taking Stock, Looking Ahead’, 38 Journal of Economic Literature 595–613 (2000); such a view also opens the door for rigorous, game-theoretical reconstructions of legal issues. See D. Baird/ R. Gertner/ R. Picker, Game Theory and the Law (Cambridge / MA: Harvard University Press, 1998).

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heightened impartiality (and thus legitimacy) of the legislator, and the potentially superior knowledge that the affected (private) parties could bring to the table (for setting the framework). The trend during the last five decades, contra this strict separation, rather was about inquiring into potentially shared responsibilities for the overarching framework.19 How radically different will also be the concept of legislative competition (regulatory competition, see Chapter 23). Through this lens, when law – qua the rules of the game – is seen as a product, the allocation of competence may be different, but Bo¨hm’s idea of neutrality is nevertheless still present. Indeed, this aspect becomes paramount in that it is now providers of legislative supply (rather than private parties) that must be kept on an equal footing – even when, for instance, different levels ‘compete’, as in the case of an optional European Code that would compete with national codes.20 When analysing which ingredients are critical to the game’s functioning, Bo¨hm identifies as legal infrastructure (traditional) contract law and the price system, but also regulation to ensure the transparency and security of market transactions and regulation of anticompetitive practices (antitrust regulation). Thus, Bo¨hm prepares the ground for his view that the level playing field emerges only in the interplay of default rules and regulation, i.e. that ‘business law’ (or also ‘economic law’) in the broad sense requires the two to operate together.21 In doing so, Bo¨hm also identifies the two areas of regulation that were to become key: regulation on restrictions of competition and regulation enhancing transparency (paradigmatic tools in capital markets law for combating distortions).22 The result is an image of ‘market order’, but not a market conceived in a purely liberal 19

20

21

22

See, for example, H. Schepel, The Constitution of Private Governance (Oxford: Hart, 2005); F. Cafaggi, ‘Private Law-Making and European Integration: Where Do They Meet, When Do They Conflict’, in D. Oliver/ T. Prosser/ R. Rawlings (eds.), The Regulatory State: Constitutional Implications (Oxford: Oxford University Press, 2010), pp. 201–28; F. Cafaggi (ed.), Reframing Self-regulation in European Private Law (Aalphen aan den Rijn: Kluwer, 2006); H. Collins, Regulating Contracts (Oxford: Oxford University Press, 1999), pp. 218–21; and from a political science perspective: A. He´ritier/ S. Eckert, ‘New Modes of Governance in the Shadow of Hierarchy: Self-regulation by Industry in Europe’ 28 Journal of Public Policy 113–38 (2008). R. Cooter, The Strategic Constitution (Princeton / NJ: Princeton University Press, 2000), pp. 131 et seq., 137 et seqq.; concurring F. Gomez, ‘The Harmonization of Contract Law through European Rules: A Law and Economics Perspective’ 4 European Review of Contract Law 89–118 (2008), at 100; S. Grundmann, ‘Costs and Benefits of an Optional European Sales Law (CESL)’ 50 Common Market Law Review 225–42 (2013), at 229, 231, 242. S. Grundmann, ‘The Concept of the Private Law Society: After 50 Years of European and European Business Law’ 16 European Review of Private Law 553–81 (2008), at 556. On the theory of regulation based on restrictions of competition, see R. Posner, Economic Analysis of Law (9th ed., Austin / TX: Wolters Kluwer, 2014), ch. 14; M. Fritsch, Marktversagen und Wirtschaftspolitik (8th edn., Munich: Vahlen, 2011), pp. 159–225; on regulation based on information imperfections, see, A. Ogus, Regulation: Legal Form and Economic Theory (Oxford:Hart, 2004), pp. 121–49; Fritsch, Marktversagen und Wirtschaftspolitik, pp. 247–87; a unifying perspective on market power and information asymmetry as justifications for regulation can be found in R. Cooter / T. Ulen, Law and Economics (6th ed. Boston: Addison-Wesley, 2011), pp. 297–9; Posner, Economic Analysis of Law, pp. 487–99; J. Ledyard, ‘Market Failure’, in S. N. Durlauf / L. E. Blume (eds.), The New Palgrave Dictionary of Economics (London: Palgrave Macmillan, 2008); a good and contemporary overview is further provided in A. Schwartz, ‘Regulating for Rationality’, 67 Stanford Law Review 1373–410 (2015); see generally, S. Grundmann, ‘On the Unity of Private Law: From a Formal to a Substance Based Concept of Private Law’, 18 European Review of Private Law 1055–78 (2010), at 1057–9 and 1063–6.

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way – as might be implied by the insistence on a concept of private law society. This market framework rather is ordo-liberal, not a laissez faire neoliberal market economy, but a market economy regulated by a public order aimed at maintaining the market’s core functions.23 All this makes clear that Bo¨hm (as much as Eucken) rejects virtually all economic systems practised in the first half of the twentieth century. These are not only the cartelized economy of the National Socialist regime and the communist planned economy, but also the nineteenth-century laissez-faire model or neoliberal approaches opposed to robust regulation (and also Keynesian deficit spending not discussed here). In contrast to US developments (epitomized by R. Coase and O. Williamson, see Chapter 3), it is striking that the Freiburg School attempted an intimate intertwining of law and economics – on equal footing. The leading scholars were versed in both disciplines. While, in the United States, the main trend was to question the regulatory framework (particularly on horizontal co-operation; see H. Manne, Chapter 21) and to stress the efficiency gains (from lower transaction costs), Freiburg School scholars developed concepts to strengthen the regulatory system, even attributing it ‘constitutional’ value. The US perspective sets a trend for the future, certainly in the development of law and economics scholarship at the Chicago School, but also in public perceptions and policy (‘economization’). In more recent times, however, Bo¨hm’s basic approach has regained prominence in the increasingly common discussion of the ‘regulatory state’, or also of a ‘taming of unregulated “neo-liberalism”’.24 The core-passage is this: ‘According to the constitution, the system and the score, the task of the legislature and government consists in creating, maintaining and implementing the framework to safeguard the functioning of the market system of guidance. . . . This is not merely government’s constitutional task, but it is also in the interests of the people . . . .’25 Two aspects touched upon call for further elaboration. The first question is whether these mandatory rules to safeguard market order (i.e., market regulation) restrict party autonomy, 23

24

25

The term neoliberal is often used without differentiation, for many approaches that see the play of party autonomy as being key. The ordo-liberal approach is one such approach often termed neo-liberal (after the liberalism of the nineteenth century). It has, however, the central feature explained in the text of pleading strongly for a very robust antitrust regime (more robust, for instance, than the more economic approach, as seen in the text) and potentially even of pleading more generally for a very robust regulation of market failure overall. Thus, it is so strongly and so explicitly opposed to other approaches termed neoliberal, namely laissezfaire approaches of neoliberalism, that confounding both nevertheless would seem to obscure the key features on which the respective protagonists put their main emphasis. On the genesis of neoliberalism as an intellectual and political idea compare recently Q. Slobodian, Globalists: The End of Empire and the Birth of Neoliberalism (Cambridge / MA: Harvard University Press, 2018); on the multiple uses of the term neoliberalism furthermore D. Harvey, A Brief History of Neoliberalism (Oxford: Oxford University Press, 2007) and D. S. Grewal / J. Purdy, ‘Introduction: Law and Neoliberalism’, 77 Law and Contemporary Problems 1–23 (2014). For connections to various contemporary legal debates compare H. Brabazon (ed.), Neoliberal Legality: Understanding the Role of Law in the Neoliberal Project (Farnham: Routledge, 2016). On one sub-strand, so-called regulated industries, see G. Majone, ‘From the Positive to the Regulatory State: Causes and Consequences of Changes in the Mode of Governance’, 17 Journal of Public Policy 139–67 (1997); taken up in the legal literature for instance in: D. Oliver et al., The Regulatory State. Interest (in German literature) has been considerable again in recent times, see: K. Riesenhuber (ed.), Privatrechtsgesellschaft: Entwicklung, Stand und Verfassung des Privatrechts (Tu¨bingen: Mohr Siebeck, 2008); F. Mo¨slein (ed.), Private Macht und privatrechtliche Gestaltungsfreiheit (Tu¨bingen: Mohr Siebeck, 2015). Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, at 139.

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or should they instead be conceived as furthering the autonomy of those who are in an unequal power relationship with their transaction partners? Bo¨hm seems to prefer the latter and this view would seem to gain ground.26 This latter perspective values substantive freedom as the overarching interest which ties contract law in the narrow sense together with market order, with the aim of enhancing the meaningful material use of party autonomy. Second, Bo¨hm would seem to see the divide between establishing the market framework and acting within it as a matter of constitutional significance for social order as such. After another passage on feudal economies, Bo¨hm turns to an aspect that institutional economics, namely Douglas North, later strongly shares. In his view, it was these institutional (legal) arrangements, rather than technical shortcomings, that stood in the way both of more equal distribution and of more dynamic economic development – economic growth and change depending on the implementation of the institutional arrangements with which a society reacts to changing boundary conditions.27 Law is seen as being just as important for evolution and progress as technology (later known as ‘innovation through law’).28 When the neutrality of the state – as the master of the game – is claimed as being of absolute importance, this is no longer mainly seen against the backdrop of the eighteenth century (against hierarchical intervention in economic activity), but primarily as a concept justified in contemporaneous economic theory and scholarship.29 This goes hand in hand with the introduction of a subsidiarity principle that places the burden on the state to prove the legitimacy of and need for state intervention.30 26

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From the rich German literature on this topic see, for example, M. Wolf, Rechtsgescha¨ftliche Entscheidungsfreiheit und vertraglicher Interessenausgleich (Tu¨bingen: Mohr, 1970), pp. 8 et seqq., pp. 59 et seqq.; C.-W. Canaris, ‘Wandlungen des Schuldvertragsrechts: Tendenzen zu seiner “Materialisierung”’ 200 Archiv fu¨r die civilistische Praxis 273–364 (2000), at 277 et seq.; for consumer self-determination: J. Drexl, Die wirtschaftliche Selbstbestimmung des Verbrauchers (Tu¨bingen, Mohr, 1998), pp. 282 et seq.; similar ideas are expressed in the capacitas approach, see the contributions in S. Deakin / S. Supiot (eds.), Capacitas: Contract Law and the Institutional Preconditions of a Market Economy (Oxford: Hart, 2009). Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, 115; see also Chapter 3 (for R. Coase and O. Williamson – in this sense), and D. North, ‘Institutions’, 5 The Journal of Economic Perspectives 97–112 (1991); and a larger account in D. North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990). Together with R. Coase and O. Williamson, D. North strengthened institutional economics with the establishment of the International Society of New Institutional Economics (1997). For comprehensive approaches, see, for example, W. Hoffmann-Riem / J.-P. Schneider (eds.), Rechtswissenschaftliche Innovationsforschung (Baden-Baden: Nomos, 1998); for individual branches of the law, for example J. Armour, ‘Law, Innovation and Finance’, in J. McCahery / L. Renneborg (eds.), Venture Capital and Financial Systems (Oxford: Oxford University Press, 2003), pp. 133–61; S. Grundmann / F. Mo¨slein (eds.), Innovation und Vertragsrecht (Tu¨bingen: Mohr Siebeck, 2020); T. Wu, ‘Intellectual Property, Innovation, and Decentralized Decisions’, 92 Virginia Law Review 123–47 (2006); G. Parchomovsky / A. Stein, ‘Torts and Innovation’, 107 Michigan Law Review 285–315 (2008). A whole journal is now dedicated to the issue: Law, Innovation and Technology (Oxford: Hart). Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, 120; this refers particularly to A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: Strahan and Cadell, 1776), for example, Book I, Chapter X, Part II, who, it should be noted, did not advocate a state of pure laissez faire, see, for example, J. Viner, ‘Adam Smith and Laissez Faire’ 35 Journal of Political Economy 198–232 (1927), particularly at 231. Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, 120 et seq.; this subsidiarity principle, nowadays more often discussed as an instrument allocating competences between different levels of public intervention (in

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From this, the core normative claim follows quite naturally: the order of an ordoliberal market economy should exclude/minimize (i) any private power position that might put the consensus mechanism at risk; and (ii) any exercise of state power not justified by its role as framework setter. Bo¨hm (like Eucken) is interested primarily in the first of these risks, he was highly influential in the political process that introduced antitrust law as a cornerstone of market order in post-war German law31 and thereby throughout the European Union as well. In the EU, then still the EEC, it was seen to be so important that it was the sole substantive area of law to find its way into the Treaty of Rome (amongst the institutional architecture).32 Bo¨hm, however, went even further, struggling against all ‘social positions of power that enable subjugation and exploitation of individuals and groups . . .’ This implies that, while focusing on mechanisms of competition (Konkurrenzmechanismus), he would likely have been interested in subsequent developments in information economics as well, namely when power imbalances (such as information asymmetries) similarly vitiate the consensus mechanism.33 Of course, power imbalances resulting from restrictions of competition are to be avoided from the outset and therefore structurally different from information asymmetries or other forms of unequal bargaining power where the abuse of an unavoidably existing power distribution is regulated and minimized. Still, from today’s perspective the parallels are sufficiently strong to argue that a similar kind of market order is needed. Bo¨hm’s text is therefore visionary also with respect to private power situations not yet defined in 1966 – moreover also for the second arena, with respect to public power. Bo¨hm addresses the second dimension as well and links both dimensions to each other in this way: ‘[F]ormation of particular positions of power should not be possible within the state – this danger was to be averted by the development of democratic controls . . . The plan [was designed as] encompassing the whole of society, the state and the relationship between the two.’ Limiting state competences and curbing concentrations of state power, Bo¨hm could hardly foresee how the European Union – without meaningful budget or administrative powers – would nonetheless establish itself as strong

31

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favour of the decentralized level), operates indeed as well in the relationship between public and private ordering. On this aspect (and history) see R. Vischer, ‘Subsidiarity as a Principle of Governance: Beyond Devolution’, 35 Indiana Law Review 104–42 (2001–2002) at 108–10; J. Verstraeten, ‘Solidarity and Subsidiarity’, in D. Boileau (ed.), Principles of Catholic Social Teaching (Milwaukee / WI: Marquette University Press, 1994), pp. 133–47; O. von Nell-Breuning, Soziale Sicherheit? Zu Grundfragen der Sozialordnung aus christlicher Verantwortung (Freiburg: Herder, 1979), pp. 176–96. On his – successful – ‘uphill battle’ in the Christian Democrat Party for a demanding antitrust law: E. Mestma¨cker, ‘Franz Bo¨hm’, in S. Grundmann / K. Riesenhuber (eds.), Private Law Development in Context: German Private Law and Scholarship in the 20th Century (Antwerp / Cambridge: Intersentia, 2018), pp. 124–44 For this influence, as well as the role played by fundamental freedoms in this account, see S. Grundmann, ‘The Concept of the Private Law Society’ (above fn. 21) See also D. J. Gerber, ‘Constitutionalizing the Economy: German Neoliberalism, Competition Law and the “New” Europe,’ 42 American Journal of Comparative Law 25–84 (1994). Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, at p. 121. For these undesired power situations and their potential integration into Bo¨hm’s thinking (even though their discussion came after 1966), see more extensively S. Grundmann, ‘The Concept of the Private Law Society’, at 570–7.

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impartial referee of (national) state power – in part the EU Commission (e.g., state aids), in part the ECJ (e.g., fundamental freedoms).34 Bo¨hm’s argument against Marxism follows the lines of ordo-liberal thinking. He admits a risk of exploitation, but holds that the risk arises only under certain circumstances and conditions and that the task of scholarship and politics is to pinpoint these conditions – an early instance of targeted market failure analysis.35 Instead of a general exploitation argument, Bo¨hm advocates a definition of particular, targeted situations of disparate bargaining power. Considering the text as a whole, it is striking that Bo¨hm never really defines private law – while this concept is absolutely constitutive for the title and the core argument. Overall, private law may mean the positive contract law order or also the relations constituted through the exercise of contractual freedom (private law as practised law). On party autonomy, Bo¨hm says that it dramatically increased with the French Revolution and is normatively of utmost importance. One aspect of party autonomy discussed today is astonishingly weak in Bo¨hm’s argument. He is concerned with safeguarding party autonomy, protecting it against power situations; however, the process of the making of such market order is not considered – a lacuna that Rawls’ interest in proceduralizing decisionmaking addresses. How does this market order arise – built on a social contract, by negotiation and understanding? Bo¨hm is highly apolitical with respect to how norms/ regulations are created; astonishingly close in this respect to the so-called historische Rechtsschule – historical school of jurisprudence – that originated in C.-F. von Savigny and saw private law as a compound of rules created prior to state power. Therefore, the Lu¨th case, decided almost a decade earlier, certainly speaks as well of a framework to be guaranteed by state between private law subjects, but it does so for the realm of opinions. There (and in Blinkfu¨er as a follow-up case), economic power is also seen as endangering the political equilibrium, as having repercussions on the functionality beyond the parties’ interests. The step, however, to see freedom of expression as a powerful driver in the political process, hence also for further developing the regulation that should steer market processes, is not key in Bo¨hm’s world. III Moral and political philosophy did not rank highly in twentieth-century philosophy before John Rawls. It is no overstatement to call him the first to venture again into the formulation 34

35

Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, at p. 121. For this line of argument that again finds some inchoate traces in Bo¨hm’s paper, see in more detail S. Grundmann, ‘The Concept of the Private Law Society’, at 558–67 (analysing in particular the powerful ECJ case law scrutinizing national legislation under fundamental freedoms and the powerful practice of the EU Commission against distortions of competition by state action). See also P. Behrens, Europa¨isches Markto¨ffnungs- und Wettbewerbsrecht: eine systematische Darstellung der Wirtschafts- und Wettbewerbsverfassung der EU (Heidelberg: C. F. Mu¨ller, 2017), who probably goes furthest in developing the concept of a fully fledged competition order. See in particular Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, 121–8, but also 131–3, 134; on this approach today via examples of consumer law, see I. D. C. Ramsay, Consumer Law and Policy: Texts and Materials on Regulating Consumer Markets (Oxford: Hart, 2012), chapter 2; J. Drexl, Die wirtschaftliche Selbstbestimmung des Verbrauchers (Tu¨bingen: Mohr, 1998), pp. 282 et seq.

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and justification of a set of moral principles – and certainly of substantive (rather than procedural) moral principles. This is all the more astonishing as the twentieth century saw such fierce debates on the philosophy and politics of justice, namely in legal and social sciences.36 Conversely in philosophy, even if this summary is overly short, the first half of the twentieth century saw (primarily formal) analytical approaches to philosophy as arguably the dominant trend. Bertrand Russell and Ludwig Wittgenstein studied linguistic logic, advocated language as the prime object of contemporary philosophy and focused on clarification, simplification and elimination of logical contradictions.37 Similarly, on the continent, phenomenology, associated especially with Edmund Husserl, sought a description and restatement of phenomena as they are.38 A second broad line of development was the rise of subjectivist approaches, or approaches questioning objective rules. Existentialism was notably explored by Jean-Paul Sartre, Albert Camus and Simone de Beauvoir.39 Later on, after the publication of Rawls’ ‘Theory’, the postmodernists articulated a radical scepticism toward the possibility of interpersonal truth or communication (even reason itself?) and worked toward the deconstruction of systems and ‘structure’.40 Important additional strands are hermeneutics with its interest in the construction of communication and meaning41 and critical theory, which emphasized the political in any expression of being.42 In all these trends, the endeavour to deduce rules of social justice, universally approved and with concrete content, was unheard of. Conversely, John Rawls seeks to return to a consent-based theory of justice – justice as fairness – and, in a manner which reaches beyond classical social contract theory (see fn. 2), to formulate substantive principles. In two later books, he would also focus on the question of how a liberal pluralistic state can possibly reach such uniform substantive principles and enquire into the question of substantive principles in relations between nations.43 However, it is the combination of the social contract concept with the rational 36

37

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40

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42 43

See overall summary in: H. Micklitz (ed.), The Politics of Justice in European Private Law: Social Justice, Access Justice, Societal Justice (Cambridge: Cambridge University Press, 2018), namely the introduction, pp. 1–44. See B. Russell, ‘The Philosophy of Logical Atomism’, 28 Monist 495–527 (1918); 29 Monist 32–63 (1919); 29 Monist 190–222 (1919); 29 Monist 345–80 (1919); L. Wittgenstein, Tractatus Logico-Philosophicus (London: Kegan Paul, Trench, Trubner, 1922); L. Wittgenstein, Philosophical Investigations (Oxford: Blackwell, 1953). E. Husserl, Ideen zu einer reinen Pha¨nomenologie und pha¨nomenologischen Philosophie: Buch 1, Allgemeine Einfu¨hrung in die reine Pha¨nomenologie (Halle (Saale): Max Niemeyer Verlag, 1913). J.-P. Sartre, L’eˆtre et le ne´ant (Paris: Gallimard, 1943); J.-P. Sartre, L’existentialisme est un humanisme (Paris: E´ditions Nagel, 1946); S. de Beauvoir, Pyrrhus et Cine´as (Paris: Gallimard, 1944). See, for example, J. Derrida, L’E´criture et la diffe´rence (Paris: E´ditions du Seuil, 1967); J.-F. Lyotard, La condition postmoderne: rapport sur le savoir (Paris: E´ditions de Minuit, 1985); J.-F. Lyotard, Le diffe´rend (Paris: E´ditions de Minuit, 1986). See also M. Foucault, Les mots et les choses: Une arche´ologie des sciences humaines (Paris: Gallimard, 1966). H.-G. Gadamer, Wahrheit und Methode (Tu¨bingen: Mohr, 1960); in English: Truth and Method (2nd ed., London: Sheed and Ward, 1989); see Chapter 1, B.II. M. Horkheimer / T. W. Adorno, Dialektik der Aufkla¨rung (Amsterdam: Querido, 1947); see also Chapter 1. Rawls, Political Liberalism; J. Rawls, The Law of Peoples (Cambridge / MA: Harvard University Press, 1999); see also the restatement of the ‘Theory’ in Justice as Fairness: A Restatement (Cambridge / MA: Belknap Press of Harvard University Press, 2001). Both books approach the core question of whether and how in a setting of fundamental diversity and even opposition (i.e., in a situation of diffe´rend, as the postmodernist Lyotard would have it), common substantive principles can still be formulated.

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choice assumption which made Rawls so innovative and interesting for a broad array of discourse communities. This opened the path to a whole range of new approaches in moral philosophy, as diverse as Ju¨rgen Habermas’ discourse theory of justice44 and – closer to Rawls, yet critical of him – Amartya Sen’s context-oriented, individualized and even more substance-oriented ideas of justice.45 Rawls bases his whole approach on consent in ‘a purely hypothetical situation’,46 by which he meant what rational human beings would universally agree upon ‘in an original agreement in a suitably defined initial situation’. This constitutes the well-known original position from which Rawls wishes to derive, in a ‘strictly deductive’ manner, his two Principles of Justice. Chapter 3 discussed here, on the ‘original position’, engages with Rawls’ three core interests. First, the type of consent to be sought – quite dauntingly, unanimous consent – is made feasible via reduction to consent on a limited, ‘reasonable’ set of core choices (sections 20 et seq.). Second, the situation in which such consent is present, using the device of the original position, is defined (sections 22–25). Third, the two substantive principles of justice – which Rawls regards as those that any reasonable person would favour – are described and compared with possible alternatives (sections 26–30). The first two sections are primarily about consent as the basic source of legitimacy and the principles derived from this. The whole line of argument is similar to viewing discourse as the basic source of legitimacy, where it is conducted in an environment unaffected by coercion (as per Habermas). The difference, of course, is that for Habermas the parties know their place in society and discuss their preferred solution, whereas, for Rawls, the discourse occurs under the veil of ignorance and the decision – rational and unanimous – concerns the best solution for all (roles) in society. In Habermas’ model, discourse – or even ‘bargaining’, in the English translation of Faktizita¨t und Geltung – brings about the best chance for an adequate solution. In Rawls’ model, reason leads to the universally favoured solution. The latter with one huge advantage for Rawls over other contemporary theories: it justifies results for the entirety of a pluralistic society – an assumption challenged by A. Sen – and it offers a method by which competing theories can be put to the test. However, for Rawls (as for Habermas), consent must be reached in a situation which is suitably designed for guaranteeing the utmost consideration of and respect for the interests of all. Although chapter 3 derives two principles of justice that are contrary to utilitarian thought, the starting point is strikingly close to normative individualism that is the basic concept of economic theory. Both share the view that ‘an agreement . . . is the best way for each person to secure his ends in view of the alternatives available . . . ’ and that it constitutes the ‘best reply, so to speak, to the corresponding demands of the others’.47 In fact, Rawls here expressly refers to some core economic concepts. At the same time, however, he stresses the categorical 44

45 46 47

J. Habermas, Theorie des kommunikativen Handelns (Frankfurt: Suhrkamp, 1981)(though with little reference to Rawls); J. Habermas, Faktizita¨t und Geltung (Frankfurt: Suhrkamp, 1992); for more details on Habermas, see also Chapter 4. A. Sen, The Idea of Justice (Cambridge / MA: Allen Lane & Harvard University Press, 2009). Terms and concepts quoted in the rest of the paragraph at ibid., pp. 121, 120, 118, 118 et seqq. and pp. 126 et seqq. Rawls, A Theory of Justice, p. 119. This reflects the principle (i) of scarcity of resources, (ii) of rational, maximizing man and (iii) of exchanges as means to finding comparative advantages via co-operation.

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imperative which can be derived from such agreement. Indeed, the words omitted from the above quote are: ‘agreement on these principles [of justice]’! Economic theory, in contrast, is more focused on agreement as a source of legitimacy for individual exchange. Rawls’ concern with social order (justice) brings him close to Bo¨hm and even goes further. He seeks to formulate principles for all questions of social coexistence and public order. The ends that matter are the so-called primary goods, rights related to freedom and the political order – not goods of an economic nature. Rawls (implicitly) also consents with Bo¨hm’s vision that agreement must be reached in a situation in which neither state nor private power vitiate consent. The ‘original position is defined in such a way that it is a status quo in which any agreements reached are fair’, in other words, ‘justice as fairness is able to use the idea of pure procedural justice from the beginning’ (section 20). This has become the best-known aspect of the whole work. Rawls then also speaks of internalization of such norms (stabilizing society): ‘Justice as fairness is a theory of our moral sentiments . . . [which] presumably affect our thought and action to some degree.’48 Moreover, like institutional economics and Bo¨hm, Rawls derives his results by comparison. He justifies his own theory in relative rather than absolute terms – therefore comparing his two principles with different forms of utilitarian thought and arguing that they are ‘superior to those conceptions known to us . . . ’ (section 21). In the second series of sections (sections 22–25), Rawls tries to describe more thoroughly the procedural setting and the design that best allows for substantive solutions (then developed in the third series). For justice, he sees exchange as being paramount (‘human cooperation both possible and necessary’), but that the players ‘have their own plans of life’ and, though assumed to be rational, also act under a ‘diversity of philosophical and religious belief, and of political and social doctrines’ (section 22). ‘Scarcity’ and ‘mutual disinterest’ – rather undemanding assumptions – are thereby assumed and accepted. Also, for intergenerational justice, the assumption is undemanding. While not assuming that decision-takers are altruistic, Rawls argues that under the veil of ignorance, many know that they will have children and rational decision-makers will therefore show some care for intergenerational justice, they will be inclined to have ‘rational long-term plans’ (section 22). The other five conditions/restrictions – beyond limited knowledge – are summarized in this way: ‘Taken together, then, these conditions . . . come to this: a conception of right is a set of principles, general in form and universal in application, that is to be publicly recognized as a final court of appeal for ordering the conflicting aims . . . ’ (section 23). While the three latter conditions – publicity, binding force and deciding disputes – have each gained wide acceptance, the first two have been questioned. In particular, Sen’s Idea of Justice, dedicated to Rawls, hails the substantive principles approach and the idea of justice as fairness but voices concerns (like several other authors) in his critique of general and universal principles of justice. For him, sidelining experiences derived from concrete situations, along with the unavoidable 48

Ibid., p. 120. On internalization of rules and its role in the perception of justice, see T. Parsons, The Social System (London: Routledge & Kegan Paul, 1951), especially chapters 6 and 7; Stanford Encyclopedia of Philosophy, ‘Social Norms’ (C. Bicchieri / R. Muldoon: 2011), sub 4; Rawls, Political Liberalism, pp. 141 et seq.; Rawls, A Theory of Justice, chapter 8.

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differences in conceptions derived from cultural, social and spiritual beliefs, is not realistic. He advocates a more concrete approach, testing substantive justice through particular fact patterns and admitting the different degrees to which justice can be reached (justice as a continuum).49 While Rawls is universalist, Sen is strongly pluralist in approach. The decision on principles of justice is made under the veil of ignorance (‘the original position’ – sections 24 and 25 – the veil and rationality). Despite similar terminology, the original position has nothing to do with the original status in Hobbes or Rousseau;50 it is instead inspired by David Hume and also Immanuel Kant.51 It really supposes two conditions: that of ‘ignorance’ and that of rationality. The core idea is not complete blindness (absence of insight), but a dislocation of knowledge about personal status combined with strong knowledge necessary for participating in the formulation of principles and rules regarding justice. The party’s personal role in society risks creating a conflict of interest.52 On the other hand, even under the veil of ignorance, all those (hypothetically) deciding on the principles of justice know about conditions of life more generally, life plans (though not their own!), individualism, egoism, justice and the need to comply with principles, once they are established. Therefore, certain assumptions can be established – starting with the binding force of principles once fixed. Rawls’ objective is to design an experimental environment for the best decision-making possible – and this should lead to exclusion of what commonly is found ‘unjust’, but also ‘irrational’. Under the veil of ignorance, endorsement of discrimination is irrational for all decision-makers. No recourse to morals or benevolence is needed, as Rawls stresses, much less demanding, more realistic assumptions (weak stipulations) are sufficient. More rigour of deduction is attained. All ‘restrictions [imposed by the veil] must be such that the same principles are always chosen. The veil of ignorance is a key condition . . . ’, that is, rational decisionmakers would all (unanimously) agree on the favoured principles. Without the veil of ignorance, this would be illusory indeed. Conversely, under the veil of ignorance, ‘the 49

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Sen, The Idea of Justice; see also A. Sen, ‘Equality of What?’, in S. McMurrin (ed.), Tanner Lectures on Human Values (Cambridge: Cambridge University Press, 1980), pp. 185–220, at pp. 215 et seq.; similar in main thrust: M. Nussbaum, Frontiers of Justice (Cambridge / MA: Harvard University Press, 2006), especially pp. 22 et seqq. Hobbes and Rousseau understand the original status or state of nature as preceding and opposed to society itself (one in a highly negative, one in an enthusiastic, way), not as an instrument for (re-)constructing basic order in society. See, for Hume’s exposition of the background conditions of human existence, p. 127. Hume stresses both the necessity of social co-operation and the ineluctability of conflicts of interests, see D. Hume, A Treatise of Human Nature (1740), Book III, Part II, Sec. II; D. Hume, An Enquiry into the Principles of Morals (1751), Sec. III, Part I. Kantian references abound in the Theory: see, for example, p. viii, pp. 11 et seq., p. 179 and especially pp. 251 et seq. Rawls particularly picks up Kant’s idea that the social contract is a mere hypothetical tool of (re-) construction (see p. 12, n. 5 and I. Kant, Metaphysik der Sitten, s. 47, AA VI, 315 et seq.; and s. 52, AA VI, 339) and that moral principles can be found through rational choice of free and equal beings (p. 251 et seq.). On the veil of ignorance and Kant, see pp. 140 et seq., and pp. 252, 256 and also (on the categorical imperative) pp. 179 and 183. ‘. . . no one knows his place in society, his class position or social status . . . fortune in the distribution of natural assets and abilities, his intelligence and strength . . . the special features of his psychology . . . ’ (Theory of Justice, p. 137). On this set of unknown items, see M. Nussbaum, Frontiers of Justice, p. 57; J. Habermas, ‘Reconciliation through the Public Use of Reason: Remarks on John Rawls’s Political Liberalism’, 92 Journal of Philosophy 109–31 (1995), at 112 et seqq. and at 118.

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parties have no basis for bargaining in the usual sense’ nor ‘for the formation of coalitions’. Rationality is the other assumption, now intellectual capacity of the decision-maker – integrating Rawls’ theory into the social sciences; a ‘concept of rationality . . . is the standard one familiar in social theory’. Rawls is, however, careful to exclude envy from his conception of rationality, because envy might destroy any rule fostering incentives; it ‘tends to make everyone worse off’. Broadly speaking, Rawls’ interest in the original position revives the tradition of the social contract by infusing it with modern rational choice theory. The third series of sections discusses the principles which can be derived (sections 26–30). It revolves around the two concepts of ‘reflective equilibrium’ and ‘justice as fairness’, as well as around the two main principles of justice themselves (on the two principles, see sections 26–29, discussed later in this section). The first concept signals the importance of a process which is pragmatic enough to lead to results, but also gives the maximum guarantee for substantive content. Rawls proposes a process both pragmatic and principle-oriented – not striving for one ideal set of principles in the abstract, but proposing a choice among already ‘considered principles’. He does not behave as a creator, but rather relies on the insight of generations of thinkers, on a pool of the most convincing principles available to rational decision-makers – not excluding that others might also come in later.53 In a second step, these principles are scrutinized with respect to their consistency and whether they could really serve all (rational decision-makers). Operationally, one generation decides, also on cross-generational justice, by virtue of being potentially parents and caring for their offspring. Rawls does not content himself with an abstract discussion of the consistency of the favoured principle, nor with a theoretically assumed consensus. Rather, he subjects the result to concrete cases for which he asks whether the application of the favoured principle would meet what is nowadays considered to represent the standard of justice by a variety of theories or thinkers (‘reflective equilibrium’).54 This has some similarity both to the hermeneutic circle and to the research question in institutional economics, insofar as principles are brought into contact with concrete applications (Chapters 1 and 3 in this volume). They mutually inform and refine one another, but in a strictly comparative mode – clearly rejecting any ‘Nirvana-approach’.55 The claim in Rawls’ argument is that justice as fairness can be reached, namely that the core principles and values which seem at first sight to contradict each other (such as liberty and equality/solidarity) can be fully reconciled.56 53

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Theory of Justice, pp. 123 et seq., pp. 150 et seqq. R. Nozick, for example, complains that libertarian principles are not part of the list: Anarchy, State and Utopia (New York: Basic Books, 1974), p. 204. Rawls replies that their addition would not change the outcome in Justice as Fairness: A Restatement, p. 83. Theory of Justice, p. 20 and pp. 120 et seq. (for a discussion of this concept, see R. Hare, ‘Rawls’ Theory of Justice – I’, 23 Philosophical Quarterly 144–55 (1973), at 144–7; R. Ebertz, ‘Is Reflective Equilibrium a Coherentist Model?’, 23 Canadian Journal of Philosophy 193–214 (1993). See Theory of Justice, pp. 122 et seq. for comparative choice vs. nirvana approach in institutional economics, see H. Demsetz, ‘Information and Efficiency: Another Viewpoint’, 12 Journal of Law and Economics 1–22 (1969); E. G. Furubotn / R. Richter, Institutions and Economic Theory (Ann Arbor: University of Michigan Press, 1997), p. 444 and p. 460; on the hermeneutic circle, see H.-G. Gadamer, Truth and Method, pp. 278 et seq. See Theory of Justice, pp. 150–61; pp. 175–83; and already ‘Justice as Fairness’, 54 (22) Journal of Philosophy 653–62 (1957) and ‘Justice as Fairness’, 67 (2) Philosophical Review 164–94 (1958); for a discussion of this

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According to Rawls, the two principles (sections 26–29) which might be reached in this way are as follows (adopting the slight reformulation given by Rawls in ‘Political Liberalism’ of 1993): 1. Each person has an equal claim to a fully adequate scheme of basic rights and liberties, which scheme is compatible with the same scheme for all; and in this scheme the equal political liberties, and only those liberties, are to be guaranteed their fair value. 2. Social and economic inequalities are to satisfy two conditions: first, they are to be attached to positions and offices open to all under conditions of fair equality of opportunity; and second, they are to be to the greatest benefit of the least advantaged members of society.57 These two principles – one of equal liberty and one admitting socioeconomic inequality, only provided there is equal opportunity – are deliberately arranged in a hierarchical order. The first principle is primary and the exceptions – in the second principle – are defined precisely and narrowly: ‘It will be recalled that the general conception of justice as fairness requires that all primary social goods be distributed equally unless an unequal distribution would be to everyone’s advantage.’ This is so because ‘not [being] moved by envy’, ‘they [i.e., all rational decision takers] have no grounds for complaining . . . [and] would, therefore, concede the justice of these inequalities’.58 At the same time, the first principle refers only to the basic (political and personal) rights and liberties, while the second principle considers social and economic order more broadly. The basic rights are to be guaranteed for all (including the least fortunate) to a full amount and it would be difficult to imagine that inequality can also be in their favour in this respect. This strong guarantee yields at least some leeway to accept inequalities in other respects, namely socioeconomic; at least in a well-to-do society. The restriction is that any such inequality must further the interests of the least fortunate (maximin rule). Although Rawls assumes that this test will often be satisfied, he regarded his rather protective formulation of the difference principle as likely to attract criticism.59 His advocacy of the maximin rule is another indication of Rawls’ inclination to strengthen distributive justice, while upholding

57

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concept, see J. Knight, ‘Justice and Fairness’, 1 Annual Review of Political Sciences 425–49 (1998); A. Sen, The Idea of Justice, pp. 52–74; R. Nozick, Anarchy, State, and Utopia, pp. 182–231. Political Liberalism, pp. 5 et seq.; in Theory of Justice (1971), see p. 302. The main change between the two articulations is the textual inversion of principles 2a and 2b (principle 2, ‘first’ phrase and ‘second’ phrase), though it is clear from the rest of the text that the lexical priority of fair opportunity to the difference principle remains unchanged (pp. 302 et seq.). The more recent text also introduces yet another ‘check’ for the plausibility of the basic principles, namely that the more often a principle is accepted as a minimum standard in traditionally important strands of thinking (‘ideologies’), the greater the case for accepting that principle as an emanation of justice (so-called overlapping consensus approach). See Political Liberalism, pp. 133–72; and see previously ‘The Idea of an Overlapping Consensus’, 7 (1) Oxford Journal for Legal Studies 1–25 (1987). Both quotes in Theory of Justice at pp. 150 and 151. See Theory of Justice, pp. 157 et seq.; for the maximin rule, see pp. 152–5, the main reason for this choice being that ‘this conception guarantees a satisfactory minimum’ (p. 156) which parties, under the veil of ignorance, would choose; for the maximin rule, see also J. Cohen, ‘Democratic Equality’, 99 Ethics 727–51 (1989); R. Musgrave ‘Maximin, Uncertainty, and the Leisure Trade-off’, 88 Quarterly Journal of Economics 625–32 (1974). For the criticism that the results in Rawls are too highly protective, see K. J. Arrow, ‘Some OrdinalistUtilitarian Notes on Rawls’s Theory of Justice’, 70 Journal of Philosophy 245–63 (1973), at 250–2; J. Harsanyi,

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a liberal starting point. However, the principles act only in one direction; that is, other solutions, which cannot be deduced in a rigorous way from the principles of justice proposed, are not unjust for this reason alone. For instance, Rawls’ principles do not tell us when, or to what extent, it is unjust to make the middle class of society worse off in economic terms, if the measures taken give particular incentives to the upper class to perform particularly well. Rawls’ principles of justice guarantee only a minimum, the upholding of which is always required as a matter of justice. When it comes to justification, Rawls is faithful to his relativist approach. In particular, he undertakes to compare his principles with those of several variants of utilitarian thought. He admits that persons typically further their own goals, as stressed by all utilitarian thinking – ‘attempting to win for themselves the highest index of primary social goods’.60 Rawls proceeds to gradually weaken the (utilitarian) assumption that everybody has the same preferences (described in a pluralistic society as a ‘case [that] is rather special’) and reaches the conclusion that, by continually weakening this assumption, one draws closer and closer to one’s original position. The first such form of weakening (‘difficulty’) is the great importance which any rational person, in Rawls’ view, attaches to fundamental rights: ‘For this priority [of liberty] implies that the persons in the original position have no desire to try for greater gains at the expense of the equal liberties.’ With respect to risk, Rawls sees risk adversity as finally more logical. The decisive aspect is care for children: even persons willing to take risks would not do so for their children. One does not gamble with ‘other peoples’ money’, prospects or values. Rawls then discusses whether gambling may not be less offensive if the results even out in the long run, a famous argument in utilitarian thought and economic theory. Rawls, in response, points to the fact that winners and losers are – or risk being – often not the same in society even in the long run.61 Towards the end of the chapter, Rawls develops a final consideration that brings him close to a reasoning consistently found in the German Constitutional Court’s case law – also in Lu¨th and Blinkfu¨er. He develops the idea that ‘the public recognition of the two principles gives greater support to men’s self-respect and this in turn increases the effectiveness of social cooperation’.62 For this reason, Rawls dismisses (pure) average utility thinking on the grounds of its deleterious effect on individuals’ self-worth: ‘If, for whatever reason, the public

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‘Can the Maximin Principle Serve as a Basis for Morality? A Critique of John Rawls’s Theory’, 69 American Political Science Review 594–606 (1975), at 595–7. Conversely, the core criticism by A. Sen is that Rawls focuses too much on primary social goods and too little on the question of whether more equality in material welfare is (not) needed to use them effectively. See Sen, ‘Equality of What’, (above fn. 49), at 215–19; Sen, The Idea of Justice, at 65 et seq.; for healthcare: N. Daniels, ‘Justice, Health, and Healthcare’, 1 American Journal of Bioethics 2–16 (2001), at 3–6. See Theory of Justice, p. 142; quotes in the following at pp. 164 and 169. See ibid., pp. 170–2. In favour of such an idea of ‘hedging’, see, for instance: F. Y. Edgeworth, Mathematical Psychics (London:Kegan Paul, 1881), pp. 51–6, attempting to show that the ‘interest of all is the interest of each’; R. Posner, ‘The Ethical and Political Basis of the Efficiency Norm in Common Law Adjudication’, 8 Hofstra Law Review 487–507 (1980), at 499 et seq. Among opposite views, however, also from economic theory, Keynes’ answer is likely most famous: ‘In the long run, we are all dead’, J. M. Keynes, A Tract on Monetary Reform (London: Macmillan, 1923), p. 80; for a recent substantiation of the claim of the uneven accumulation of wealth, see also T. Piketty, Capital in the Twenty-First Century (Cambridge / MA: Belknap Press of Harvard University Press, 2014). See Theory of Justice, p. 178 and quotes in the following at pp. 181 and 179 respectively.

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recognition of utilitarianism entails some loss of self-esteem, there is no way around this drawback.’ Interestingly Rawls regards law as a social fact that – because it is public – shapes thinking and has to take into consideration how it is perceived, and surprisingly, order is also internalized! Rawls, finally, strikingly suggests that Kant’s famous exhortation to treat ‘men as ends in themselves and never as only a means . . . obviously needs an explanation’. This need for an explanation is noteworthy if, as the German Constitutional Court conceives it, Kant’s notion lies at the heart of any fundamental rights thinking.63 For Rawls, however, using the Kantian approach as an additional line of arguments implies only adding one more piece of ‘overlapping’ consensus between as many broadly used approaches as possible, now with other legal systems and traditions (a non-utilitarian, strictly Kantian approach). As lawyers, we might add that the notion of fundamental rights is the one set of rights that has achieved a worldwide constitutional prominence like no other and thus constitutes the most fundamental value order on which to ground private law theory. Probably the fiercest attack on Rawls’ theory – even from thinkers that sympathize with him in principle – is concerned with the theory’s ‘universal’ claim. It is said to be too abstract and not pluralistic enough. These are important concerns, namely in a global arena of law, also of private law. The most acute formulation of this two-fold critique can be found in Amartya Sen. While clearly building on Rawls, Sen proposes a more pluralist and more individualized approach to justice – akin, yet contrasting, and amazingly more closely answering to economic theory as well, namely to the total welfare paradigm.64 Sen argues in essence that even in regard of the ultimate goal of utilitarianism (the maximization of liveability for all), it lacks consistency to apply the same units of account (for measurement for increase in welfare). Societies in this world, but also social needs in different social strata, and finally also individual lifestyles (even altruistic ones) are too different. The idea of justice is therefore not universal and to be formulated in abstract, but by concrete individual steps of obvious and recognized increase in justice. Sen as well – here entirely in accordance with Rawls – sees a priority that the facilitation for all, the availability of all basic options for the weaker must be secured – this aim taking priority even in a maximization approach.65 The pluralistic search for increases in 63

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BVerfGE (Official Reports) 45, 187 (1977), at 228. The court, in the tradition of Kant’s categorical imperative (Grundlegung zur Metaphysik der Sitten, AA IV, 428 et seq.), interprets Article 1 of the German Constitution – mandating respect for the dignity of human beings – as mandating exactly this rule, that man always has to be treated as an end in himself and never as only a means. See Sen, Idea of Justice – answering in use of terminology, but as well in dedication, to Rawls, A Theory of Justice – both lead texts. For the choice, in institutional and neoclassical economic theory, of total welfare as the ultimate benchmark (i.e., of the sum of all welfare benefits in the whole economy aggregated), see A. Kronman / R. Posner, The Economics of Contract Law (Boston / MA: Little, Brown, 1979), introduction, pp. 1–2 (ultimate benchmark: ‘wealth of society’). Of no importance are issues of redistribution: J. Hirshleifer, Price Theory and Applications (Englewood Cliffs / NJ: Prentice Hall, 1976), p. 287; O. Williamson, ‘Peak-Load Pricing and Optimal Capacity under Indivisibility Constraints’, 56 American Economic Review 810–27 (1966), at 813 (‘society is indifferent to the income redistribution’); more extended discussion, for instance, by F. Go´mez-Pomar, ‘European Contract Law and Economic Welfare: A View from Law and Economics’, in S. Grundmann (ed.), Constitutional Values and European Contract Law (Alphen: Kluwer International, 2008), pp. 215–40, especially pp. 228–36; for alternative views, namely so-called consumer welfare, see Chapter 21, fn. 65. For a concise summary of the Idea of Justice – in confrontation with the Theory of Justice – see D. Satz, ‘Amartya Sen’s The Idea of Justice: What Approach, Which Capabilities?’, 43 Rutgers Law Journal 277–93 (2012).

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justice is therefore mandatory – and operationalized already in the so-called capabilities approach.66 This approach moreover has by no means only remained abstract, but has been thought through very concretely in law – albeit primarily in one field only, labour law, and this also for countries of high economic development.67 The core idea is that the material weight of the opportunities offered should be primarily considered and neither, abstractly, should the maximization of happiness be formulated as the ultimate goal, nor, concretely, resource access and willingness to pay. Rather, it is decisive – in concrete terms but qualitatively weighted – how a solution maximizes the so-called substantive freedoms for all, namely the ability to live a long life, the participation in political life and the actual access to economic activity. Obviously not only significantly more pluralistic objectives are incorporated in such an approach, but the approach already holds inherent mechanisms of redistribution.68 Rawls’ text is not directly concerned with issues of private law – while Bo¨hm’s refers to it already in its title. Economic rights – core to private law – are subject only to the second principle of justice and these pose only outer limits. Three reasons relate the text to private law nevertheless. First, as Sen puts it (contrary to Rawls), at least some level of economic rights might require absolute protection and be limited only by other such rights. Second, any given market order or economic/business law system could be assessed against the second principle, namely whether it furthers the interests of the least well-to-do. If Thomas Piketty is correct that market economies in the twentieth century have led to accumulation of wealth mainly with the richest,69 the following would ensue: while the second principle may still not have been violated (where no solution more favourable to the least well-to-do could be found), it remains clear as a minimum that the search for such a solution would take precedence over other goals. Third, it is unclear whether business regulation, which Bo¨hm sees as a constitutional order, is really well-placed in the weaker second principle. Due to the sweeping importance of economic questions in all areas of life, even in richer societies, Rawls might require modification with considerations from Bo¨hm (see the conclusion in Section V). What the Lu¨th case – combined with the Blinkfu¨er case – strikingly shows is that even the fundamental political freedoms are dependent on economic power situations; that 66

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Developed mainly in: A. Sen, Commodities and Capabilities (Oxford: Oxford University Press, 1985); concise summary by A. Sen, ‘Development as Capability Expansion’, in: S. Fukuda-Parr et al. (eds.), Readings in Human Development (New Delhi / New York: Oxford University Press, 2003), pp. 41–58. S. Deakin / R. Rogowski, ‘Reflexive Labor Law, Capabilities and the Future of Social Europe’, in R. Rogowski et al. (eds.), Transforming European Employment Policy: Labour Market Transitions and the Promotion of Capability (Cheltenham: Edward Elgar, 2011), pp. 229–54; A. Supiot, ‘En guise de conclusion: la capacite´, une notion a` haut potential’, in Deakin / Supiot, Capacitas, (above fn. 25) pp. 161–71; E. Kocher, ‘Das Recht auf eine selbstbestimmte Erwerbsbiografie’, 41 Leviathan 456–78 (2013), at 459–60; very recently also B. Langille (ed.), The Capability Approach to Labour Law (Oxford: Oxford University Press, 2019); see also I. Robeyns, ‘The Capability Approach’, in S. Olsaretti (ed.), The Oxford Handbook of Distributive Justice (Oxford: Oxford University Press, 2018), pp. 109–28. On the pluralist potential of the capabilities approach and on its potential for redistribution, see A. Sen, ‘Presidential Address: The Nature of Inequality’, in K. Arrow (ed.), Issues in Contemporary Economics (Houndmills: Macmillan, 1991), pp . 3–22 (especially 10 et seq.), and The Idea of Justice, chapter 9, ‘Plurality of Impartial Reasons’, pp. 194–207; E. Anderson, ‘Justifying the Capabilities Approach to Justice’, in H. Brighouse / I. Robeyns (eds.), Measuring Justice (Cambridge: Cambridge University Press, 2010), pp. 81–100. T. Piketty, Capital in the 21st Century (Cambridge / MA: Belknap Press of Harvard University Press, 2014).

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even for the first principle values (if one admits that they are more important), distribution of wealth in society is paramount, also for imposing them on others. One could argue that a market order – in the sense of Bo¨hm’s, perhaps translated into a Habermasian discourse situation free of excessive power on certain actors – is also required when it comes to operationalizing the political and personal freedoms that Rawls puts at the centre. Distortions of political processes, for instance in an internet society, immediately come to mind. IV A third (or fourth) text adds depth to the picture, shorter than the others, less discussed, but now much more focused on the concrete texture of law, namely constitutional, economic and private law. Like Bo¨hm’s, this text conceptualizes the theme of economic constitution after World War II. Luigi Mengoni, probably Italy’s most influential private law scholar of that time, sought to explore one lacuna. His ‘Forma giuridica e materia economica’ (1963/ 66) focuses on the relationship between law and economic activities. Mengoni asks whether law serves mainly as an instrument to accomplish such activities (prevalence of the economic) or whether it also guides and shapes them (prevalence of the political). Recent writings on the same topic from diverse authors demonstrate the question’s ongoing relevance.70 Mengoni, again against the backdrop of a historical introduction, enquires after law’s function in economic activity – whether it only provides the instruments needed by defining, for example, party autonomy (with a set of default rules as a backstop to contract drafting) and private property, or whether it rather guides economic activity, at least partially, thereby shaping economy. Mengoni sees the liberal approach by no means based on utilitarian thought initially (contrary to what most German authors believed to be the case because of its importance in neoclassical thought), but rather as rooted in the idealistic concept of human nature. Free will – and thereby (liberal) party autonomy – was seen as the most sublime emanation of such nature. In Mengoni’s view, liberalism was highly successful in achieving liberation from the bonds of the Ancien Re´gime, but failed to contain the dangers which were engendered, successively, by industrialization and mass society. It liberated the famous ‘invisible hand’ without then containing it. Mengoni then shows how collective forms of contracting were meant to solve these new issues, namely collective bargaining in labour relationships and co-operatives formed by consumers – failing, however, over problems of collective action. Thus, this great private law scholar thinks as a functionalist for the whole system – in a highly value-oriented approach (the 1985 book is on Law and Values!). Values guide the remainder of the paper, which is mainly normative in style, but rooted in the posited legal value system. Mengoni gives a series of three sections, the third with the main thesis. Via the constitution, the whole economic framework can be brought in line 70

K. Pistor/ C. Milhaupt, Law and Capitalism: What Corporate Crises Reveal about Legal Systems and Economic Development Around the World (Chicago / IL: Chicago University Press, 2008); K. Pistor, The Code of Capital: How the Law Creates Wealth and Inequality (Princeton / NJ: Princeton University Press, 2019); A. Somek, The Cosmopolitan Constitution (Oxford: Oxford University Press, 2014).

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with the value system which society, through a democratic process, has decided on (see fn. 11). Sections 4 and 5 describe the public regulation regime (overall and core examples), sections 6 and 7 the interplay between such regulation and economy. For Mengoni, Continental European capitalism must find a compromise between state organization and individual liberty. Economic participation of all will be decisive for the safeguarding of democracy – a similar idea as in Bo¨hm, but more in a law and society tone. Most importantly, Mengoni no longer sees the value order as rooted in natural law, but instead as constitutionalized (actually, while the court judgments came first in Germany, this type of conceptualization comes first from Italy).71 Interpreting the constitution with respect to the economy is the core theme of the paper, tying economy more intimately to a supraindividual value system. Mengoni becomes very concrete and assertive – when (as, later, did the German Constitutional Court in its decision on sureties) he declares that classical liberalism is no longer in line with the value system of post-war constitutions: ‘The Constitution repudiates the formal conception of justice . . . [mandating] that the social order . . . ought to be improved, so that the social order, instead of being a given, is constructed by the State.’72 Economic order is to be seen – in terms derived from Scholastic philosophy – not as jus normatum, but in a much more foundational way as justitia normans. For private law order, Mengoni adds a decisive step beyond Bo¨hm and Rawls. Beyond expressing the need for a market order, beyond positing an ideal-hypothetical situation for decision-making about it (and justice), Mengoni tries to illustrate – within the existing institutional setting – how the constitutional order can be developed for and applied to questions posed by actual, current economic activity. The ‘legal black hole’ is filled with the concept of ‘constitutionally guided discretion’, for instance in the hands of judges. Moreover (again transcending Bo¨hm), these questions are carried down to the level of individual rights. Not only are restrictions of competition dealt with, but economic order more generally and, in particular, protection in cases of imbalances between the parties resulting either from market structure or from the structure of the transaction. In all this, Mengoni’s proposal – developed under the auspices of the constitution – is by no means strongly paternalistic. To the contrary, overall welfare is best served by a guarantee of broad party autonomy (see also Chapter 11 on Raiser). For instance, Mengoni characterizes the duty of the management of a firm to act in the common interest (as under German law at that time) as ‘psychologically absurd’. Altogether, Mengoni observes three main features of an economic order. It is a general economic order, not just an order of competition. It is constitutionally framed and grounded and therefore, literally, of constitutional rank. It should further an equilibrium of forces (a ‘pluralism’ of forces, to which he devotes further writings). This is a masterpiece of practical reasoning in legal scholarship – and the only text that can really explain how groundbreaking the Lu¨th and Blinkfu¨er cases were. 71

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See, for instance, H. Dreier, Dimensionen der Grundrechte: Von der Wertungsordnungsjudikatur zu den objektiv-rechtlichen Grundrechtsgehalten (Hanover: Schriftenreihe der Juristischen Studiengesellschaft Hannover, 1993), pp. 20–5 et passim (‘constitutionalization’ of the whole legal order and natural law thinking); and, of course, C.-W. Canaris, in this volume, namely Chapters 7 and 8. See Mengoni, ‘Forma giuridica e materia economica’, pp. 159 et seq.

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V The texts discussed here all concentrate on ‘good’ order, aim to establish a constitutional order and are based on an individualistic ‘liberal’ model of rational decision-makers (more hesitant perhaps is Mengoni). However, the areas of application are different, perhaps even complementary between Bo¨hm and Rawls. Bo¨hm and Mengoni start from a historical context, but develop normative consequences, while Rawls argues in an exclusively ahistorical and hypothetical ‘ideal’ mode. Because of their different fields of application, the three texts come together in a surprisingly constructive way. For his part, Rawls’ aim is to establish basic principles of justice (i.e., of liberal equality) concerning core political rights and values (including security of personal property), not businessrelated freedoms. His order is developed on a unanimous rather than negotiated basis (with decisions taken in a procedurally ideal setting). Only on a secondary level does Rawls’ model permit (but not impose) measures of solidarity on a basis of unequal treatment (distributive justice). His text also deals with economic activities themselves only at a secondary level (if at all). In the other two texts, these activities are the core interest, although the political dimension that they see as connected with markets should not be underrated. Bo¨hm’s and Mengoni’s ideas revolve around the good ‘procedural’ setting for negotiated consent in real markets and real society, not a hypothetical set. Bo¨hm’s answer is negotiated consent in a setting that avoids harmful power situations. The political process is understood to be responsible for creating those settings, rather than for the outcomes as such. For creating such settings, Mengoni proposes a consent-oriented political process, Bo¨hm rather a meritocratic method, giving particular weight to scholarship in the search for ‘better’ substantive solutions). From all texts, a proposal for basic societal order can be derived – for both the political and the economic spheres of society. They coincide enough in their basic assumptions. They all can be read as an intersection between utilitarian and fairness-oriented thinking (even if they diverge, as Rawls strongly highlights). Given different fields of application and different modes of decision-making, it would seem to be even more unrealistic to rely on one reason alone, combined with a unanimity requirement. For economic activities, there would be no solution without negotiation and all that can be publicly established is a good procedural setting to facilitate ‘free’ and informed consensus. All three texts can also be seen as ‘manifestos’ within their respective discursive communities. Bo¨hm, with his historic account, wrote in the context of a divided Germany and aimed to rebut the Marxist image of the ‘historic’ necessity of capitalism being supplanted by communism. Mengoni’s background is similar. Conversely, Rawls, in a context of libertarian thinkers, grounds his text in ‘their’ categories of individualism, consensus and rational choice, seeking to justify, with these ‘weapons’, principles of justice which are thoroughly protective to the least well-to-do in society. The texts can also be fruitfully contrasted. Bo¨hm’s text is concrete, drawing on rich historical material – therefore descriptive, but then highly normative. Rawls’ text is universal and can be characterized as an attempt at meta-normative argument. Its strength lies in the proceduralization from which substantive principles are derived. Because Bo¨hm lacks this side (not Mengoni though!), both texts are more complementary. Rawls

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can fill the main ‘gap’ in Bo¨hm, which is how the process of decision-making can legitimate the kind of market order chosen – but alternatively, so could Mengoni. Bo¨hm has some affinity to utilitarian thought, although his insistence on market order and on the parallelism between political and economic order reach well beyond the typical trends of twentieth-century utilitarian thought. Rawls is clearly opposed to utilitarian thought. In all this common ground and divergence, the texts speak to each another. For a fundamental societal order, they even seem to complement each other, with overlapping focuses: in their scope of application, in their attitude to the procedure of decision-taking and in the intensity with which they address private law. In contrast to the liberal philosopher and to the ordo-liberal, Luigi Mengoni is a principled realist. He considers the carefully assessed, multi-facetted issue of the legal reality of economic activity. He is the one who ties considerations of societal order back to existing, namely constitutional, law. He does so by assessing any theory on societal order against the existing constitution. Finally, Mengoni considers market order and protection more broadly, and indeed much more generally, than Rawls or Bo¨hm. And Sen opens up this picture to globalization, incremental improvements and pluralism.

7 Values in Private Law Moritz Renner

a topic and materials I This chapter concerns the role of values in private law adjudication. It is closely related to the questions dealt with in Chapter 1 on the ‘inside and the outside of private law’. A strictly positivist theory of private law might argue that there is no place for values in a rule-based legal order. Indeed, conflicts of values seem much more important for interpreting opentextured and often politically charged constitutional principles than for applying the seemingly technical rules of private law. However, disputes between private parties are by no means exempt from value conflicts. In a globalized world, it has even become more frequent that value conflicts play out in private law constellations. Moreover, in modern legal systems, constitutional values increasingly permeate the realm of private law, especially with a view to the growing importance of fundamental and human rights (see Chapter 8). The case in Box 7.1, decided by the German Federal Court of Justice, demonstrates these developments in a particularly striking manner. The case is challenging because its decision will almost inevitably involve value judgements. There is a strong interest of the claimant to preserve not only historical truth but also their right to privacy. At the same time, there is a countervailing interest of the defendant to be protected in their freedom of expression and freedom of the press. The balancing between these countervailing interests may be highly dependent on the legal, constitutional, but also political context of the decision. II The reference texts for this chapter both come from the United States. Ronald Dworkin has been one of the leading legal theorists to revive the idea of a legal reasoning based not only on positive legal rules, but also on principles transcending positive law. His approach has been highly influential not only in the United States, but in Europe as well. Yet it has not remained uncontested. Duncan Kennedy, one of the exponents of 156

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BOX 7.1 CASE STUDY

Bundesgerichtshof IX ZB 10/18, NJW 2018, 3254 The claimant in this case is a Polish national and a survivor of the Nazi concentration camps in Majdanek and Auschwitz. The defendant is a German TV station. The defendant TV station on its website advertised a historical documentary referring to ‘the Polish extermination camps’ Majdanek and Auschwitz. Following a complaint by the Polish embassy in Germany the wording on the website was changed into ‘the German extermination camps on Polish territory’. The claimant asked the defendant to publish a pre-formulated apology in Polish and German on its website. Subsequently, the defendant apologized to the claimant and published a corrigendum with a different wording on its website. The claimant held this to be insufficient and went to court in Poland, with the aim of obligating the defendant to publish the pre-formulated apology. After the claimant was successful in the Polish courts, the German Federal Court of Justice had to decide whether the Polish judgment should be enforced in Germany. Under Articles 45 and 34 of the pertinent European Regulation 44/2001 the enforceability of judgments from other EU member states may be refused if ‘such recognition is manifestly contrary to public policy in the Member State in which recognition is sought’.

BOX 7.2

Ronald Dworkin, Taking Rights Seriously (Cambridge / MA: Harvard University Press, 1977), pp. 81–130 Duncan Kennedy, ‘The Paradox of American Legalism’, 3 European Law Journal 359–77 (1997) the critical legal studies movement, is highly sceptical of the idea that judicial decisionmaking should be guided by overarching values or principles. In the spirit of American legal realism, he seeks to expose the inherent contradictions of the values that inform the Western legal tradition. The reference text for this chapter is of special interest in this respect, as it identifies the parallels and differences between legal values (and their critique) in the United States and in Europe (Box 7.2). As Kennedy’s article suggests, value-oriented approaches to legal reasoning have often taken a different form in Europe than in the United States. Robert Alexy, one of the most influential Continental European theorists in this respect, bases large parts of his theory of legal reasoning on discourse theory (see Chapter 4). The differences between US and European legal thinking underlying this divergence are well summarized in a comparative study by Grechenig and Gelter. The convergences in theoretical development on both sides

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BOX 7.3

Robert Alexy, A Theory of Legal Argumentation: The Theory of Rational Discourse as Theory of Legal Justification (Oxford: Oxford University Press, 1989) Kristoffel Grechenig / Martin Gelter, ‘The Transatlantic Divergence in Legal Thought: American Law and Economics vs. German Doctrinalism’, 31 Hastings International & Comparative Law Review 295–360 (2008) D. Kennedy/ C. Joerges / D. M. Trubek (eds.), Critical Legal Thought: An AmericanGerman Debate (Baden-Baden: Nomos, 1989)

of the Atlantic, when it comes to the critique of the respective traditions, are highlighted in the proceedings of a Bremen colloquium documented by Joerges and Trubek1 (Box 7.3).

b theories, context and discussion I What role do values play in private law and, specifically, in private law adjudication? From the perspective of classical (Continental European) legal positivism and on the basis of the private law codifications of the nineteenth century, the answer seemed simple: there is no room for value-based adjudication in private law.2 Value judgements may guide the legislature when it enacts new laws, but the judge has to apply these laws without making value judgements of their own. This rather simplistic view has a strong normative underpinning in the democratic separation of powers. It has, however, been challenged from various sides. On the one hand, there has always been an ethical critique of the positivist disregard for values in legal adjudication. The ethical critique has been most forcefully put in the context of transitional justice. This is evidenced by the famous Hart/ Fuller debate (see Chapter 1) and the ‘Radbruch formula’ holding that (National Socialist) statutes had no legal quality if they were ‘unbearably unjust’ or ‘fundamentally disregarded human equality’.3 However, in today’s pluralist societies, the idea that there is a single set of absolute and universally accepted values accessible to the judge is not easy to uphold. In our example case (Box 7.1), even while referring to largely the same set of values, Polish and German courts reached very different conclusions,

1

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3

For an update of the discussion (twenty-five years later) see the contributions to the German Law Journal’s Special Issue in volume 12 (2011), issue 1. See especially Hans Kelsen, Reine Rechtslehre: Einleitung in die rechtswissenschaftliche Problematik (Leipzig / Vienna: Deuticke, 1934), p. 36. See Gustav Radbruch, ‘Gesetzliches Unrecht und u¨bergesetzliches Recht’, 105 Su¨ddeutsche Juristenzeitung 107 (1946).

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eventually culminating in the German Federal Court of Justice’s refusal to enforce the Polish judgment. On the other hand, since the beginning of legal positivism, there has been an epistemological critique of the classical positivist methodology.4 The critique argues that it is impossible for the judge to simply apply the law without bringing their personal position and values to bear on the case at hand. This has led proponents of the Freirechtsschule in Germany, legal realism in the United States and similar movements worldwide5 to claim that it is the judge and not the legislator who actually makes law according to their value orientations. Others, such as Josef Esser (see Chapter 1), have taken an intermediary position by arguing that the judge is at the same time bound to legal constraints and a responsibility towards the values of the larger community which they serve. Legal rules even make express references to values. In our example case (Box 7.1), the notion of ‘public policy’ referred to in Article 34 of EU Regulation 44/2001 is such a rule. In a similar manner, the general clauses of German private law are today generally taken to refer to the values enshrined in the German Constitution (see Chapter 8). From the perspective of this intermediary position, which can be considered widely accepted today, the question of values in private law has largely become a methodological issue. It has become a question of the role of the judge, and is no longer an abstract question about the nature of private law. Yet the issue has not become less contentious. Innumerable attempts have been made to conceptualize and rationalize the process of judicial decision-making in a way that, much in the spirit of Josef Esser, takes account of both the methodological demands of legal discourse and the necessary openness of legal discourse to value judgements. One of the most influential thinkers in contemporary legal theory who has undertaken such an attempt is US legal theorist Ronald Dworkin. An excerpt from his famous 1977 book Taking Rights Seriously is the first reference text of this chapter. In the context of the debate on values in private law, Dworkin represents a rather optimistic position. He acknowledges that there are ‘hard cases’ where a judge cannot easily develop a solution for the case at hand based on statutory interpretation alone. At the same time, he argues that these hard cases nevertheless have only one correct legal solution and that the judge is not free to fill the perceived gaps in statutory law with idiosyncratic and purely subjective value judgements. Instead, he claims that an ideal judge (‘Hercules’) would base their decision on a rational reflection of the value judgements of the community, as they are embodied in the constitution. The second reference text of this chapter takes a contrary, rather pessimistic stand on the question of value judgements in private law adjudication. The author of the text, Duncan Kennedy, is one of the most famous exponents of the critical legal studies movement, which, in the tradition of American legal realism, is at the same time a methodological and an ideological critique of legal practice. From Kennedy’s perspective, the question of 4

5

Compare Benjamin Lahusen, Rechtspositivismus und juristische Methode. Betrachtungen aus dem Alltag einer Vernuftehe (Weilerswist: Velbru¨ck, 2011). For a comparative overview of the developments in Germany and the United States see Kristoffel Grechenig / Martin Gelter, ‘The Transatlantic Divergence in Legal Thought: American Law and Economics vs. German Doctrinalism’, 31 Hastings International & Comparative Law Review 295–360 (2008).

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values in private law boils down to a political controversy between liberal/socialdemocratic and conservative positions that is barely masked by the rhetoric of legal methods. Although Kennedy and Dworkin both write from a distinctively US perspective, their positions are paradigmatic for private law discourse not only in the United States. Germany and Italy, for example, have both seen similar controversies and theoretical fashions when it comes to the role of values in private law.6 Today, in Europe as much as in the United States, a certain pragmatism dominates the discussion. Many authors stress the role of constitutional rights as guiding principles, whereas jurisprudence has tried to integrate the critique of Kennedy and others into a more self-conscious methodology.7 II One of the central chapters in Ronald Dworkin’s book Taking Rights Seriously deals with ‘hard cases’. Dworkin implicitly defines ‘hard cases’ as those in which ‘no settled rule disposes of the case’.8 Against what he takes to be the position of contemporary legal positivism (see Chapter 1), Dworkin argues that the decision of such cases does not simply lie in the ‘discretion’ of the judge; instead, he claims, ‘one party may nevertheless have a right to win’.9 It seems that, at this point, Dworkin refers to a legal – rather than a merely moral – right of the party to win. His question, then, is: how can there be a legally grounded decision of hard cases when statutes and settled case law do not provide a solution? Dworkin’s answer to the question is based on a conceptual distinction between principles and policies. He employs this distinction in order to better understand the interplay between judge and legislator. For Dworkin, the judge is not a ‘deputy to the appropriate legislature’.10 The judge must base their judgments on a wholly different set of arguments. Whereas the legislature can appeal to arguments of policy, that is, it (only) needs to show that its decision ‘advances or protects some collective goal’, the judge must resort to arguments of principle, that is, they must show that their decision ‘respects or protects some individual or group right’.11 Thus, the judge cannot simply base their decision of a civil case on the consideration that it would be economically wise; they must decide whether or not the plaintiff had a legal right to the claimed relief. Dworkin supports his thesis by two arguments which he calls ‘as unoriginal as possible’.12 To him, considerations 6

7

8 9 10 11 12

For a comparative perspective on German developments see the contributions in D. Kennedy / C. Joerges / D. M. Trubek (eds.), Critical Legal Thought: An American-German Debate (Baden-Baden: Nomos, 1989). For Germany see Ralf Dreier, ‘Recht und Moral’, in Ralf Dreier (ed.), Recht – Moral – Ideologie (Frankfurt: Suhrkamp, 1981), pp. 180–216 and Robert Alexy, A Theory of Legal Argumentation: The Theory of Rational Discourse as Theory of Legal Justification, (Oxford: Oxford University Press, 1989) on the guiding function of constitutional rights; Friedrich Mu¨ller, Strukturierende Rechtslehre (Berlin: Duncker & Humblot, 1994) on the necessary indeterminacy of linguistic meaning. Ronald Dworkin, Taking Rights Seriously (Cambridge / MA: Harvard University Press, 1977), p. 81. Ibid. Ibid., p. 82. Ibid. Ibid., p. 84.

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of both democratic majority rule and predictability of decisions militate against the reference to policy objectives in judicial decisions. With his concept of principle-based adjudication, Dworkin seeks to overcome what he sees as a rather artificial account of legal reasoning: the (modern) positivistic idea that adjudication is limited by legal constraints, but within these constraints discretionary. The concept of principle-based adjudication for Dworkin reflects the fact that judicial decisions are subject to the consistency requirements of legal discourse and at the same time reflect the ‘history and morality’ of the institutional context.13 This merging of legal form with moral content comes close to Fuller’s concept of the ‘inner morality’ of the legal system,14 but it is much more explicit and detailed. Dworkin makes his concept concrete by confronting possible objections and problems it may raise, first with regard to the danger of formulating rights in a manner that is too abstract, second with regard to the problem of unjust precedents, and third with regard to the problem of the democratic separation of powers. Dworkin answers to the first objection by elaborating a distinction between abstract and concrete rights. He argues that there is a category of rights which goes beyond the abstraction of political ‘grand propositions’ in that they aim at a particular resolution of conflicts.15 Only such ‘concrete rights’, he claims, are to be respected by judges deciding a legal case. Thus, Dworkin’s definition of concrete rights itself remains rather abstract, and he acknowledges that rights and principles can never be wholly separated from the community goals on which they are based. Nevertheless, he explicitly positions himself against Richard Posner and the economic analysis of law (see Chapter 3) by arguing that abstract rights based on economic policies can never determine the outcome of a civil case – which must be based on concrete individual rights alone.16 Dworkin further supports his distinction between abstract and concrete rights by arguing that a judge – like the referee in a game – can only argue within a specific institutional context. Therefore, there is no way for a judge to simply ‘give effect to his background convictions’ or appeal to the values of the community at large.17 Here, Dworkin makes a rather sociological point, however, without either clarifying the normative status of this argument or describing the mechanisms of institutional constraint in more detail. With a view to our example case (Box 7.1), it is important to note that the Polish decisions in the case were rendered against the backdrop of a highly controversial ‘Holocaust Law’. The Polish Holocaust Law effectively prohibited statements suggesting that ‘Poland or the Polish people’ had a share of responsibility in the crimes of the German Nazi regime. German courts, in contrast, had to assess the case in the light of earlier precedents of the Federal Constitutional Court holding that the fundamental rights enshrined in the German

13 14

15 16 17

Ibid., p. 87. Lon L. Fuller, ‘Positivism and Fidelity to Law: A Reply to Professor Hart’, 71 Harvard Law Review 630–72 (1958), 650. Ronald Dworkin, Taking Rights Seriously (Cambridge / MA: Harvard University Press, 1977), pp. 89 and 93. Ibid., p. 98. Ibid., p. 102.

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Constitution, among them freedom of expression and freedom of the press, formed part of German public policy in international cases. Dworkin seems to assume that the institutional constraint that effectively binds the judge to a particular set of admissible arguments and a particular set of principles is very much equivalent with the accepted methods of legal reasoning. Thus, Dworkin explains how an ideal philosophical judge (Hercules) can make principle-based decisions with reference to the constitution, statutes and the common law. His basic idea, shared by large parts of conventional jurisprudence, is that, with regard to the interpretation of statutes and the constitution, Hercules can rely on both legislatorial intent and the principles embedded in positive law. Thus, the judge – even the mediocre ‘Herbert’ – engages in a ‘process of reasoning’ which necessarily refers to legal principles and ‘concrete rights’.18 When arguing with precedents in the common law, the judge becomes involved in a similar process of reasoning: they are bound to the objective of ‘treating like cases alike’. In this context, Dworkin describes reasoning by precedent as a method of analogical reasoning: the judge (Hercules) ‘must construct a scheme of abstract and concrete principles that provides a coherent justification for all common law precedents’.19 This idea of principles underlying precedents allows Dworkin to counter the second objection against his theory, which relates to the treatment of precedents perceived as unjust. As Hercules must base their decision on a ‘coherent set of principles’, they can ‘disregard some part of institutional history as a mistake’.20 Here, we come back to Dworkin’s initial thesis: institutional constraint and the reflection of values are not two distinct stages in the process of adjudication, but they are realised at the same time. It is in the process of legal reasoning that judges reflect on principles as a concrete form of value judgements. From this perspective, a third potential objection that Dworkin initially raised against his own theory simply vanishes. There is no problem of the separation of powers if a judge necessarily – and necessarily within the limits of legal discourse – refers to value judgements in the form of principles.21 As the judge engages in and is bound by principle-based legal (and not political) reasoning, ‘nothing remains to submit to either his own or the public’s convictions’.22 Dworkin’s theory thus accommodates both the specific rationality of legal reasoning and its embeddedness in a democratic society. This seems highly plausible to the extent that courts can rely on principles that are enshrined in constitutional norms. However, even here principles can conflict and collide – such as the protection of personality rights and the right to free speech in our example case (Box 7.1). III Duncan Kennedy, the author of the second reference text of this chapter, would certainly not follow Dworkin’s highly idealistic account of legal reasoning. Quite to the contrary, 18 19 20 21 22

Ibid., pp. 105–7. Ibid., pp. 113–16. Ibid., pp. 119–20. Ibid., pp. 123–30. Ibid., p. 125.

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Kennedy’s text is a direct attack on ‘the American mainstream [in jurisprudence], typified by Dworkin’.23 Kennedy stands in the tradition of legal realism and critical legal studies, ‘the “viral” strain of ideology-critique in American legal thought’.24 The reference text is an attempt to explain this tradition to a European audience, it is an endeavour in comparative legal thought. Kennedy argues that the critical tradition of US legal thought has its background in a specific historical and institutional constellation: whereas in Europe ‘the stakes in general ideological conflict have been higher’, ‘in the United States, the stakes of judicial law-making have been much higher than in Europe’.25 As a consequence, there is an ‘American tendency to turn political conflicts into legal questions’.26 This tendency, according to Kennedy, explains that sophisticated ‘techniques of critique of substantive legal regimes and of the judicial opinions that rationalise them’ have emerged.27 At the same time, he claims, it explains a particular respect for – and preoccupation with – the rule of law. Here, Kennedy turns against common misunderstandings that hold the differences between common law and civil law, or the emergence of judicial review in the United States, responsible for the particularities of ‘American Critical Legalism’. Kennedy further develops his thesis by enumerating the three factors he deems decisive for the emergence of the US critical tradition: beyond the high ideological stakes of judicial law-making, a comparatively ‘meagre’ legal tradition and shifting political sympathies of the judiciary.28 The relevance of these factors is convincingly demonstrated with a view to the Supreme Court’s landmark decisions in striking down labour legislation after the New Deal (Lochner), on the one hand, and in overcoming racial discrimination and segregation (Brown v. Board of Education), on the other hand. These and other contested decisions have triggered a broad and critical debate about legal reasoning in academia, mostly along ideological lines. The decisions have been understood as value judgements, and they have been criticized from a value-oriented perspective. For Kennedy, this is not the important point. The important point is that they have also given birth to what he calls ‘the virus’, a mode of critique that is not directed against a particular political outcome, but against the rationality of legal reasoning as such. Kennedy’s ‘project is to attempt to develop and extend this American form of internal critique’.29 It is an internal form of critique because it does not seek to replace one ideological bias, one system of values for another. Rather, it aims at laying open the irrationality of legal reasoning as such – and from within legal, not political, discourse. As our example case (Box 7.1) shows, values-based legal reasoning certainly does not mandate a specific decision. From Kennedy’s perspective, neither the decisions of the Polish courts nor those of the German courts can be considered right or just in a purely legal sense. Instead, any decision of the case is necessarily a political one. While this is certainly 23 24 25 26 27 28 29

Duncan Kennedy, ‘The Paradox of American Legalism’, 3 European Law Journal 359–77 (1997), 361. Ibid., 359. Ibid., 360. Ibid., 361. Ibid., 361. Ibid., 364–5. Ibid., 366.

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revealing and true, it might be asked whether Kennedy underestimates not values, but the value of legal reasoning as such – especially in times when legal as well as other social institutions have come under immense pressure from populist political forces. A large part of the reference article is devoted to a ‘summary genealogy’ of the critical tradition.30 Here, Kennedy shows that the practice and the techniques of legal criticism emerged before there was any critical ‘project’. He places special emphasis on the ‘heritage’ of legal realism as formulated around the turn of the twentieth century by thinkers like Morris Cohen and Robert Hale.31 Kennedy analytically divides the heritage of legal realism into two parts: a critique of the coherence of private law institutions and a critique of the assumed ideological neutrality of judicial decisions. Both parts of the realist heritage, however, are intertwined. If there is no coherent ‘general rule’ for judicial decision-making in hard cases, then the resulting ‘gaps, conflicts, and ambiguities’ must be resolved by policy decisions. Thus, the coherence critique of private law inevitably leads to an ideology critique of private law – lest one is a mere nihilist. The ideology critique of legal realism, for Kennedy, was far from being nihilist. Instead, legal realists formed a reformist alliance with progressive political forces and claimed that a thorough policy analysis would enable judges to make better decisions in hard cases – both from a legal and from a political perspective. In the reference article, Kennedy himself does not seem to subscribe to this reformist political agenda – or any political agenda at all. He is not so much interested in the potential of critical legal thought for an ‘external’ political critique of private law, but in the legal methods that are generated by an ‘internal consistency critique’.32 Here, his approach to legal reasoning most starkly differs from Dworkin’s optimistic, reconstructive endeavour. Kennedy does not aim at a rational reflection of values in legal reasoning. Instead, he aims at enabling the very critique of value judgements in legal reasoning. His ideal is not a legal rationality building upon shared values, but a legal rationality building upon the common denominator that any value-based judgment can be criticized. Critical legal thought, then, is ‘a formidable technology of delegitimation’,33 which does not seek to construct its own narrative of legitimacy.34 What Kennedy might not have anticipated at the time of his writing is the hazards for democratic societies that come with delegitimating legal institutions. With a view to our example case (Box 7.1), it is certainly true that value judgements are always context-specific and often more politics than law. However, if the German Federal Court of Justice were to base a refusal of enforcement on openly political grounds, it would jeopardize the very purpose of a legal judgment: to resolve a conflict through a binding decision. While political disputes are interminable, legal conflicts end with a binding decision. 30 31

32 33 34

Duncan Kennedy, ‘The Paradox of American Legalism’, 3 European Law Journal 359–77 (1997), 366–74. See especially Morris R. Cohen, ‘Property and Sovereignty’, 13 Cornell Law Review 8 (1927); Robert L. Hale, ‘Coercion and Distribution in a Supposedly Non-Coercive State’, 38 Political Science Quarterly 470–94 (1923). Duncan Kennedy, ‘The Paradox of American Legalism’, 3 European Law Journal 359–77 (1997), 369–70. Ibid., 374. This approach differs from the more normative stance taken by many ‘critical’ legal theorists in Europe, see Christian Joerges, ‘German Perspectives and Fantasies’, 12 German Law Journal 10 (2011).

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For Kennedy, the project of legal criticism from within is a genuinely US endeavour. The European tradition, he argues, ‘is both more and less critical than American liberal legalism’.35 It is more critical because it tends to identify legal formalism as such with a politically conservative ideology and juxtaposes the formality of private law with a more social alternative (see also Chapter 10). It is less critical because it has not led to the development of critical practices that can be universally applied to ‘delegitimate’ judicial decisions. IV Both texts discussed in this chapter acknowledge that value judgements play an important role in private law adjudication, but both texts take contrary views on the consequences of this acknowledgement. Dworkin’s aim is to show that judgments in hard cases are necessarily based on value judgements, but that this does not make adjudication irrational in any way. He claims that values can be legally rationalized in the form of legal rights and principles. Kennedy, however, attacks this position from two sides. On the one hand, he claims that values are equivalent to political ideology and thus give rise to partisan decisions. On the other hand, he shows that the techniques of legal reasoning are as such insufficient and often incoherent when employed to justify value-based decisions. But ultimately, both texts can be seen as evidence of the ‘utter faith and utter distrust in law’ which – contrary to Kennedy’s assumptions – is hardly unique to the US legal tradition. In fact, it is a pervasive element in the Western legal traditions, where the rationality of legal reasoning and its critique have always found their respective historical and institutional places. The debate between both positions is centuries old – and it is not likely to end anytime soon. As our example case shows (Box 7.1), both approaches have their merit in explaining complex decisions on conflicting private interests. It is true that such decisions are often value-based in that they necessarily reflect broader social and political conflicts. At the same time, values in modern societies are often embodied in concrete social and legal institutions. Fundamental and human rights form part of most constitutions, political values are codified into positive law. Seen in this context, the values that might guide private law adjudication may not be as inconclusive as they first seem. In our example case, the German Federal Court of Justice refused to enforce the Polish judgment in favour of the claimant. It argued that it would disproportionately encroach upon the defendant’s constitutional right to free speech if a court were to prescribe the exact wording of a statement to be published by a media organization.

35

Duncan Kennedy, ‘The Paradox of American Legalism’, 3 European Law Journal 359–77 (1997), 376.

8 Constitutionalization, Regulation and Private Law Hans-W. Micklitz

a topic and materials I Constitutionalization of private law is a dazzling term. Constitutionalization may mean (1) materialization of private law through fundamental and human rights; (2) the idea of a private law society (Privatrechtsgesellschaft), as presented in Franz Bo¨hm’s social theory of an economic constitution for a nation state (Chapter 6),1 or the European Union (Chapter 24); or (3) the self-constitutionalization of private law beyond the nation state (Chapter 25). In this chapter, constitutionalization is defined as the influence of fundamental and human rights – social, civil and political – rooted in national constitutions. This form of constitutionalization has gained considerable ground in the last decades. The overall expectation is that human and fundamental rights might overcome a certain justice deficit in the private law order. The judgment of the German Constitutional Court on bank surety of 19 October 1993 is paradigmatic for the kind of conflicts between, on the one hand, constitutional and human rights and, on the other hand, the private law order (Box 8.1).2 In essence it is a question of the relationship between private law and public law, between the autonomy of the private law system and its interaction with the constitutional fundamental rights and with human rights. The debate is not new and it goes back to the beginning of the twentieth century. II The three texts to be discussed come from three different legal orders – France, Germany and Italy, but they all focus on the constitutionalization of private law through the use of fundamental and human rights (Box 8.2). 1

2

F. Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’ (1966) 17 ORDO: Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft 75–151. BVerfGE (Amtliche Entscheidungssammlung des Bundesverfassungsgerichts – official reports of the German Constitutional Court) 89, 214. There is no official translation into English available, but here is an English webpage https://bit.ly/31hN5Rd.

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BOX 8.1 CASE STUDY

The Bank Surety Case, BVerfGE 89, 214 The constitutional complaint concerns the question of the extent to which civil courts are constitutionally obliged to subject surety agreements with banks to a content review, in cases where relatives of borrowers without income or wealth assume high liability risks as guarantors. The court had to decide on the implications of the greater power of one party leading to de facto unilateral determination of the content of the contract. On earlier stages of the proceedings, all arguments with which the complainant attempted to substantiate her weakness in negotiations were rejected on the grounds of her being of legal age and able to ascertain for herself the resulting risks. The Federal Supreme Court (BGH) had denied the existence of any obligation on the part of the credit institution to provide information and advice on the liability risk of bank sureties.

BOX 8.2

R. Saleilles, De La Personnalite´ Juridique, Histoire und The´ories, Vingt-cinq Lec¸ons d’introduction a` un Cours de Droit Civil Compare´ sur les Personnes Juridiques (Paris: Dalloz, 1910), (English translation available on the book website) C.-W. Canaris‚‘Verfassungs- und europarechtliche Aspekte der Vertragsfreiheit in der Privatrechtsgesellschaft’, in P. Badura and R. Scholz (eds.), Wege und Verfahren des Verfassungslebens: Festschrift für Peter Lerche zum 65. Geburtstag (Munich: C. H. Beck, 1993), pp. 873–91, English translation available on the book website G. Vettori, ‘Contratto e concorrenza ’ (2004) 4 Rivista di Diritto Privato 5–37, (English translation available on the book website) In De La Personnalite´ Juridique, Histoire und The´ories3 Raymond Saleilles develops a robust argument on the legal subject. In the French legal system, courts enjoy a restricted authority. If at all, it is for parliament to ‘constitutionalize’ private law.4 The historical text highlights two lines of thought still present today:5 the tension (1) between subjective rights and objective societal legal values and (2) between legal subject-holders of individual rights and bearers of responsibilities towards the civil society. Claus-Wilhelm 3

4

5

R. Saleilles, Vingt-cinq Lec¸ons d’introduction a` un Cours de Droit Civil Compare´ sur les Personnes Juridiques (Paris: Dalloz, 1910). C. Herrmann and C. Perfumi have reconstructed the historical evolution and the conditions of evolution of the constitutionalization in their contribution ‘France, country report’, in Brüggemeier, Colombi Ciacchi and Commande´, Fundamental Rights and Private Law, pp. 190–252. On the difficulties in handling that distinction in the common law, G. Samuel ‘“Le droit subjectif” and English law’ (1987) 46(2) Cambridge Law Journal at 264.

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Canaris published ‘Verfassungs- und europarechtliche Aspekte der Vertragsfreiheit in der Privatrechtsgesellschaft’6 after the German reunification. He claims that ‘an essential reason for the breakdown of the actually existing socialism (real existierender Sozialismus) lies in its disregard of private law’. In this respect, it is a quintessentially German text, not least because Canaris’ perspective on private law is closely connected to what Franz Bo¨hm and ErnstJoachim Mestma¨cker would call the private law society. Whether interventions such as Directive 93/13 on unfair terms are in line with ordo-liberalism is subject to debate (Chapters 6 and 13). In ‘Contratto e concurrenza’7 Giuseppe Vettori offers a very different take on the constitutionalization of private law in Italy. Vettori links three debates: the interaction between the economic constitution, antitrust and contract law. He lays the focus on the rather advanced constitutionalization process through human and fundamental rights, originally meant to push back on residual influences of fascism8 (for similar developments in Germany see Chapter 6). In a second step, Vettori analyses the reorganisation of the economic constitution through the welfare state,9 its impact on antitrust and contract law and the role of human and fundamental rights. Contract law evolves and is said to adapt its function in parallel to the economic constitution. The amazing rise of constitutionalization has led to a blossoming discourse on the reach of fundamental and human rights into all fields of private law, labour law, consumer law, finance, but also on the impact and the availability of appropriate remedies. Since the beginning, this process has been accompanied by strong voices who both criticized and defended the selfstanding character of the private law order, where constitutional interference through fundamental and human rights should remain as an exception to the rule, if at all (Box 8.3).

BOX 8.3

G. Brüggemeier, A. Colombi Ciacchi and G. Comande´ (eds.), Fundamental Rights and Private Law in the European Union, Vol. I, A Comparative Overview (Cambridge: Cambridge University Press, 2010) H. Collins, ‘On the (in)compatibility of human rights discourse and private law’, H.W. Micklitz (ed.), Constitutionalization of European Private Law (Oxford: Oxford University Press), pp. 26–60 M. Safjan and D. Düsterhaus, ‘A union of effective judicial protection: addressing a multi-level challenge through the lens of Article 47 CFREU’ (2014) 33 Yearbook of European Law 3–40 6

7 8

9

C.-W. Canaris‚ ‘Verfassungs- und europarechtliche Aspekte der vertragsfreiheit in der privatrechtsgesellschaft’, in P. Badura and R. Scholz (eds.), Wege und Verfahren des Verfassungslebens: Festschrift für Peter Lerche zum 65. Geburtstag (Munich: C. H. Beck, 1993), pp. 873–91. G. Vettori, ‘Concorrenza e contratto’ (2004) 4 Rivista di Diritto Privato 5–37. G. Alpa and M. Andenas, Grundlagen des Europa¨ischen Privatrechts (Heidelberg, Dordrecht, London, New York: Springer, 2010); review H.-W. Micklitz (2012) 2 Zeitschrift für europa¨isches Privatrecht 446–8. Amintore Fanfani sul controllo sociale dell’attivita` economica, Relazioni e proposte presentate nella Commissione per la Costituzione, III sottocommissione, Rome, 1946, 119–23.

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b theories, context and discussion I Constitutionalization of private law is a product of the twentieth century. Mattias Kumm10 coined the term ‘total constitution’ for that process. The constitution or, more precisely, fundamental and human rights shape all aspects of the legal order, including its private law system, which operates on the national, the European Union and the global level. However, in the nineteenth century, the exact opposite was true. The ius commune, private law doctrine and private law theory formed the core of the law. Public law was built parasitically on that core.11 In Germany post-war ordoliberalism revitalized the idea of an autonomous private law. To this day, it represents a theoretical and practical-political model which, nonetheless, does not claim supremacy over public law (for a more comprehensive understanding see Chapter 6). The dissolution of boundaries in private law beyond the state reignited the debate about the autonomy of the private law system alongside fundamental and human rights. This debate goes to the heart of private law’s autonomy and of its potential selfconstitutionalization. Whether ‘private law beyond the state’,12 ‘transnational law’,13 ‘transnational private law’ and ‘transnational private regulation’,14 the nomenclature is based on a private law which is not grounded in a national context, and where constitutionalization is deterritorialized (for more detail on self-constituting private law in a globalized legal order see Chapter 25). The constitutionalization of private law provoked a variety of studies concerning the impact of human and fundamental rights on national law15 and on the EU legal system.16 Implicitly or explicitly, they promote the constitutionalization of private law as a means to increase fairness in private legal relations.17 Otto von Gierke launched the debate in 1889 10 11 12

13

14

15

16 17

M. Kumm, ‘Who is afraid of the total constitution?’ (2006) 7 German Law Journal 341–70. F. Wieacker, A History of Private Law in Europe, trans. by T. Weir (Oxford: Oxford University Press, 1995). R. Michaels and N. Jansen, ‘Private law beyond the state? Europeanization, globalization, privatization’ (2006) 54 American Journal of Comparative Law 843–90. G.-P. Calliess and P. Zumbansen, Rough Consensus and Running Code: A Theory of Transnational Private Law (Oxford: Hart, 2011). F. Cafaggi, ‘The regulatory function of transnational commercial contracts: new architectures’ (2013) 36 Fordham International Law Journal 1558–618. D. Oliver and J. Fedtke (eds.), Human Rights and the Private Sphere: A Comparative Study (New York/ London: Routledge, 2007); C. Mak, Fundamental Rights in European Contract Law: A Comparison of the Impact of Fundamental Rights on Contractual Relationships in Germany, the Netherlands, Italy and England (The Netherlands:Wolters Kluwer, 2008); S. Grundmann (ed.), Constitutional Values and European Contract Law (The Netherlands: Kluwer Law International, 2008); Brüggemeier, Colombi Ciacchi and Commande´, Fundamental Rights and Private Law; O. O. Cherednychenko, Fundamental Rights, Contract Law and the Protection of the Weaker Party (Munich: Sellier, European Law Publishers, 2007); D. Hoffman (ed.), The Impact of the UK Human Rights Act on Private Law (Cambridge: Cambridge University Press, 2011); C. Busch and H. Schulte-No¨lke (eds.), Fundamental Rights and Private Law (Munich: Sellier, European Law Publishing, 2011). H.-W. Micklitz (ed.), Constitutionalization of European Private Law (Oxford: Oxford University Press, 2014). See H. Collins, ‘The constitutionalization of European private law as a path to social justice?’, in H.W. Micklitz (ed.), The Many Concepts of Social Justice in European Private Law (Cheltenham: Edward Elgar, 2011), pp. 133–66.

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in his studies on the social task of private law.18 The difficult political and economic conditions in Europe at the end of World War I had led to heated political debates on the substance of private law. Duncan Kennedy distinguishes between the traditional, liberal model (classical legal thought) and its later transformation into what he called the ‘social’.19 The two World Wars spawned and legitimated democratic social legislation (see Chapter 9). While constitutionalization and materialization of private law may develop hand in hand, analytically they need to be strictly separated (on materialization see Chapters 2 and 10, on self-constituting private law see Chapter 25). The mobilization of human and fundamental rights for the sake of a ‘fair’ order of private law is a relatively recent development in which courts took the lead, not least legitimatized through international and European conventions. In 1959 the German Constitutional Court decided on the horizontal impact of free speech in private relations (Chapter 6).20 Throughout the 1980s and 1990s, constitutionalization was meant as a means for reaching contractual fairness.21 Today, 50 per cent of all parties invoke the European Charter of Fundamental Rights in preliminary ruling proceedings before the ECJ in Luxemburg.22 Citizens who became excessively indebted in the aftermath of the 2008 crisis have mobilized the European Charter in lawsuits against their own member states.23 In many of its judgments, the ECJ behaves like a constitutional court, thereby gradually upgrading the social dimension in business-to-consumer relations, oftentimes at the expense of the member states’ autonomy.24

18

19

20

21 22

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O. von Gierke, Die Soziale Aufgabe des Privatrechts (Berlin: Springer, 1889); A. Menger, Das Bürgerliche Recht und die Besitzlosen Volksklassen: Eine Kritik des Entwurfs eines Bürgerlichen Gesetzbuches für das Deutsche Reich (Tübingen: Laupp, 1890; 4th ed. 1908, Digitalisat). D. Kennedy, ‘Three globalisations of law and legal thought: 1850–2000’, in D. M. Trubek and A. Santos (eds.), The New Law and Economic Development: A Critical Appraisal (Cambridge: Cambridge University Press, 2006), pp. 19–73. Lüth decision of the BVerfG – BVerfGE 7, 198, available in English, https://bit.ly/3eAsmff; H. Ro¨sler, ‘Harmonising the German civil code of the nineteenth century with a modern constitution: the Lüth revolution 50 years ago in comparative perspective’ (2008) 23 Tulane European & Civil Law Forum 2–36. Brüggemeier, Colombi Ciacchi and Commande´, Fundamental Rights and Private Law. M. Safjan and D. Düsterhaus, ‘A Union of effective judicial protection: addressing a multi-level challenge through the lens of Article 47 CFREU’ (2014) 33 Yearbook of European Law 3–40. This is a question of European courts as social actors, which should/want/have to compensate the legislator’s deficiencies, see N. Reich, ‘Balancing in private law and the imperatives of the public interest: national experiences and (missed?) European opportunities’, in R. Brownsword, H.-W. Micklitz, L. Niglia and S. Weatherill (eds.), The Foundations of European Private Law (Oxford:Hart, 2011), pp. 221–48, especially pp. 241 et seq.; H.-W. Micklitz, ‘Unfair contract terms – public interest litigation before European courts, Case C-415/11 Mohamed Aziz’, in V. Colaert and E. Terryn (eds.), Landmark Cases of EU Consumer Law: in Honour of Jules Stuyck (Antwerp: Intersentia, 2013), pp. 615–34; H.-W. Micklitz, ‘Mohamed Aziz: sympathetic and activist, but did the court get it wrong?’, in A. Sodersten and J. H. H. Weiler (eds.), Where the Court Gets it Wrong (Florence: European Constitutional Law Network, 2014), pp. 1–18, https://bit.ly/3i3PTYf. H.-W. Micklitz and N. Reich, ‘The court and the sleeping beauty: the revival of the Unfair Contract Terms Directive (UCTD)’ (2014) 51 Common Market Law Review 771–808, as well as the overview of the case law of the ECJ, B. Kas and H.-W. Micklitz, ‘Overview of cases before the CJEU on European consumer contract law (2009–2013): part I’ (2014) 10(1) European Review of Contract Law 1–63; B. Kas and H.-W. Micklitz, ‘Overview of cases before the CJEU on European consumer contract law (2009–2013): part II’ (2014) 10(2) European Review of Contract Law 189–257.

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The rise of the fundamental and human rights discourse has evoked scepticism, not only due to the alleged ‘juristocracy’,25 but also amongst those who, like the Social Justice Group,26 fight for a social and fair European contract law.27 Will courts change the basic principles of the private law system (see Chapter 14 on gender equality)?28 Which tasks shall remain for the legislator and to what extent is the legislative power restricted by fundamental rights?29 The German Constitutional Court has taken an affirmative position in the bank surety case. II Raymond Saleilles, a renowned French jurist and comparative legal and socio-legal scholar, dealt extensively with the German-driven scientification of law, private law and legal methodology. Chapter 22 of the collection deals with: ‘La notion du droit subjectif. La notion de sujet de droits. La notion de personnalite´. Critique de l’E´cole positiviste. La the`se de la re´alite´ juridique: the´orie institutionnelle.’30 It can be broken down into three subthemes: (1) the ‘legal subject’; (on legal subject and the ‘person’ in the twenty-first century, see Chapter 18);31 (2) legal positivism and legal idealism; and (3) the legal entity. Saleilles is firmly rooted in French rationalism; however, without compromising his law and society sensitivity, he is the founding father of French legal sociology (Chapters 2 and 10). Saleilles discusses the tensions between subjective rights and mere interests, subjective rights and objective order, private and public law, the profile of the autonomous human being and the abstract legal order in society. In the introduction Saleilles refers to Rudolf Jhering:32 ‘If the right is not the will in act form, must it be said, as by Jhering and his disciples, that it is no more than an interest juridically protected?’ If this question is answered in the affirmative, the law (subjective right) is threatened: first, law is reduced to a simple tool to enforce protected interests (with regard to the ‘social’ Georges Ripert, see Chapter 9); second, the subjective right has to be attributed to the beneficiaries of the objective order; third, the objective order takes the upper hand over subjective rights and submits their autonomy to the 25

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R. Hirschl, Towards Juristocracy: The Origins and Consequences of the New Constitutionalism (Boston, MA: Harvard University Press, 2007); J. A. Majoral, ‘The judicial construction of Europe in time of crisis: a move towards European juristocracy’ 2014 manuscript. The Study Group on Social Justice in European Private Law, ‘Social justice in European contract law: a manifesto’ (2004) 10 European Law Journal 653–74. H. Collins, The European Civil Code: The Way Forward (Cambridge: Cambridge University Press, 2008). Concerning the double-edged consequences of the principle of equality for the legal system and law itself: A. Somek, Engineering Equality: An Essay on European Anti-Discrimination Law (Oxford: Oxford University Press, 2011). The European Union has introduced a screening mechanism for legislative initiatives, V. Kosta, Fundamental Rights in EU Internal Market Legislation (Oxford: Hart, 2015). ‘The notion of the subjective right. The notion of the subject of law. The notion of personality. A critique of the positivist school. The thesis of legal reality: institutional theory’ in Saleilles, Vingt-cinq Lec¸ons. L. Azoulai, E. Pataut and S. Barbou des Places (eds.), Constructing the Person in EU Law: Rights, Roles, Identities (Oxford, London: Hart, 2016). Saleilles, De La Personnalite´ Juridique, p. 536, ‘Si le droit n’est pas la volonte´ en acte, faut-il dire avec Jhering et ses disciples, qu’il est simplement un inte´reˆt juridique?’

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legitimacy of the objective order. The ‘being allowed to want’ (wollen dürfen) would replace the ‘being able to want’ (wollen ko¨nnen) (Saleilles uses German terminology). As history shows, the objective order does not guarantee individual autonomy.33 The subjective right is a power at the service of interests of a social character, and exercised by an autonomous will. Saleilles defends the legal subject and its autonomy as a necessary condition for the existence of law. Law is not mere regulation, but exists beyond statutes and principles, provided that it is an expression of the volonte´ ge´ne´rale (Jean-Jacques Rousseau). The subjective right serves social interests, but it requires the exercise of free will. The subjective right is power put at the service of social interests, exercised through autonomous will.34 The subjective rights refers to the possibility of action to which only an autonomous individual is entitled. The autonomy is not positivistic (the subjective right does not depend on the legitimacy of a law) nor is it metaphysical or idealistic, since it requires real conditions, which guarantee its existence.35 For Saleilles – perhaps somewhat ahistorically – the justification of the subjective right and the autonomy only began with the French Revolution and the French Code Civil. The ongoing constitutionalization of private law seems to confirm Saleilles’ concerns. The third generation of human rights speaks predominantly of social interests – according to Thomas Wilhelmsson, ‘other values’ or ‘public values’ (Chapter 9). It is not difficult to proffer reasons why these interests deserve protection. Saleilles refers to Georg Jellinek, who in Das System der subjektiven o¨ffentlichen Rechte36 derives the existence of subjective rights from the ‘social interests’ enshrined in the Weimar Constitution. These subjective rights are said to serve the objective order. Norbert Reich based Bürgerrechte in der Europa¨ischen Union on Jellinek’s scholarship and he demonstrates how the ECJ deduces subjective rights from protected interests.37 Saleilles’ main argument is the instrumentalization of the subjective right to pursue specific ends, which threatens the subjective right’s existence, or may even extinguish it.38 These findings contradict E´mile Durkheim’s formula of the cult of the individual,39 which seems to lie behind the expansion of subjective rights. 33 34 35

36 37

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Ibid., p. 547. Ibid., p. 543, One wonders whether this is a kind of modern, secular natural law (or natural rights) theory similar to that proposed by J. Finnis, Natural Law and Natural Rights (Oxford: Oxford University Press, 1980). First published in 1892/1905 (Tübingen: Mohr Siebeck). N. Reich, Bürgerrechte in der Europa¨ischen Union: Subjektive Rechte von Unionsbürgern und Drittstaatsangeho¨rigen unter besonderer Berücksichtigung der Rechtslage nach der Rechtsprechung des EuGH und dem Vertrag von Amsterdam (Baden-Baden: Nomos Verlagsgesellschaft, 1999). The theoretical basis can be found in N. Reich, ‘System der subjektiven o¨ffentlichen Rechte in the Union: a European constitution for citizens of bits and pieces’, in Publications of the Academy of European Law at the European University Institute (Oxford: Oxford University Press, 1998), pp. 157–236. W. Hallstein, ‘Von der Sozialisierung des Privatrechts’ (1942) 102 Zeitschrift für die gesamte Staatswissenschaft 530–54, 546 et seq.; L. Raiser, ‘Wirtschaftsverfassung als Rechtsproblem’, in Festschrift für Julius von Gierke zu seinem goldenen Doktorjubila¨um (Berlin: De Gruyter, 1950), pp. 181–200, 196 et seq. R. Münch, Die Konstruktion der Europa¨ischen Gesellschaft: Zur Dialektik von transnationaler Integration und Nationaler Desintegration (Frankfurt: Campus-Verlag, 2008).

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Constitutionalization of private law, the total constitution40 hidden in human and fundamental rights, threatens in the long run the existence of the legal system – and thereby of subjective rights.41 But why define law in this subjective way? Does such a reading not go back to Immanuel Kant? Because of the florescence of the (neoKantian) philosophy of private law, especially of tort law,42 in recent years, an AngloSaxon reader might understand Saleilles as merely reformulating a volitional theory of moral action, as per Kant’s metaphysics. III Claus-Wilhelm Canaris combines two completely different perspectives: on the one hand, he stresses the opportunities for former communist states resulting from private law and freedom of contract. On the other hand, he claims private law and freedom of contract to be menaced by the EU’s regulation on unfair terms. Canaris wrote his contribution before the Surety judgment of the German Constitutional Court in 1993.43 Freedom of contract, as stated by the Court, enjoys constitutional status, but the constitution at the same time determines its limits. All major comparative legal studies refer to this landmark judgment of the German Constitutional Court as an example of a constitutionally embedded ‘fair’ contract law.44 Canaris uses its predecessor, the Handelsvertreter (commercial agent) judgment,45 to protect contractual freedom through competition.46 Only in the case of ‘extreme imbalances’ may the protection of the weaker contracting party prevail. The court goes far beyond Canaris in that the constitutional order requires protection whenever there is a structural imbalance involved. Canaris relies on Bo¨hm and Friedrich von Hayek (see Chapter 6): ‘ it is determining for the private law society that the state does not oblige the citizens to pursue certain objectives, but leaves it to them (within certain limits) to choose their targets as well as the means to achieve them’. Saleilles seems to share Canaris’ concern, albeit from a different perspective. Canaris stresses the constitutionally agreed freedom of contract which is put in peril by the advocacy of a fair contract. In this context, Saleilles would have pointed to 40

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M. Kumm, ‘The moral point of constitutional pluralism: defining the domain of legitimate institutional civil disobedience and conscientious objection’, in J. Dickson and P. Eleftheriadis (eds.), The Philosophical Foundations of European Union Law (Oxford: Oxford University Press, 2013), pp. 216–46. The integrity of law could be damaged, C. Joerges, ‘The European economic constitution and its transformation through the economic crisis’, in D. Patterson and A. So¨derston (eds.), A Companion to European Union Law and International Law (Oxford: Wiley-Blackwell, 2015); in the same direction M. Renner, ‘Death by complexity: the financial crisis and the crisis of law in world society’, in P. F. Kjaer, G. Teubner and A. Febbrajo (eds.), The Financial Crisis in Constitutional Perspective: The Dark Side of Functional Differentiation (Oxford: Hart, 2011), pp.93–112. A. Ripstein, Force and Freedom: Kant’s Legal and Political Philosophy (Cambridge, MA: Harvard University Press, 2009); E. Weinrib, The Idea of Private Law (Oxford: Oxford University Press, 1995). BVerfGE 89, 214. C. Mak, Fundamental Rights in European Contract Law; Cherednychenko, Fundamental Rights, Contract Law and the Protection of the Weaker Party; Brüggemeier, Columbi Ciacchi and Comande´, Fundamental Rights and Private Law. BVerfGE 81, 242 Canaris ‘Verfassungs- und europarechtliche Aspekte’, p. 880.

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the threat to law itself, or perhaps to the ‘culture of freedom’.47 Ordo-liberalism paved the way for the constitutionalization of private law, even if it aimed theoretically and ideologically at the constitutionalization of the freedom of contract alone. Canaris is not interested in the discussion of the economic constitution or its possible links to fundamental rights but in contractual freedom.48 He links the ‘private law society’ to Karl Popper’s ‘open society’, for which a pluralism of values is constitutive.49 Contract and contractual freedom are supposed to guarantee a pluralism of values, which inevitably manifests itself through various ideas of justice. In Lochner50 the US Supreme Court constitutionalized freedom of contract while the New Deal reversed or inverted this process; the court-driven constitutionalization led to politicization and legislative intervention. Contractual freedom, competition and private property are the constituent characteristics of the private law society. To the list, Canaris adds family, succession, communication and media. He explicitly objects to Plato, who tried in Politeia to ‘nationalize’ the family in a ‘particularly disgusting way’ (formulation by Canaris).51 Ripert demonstrates how the French Parliament in the 4th Republic (1946–1958) regulated family law.52 This runs counter to the idea of family law being constituted under private law, but is in line with Kennedy’s third globalization. Since 1957, the European Union has been promoting gender equality; first the ECJ, later the EU legislator transformed gender equality into the non-discrimination principle (see Chapter 14).53 Overall, not least regarding same-sex marriages, there is a move towards contractualization of family law.54 Canaris considers the private law society to be of constitutional nature55 and this brings him straight away into the debate on the ‘economic-political neutrality’ of the German constitution (see also Chapter 2). He distances himself from Hans Nipperdeys’ idealization, according to which ‘only the social market economy corresponds to the liberal, social constitutional state (and) is institutionally guaranteed’.56 Nevertheless, he emphasizes that each statutory intervention into the market has to be compatible with ‘objective requirements’ and that the ‘primacy of the market principle in the interplay of rule and exception’ has to be preserved. These considerations come close to those of Saleilles, who highlights the exceptional nature of statutory interventions. Quite astonishingly, Canaris does not 47 48 49 50 51 52

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U. Di Fabio, Die Kultur der Freiheit (Munich: C. H. Beck, 2005). Six years later he published Grundrechte und Privatrecht Eine Zwischenbilanz (Berlin: De Gruyter 1999). K. Popper, The Open Society and Its Enemies (London: Routledge, 1945). Lochner v. New York, 198 US 45 (1905). E. Flaig, Gegen den Strom: Für eine sa¨kulare Republik Europa (Springe: zu Klampen, 2013), pp. 57 et seq. Concerning the parallel development in Italy, Leonilde Jotti, La Famiglia, Relazioni e proposte presentate nella Commissione per la Costituzione, I sottocommissione, Rome, 1946, 55–7, https://bit.ly/384Ijbg; summary of the discussion: La Costituzione della Repubblica Italiana illustrata con i lavori preparatori da Vittorio Falzone, Filippo Palermo, Francesco Cosentino, Segretariato Generale della Camera dei Deputati, Roma, 1948, 65–68. See K. Carr, ‘Deconstructing and reconstructing family law through the European legal order’, PhD thesis, European University Institute, Florence (2014). F. Sweenen (ed) Contractualisation of Family Law: Global Perspectives (New York: Springer 2015). Canaris‚ ‘Verfassungs- und europarechtliche Aspekte’, p. 879. Canaris‚ ‘Verfassungs- und europarechtliche Aspekte’, p. 879.

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refer to EU law and the idea of a European economic order based on competition (Chapter 24). Therefore, Canaris’57 position on the tension between contractual freedom and justice is not unexpected. He develops his argument in interaction with Werner Flume, Konrad Zweigert and Hein Ko¨tz, and Walter Schmidt-Rimpler. Flume’s stat pro ratione voluntas58 makes the will of the contractual parties and not the reasonableness of the contractual content the decisive factor. Zweigert and Ko¨tz59 require the economic and social equality of the contracting parties, thus freedom of contract only applies to contracts between large companies. Canaris considers the position of Zweigert and Ko¨tz ‘extreme’ and ‘completely unrealistic’ because it ignores the balancing function of competition. The Surety judgment confirms Zweigert and Ko¨tz, instead of Canaris, since it treats contractual justice to be an equitable principle of contract law, at least in business-to-consumer relations. Schmidt-Rimpler, the third protagonist, starts from the premise that a contract resulting from negotiations is per se to be regarded as correct and just (see Chapter 11). Canaris rejects the concept, since it implies that competition has to provide guaranteed fair outcomes. To Canaris, contract law can only handle commutative justice, not distributive justice, differences of status and origin are compensated for by education. ‘Primacy of contractual freedom’ is the benchmark, which could be reasonably corrected by means of information obligations and revocation rights. Canaris rejects the judicial or administrative control of the results of contractual freedom. His critique is directed against the EU draft proposal on unfair contract terms, which included the judicial control of individual terms. Not least under strong pressure from Germany,60 the European Union restricted the scope of Directive 93/13/EEC to the control of standard terms. Control of individual contract terms, Canaris says, would have infringed the German Basic Law and established a fair contract in the meaning of Zweigert and Ko¨tz. I disagree.61 The expansion of control to include clauses, regardless of whether they are individually negotiated or not, is common practice in many countries; even in the United Kingdom, which is not considered to be the most consumer-friendly jurisdiction. Technological development has reduced the importance of the distinction between standard and individual terms. Does the control of unfair terms represent a materialization of contract law or is it at the same time a constitutionalization? The German Constitutional Court judgment materializes the control of unfair terms via the constitution. In Mohamed Aziz, the ECJ constitutionalizes the control of unfair terms via a reference to the right to 57 58

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Canaris‚ ‘Verfassungs- und europarechtliche Aspekte’, pp. 881 et seq. By referring to W. Flume, Allgemeiner Teil des Bürgerlichen Rechts, Vol. II, 3rd ed. (Berlin, Heidelberg: Springer-Verlag, 1979), sections 1, 5, 6a. K. Zweigert and H. Ko¨tz, Einführung in die Rechtsvergleichung auf dem Gebiete des Privatrechts, 2nd ed. (Tübingen: Mohr Siebeck, 1984), pp. 7 et seq. The contribution of H. E. Brandner and P. Ulmer, ‘The Community Directive on Unfair Terms in Consumer Contracts: some critical remarks on the proposal submitted by the EC Commission’ (1991) 28 Common Market Law Review 647–62 represents the marker of the discussion. H.-W. Micklitz, ‘Reforming European Union unfair terms legislation in consumer contracts’ (2010) 6 European Review of Contract Law 347–83.

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housing.62 Private law can only unfold in a constitutional frame.63 This is no longer the self-constituted private law society. IV Giuseppe Vettori’s introduction to the relationship between contratto (contract) and concorrenza (competition) is illuminating: ‘La disciplina della concorrenza tracciata nel codice si rivolge ad una struttura di mercato gia` definita.’ Antitrust law can only unfold once the political decision for a market-oriented order has been taken. ‘Solo dopo un percorso a ritroso . . . e` possibile un’analisi attenta di rapporti fra il contratto e la concorrenza, fra due liberta` in cerca da sempre di un contesto ordinato di garanzie e di limiti.’64 Vettori does not speak of antitrust law or contract law, but of ‘contract’ and ‘competition’. Only the essential components of his argumentation are discussed. The dilemma of each liberal democracy is attributable to the fact that each political decision can create, but simultaneously restrict, liberties. The balance sways either in favour of liberty or towards its restriction. Vettori structures the history of contract and competition around three colliding issues: (1) the rise of the US antitrust legislation;65 (2) the Italian constitutional debate until the 1980s; and (3) the decision in the Treaty of Rome in favour of a competitive market order. The US history serves only one purpose: ‘antitrust ha un pluralita` di anime anche in America’.66 Competition is like every other legislative act exposed to economic and political influences. Article 41 of the Italian Constitution is ‘anfibologico’ (amphibolic) – lacking a clear legal policy:67 Private economic enterprise is free. It may not be carried out against the common good or in such a manner that could damage safety, liberty and human dignity. The law shall provide for appropriate programmes and controls so that public and privatesector economic activity may be oriented and co-ordinated for social purposes.

The Italian discussions of the 1950s and 1960s echo the German ones. The German Constitutional Court has described the German constitution as ‘neutral’ in the much-debated

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In a hidden form ECJ Case C-415/11, Aziz v. Catalunyacaixa [2013] ECLI:EU:C:2013:164; see H.-W. Micklitz, ‘Unfair contract terms: public interest litigation before European courts, Case C-415/11 Mohamed Aziz’, in V. Colaert and E. Terryn (eds.), Landmark Cases of EU Consumer Law: In Honour of Jules Stuyck (Antwerp: Intersentia, 2013), pp. 615–34; open in ECJ: Case C-34/13, Monika Kusˇionova´ v.SMART Capital a.s. [2014] ECLI:EU:C:2014:2189, for this procedure see F. della Negra, ‘The uncertain development of the case-law on consumer protection in mortgage enforcement proceedings: Sa´nchez Morcillo and Kusˇionova´’ (2015) 52(4) Common Market Law Review 1009–32. C. Schmid, ‘The ECJ as a constitutional and a private court: a methodological comparison’, ZERP discussion paper (2006). Vettori, ‘Concorrenza e contratto’, p. 5. In that context, A. Rand, ‘America’s persecuted minority: big business’ and A. Greenspan ‘Antitrust’, both in A. Rand, Capitalism: An Unknown Ideal (London: Penguin, 1986). Vettori, ‘Concorrenza e contratto’ p. 9; in the same vein N. Duxburry, Patterns of American Jurisprudence (Oxford: Oxford University Press, 1997). https://bit.ly/2VfTAQT.

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judgment on co-determination.68 In Italy, the state has enjoyed strong influence on the economy at least since the world economic crisis in 1929. Referring to R. Romeo, Vettori writes:69 ‘lo Stato italiano possedeva una parte dell’industria proporzionalmente piu` ampia che ogni altro Stato europeo, a eccezione dell’Unione Sovietica’ (‘the Italian state used to control a proportionally larger part of industry than all other European states, except the Soviet Union’). Unlike Germany, Italy did not experience a strong move towards decartelization, liberalization and privatization after World War II.70 The transition from a ‘stato gestore’ (the company state) to a ‘stato regolatore’ (the regulatory state) is linked to the adoption of the Single European Act of 198671 and the Maastricht Treaty of 1992. Law 287/1990 is the equivalent of the German Act against Restraints of Competition of 1957. It unites three values:72 l’economicita` (equity), la giustizia sociale (social justice) and la liberta` individuale (individual liberty). Law 202/1993 introduced the liberalization and privatization of public enterprises. Since the adoption of the Single European Act, the European Commission had been putting pressure on member states to break up state monopolies. In the 1990s, the European Union launched in agreement with the European Parliament and the Council, a process of deregulation through secondary EU law, first in telecommunications, later in energy and transportation.73 Vettori’s point of departure – competition and contract as instruments of economic policy – runs like a leitmotif through his analysis on monopolies, mergers, anticompetitive agreements, downstream contracts and damage claims. Monopolies need to be restricted, but in whose favour (small businesses?) and by what means? Are contracts that stipulate an unfair impediment void or at least voidable? Competition is supposed to create freedom to act, but merger control sets limits and downstream and upstream contracts alike suffer from the unresolved difficulty of how to handle power below a dominant position.74 The last field, where competition and contract collide, is damage claims in distribution contracts or those of third parties, which are affected by an unlawful restriction of 68 69

70 71 72

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BVerfGE 50, 290. Vettori, ‘Concorrenza e contratto’ p. 11; K. W. No¨rr, Die Republik der Wirtschaft, Vol. I, Von der Besatzungszeit bis zur Großen Koalition (Tübingen: Mohr Siebeck, 1999), pp. 36 et seq. Helpful: H. Woller, Geschichte Italiens im 20. Jahrhundert (Munich: C. H. Beck, 2010). Vettori, ‘Concorrenza e contratto’, p. 16. Vettori, ‘Concorrenza e contratto’, p. 15 by referring to L. Mengoni, ‘L’argomentazione orientata alle conseguenze’, in L. Mengoni, Ermeneutica e Dogmatica Giuridica (Milan: Giuffre`, 1996), p.11. See Jürgen Keßler and Hans-W. Micklitz, Kundenschutz auf den liberalisierten ma¨rkten: vergleich der Konzepte, Maßnahmen und Wirkungen in Europa. Energie, VIEW series, vol. 23 (Baden-Baden: Nomos, 2008); J. Keßler and H.-W. Micklitz, Kundenschutz auf den liberalisierten Ma¨rkten: Vergleich der Konzepte, Maßnahmen und Wirkungen in Europa. Personenverkehr/Eisenbahn, VIEW series, vol. 24 (Baden-Baden: Nomos, 2008); J. Keßler and H.-W. Micklitz, Kundenschutz auf den liberalisierten Ma¨rkten – Vergleich der Konzepte, Maßnahmen und Wirkungen in Europa. Telekommunikation, VIEW series, vol. 25 (Baden-Baden: Nomos, 2008), with the respective country reports concerning Italy, in which the links between the two laws are demonstrated and discussed. Meanwhile the European Commission deals with the topic, at least with regard to the field of food chains, see Directive (EU) 2019/633 of the European Parliament and of the Council of 17 April 2019 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain, PE/4/2019/REV/2, OJ L 111; see also the so-called College of Europe Study (Bruges Study) on the legal framework covering business-to-business unfair trading practices in the retail supply chain, DG Internal Market, https://bit.ly /2Yy2lYz.

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competition. Vettori analyses Courage75 in light of the then unsettled national case law. After Manfredi,76 the injured parties had set high hopes on being compensated, but were disappointed.77 The adoption of the directive on cartel damage claims in 2014 introduced a common platform for antitrust injury claims.78 Vettori concludes by referring to Ludwig Raiser:79 ‘In realta` ogni contratto e` un fatto inserito nell’economia nazionale’ (In fact all contracts are integral parts of the national economy). The contract proves to be a political instrument, which is embedded in the economic constitution of each state – and of the EU as well. The relative openness of the highest courts in the country to make use of human rights and fundamental rights in the interpretation of private relations seems to confirm Vettori’s analysis.80 V The judgment of the German Constitutional Court condenses in a nutshell the ambiguities of the constitutionalization of private law. Unlimited family sureties have largely vanished from securities loan contracts. In this way, private law relations have become fairer, but how far can/may/shall constitutionalization reach? What makes a family in the twenty-first century, who belongs to the family and shall close friends to be treated alike or differently?81 Gunther Teubner82 rejects the individualization of the conflict, which necessarily leads to strange distinctions between banks and non-banks, family members and non-family members. He puts the emphasis on the institutional conflict between different incommensurable logics of action, family and the economy, a structural corruption in the relationship between the two. Communication within the family can only be protected if ruinous family sureties are prohibited per se. The German Constitutional Court has adjudicated only exceptionally on private law matters, as have other constitutional courts in the EU member states. In contrast, the ECJ has decided more than 100 cases in the field of European consumer law alone. Is the ECJ 75 76 77 78 79

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Case C-453/99, Courage Ltd v. Bernard Crehan [2001] ECR I-6297; [2006] UKHL 38. Case C-295/04, Vincenzo Manfredi v. Lloyd Adriatico Assicurazioni SpA [2006] ECR I-06619. F. Wenzel Bulst, ‘Zum Manfredi-Urteil des EuGH’ (2008) Zeitschrift für europa¨isches Privatrecht 178–95. https://bit.ly/2BJZYst. Vettori, ‘Concorrenza e contratto’, p. 37, in reference to L. Raiser, ‘Funzione del Contratto e Liberta` Contrattuale’, in Il Compito del Diritto Privato, translated (Milano, 1990), p. 101. There is abundant literature in Italian on the constitutionalization of private law. See T. Barkhuysen and S. Lindenbergh (eds.), Constitutionalisation of Private Law (Leiden: Brill/Nihoff, 2006); O. Cherednychenko, ‘Fundamental rights and private law: a relationship of subordination or complementarity?’ (2007) 3(2) Utrecht Law Review 1-25; H. Collins, ‘Private law, fundamental rights, and the rule of law’ (2018) 121(1) West Virginia Law Review 1–25; M. Hesselink, ‘Private law and the European constitutionalisation of values’ (2016) Centre for the Study of European Contract Law Working Paper Series No. 2016–07; M. Kumm, ‘Who is afraid of the total constitution? Constitutional rights as principles and the constitionalization of private law’ (2006) 7(4) German Law Journal 341–69; Micklitz, Constitutionalization of European Private Law. M. Meli, ‘Social justice, constitutional principles and the protection of the weaker party (2006) 2 European Review of Contract Law 159–66. G. Teubner, ‘Ein Fall von struktureller Korruption? Die Familienbu¨rgschaft in der Kollision unvertra¨glicher Handlungslogiken (BVerfGE 89, 214 ff.)’ (2000) 83 Kritische Vierteljahreszeitschrift für Gesetzgebung und Rechtswissenschaft 388–404.

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building a constitutionalized European private law? Where is the borderline to be drawn between ‘normal’ private law and ‘constitutionalized’ private law, national and European? Which are the elements, principles, concepts of private law that are protected by the national and the European constitutions and what remains for the national civil courts to decide? Is it for courts to decide on the constitutionalization of private law or is it for the legislature, national and European (Chapter 9)? Hugh Collins describes plastically the still opposite strongly conflicting positions:83 On one view . . . private law and constitutional law resemble semi-detached houses: independent homes, but joined by a common wall. The two houses of public and private law lean on each other for support, but can be inhabited entirely separately. [. . .] On another view [. . .] constitutional laws, or at least the basic constitutional principles such as the fundamental rights, provide the common foundations for what is ultimately a single structure. The foundational rights support both the edifice of public law and private law.

83

H. Collins, ‘On the (in)compatibility of human rights discourse and private law’ in Micklitz, Constitutionalization of European Private Law, pp. 26–60.

9 Democracy and Private Law Hans-W. Micklitz

a topic and materials I The codifications of the nineteenth and twentieth century endowed private law with a public foundation. However, from the very moment of codification, there was a tension between the civil codes and the growing parliamentary legislative powers. Nowadays, despite the formal power to do so, parliaments do not readily interfere in national codifications. There is a certain reluctance throughout all countries with a codification and parliaments tend to rely first on the courts to find appropriate responses to changing economic and political circumstances. The case in Box 9.1, which has been widely discussed worldwide, illustrates the difficult relationship between the role and function of the judiciary vs parliament in

BOX 9.1 CASE STUDY

Urgenda Foundation v. The State of the Netherlands Urgenda Foundation v. The Netherlands [2015] HAZA C/09/00456689 The Urgenda Foundation and a group of 900 Dutch citizens sued the Dutch government to compel the state to reduce greenhouse gas emissions, primarily CO2, more aggressively. The Hague District Court ruled that, by 2020, the Dutch government must reduce greenhouse gas emissions by at least 25 per cent (compared to 1990) to fulfil its duty of care to protect Dutch citizens against the imminent danger caused by climate change. The court had to decide whether the state had breached its duty of care under the Dutch Civil Code, which requires parties to take precautionary measures to mitigate a hazardous situation.1

1

Urgenda Foundation v. The State of the Netherlands Urgenda Foundation v. The Netherlands [2015] HAZA C/ 09/00456689, https://elaw.org/nl.urgenda.15.

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private law.2 The far-reaching judgment is based on the Dutch Civil Code. But is it for the judiciary to go that far? Or should this kind of dramatic changes be left to parliament? Some will understand Urgenda as a case of juristocracy, others will point to the inactivity of legislatures. When the legislature fails to respond, courts might step in and decide in line with mainstream discussions in society.3 II The three texts in Box 9.2 capture the economic, political and legal relation between private law and democracy which has changed significantly since the first wave of codification.4 BOX 9.2

G. Ripert Le Re´gime De´mocratique et le Droit Civil Moderne, 2nd ed. (Paris: Librairie ge´ne´rale de droit et de jurisprudence, 1948), (English translation available on the book website) F. Ku¨bler, ‘Privatrecht und Demokratie: Zur Aktualita¨t gesellschaftstheoretischer Vorstellungen in der Jurisprudenz’, in F. Bauer, J. Esser, F. Ku¨bler, L. Raiser and E. Steindorff (eds.), Funktionswandel der Privatrechtsinstitutionen: Festschrift fu¨r Ludwig Raiser (Tu¨bingen: Mohr, 1974), pp. 697–725, (English translation available on the book website) T. Wilhelmsson, ‘Varieties of welfarism in European contract law’ (2004) 10 European Law Journal 712–33 George Ripert’s Le Re´gime De´mocratique et le Droit Civil Moderne, published for the first time in 1936, criticizes the supremacy of ‘politics’. In ‘Privatrecht und Demokratie: Zur Aktualita¨t gesellschaftstheoretischer Vorstellungen in der Jurisprudenz’, Friedrich Ku¨bler defends the opposite position.5 Not least as a reaction to the massive exploitation of private law to enforce the racist ideology of National Socialism, German legal scholars had promoted a formal apolitical understanding of the role and function of private law (Chapter 5). The student revolt of 1968 had made the politics of law and its democratization a prominent topic. In ‘Varieties of welfarism in European contract law’,6 Thomas Wilhelmsson illustrates that concrete conclusions for the comprehension of a social 2

3

4

5

6

R. Weaver and D. Kysar, ‘Courting disaster: climate change and the adjudication of catastrophe’ (2017) 93(1) Notre Dame Law Review 295–356. For evidence in a different field see M. Heindlmaier, D. Kramer, D. Sindbjerg Martinsen, J. Sampson Thierry, A. Schenk and B. Werner ‘ECJ judges read the morning papers: explaining the turnaround of European citizenship jurisprudence’ (2018) 25 (10) Journal of European Public Policy 1422–41. For a deeper analysis M. Hesselink, ‘Democratic contract law’, Amsterdam Law School Legal Studies Research Paper No. 2014–24. F. Ku¨bler, ‘Privatrecht und Demokratie: Zur Aktualita¨t gesellschaftstheoretischer Vorstellungen in der Jurisprudenz’, in F. Bauer, J. Esser, F. Ku¨bler, L. Raiser and E. Steindorff (eds.), Funktionswandel der Privatrechtsinstitutionen: Festschrift fu¨r Ludwig Raiser (Tu¨bingen: Mohr, 1974), pp. 697–725. T. Wilhelmsson ‘Varieties of welfarism in European contract law’ (2004) 10 European Law Journal 712–33.

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182 BOX 9.3

M. Hesselink, ‘Democratic contract law’, Amsterdam Law School Legal Studies Research Paper No. 2014–24 C. Joerges and T. Ralli (eds.), ‘European constitutionalism without private law, private law without democracy’, Arena Report No. 3/11, Recon Report No. 14 private law can be drawn from model types of democratic welfare states. The need for politicization and democratization of private law is presupposed. The author pursues analytical not normative targets. He does proclaim an ideal type for Europe, but advocates different national solutions which enter into competition with each other.7 Not least owing to the initiative of the European Parliament to elaborate a European Civil Code complementary to the then envisaged European Constitution, the debate on democracy and private law shifted from the national to the European level. The common denominator of the voiced critique is the well-known European ‘democratic deficit’. The implicit yardstick of such critique is the democracy and lawmaking in national parliaments. (See further reading in Box 9.3.)

b theories, context and discussion I The contemporary form of Continental private law started to hold sway with the creation of nation states after the Peace of Westphalia, which culminated in the codification of private law in France (1804), Austria (1811), Italy (1942) and Germany (1900). Scholarship attributes the autarky of private law, whether Continental or common, to its origins and its function in the political economy. The claim assumes the separation or separability of private law from public law.8 The early codifications are not the product of a fully fledged democratic process; at least in today’s understanding.9 The German codification is perceived as stemming organically from the ‘Volksgeist’ (Friedrich von Savigny). The French Code Civil dates back to 1804 and is often called the ‘Code Napole´on’. France has preserved the belief that the French Revolution provided the people of Europe not only with democracy, but also with a democratically legitimized private law.10 This myth may have to do with the deep influence of the Code Civil on national movements in South West Germany in the early nineteenth century, where it was used as an argument for a new

7

8 9

10

T. Wilhelmsson, ‘Private law in the EU: harmonised or fragmented Europeanisation?’ (2002) 10 European Review of Private Law 77–94. H. Dagan and A. Dorfman, ‘Just relationships’ (2016) 116(6) Columbia Law Review 1395–460, 1424–30. F. Wieacker, Voraussetzungen europa¨ischer Rechtskultur (Go¨ttingen: Go¨ttinger Tageblatt, 1985); trans. by E. Bodenheimer as ‘Foundations of European Legal Culture’ (1990) 38 The American Journal of Comparative Law 1–29. J. Gordley, ‘Myth of the French civil code’ (1994) 42 American Journal of Comparative Law 459–505.

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democratic order.11 The national legal cultures and traditions are deeply rooted in the origin of the codified and non-codified legal private law systems.12 The origin of private law systems was never an obstacle to the development of a stable organization of the market, be it before, during or after the Industrial Revolution. Rather, these legal systems provided the conceptual framework which is required in a capitalist market society: the autonomy of the subject, the guarantee of private property and the contract as form of exchange.13 The formal rationality of private law (see Chapter 2, Max Weber in particular) shielded the private law systems against open politicization through democratic processes.14 Western democracies subjected private law to various reforms inside or outside the codified body or, in the case of common law countries, to policy-orientated regulation. However, the three pillars, the legal subject, contract and tort, remained by and large untouched. The great reform of the German Civil Code (BGB) in 2002 is to be understood as a technical bureaucratic exercise to implement the 20-year-old proposals of the Commission on the Law of Obligations (Schuldrechtsreformkommission). It is a matter of controversy whether more far-reaching political ideas voiced already by Otto von Gierke in his seminal paper on the social tasks of private law written 130 years ago (see Chapter 8) have been realized through the integration of consumer law.15 A serious political discussion in the democratic fora on the pros and cons of the ‘social’ in the BGB did not take place. Even in the Netherlands political discussions were limited;16 a pattern repeated in Estonia (1996), the Republic of Latvia (1997), Lithuania (2000) and in the Czech Republic as well as in Hungary (2014).17 The discussion concerning the European Civil Code as an integral part of building what was then envisaged as a European constitution adds new facets to this historical overview, but does not change the overall picture. In 2001, the European Commission launched the project at the behest of the European Parliament. Whilst the initiative came from the European Parliament, the way the European Commission implemented it appears rather undemocratic:18 200 academics produced a kind of a European Civil 11

12

13 14

15

16

17

18

H. Schulze, ‘Mentalita¨tsgeschichte: Chancen und Grenzen eines Paradigmas der franzo¨sischen Geschichtswissenschaft’ (1985) 36 Geschichte in Wissenschaft und Unterricht 247–70. H.-W. Micklitz, The Politics of Justice in European Private Law (Cambridge: Cambridge University Press, 2018); more generally on how history transforms culture E. Flaig, Gegen den Strom (Springe: zu Klampen Verlag, 2013). E. Schmidt and G. Bru¨ggemeier, Grundkurs Zivilrecht, 7th ed. (Munich: C. H. Beck, 2006). On the ideological dimension D. Kennedy, ‘Three globalisations of law and legal thought: 1850–2000’, in D. M. Trubek and A. Santos (eds.), The New Law and Economic Development: A Critical Appraisal (Cambridge: Cambridge University Press, 2006), pp. 19–73. In the affirmative, S. Grundmann, ‘Consumer law, commercial law, private law: how can the EU Sales Directive and the UN Sales Convention be so similar?’ (2003) 14 European Business Law Review 237–57; for a different view, in particular on the role and function of standard contract terms, H.-J. Pflug, Kontrakt und Status im Recht der Allgemeinen Gescha¨ftsbedingungen (Munich: C. H. Beck, 1986). E. Hondius, ‘Das neue Niederla¨ndische Zivilgesetzbuch’ (1991) 191(5) Archiv fu¨r die civilistische Praxis 378–95. L. Ve´ka´s and M. Paschke (eds.), Europa¨isches Recht im ungarischen Privat- und Wirtschaftsrecht (Mu¨nster: LIT Verlag, 2004); N. Reich, ‘Transformation of contract law and civil justice in the new EU member countries: the example of the Baltic states, Hungary and Poland’, in F. Cafaggi (ed.), The Institutional Framework of European Private Law (Oxford: Oxford University Press, 2006), pp. 271–302; L. Ve´ka´s, ‘Ein Verfechter der europa¨ischen Rechtskultur’ (2015) 1 Zeitschrift fu¨r europa¨isches Privatrecht 128–41. H. Schepel, The European Brotherhood of Lawyers: The Reinvention of Legal Science in the Making of European Private Law, first published 2 March 2007 https://doi.org/10.1111/j.1747–4469.2007.00055.x.

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Code termed the Academic Draft Common Frame of Reference (2008). Due to the open resistance of six member states’ governments, the European Commission had to withdraw its proposal of a Common European Sales Law, the remainder of the project. National politics prevailed over European bureaucracy. However, neither national parliaments nor the European Parliament made their voice heard during the short history of what could have become a European Civil Code. II Georges Ripert’s text features a strong historical reference. The book contains a careful reconstruction of the development of French civil law from the end of the Franco-Prussian War in 1870/71 until the creation of the Fourth Republic in 1946. Page 2 of the introduction conveys the message: ‘Notre droit reste expose´ au meˆme pe´ril: le triomphe exclusif de l’une des forces sociales’ – ‘Our law remains exposed to the same danger: of the triumph of one of the social forces embodied by the democratic powers.’ It was only during the Third Republic that the French Parliament had obtained legislative sovereignty. Until 1875/77, the legislative power was primarily in the hands of the monarchy – even if it barely used its authority. Apart from the withdrawal of the liberal divorce law, the Code Civil remained unchanged until the French Parliament took power, at which time democracy wanted new laws.19 Ripert refers to Tissier, Picard, Charmant and Duguit.20 On the occasion of the centenary celebration of the Code Civil in 1904 they intended to replace the metaphysical order of the Code Civil with a system which takes into account social reality. Their critique led to a variety of legislative amendments, with the majority regarding family law. To the extent that the subject-matter cannot be integrated into the Code Civil, the following maxim applied; ‘the rule is never stated in a formula because the legislator thinks only of particular cases. It is said that a law conforms with the general interest when it responds to a sufficient number of private interests’.21 Von Gierke22 had come to a similar conclusion; he argued for an organic law deriding those conceptualists who think judicial reasoning is somehow self-sufficient. He is near to Duguit because he argues that law and life are more closely related than the conceptualists allow for, although von Gierke developed a theory de lege lata, whereas Duguit wanted the code torn up. The second part tackles the claim intrinsic to each democracy: the transfer of legislative authority to parliament amounts to social progress. Ripert contrasts the pre-democratic codification, which was cast from one mould, with parliamentary selectivity and lack of 19 20

21

22

P. 14 La de´mocratie arrive´e au pouvoir veut un droit niveau. On Duguit’s social and function approach to law see G. Comparato and R. Condon, ‘The general transformations of private law since Le´on Duguit’, in L. de Almeida, M. Cantero Gamito, M. Durovic and K. Purnhagen (eds.), The Transformation of Economic Law Autonomy, Responsibility and Sovereignty in European Private Law: Essays in Honour of Hans-W. Micklitz (Oxford: Hart Publishing, 2019) pp. 115–136. Ripert, Le Re´gime De´mocratique, p. 27, ‘La re`gle n’est jamais e´nonce´e dans une formule car le le´gislateur ne songe qu’a` des cas particuliers. On dit que la loi est d’inte´reˆt ge´ne´ral quand elle re´pond a` un nombre suffisant d’inte´reˆts prive´s.’ O. von Gierke, Die soziale Aufgabe des Privatrechts (Berlin: Springer, 1889); trans. into English by E. McGaughey, ‘The social role of private law (Otto von Gierke, 1889)’ (2018) 19(4) German Law Journal 1017–116.

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conceptual thinking.23 This does not mean, as was the case with the national convention, compiling a code intended to record societal transformation and fulfil a new ideal or, as was the case in the Soviet republics, to rapidly destroying the capitalist system to establish communism. The consequence is a different law, guided not by reason (la Raison) but by interests, one that is said to be an expression of the rulers’ will and imposes itself on the ruled; nothing more than the will of power. The legitimacy of parliament is rooted in legislation. Legal stagnation is equivalent to a de-legitimation, because citizens get the impression that legislation does not accomplish the tasks which were entrusted to it in the framework of a representative democracy. As Alexis de Tocqueville already pointed out, the deeper reason has its roots in the conviction of social progress, of the indefinite perfectibility of man, which is an intrinsic part of the democratic ethos and of French enlightenment. All party programmes are geared towards progress and stagnation equals regression. In the words of Ripert:24 democracy searches for its law because it is convinced that substantial progress must correspond with moral and social progress and, if it is the only idealism left in it, it must be agreed that it does not lack beauty. The chapter concludes with a critical analysis of the attitude of jurists, whom he blames for their indifference or superficial loyalty (fidelité) towards parliament as the formal legislative authority. Ripert defends the overriding importance of reason, which the judge has to translate into practice. The legislature’s lack of principle, the substitution of reason through interests and legislative intent promotes the ‘gouvernement des juges’. This short passage reveals the profound distrust of the judiciary dominating at the time. The struggle for justice as the new ‘goddess’ has taken the place of reason. Justice is no longer defined in the Code Civil, but in the law of nature, within the realm of human rights. The idealization of human rights plays into the hands of ideologists and religions and Catholic lawyers are claimed to be the only ones who are convinced. Ripert predicts that a balance between human rights and the Code Civil can only be maintained by minimizing their influence, by restricting them to one or several essential human rights.25 The direct horizontal application of human rights in private law situations is claimed to dissolve private law and dissolve the spiritual force of the subjective right26 (see Chapters 6 and 8). The insight that in a legal system which is characterized by reason, eternal truths are condensed loses its impact. Ripert rejects Raymond Saleilles, one of the founding fathers 23

24

25

26

Ripert, Le Re´gime De´mocratique, p. 32, ‘Il ne s’agit pas, comme sous la Convention nationale, de faire un Code destine´ a` constater la transformation de la socie´te´ et a` satisfaire un ide´al nouveau ou, comme dans les Re´publiques sovie´tiques, de de´truire brusquement le re´gime capitaliste pour e´tablir le communism.’ Ripert, Le Re´gime De´mocratique, p. 39, ‘la de´mocratie cherche son droit parce qu’elle est convaincue qu’un progre`s mate´riel doit correspondre a` un progre`s moral et social et, si c’est la` le seul ide´alisme qui lui reste, il faut convenir qu’il ne manque que la beauté’. Ripert, Le Re´gime De´mocratique, p. 49. This is similar to the Irish Supreme Court’s approach to the interaction of the constitution with private law in Meskell v. CIE [1973] IR 121 (SC). For an overview of the relationship between the Irish constitution and tort law see B. McMahon and W. Binchy, Law of Torts, 4th ed. (Dublin: Bloomsbury Professional, 2013), pp. 19–50. Jellinek’s account of the American origins of the French Revolution might help to better understand Ripert, see G. Jellinek, The Declaration of the Rights of Man and of Citizens: A Contribution to Modern Constitutional History, trans. by M. Farrand (New York: Henry Holt, 1901). See also G. de Ruggiero, The History of European Liberalism, trans. by R. Collingwood (New York: Oxford University Press, 1927), where he stresses the link between Protestantism and liberalism.

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of the French sociology of law, arguing that social shortcomings, which require a legal solution, can always be found. The orientation towards social progress – Ripert refers to the masters of ‘droit social’ such as Durkheim, Gide, Duguit and Gurvitch – endangers the individual’s autonomy. His closing words about the future of the legal profession are pessimistic. Jurists are no longer the framers of a reason-oriented legal system which is built for eternity, but become adulates of a democratic legislative machinery which itself undermines the foundations of the law.27 It seems as if Ripert would prefer to leave hard cases to the judiciary rather than to the legislature. III Friedrich Ku¨bler approaches the core of the question, ‘the relation between social ideas of order and the private law system’, by choosing a methodological approach informed by legal history. At the beginning of the 1970s, it was unusual for a private law professor to deal with the social dimension of private law.28 In the 1960s, the tension between law and politics was openly addressed by only a few, mostly from Frankfurt am Main or Tu¨bingen, later Bremen.29 With the social-liberal Brandt/Scheel government taking power in 1969, the path for an open debate about the relationship between private law and democracy was free. L. Raiser had opened the academic debate with Grundgesetz und Privatrechtsordnung (Basic Law and the Private Legal Order) in 1967.30 His disciple Ku¨bler searched for ‘sociotheoretical ideas’31 which influence private law. Ku¨bler was not afraid of a democratic politicization of private law. He did, however, highlight its limited explanatory value:32 ‘This is to say that the conditions of existence of a democratically built industrial society require more reason (or rationality) and responsibility as the mechanism of the pluralisticpolitical process may (certainly) produce.’ Ku¨bler starts with methodological considerations and refers to J. Esser (see Chapter 1, pages 41 onwards). The starting point is whether and to what extent ‘socio-political ideas’ have an impact on the concept and the wording of the private law system. This requires the existence of societies which define themselves through the exchange between legal subjects. Ku¨bler recognizes a first concretization of socio-political ideas in the Code Civil, to which he attributes ‘democratic impulses’ in the specific shape of French rationalism. The result is the product of the insight of all those who are concerned as considered by Jean Jacques Rousseau. Germany has entangled itself in the debate about the pros and cons of a codification between Anton Thibaut and Friedrich Carl von 27

28 29

30

31

32

As to the role and function of anti-discrimination laws in the EU A. Somek, Engineering Equality: An Essay on European Anti-Discrimination Law (Oxford: Oxford University Press, 2011). F. Ku¨bler, ‘Privatrecht und Demokratie’. On the intellectual history of the University of Bremen, P. Derleder, Kurzer Aufbruch in eine neue Welt (Bremen: Donat Verlag, 2019). L. Raiser, Grundgesetz und Privatrechtsordnung (Munich: C. H. Beck,1967), and earlier F. Wietho¨lter, Die Position des Wirtschaftsrechts im Sozialen Rechtsstaat: Festschrift fu¨r Franz Bo¨hm (Tu¨bingen: Mohr, 1965), pp. 41–62. One should know that it was politically and academically not correct to speak of legal politics (Rechtspolitik). Politics was replaced in legal writings by ‘theory’. Ku¨bler, ‘Privatrecht und Demokratie’, p. 725.

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Savigny. However, it might be helpful to remember that Thibaut advocated for a nation state which was politically capable of acting and which nevertheless aimed at a consensus with regard to codification, whereas von Savigny considered the people as the epitome of cultural tradition. The codification in the BGB (German Civil Code), realized several decades after the intellectual battle, gained importance for the building of a nation state. The liberal model provoked resistance by Anton Menger, Karl Renner and von Gierke, not least because the BGB neglected the social tasks of private law which were relevant at the time of its adoption. The alignment of the liberal model to the changing social conditions remained for courts. This marks an essential difference between Germany and France; at least at the time. Apart from the development of new legal institutions through the courts, culpa in contrahendo, positive breach of contractual obligation and the fundamental change of circumstances underlying the contract, the courts have gradually subjected standard contract terms to judicial control.33 Ku¨bler highlights the serious consequences of judicial interventions which facilitated the integration of national-socialist ideas into the legal system:34 ‘one might say that this socio-ethical return of private law might alleviate the consequences of industrialization and proletarization in individual cases, but generally leads to an aggravation since it partially removes competition and its redistributive function and thereby cements existing differences’. Under reference to Ernst Bloch,35 Ku¨bler points to the contrast between freedom and equality, the egalitarian guarantee of a private-autonomous design, and the guarantee of a material minimum existence. This line of argumentation features the refusal of liberalism in favour of a ‘diffuse community ideology’. Ku¨bler sums it up: ‘The outlined development makes clear the low degree to which private law was prepared for the democratic constitution of the twentieth century.’ With the dawn of the Weimar Republic Germany became a democracy. The social and economic turmoil of the 1920s resulted in ‘hectic legislative activity’ not only in Germany, but also in France, as Ku¨bler points out with reference to Ripert. German courts assumed responsibility for protecting the private law system against ‘the parliamentarian law which was corrupted by stakeholders and political considerations of expediency’. Von Savigny’s idea of a people’s spirit which prevails through law had utterly failed. Until long after World War II, ‘the world was fine as long as legislation was in the hands of academics and specialist jurists; the laws of the national-socialist regime can be blamed on the mass of voters and their representatives’.36 Ordo-liberalism (see Chapters 2 and 6) made the first step to align market economy with democracy: ‘The so-called market rules are, on closer inspection, nothing else than an exaggerated, from a technical point of view highly sophisticated, daily and hourly plebiscitary democracy – a referendum which continues from morning to night time, all year long, the technically most ideal.’37 The necessary economic knowledge is provided by scientific advisory boards. The Volonte´ ge´ne´rale – the reasonable understanding of 33 34 35 36 37

D. Hart, Allgemeine Gescha¨ftsbedingungen und Justizsystem (Kronberg/Taunus: Scriptor-Verlag, 1974). Ku¨bler, ‘Privatrecht und Demokratie’, p. 709. E. Bloch, Naturrecht und menschliche Wu¨rde (Frankfurt: Suhrkamp, 1971). Ku¨bler, ‘Privatrecht und Demokratie’, p. 715. F. Bo¨hm, ‘Wirtschaftsordnung und Staatsverfassung’ (1950) 153/154 Recht und Staat at 42. For a view on ordoliberalism from the outside see D. Gerber, ‘Constitutionalizing the economy: German neo-liberalism, competition law and the “new” Europe’ (1994) 42(1) The American Journal of Comparative Law 25–84.

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a legal provision (in our context) – is replaced by the expertise of economists and lawyers,38 in contrast to the elaboration of the French Code Civil and the German BGB, which involved lawyers exclusively. Ku¨bler then deals with the consequences of democratization of private law. He expects three advantages:39 (1) the provision of a common, uniform frame of reference for the entire legal system; (2) the possibility to take into account the structural change of the legal system, which he illustrates by giving the example that modern legislative activity not only involves the simple balancing of opposed interests, but also has to take into consideration the functional intertwining of economic contexts; and (3) the benefit from the correspondent relation between the overall legal system and procedures of social self-control to enhance the understanding of private law. The contribution ends with a critical outlook on the risks that democratization of legislative activity would entail. These passages resemble Ripert’s criticism of the legislation of the Fourth Republic, even though his choice of words is more moderate. Ku¨bler calls for engaged social commitment by lawyers: ‘[t]he ethos of a lawyer involves the necessity of his own enlightenment: this is the ethos of a citizen, and at the same time the ethos of a social science representing a practical approach’.40 The judges in Urgenda would then be assumed to combine legal professionalism with a sensitivity to the rising environmental concerns. IV Ripert emphasizes the arbitrariness of a droit social which does not require any concrete content. Ku¨bler outlines the framework in which the democratic discussion should be engaged rather than focusing on the contents or on the social function of private law in the meaning of Menger, Renner and von Gierke. Thomas Wilhelmsson takes for granted that it is the democratic legislature that determines social private law. Since World War II, all Western democracies have undergone a process which Fritz Scharpf refers to as ‘social democratization’.41 All states have dedicated themselves to making private relationships more social and more just. Ever since President Kennedy’s speech in 1962, consumer protection and consumer law can be found on the political agenda of Western democracies.42 The European Union is at the forefront of the agenda. This explains why consumer law represents the reference point around which Wilhelmsson constructs his argument. His emphasis lies on the search for assigning criteria to different forms of ‘welfarism in contract law’ and this approach means that he does not deal with theories about social justice or of social private law. In section II (The Elusive Value-Structure of the Welfare State) Wilhelmsson compares the liberal model of contract law with the model of the welfare state with the aim of finding out whether and to what extent the latter can be a sustainable basis for European contract 38 39 40 41 42

Ku¨bler, ‘Privatrecht und Demokratie’, p. 719. Ku¨bler, ‘Privatrecht und Demokratie’, p. 720–2. Ku¨bler, ‘Privatrecht und Demokratie’, p. 725. F. Scharpf, Sozialdemokratische Krisenpolitik in Europa (Frankfurt: Campus-Verlag, 1987). E. van Hippel, Verbraucherschutz, 3rd ed. (Tu¨bingen:Mohr, 1986).

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law.43 There are three obstacles: (1) the lack of an encompassing concept of a welfare state which could guide the European Union; (2) the profound reorganization of the Western welfare states since the 1980s; and (3) the uncertainty of the impact of coherent values for a European contract law. He writes:44 ‘the welfare state is characterised by a continuous balancing between market-orientated efficiency and solidarity-based interventions of the state’. The idea of a model for a welfare state does not say anything about when and where the state should intervene. It does not tell us whether and to what extent private actors, that is, companies, can or should be subject to welfare-state obligations.45 Through five ‘dichotomies’ Wilhelmsson aims to capture the criteria and parameters which centre on the welfarist paradigms (dichotomies within the welfarist paradigm) in the private law theory. His analyses discuss implicitly what kind of choices the European legislature could take and what kind of choices it has taken. The five dichotomies are structured on a scale starting with the liberal model placed in contrast to the welfarist model: (1) commutative (corrective) v. distributive (distributing) justice. Contract law traditionally has a corrective function. It is highly debatable whether and to what extent it also has a distributive one. Wilhelmsson highlights the different perspectives. He is not interested in the empirical question as to whether contract law can lead to distributive justice, but in a possible justification of a distributive contract law; (2) market-rational v. market-corrective regulation. Market-rational regulation intends to strengthen the function of the market mechanism and is therefore more sustainable with regard to a liberal contract model. By contrast, the market-corrective regulation wants to eliminate market failures and non-market values.46 Its core target is correction as regards content in the light of social justice, whereas market-rational regulation is dominated by the idea of procedural justice. A clear separation between material and procedural justice is not possible;47 (3) internal v. external perspective. ‘Internal’ refers to the bilateral contractual relationship between two parties, whereas ‘external’ alludes to third parties which are not involved in the contract. The internal perspective contains collective provisions like standard contract terms, since the corrective function of justice applies typically to consumers collectively. The external does not involve relational contracts, networks or linked credit agreements,48 but the contractual and regulative effects on the distribution of 43

44 45

46

47 48

M. Hesselink, ‘If you don’t like our principles, we have others: on core values and underlying principles in European private law: a critical discussion of the new “principles” section in the Draft Common Frame of Reference’, in R. Brownsword, H.-W. Micklitz, L. Niglia and S. Weatherill (eds.), The Foundations of European Private Law (Oxford: Hart, 2011), pp.59–72. Wilhelmsson ‘Varieties of welfarism’, 715. L. Azoulai, ‘The Court of Justice and the social market economy: the emergence of an ideal and the conditions for its realization’ (2008) 45 Common Market Law Review 1350–5. N. Reich, Markt und Recht (Neuwied/Darmstadt: Luchterhand, 1977) distinguishes between market complementing and market correcting interventions. H. Collins, ‘Good faith in European contract law’ (1994) 14 Oxford Journal of Legal Studies 229–54. M. Amstutz and G. Teubner (eds.), Networks: Legal Issues of Multilateral Co-operation (Oxford: Hart, 2009).

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advantages between groups of consumers or groups of entrepreneurs. This includes rules which aim to reduce discrimination. The sharpest economic discrimination49 is inherent to a competitive legal order.50 Ku¨bler shows how well-meant attempts by state authorities (specifically the Reichsgericht) can be a double-edged sword for society and the economy; (4) alignment with capabilities v. alignment with needs. This distinction destroys the abstractness of the subject which has characterized the private law system since the Code Civil. Welfare models follow different roles played by subjects in the economic order, such as consumers, tenants, employees or entrepreneurs. Traditional contract law assumes the equality of all subjects, the existence of equal capabilities and equal opportunities, which are immanent to the concept of autonomy. Wilhelmsson feels strongly about the alignment of contract law with needs.51 He refers to poverty, low income, unemployment and sickness – phenomena which were not caused by the people concerned and which he calls ‘social force majeure’;52 (5) protection of parties v. protection of other values. He refers to values such as environmental protection or the protection of human rights. Statutory interventions which oblige the parties to adhere to objectives of environmental protection have a strongly distributive function between generations. The tension between different welfare targets, in particular between consumer and environmental protection, is only marginally approached.53 This might change in light of the 17 UN Global Sustainability Goals and EU promoted Circular Economy.54 In sum, Wilhelmsson uses the five dichotomies to develop a welfarist assessment scheme of contract law:55 (1) market-rational; (2) market-corrective; (3) internally redirecting; (4) externally redirecting; (5) need; and (6) public values, environmental protection and human rights. He applies this scheme in order to categorize, analyse and evaluate European contract law. Unsurprisingly, European contract law is, due to its dependence on information, market-rational at its core56 (Chapter 5, Cassis de Dijon). At the same time, it is partly market-corrective – as a consequence of the high share of mandatory contract law – while also designed for an internal reorganization between the weaker 49 50 51

52

53

54 55 56

D. Caplovitz, The Poor Pay More: Consumer Practices of Low Income Families (New York: Free Press, 1963). H. Schweitzer, inaugural lecture at the University of Mannheim, unpublished. T. Wilhelmsson, Critical Studies in Private Law: A Treatise on Need-Rational Principles in Modern Law (Dordrecht: Kluwer, 1992). See R. Condon, ‘Vicarious liability in the common law and the civil law tradition: a comparative study of the approaches adopted in England and France’, PhD Thesis, European University Institute, Florence (2017), chapter 2, where he draws on Ewald who contrasts the providential nineteenth-century view of the universe with the more ‘scientific’ and statistical view of misfortune in the twentieth century – since God is dead, and what befalls individuals has no greater meaning. L. Kra¨mer, ‘Vom Rechte das mit uns geboren: Der Einzelne im gemeinschaftlichen Umweltrecht’, in L. Kra¨mer, H.-W. Micklitz and K. Tonner (eds.), Law and Diffuse Interests in the European Legal Order (Baden-Baden: Nomos, 1997), pp. 741–54. E. Terryn and B. Kersbilck (eds.), Consumer Protection and Sustainability (Cambridge: Intersentia, 2019). Wilhelmsson ‘Varieties of welfarism’, 725. G. Howells, C. Twigg-Flesner and T. Wilhelmsson, Rethinking EU Consumer Law (London: Routledge, 2017).

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consumer and the stronger entrepreneur. Parameters (4)–(6) play a more marginal role. The scheme is suitable for the development of a new architecture of consumer law.57 Wilhelmsson’s contribution was written in 2004. Over the last sixteen years, the trend towards a more welfarist European contract law has gained ground, although not in a direction which reaches much beyond the market rationale. This is true in relation to need as consequence of the continuous economic crisis following Lehman Brothers and the euro crisis, which have both drawn attention to over-indebtedness and consumer bankruptcy,58 as well as to the growing importance of human rights and sustainability, also with regard to contract law (see Chapter 8). It remains to be seen whether and to what extent the European Union only acts as a neoliberal hegemon that subjects contract law to market efficiency or gives priority to financial stability, or whether the EU legislator is in a position to develop elements, if not a concept, of a social contract law.59 V Two hundred years of codification and 150 years of democracy have left their mark on private law. Although the external structure of the comprehensive codifications is still in place, profound changes can be seen, partly within the codified private law, partly through the rise of private regulation law which enfolds the codification or common law like a wreath.60 Consumer law is only one of these legal fields. From a historical point of view, labour law and tenant law preceded consumer law. As a consequence of the progressing European integration process, the law of regulated markets must be taken into account as well. However, the structural change in society and economy has not entailed radical innovations in that respect. Sustainability and the circular economy are about to reach private law, at least academically, but not yet at the political level. Even the Academic Draft of a Common Frame of Reference, which was advocated for by the European Parliament, by the European Commission and by parts of the academic community, looks rather conventional in content, apart from the integration of non-discrimination law. It is a totally different question as to whether a European legal order in whatever form could be called democratic.61 It was only during periods of communism and National Socialism that private law underwent radical transformations. The Volksgesetzbuch62 as proposed by National 57

58

59

60 61

62

H.-W. Micklitz, ‘Do consumers and business need a new architecture for consumer law? A thought provoking impulse’ (2013) 32(1) Yearbook of European Law 266–367. I. Domurath, G. Comparato and H.-W. Micklitz (eds.), ‘The over-indebtedness of European consumers: a view from six countries’, LAW 2014/10 Department of Law European Regulatory Private Law Project (ERCERPL – 08) European Research Council (ERC) Grant. D. Kochenov, G. de Bu´rca and A. Williams (eds.), Europe’s Justice Deficit? (Oxford: Hart Publishing, 2015); C. Kilpatrick, ‘On the rule of law and economic emergency: the degradation of basic legal values in Europe’s bailouts’ (2015) 35 Oxford Journal of Legal Studies 325–53. H.-W. Micklitz, ‘The visible hand of European private law’ (2009) 28 Yearbook of European Law 3–59. C. Joerges and T. Ralli (eds.), ‘European constitutionalism without private law, private law without democracy’, Arena Report No. 3/11, Recon Report No. 14 Diskussionspapier. Summary H. Hattenhauer, ‘Das NS-Volksgesetzbuch’, in A. Buschmann, G. Otte, W. Schubert and F.L. Knemeyer (eds.) Festschrift fu¨r R. Gmu¨r (Bielefeld: Gieseking Verlag, 1983), pp. 255–79; M. Stolleis and D. Simon (eds.), Rechtgeschichte im Nationalsozialismus: Beitra¨ge zur Geschichte einer Disziplin (Tu¨bingen: Mohr, 1989).

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Socialists was never adopted. The only complete document from communist times is the ZGB, the Civil Code of the German Democratic Republic (DDR). It became effective in 1975 and was applied until the dissolution of the DDR. The vast majority of communist states contented themselves with changes to the codified private law, in order to adapt it to the communist ideology. The contractual provisions were complemented with political, that is, socialist-ideological, ideas.63 Will the rising political concern about climate change lead to a substantial revision of the Civil Codes? So far it seems that the legislatures rely on courts to bring private law in line with sustainability requirements. Urgenda demonstrates the flexibility of private law rules to integrate climate change into tort law. Those who support judicial activism underline that active courts do not reach out to supplement democratic processes. The Dutch court stressed the interaction between the judiciary and the legislature in a democracy.64 The effects of politicization through democratization during the last 150 years should not be underestimated. As foreseen by Ripert, they arise insidiously. Transformations occur within the core – contract and tort – and on the edges. Seen through a democratic lens they might serve different purposes at the same time. In tort, ideas of compensation coming from the welfare state and ideas of economic efficiency can justify the same legal rules. Labour law, tenant law and consumer law have developed into autonomous fields surrounding the core of private law. This makes it unreasonable to speak of what private law means in isolation from these peripheral fields; it is also methodologically questionable to use the traditional contract and tort as the sole starting point. The rifts between the law of regulated markets and civil law are even sharper. Both exist independently, beyond traditional contract law and even beyond consumer, labour and tenant law. National private law, whether codified or not, and (European) regulatory law stand sidebyside. The connection between the two is becoming looser, the gap is widening, although there is potential for reconnection. Janecek concerns air pollution. The solution the ECJ advocates goes very much along with Urgenda. Private parties are granted standing under EU law to push national executive bodies into action – via the judiciary.65

63

64 65

See L. Ve´ka´s and M. Paschke (eds.), Europa¨isches Recht im ungarischen Privat- und Wirtschaftsrecht (Mu¨nster: Lit Verlag, 2004); N. Reich, ‘Transformation of contract law’. Weaver and Kysar, ‘Courting disaster’, 341, fn. 323. Case C-237/07, Janecek [2008] ECLI:EU:C:2008:447; for a careful reconstruction of the background of the case see B. Kas, ‘“Hybrid” collective remedies in the EU social legal order’, PhD Thesis, European University Institute, Florence (2017), https://cadmus.eui.eu/handle/1814/46964.

10 Formalism, Substantive and Procedural Justice Moritz Renner

a topic and materials I This chapter deals with the different, and changing, conceptions of justice underlying modern private law systems. The foundations of modern private law have been laid in the nineteenth century and the political revolutions of that time are still reflected in many private law institutions. However, in the course of the twentieth century, private law has undergone a thorough transformation. Formalist conceptions of justice and equality have been gradually replaced by ideas of substantive, or distributive, justice, which aim at achieving social change through the means of private law. This development is closely linked to both the rise of the modern welfare state and the emancipatory movements of the twentieth century striving for social, gender and race equality (see also Chapter 14). For the civil rights movement in the United States, for example, legal institutions were as central as they were for social justice movements in Europe. However, in the struggle for justice and equality the role of private law has often proven ambivalent. Even well-intended distributive rules might have the effect of perpetuating inequality as they necessarily rely on pre-existing social categories. This is well illustrated by the civil rights case from the United States in Box 10.1. Although the case is concerned with a seemingly trivial matter of school life, it raises fundamental questions of equality and justice. Would a single election with formally equal rights for all candidates have better served its purpose? Is it justified to rely on group categories in order to provide equal opportunities for individuals of all groups? Or do rules intending equal opportunity actually curtail the individual freedoms of members of disadvantaged groups? II The questions raised by our case example are not new, and they are not limited to civil rights issues. Since the nineteenth century, the formalist conceptions of equality and justice underlying modern private law systems have been heavily criticized. In private law 193

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BOX 10.1 CASE STUDY

Godby v. Montgomery County Board of Education, 996 F. Supp. 1390 [M.D. Ala. 1998] The plaintiff, a mixed-race child with a white mother and a black father, brought the case against her former high school alleging that the school had discriminated against her and violated her rights under the Civil Rights Act. At the school, ‘homecoming queens’ were elected according to their race. Students were asked to nominate white students and black students, separately. The plaintiff was nominated for both the white and the black homecoming queen election and had to decide in which election to run. She was eventually elected white homecoming queen, but renounced the title because of her anguish at the election system. The school argued that the racially separated elections served for giving both black and white students the chance to be elected homecoming queen.

scholarship, there has always been a countermovement trying to orient the law towards ‘material justice’. Commonly the development of modern private law is described as a gradual movement from ‘formal’ to ‘material’ justice. The first reference text for this chapter (available in English on the book’s website) is by Franz Wieacker, a German legal historian. His magisterial account of the ‘social models’ of private law illuminates the intellectual currents that have driven this movement. Although Wieacker’s narrative has been criticized as sometimes idealistic and simplifying,1 its impact has been enormous.2 The second reference text for this chapter is a testament to this fact. It is an article from a United States law review written by Ju¨rgen Habermas, one of the most influential Continental European social theorists of the twentieth century (see also Chapter 4). This article is particularly interesting because it begins where Wieacker’s narrative ends: with the unresolved questions and necessary limitations of the welfare state model of material justice in private law. The narrative of the development of private law that guides both Wieacker and Habermas is by no means a Continental European idiosyncrasy. The development of the common law has been recounted in very similar terms by Atiyah and others. Beyond historical narratives, today’s private law scholarship is still confronted with the question that Habermas posed: what comes after material justice in private law? Influential attempts at answering this question have been made by Teubner and Wietho¨lter, who both try to fill the Habermasian postulate for more ‘procedural’ justice in private law with life. All these approaches, however, have in common that they suggest an evolutionary model of the 1

2

See, for example, Sibylle Hofer, Freiheit ohne Grenzen? Privatrechtstheoretische Diskussionen im 19. Jahrhundert (Tu¨bingen: Mohr Siebeck, 2001). Most notably, it informs a widely shared account of the development of European private law as progressing towards more social justice, see for example, Hans-W. Micklitz, The Politics of Justice in European Private Law (Cambridge: Cambridge University Press, 2018).

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BOX 10.2

Franz Wieacker, Das Sozialmodell der klassischen Privatrechtsgesetzbu¨cher und die Entwicklung der modernen Gesellschaft (Karlsruhe: C. F. Mu¨ller, 1963) (English translation available on the book website) Ju¨rgen Habermas, ‘Paradigms of Law’, 17 Cardozo Law Review 771–84 (1995–1996)

BOX 10.3

Patrick Selim Atiyah, The Rise and Fall of Freedom of Contract (Oxford: Clarendon Press, 1979) Erhard Blankenburg, ‘The Poverty of Evolutionism: A Critique of Teubner’s Case for “Reflexive Law”’, 18 Law & Society Review 273–89 (1984) Claus-Wilhlem Canaris, ‘Wandlungen des Schuldvertragsrechts: Tendenzen zu seiner “Materialisierung”’, 200 Archiv fu¨r die civilistische Praxis 273–364 (2000) Gunther Teubner, ‘Substantive and Reflexive Elements in Modern Private Law’, 17 Law & Society Review 239 (1983) Rudolf Wietho¨lter, ‘Proceduralization of the Category of Law’, 12 German Law Journal 465–73 (2011)

development of private law – which raises a plethora of both methodological and normative questions, as Blankenburg argues. These contemporary positions in the debate on private law theory can be reconstructed in the supplementary readings listed in Box 10.2.

b theories, context and discussion I Private law has always played a central role not only in the modernization of society but also in the historical struggles lying behind all processes of social modernization. The formal rationality of modern private law, which Max Weber (see Chapter 2) identifies as a necessary precondition for the rise of modern capitalism, is closely linked to the emancipative ideals of the French and American revolutions of the eighteenth century aspiring to a law of free and equal citizens. It is because of this link that the formal qualities of modern private law have been both subject to and reference point of a wide range of criticism on both sides of the Atlantic.3 This criticism was voiced when in the United 3

For a well-rounded overview see Kristoffel Grechenig / Martin Gelter, ‘The Transatlantic Divergence in Legal Thought: American Law and Economics vs. German Doctrinalism’, 31 Hastings International & Comparative Law Review 295–360 (2008).

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States, around the turn of the nineteenth to the twentieth century, legal realism (see Chapter 1) aimed at laying open the hidden (libertarian) political agenda behind the Lochner doctrine.4 In Continental Europe, a similar approach was taken by both social conservative and socialist critiques of private law as espoused by Otto von Gierke and Anton Menger.5 Initially, these critical approaches have remained a minority position, although some of their ideas eventually found their way into the Continental European civil law codifications.6 It was not until World War I that the formal-liberal conception of private law began to be dismantled in Europe as well as in the United States. This process, however, was driven by factual exigencies rather than by normative considerations. The necessities of the war economy had led to ever more interventionist governmental policies and, after World War I, widespread social deprivation during the ensuing global economic crisis provoked judicial as well as legislative attempts to incorporate ideas of distributive justice into the classical concepts of private law. Few authors have described this ‘materialization’ of private law more masterfully than legal historian Franz Wieacker, whose influential 1952 lecture on the ‘social models’ of private law is the first reference text of this chapter. And few authors have analysed the limits of materialization more clearly than sociologist Ju¨rgen Habermas (see also Chapter 4), whose Cardozo Law Review article on the paradigms of private law can be read as a contemporary response to Wieacker’s lecture. Habermas’ analysis is also a central reference point for contemporary theories of procedural justice in private law. Although neither of the reference texts is concerned with problems of racial discrimination, they both speak to our example case concerning the application of the United States Civil Rights Act (Box 10.1). The field of antidiscrimination law (see also Chapter 14) is one of the prime examples for the conflicting conceptions of justice underlying modern private law systems. The fact that specific legislation such as the Civil Rights Act exists is a consequence of the perceived shortcomings of legal rules providing for the formal, not material equality of private law subjects. At the same time, rules aiming at distributive justice such as affirmative action rules – or the separate election rules for black and white homecoming queens in our case example – lay bare the contradictions that are inherent in all concepts of material justice.

4

5

6

Morris R. Cohen, ‘Property and Sovereignty’, 13 Cornell Law Review 8 (1927); Morris R. Cohen, ‘The Basis of Contract’, 46 Harvard Law Review 553–92 (1933); Robert L. Hale, ‘Coercion and Distribution in a Supposedly Non-Coercive State’, 38 Political Science Quarterly 470–94 (1923). This critique has, from the 1970s on, been taken up by the Critical Legal Studies movement, see for example, Duncan Kennedy, ‘Toward an Historical Understanding of Legal Consciousness: The Case of Classical Legal Thought in America: 1850–1940’, 3 Research in Law and Sociology 3–24 (1980). For a comparative law perspective on the debate see Patrick S. Atiyah / Robert S. Summers, Form and Substance in Anglo-American Law: A Comparative Study of Legal Reasoning, Legal Theory, and Legal Institutions (Oxford: Oxford University Press, 1987). Otto von Gierke, Die soziale Aufgabe des Privatrechts (Berlin: Springer, 1889); Anton Menger, Das bu¨rgerliche Recht und die besitzlosen Volksklassen (Tu¨bingen: Laupp, 1927 [1890]). Andreas Abegg, Die zwingenden Inhaltsnormen des Schuldvertragsrechts. Ein Beitrag zu Geschichte und Funktion der Vertragsfreiheit (Zurich: Schulthess, 2004), p. 81.

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II The central concept in Wieacker’s lecture is the concept of the social model, which serves to describe the complex relation between political history and the history of private law. Wieacker clearly sees that private law is never a mere mirror image of the prevalent social ethics of a particular time, but also formed by the ‘unchanging principles’ innate to any legal system.7 He thus seems to take a middle ground between positivist and natural law approaches to private law. His lecture, however, analyses private law as positive law, as law made by a certain legislature in a certain historical situation. Specifically, the lecture sets out to discover the ‘hidden project’ behind the European private law codifications of the nineteenth century.8 Wieacker’s approach is to write a history of ideas of private law, to contextualize the development of modern private law with a view to the political and philosophical ideas that – in his view – influence every process of lawmaking. In this endeavour, Wieacker draws from a profound classical education. His masterpiece and milestone book on the history of modern private law (Privatrechtsgeschichte der Neuzeit, 1935, 2nd ed. 1967; see Chapter 5) is as much the writing of a legal historian as a contribution to the history of the humanities in post-medieval Europe in general. For Wieacker, European jurisprudence has, since its scholastic beginnings, never lost its close ties to the philosophical disciplines. Thus, jurisprudence necessarily takes part in the revolutions of philosophical and political thought which have shaped European history. His concept of the social model is therefore not sociological, but historical – Wieacker writes not about ‘law and society’, but about ‘law and history’. Obviously, this approach bears certain resemblances to the nineteenth-century Historical School of law, in which Friedrich Carl von Savigny placed the Romantic idea of the ‘Volksgeist’ at the centre of his model of legal evolution.9 But Wieacker departs from von Savigny when he acknowledges the specific formal qualities of the legal system which enable abstract legal rules to remain unchanged even in the face of changing social circumstances. The ‘hidden project’ of private law codifications is hidden exactly because it is disguised by the seemingly continuous tradition of legal scholarship. This holds especially true for the European codifications that legal scholars claim – until today – carry on the tradition of Roman civil law.10 Wieacker also departs from von Savigny’s ideas of a quasi-organic development of legal systems11 when he integrates the great economic and social revolutions of the nineteenth and twentieth centuries in his historical narrative. He characterizes the European private law codifications of the nineteenth century as manifestations of the Enlightenment belief 7

8 9

10

11

Franz Wieacker, Das Sozialmodell der klassischen Privatrechtsgesetzbu¨cher und die Entwicklung der modernen Gesellschaft (Karlsruhe: C. F. Mu¨ller, 1953)(English translation), p. 3. Ibid. (English translation), p. 4. Friedrich Carl von Savigny, Vom Beruf unserer Zeit fu¨r Gesetzgebung und Wissenschaft (Heidelberg: Mohr and Zimmer, 1814). See, most notably, Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition, (Oxford: Oxford University Press, 1996). Friedrich Carl von Savigny, Vom Beruf unserer Zeit fu¨r Gesetzgebung und Wissenschaft (Heidelberg: Mohr and Zimmer, 1814).

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in a rational natural law, realizing in itself the ideals of freedom and equality.12 But he is very conscious of the fact that these ideals were, throughout the nineteenth century, synonymous with the interests of a particular historical subject: the entrepreneurial bourgeoisie. This, for Wieacker, holds true for the Bu¨rgerliches Gesetzbuch (BGB) in Germany as much as it does for the French Code civil – although both codifications were made under quite different historical circumstances and based on different scholarly traditions. What unites them, in Wieacker’s view, are their political ideals: the ideals of freedom and equality as understood by the exponents of the ‘economic society of the nineteenth century’ (‘Wirtschaftsgesellschaft des 19. Jahrhunderts’).13 In substance, Wieacker argues, the ideals of freedom and equality, of liberalism and democracy, are rather contradictory: liberalism aims at the highest possible degree of autonomy from government, while democracy must aim at the broadest possible participation and – ideally – the identity between people and government. It is only the specific historical constellation of the early and mid-nineteenth century, in which the birth and rise of the bourgeoisie make those divergent agendas seem to converge. The private law codifications of the time appeared to satisfy both the urge for freedom from the bonds of monarchic and corporative societies (freedom of contract) and the striving for more social equality (abolishment of feudal privileges).14 It was the formal equality embodied by modern private law codifications that allowed for this conciliation of contradictory ideals. Yet the conciliation of liberalism and democracy was possible only for a short historical moment – and only for a small group of people. Wieacker turns his attention to the discontents of liberalism, when he observes that particularly for small trade and the growing working class the promise of freedom and equality did not fulfil itself in the way it did for the propertied classes. Small trade was choked by the competition of larger factories, and for the working class, freedom of contract, as yet unbalanced by the freedom of coalition, soon became an instrument of oppression.15 While Wieacker is not concerned with racial inequality, the history of racial segregation and discrimination in the United States that underlies the Godby case (Box 10.1) would be another example in point. To social groups that have historically suffered from discrimination, the formal equality of rights guaranteed by private law is often of little help in achieving equal conditions of life. In the decades following Wieacker’s lecture, the idea that the private law of the nineteenth century was a realm of unlimited individual freedoms has met with wellfounded criticism by legal historians.16 Authors such as Sybille Hofer have rightly pointed out that the dominant strands of private law theory in the nineteenth century – to differing

12

13 14 15 16

Franz Wieacker, Das Sozialmodell der klassischen Privatrechtsgesetzbu¨cher und die Entwicklung der modernen Gesellschaft (Karlsruhe: C. F. Mu¨ller, 1953) (English translation), p. 5. Ibid. (English translation), p. 6. Ibid. (English translation), pp. 8–9. Ibid. (English translation), pp. 11–12. Sibylle Hofer, Freiheit ohne Grenzen? Privatrechtstheoretische Diskussionen im 19. Jahrhundert (Tu¨bingen: Mohr Siebeck, 2001); Tilman Repgen, Die soziale Aufgabe des Privatrechts (Tu¨bingen: Mohr Siebeck, 2001); Joachim Ru¨ckert, ‘Zur Legitimation der Vertragsfreiheit im 19. Jahrhundert’, in Diethelm Klippel (ed), Naturrecht im 19. Jahrhundert (Goldbach: Keip, 1997), pp. 135–83.

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degrees – all saw individual freedom as limited or even defined by the common interests of society.17 In any case, the perceived injustices of the formalist private law of the twentieth century did not only fuel socialist critiques, but also led to fundamental changes in lawmaking. It is these changes that can be described as a process of ‘materialization’,18 a concept that covers a wide range of phenomena which have in common that they aim at complementing the formal equality of private law with protective provisions and substantive standards of justice. In Germany, the authoritarian welfare state under Bismarck laid the foundations for an elaborated system of social security already in the nineteenth century. Throughout that century, the process of materialization was driven by a rather unlikely coalition between conservative as well as socialist critics, nobility and state sovereigns.19 The codification of the BGB in Germany assuaged some of the concerns of these different groups. Yet it was only through the courts that a more welfarist approach found its way into core concepts of private law.20 In Germany, the natural law concepts of iustium pretium, laesio enormis and clausula rebus sic stantibus, which had been abolished in the codifications of the nineteenth century, were gradually reintegrated into the doctrine of private law in the face of the hyperinflation of the 1920s, and the legislature reacted to social inequalities through new laws in the fields of labour and tenancy law. Thus, the liberal private law codifications were gradually transformed into a body of law which openly pursued regulatory policies (see Chapter 6). The social law, which von Gierke imagined as a third category between public and private law, was step by step formally integrated into codifications such as the Italian Codice Civile and the German BGB.21 After the publication of Wieacker’s lecture, this development was further reinforced by European law, particularly in the field of consumer law.22 Wieacker himself, however, takes a very cautious stance towards legislatorial attempts at a further materialization of private law. He acknowledges that politics has contributed a great share to the development of a more socially acceptable private law order, for example in the fields of labour and tenancy law, but he opines that politics has followed the path of materialization with ‘impetuous urgency and little maturity’.23

17

18

19

20 21 22

23

Sibylle Hofer, Freiheit ohne Grenzen? Privatrechtstheoretische Diskussionen im 19. Jahrhundert (Tu¨bingen: Mohr Siebeck, 2001), pp. 277–83. The concept has been widely accepted by German private law scholarship, see, for example, Claus-Wilhelm Canaris, ‘Wandlungen des Schuldvertragsrechts: Tendenzen zu seiner “Materialisierung”’, 200 Archiv fu¨r die civilistische Praxis 273–364 (2000). Franz Wieacker, Das Sozialmodell der klassischen Privatrechtsgesetzbu¨cher und die Entwicklung der modernen Gesellschaft (Karlsruhe: C. F. Mu¨ller, 1953) (English translation), pp. 13–15. Ibid. (English translation), pp. 18–19. For the latter, however, the decisive step was taken with the modernization of the law of obligations in 2002. Groundbreaking Eike von Hippel, Verbraucherschutz (Tu¨bingen: Mohr, 1974); Kostas Simitis, Verbraucherschutz, Schlagwort oder Rechtsprinzip? (Baden-Baden: Nomos, 1976); Christian Joerges, Verbraucherschutz als Rechtsproblem (Heidelberg: Recht und Wirtschaft, 1981). Franz Wieacker, Das Sozialmodell der klassischen Privatrechtsgesetzbu¨cher und die Entwicklung der modernen Gesellschaft (Karlsruhe: C. F. Mu¨ller, 1953) (English translation), p. 20.

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Here, it becomes apparent that Wieacker’s plea for a more socially inclusive private law is made not from a reformist, but rather from a conservative position. Wieacker’s ideal of a society ordered by private law is – with express reference to Otto von Gierke – an ethically responsible society oriented towards the principles of traditional natural law and organized in a corporatist (genossenschaftliche) manner.24 In Wieacker’s lecture, this ideal remains rather vague. It seems, however, that the ideal is not quite the welfare state of our times, based on liberal markets and democratic nation state institutions. In the terms of contemporary political philosophy, Wieacker’s ideas seem much closer to communitarian approaches that aim at new forms of societal organization, beyond free markets and institutionalized politics.25 Such a communitarian reading of Wieacker might prove particularly fruitful for contemporary hard cases such as our example case on civil rights (Box 10.1), as will be shown in the discussion of the closely related second reference text for this chapter. III Wieacker’s very own ‘hidden project’ of a proto-communitarian private law makes it a promising endeavour to confront his 1952 lecture with a programmatic text by German sociologist and moral philosopher Ju¨rgen Habermas. Habermas’ article on ‘paradigms of law’, the second reference text for this chapter, was published more than forty years after Wieacker’s seminal lecture and clearly argues from a different historical perspective. For Habermas, the materialization of private law, the ‘social transformation of law’ has already passed its zenith.26 His question is no longer how to overcome the social inequalities brought about by liberal private law, but how to remedy the dysfunctionalities of the highly developed welfare states in the United States and Europe. Yet in posing this question, Habermas heavily relies on Wieacker’s account of the social models of private law, when he describes the move from the liberal ‘private law society’ (see also Chapter 7) towards a more ‘instrumental’ understanding of private law. For him, the central driving force behind this move has been the aim of establishing the factual ‘conditions for the actual exercise’ of the subjective rights enshrined in the liberal conception of private law. However, Habermas argues, this move came at a cost. The idea that law should establish the factual preconditions for an exercise of subjective rights implies a certain conception of the role of the state (see Chapter 9). Only an interventionist state can claim to regulate society in such a way as to actually change the basic structures of social reproduction. Any attempt at bringing about such change necessarily has perverse side effects: ‘the welfarestate model pays for the agency of the state at the expense of the autonomous state of 24 25

26

Ibid. (English translation), pp. 25–7. Michael Walzer, Spheres of Justice: A Defense of Pluralism and Equality (New York: Basic Books, 1983); Charles Taylor, The Ethics of Authenticity (Cambridge / MA: Harvard University Press, 1992); Amitai Etzioni, The Spirit of Community: Rights, Responsibilities, and the Communitarian Agenda (New York: Crown Publishers, 1993). Ju¨rgen Habermas, ‘Paradigms of Law’, 17 Cardozo Law Review 771 (1995–1996), 771. For a similar conclusion, based on entirely different premises see the discussion of Kaplow and Shavell in Chapter 11.

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actors’.27 The welfare state turns into a paternalistic state by trying to ‘apportion life opportunities’, ‘by guaranteeing social security, health care, housing, income provisions; education, leisure, and the natural bases of life’.28 In trying to guarantee the material preconditions for the exercise of liberal freedoms, it must at some point limit those freedoms and replace them with an ever deeper encroachment into individual autonomy. Our example case from the field of civil rights (Box 10.1) speaks directly to this problem. The separate election procedures for black and white homecoming queens – which were intended to let students from both races be elected – effectively force individual students to make a decision whether they are black or white. For the mixed-race plaintiff in the case, this seems to be a decision that is impossible to make. The paradox of welfare state regulations he describes prompts Habermas to ‘propose a proceduralist understanding of law’29 which intends to overcome the dilemma of the late-modern welfare state moving back and forth between liberalism and paternalism and thus failing to fulfil the emancipatory aspirations of private law. For Habermas, ‘both views lose sight of the internal connection between private and political autonomy’.30 What his theory aims at is nothing less than a reconstruction of private law on the basis of a new conception of civic autonomy (see also Chapter 4). Instead of concentrating on the relationship between state and individual, he argues, the theory of private law should focus on ‘complementary forms of communication’ between the private and the public sphere.31 In order to identify such forms of communication, Habermas shifts his focus from the addressees of private law – ‘economic man or welfare client’ – to the genesis of private law. Thus, he seeks to overcome the tension between freedom and equality which is central to Wieacker’s account of the materialization of private law (see Section II). The ‘proceduralist understanding of law’, which is advocated for by Habermas, is not a mere idealization. It has, for example, informed debates about workers’ co-determination in German company law. The idea of co-determination laws is that the interests of all those concerned with corporate decisions are best protected not through mandatory provisions of substantive law, but through participation in corporate decision-making. Therefore, both shareholders’ and workers’ concerns are represented in the supervisory body of public corporations. Workers’ representatives have the same number of seats in the supervisory body as the shareholders’ representatives. In cases of a tie, the chairperson, who is a shareholders’ representative, can cast a double vote. In such cases, the chairperson must justify their making use of the double vote. This procedure at the same time enables and limits an effective voicing (see Chapter 21) of workers’ concerns: they must be heard, but not to the effect that the company’s decisions are effectively predetermined by a voting majority in the supervisory body. The German Federal Constitutional Court has held that this very procedure effectively allows for both shareholders and workers to exercise their 27 28 29 30 31

Ibid., 775. Ibid. Ibid., 776. Ibid. Ibid., 777.

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constitutional rights.32 The example stands for numerous attempts to resolve the seeming antagonism between economic freedoms and standards of social protection in a discourse of ‘the affected parties themselves’.33 In our civil rights case example (Box 10.1), it is hard to foresee which rules a discourse of the affected parties themselves would produce for the process of electing a homecoming queen. It is likely, however, that these rules would avoid relying on racial – and maybe also gender – categories. Habermas’ more abstract analysis starts from the observation that the ‘principle of legal freedom engenders actual inequalities, since it not only permits, but also facilitates the differential use of the same rights by different subjects’.34 At the same time, he sees ‘materialized law’ as ‘stamped by an ambivalence of guaranteeing freedom and taking it away’ by foreclosing the very possibility of differentiated life plans in a move of ‘normalizing’ social relations.35 This seeming dilemma is exemplified with a view to feminist legal movements which in the twentieth century moved from a fight for equal access and opportunity to the promotion of actual equality through welfare state programmes such as protective norms pertaining to pregnancy and maternity – until in the 1960s the ‘ambivalent consequences’ of such programmes became apparent. For Habermas, these ambivalent consequences lie in the fact that protective laws have often had the perverse effect of stabilizing gender-related inequalities, for example, by limiting women’s opportunity for employment in the first place. The reason for this he sees in the ‘overgeneralized classifications’ used by the pertinent legislation, which consolidates ‘existing stereotypes of gender identity’.36 Indeed, this problem is extensively dealt with in the European Court of Justice’s judicature on antidiscrimination law, which has held the prescription of strict quota rules illegal under EU law and thus paved the way to more differentiated means of affirmative action.37 A similar development is at play in civil rights discourse. In many cases, distributive rules on affirmative action (the separate black and white elections in our case example) seem unsuitable for achieving the goal of equal social opportunities. Especially constellations of intersectional discrimination might be more adequately addressed by an open-textured principle of equal treatment that allows for considering multiple factors of discrimination on a case-by-case basis.38 The problem of overgeneralized classifications, Habermas argues, can only be overcome in the lawmaking process itself; as it is inevitable that the attribution of rights has different consequences for different groups of people, it is necessary that these consequences are reflected in the law-making process. This requires that ‘the affected parties themselves . . . conduct public discourses in which they articulate the standards of comparison and justify the relevant aspects’.39 Thus, the welfare state approach of normalizing individual life plans by way of legal regulation can be replaced by guaranteeing the 32 33 34 35 36 37 38 39

BVerfGE 50, 290. Ju¨rgen Habermas, ‘Paradigms of Law’, 17 Cardozo Law Review 771 (1995–1996), 778. Ibid., 780. Ibid. Ibid., 781–2. See, above all, ECJ cases no. C-450/93 Kalanke and C-409/95 Marschall. In a similar vein Michael Gru¨nberger, Personale Gleichheit (Baden-Baden: Nomos, 2013), 749–869. Ju¨rgen Habermas, ‘Paradigms of Law’, 17 Cardozo Law Review 771 (1995–1996), 783.

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reflection of such life plans in the lawmaking process. It is implied that this lawmaking process is one of open discourse in which the private and the public autonomy of the individual can ultimately be reconciled (see Chapter 4). In our example case (Box 10.1), it seems that for the mixed-racial plaintiff, the distributive approach providing for separate elections of black and white homecoming queens was of little help. It is hard to see how the situation might be alleviated by state legislation, which would run the same risk of perpetuating racial categories. If there is a satisfying solution to the problems raised by the case, it is most likely to be found in the rules that the particular community, that is the student body of the high school, consider an adequate reflection of their social realities. What Habermas’ text lacks is an analysis of the concrete institutional settings in which this reconciliation might be realized. It was only in recent years that various authors have taken up Habermas’ challenge and analysed the procedural legitimacy of institutions as diverse as EU standard-setting bodies40 and transnational private regimes (see Chapter 25). It remains an open challenge to spell out the conditions for procedural justice in private legal conflicts ranging from transnational commercial arbitration to high school discrimination. IV In the course of the twentieth century, the rise of the welfare state has fundamentally transformed private law in Europe as well as in the United States. This process has been described as materialization of private law, but also as a story of decline of the freedom of contract.41 In recent decades, the ambivalent and even perverse side effects of the move to more material justice have begun to surface: by trying to guarantee the material preconditions of liberal freedoms, regulatory law has often had anti-emancipative effects. Instead of empowering citizens, it has frequently subjected them to an ever-tightening bureaucratic control. This has not only led to a growing critique of the political model of the welfare state but has also prompted discussions about more ‘responsive’ regulatory approaches in private law.42 Lately, normative approaches in the economic analysis of law, starting from the problem of incomplete information and bounded rationality (see Chapter 11) have taken up these impulses by proposing a ‘libertarian paternalist’ theory of regulatory law, which aims at accommodating both the libertarian ideals of private law and the need for welfare state interventions.43 Against the background of the historically and philosophically informed debate initiated by scholars like Wieacker and Habermas, such approaches necessarily seem under-complex in their treatment of the eternal tension between liberty and equality that underlies our conception of private law. This is especially deplorable as 40 41 42

43

Harm Schepel, The Constitution of Private Governance (Oxford and Portland / OR: Hart, 2005). Patrick S. Atiyah, The Rise and Fall of Freedom of Contract (Oxford: Clarendon Press, 1979). Most notably Gunther Teubner, ‘Substantive and Reflexive Elements in Modern Private Law’, 17 Law & Society Review 239 (1983). Cass R. Sunstein / Richard H. Thaler, ‘Libertarian Paternalism Is Not an Oxymoron’, 70 Chicago Law Review 1159–202 (2003); Richard H. Thaler / Cass R. Sunstein, Nudge: Improving Decisions about Health, Wealth, and Happiness (New Haven / CT: Yale University Press, 2008).

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already Wieacker points to a communitarian vision of private law centred around autonomous and responsible citizens, not – more or less informed and rational – consumers. In a very similar vein, the article by Habermas impressively demonstrates that the relationship between individual freedom and state regulation is not the zero-sum game as which it is still conceived by contemporary approaches in the economic analysis of law. The potential for a procedural legitimation of private law is still largely unexplored. It is clear today that this potential will need to be tapped when it comes to phenomena of law beyond the state (see Chapter 25) and private lawmaking (see Chapter 26) which can no longer build on the symbolic legitimacy of nation state institutions. Both articles only hint at possible solutions for cases such as our civil rights case example (Box 10.1). Their main achievement lies in furthering our understanding of the different and sometimes contradictory conceptions of justice and equality that inform our thinking about private law. The court deciding our example case concluded after giving ‘careful – perhaps too much – consideration to this case’ that the plaintiff was unlawfully discriminated against by her high school.44 The case is thus evidence of the limits of distributive legal rules in complex societies. The question of how effectively to achieve equality of opportunities without such rules, however, remains open. Both Wieacker and Habermas would tend to argue that this is a question that cannot be answered in court. Instead, it has to be answered by the affected parties themselves in making the rules of equal treatment that they deem adequate.

44

Godby v. Montgomery County Board of Education, 996 F. Supp. 1390, 1418 [M.D. Ala. 1998].

part i ii

Transactions and Risk: Private Law and the Market

11 Negotiation, the Function of Contract and the ‘Justice of Consensus’ Stefan Grundmann

a topic and materials I This chapter addresses the function that negotiations and contracts fulfil in society (and in law) and explores the extent to which consensus is a source of legitimacy for legal effects (‘justice of consensus’) – including the negative side, the limits of the legitimacy of consensus. More in detail, this chapter is about three main sub-questions: justification(s) for freedom of contact and of its limitations; which kinds of particular limitations may be legitimate, namely whether and when redistribution is a legitimate goal; and how much rationality can be assumed or not and which reactions are advisable in case of biases. One particular prerequisite for ‘free’ decision-making – free in a meaningful way, that is, information – is dealt with in Chapter 12. An illustration of some of these questions can be found in the case in Box 11.1. This case would typically be decided differently on the European continent and in the United States. It illustrates how a paternalistic rule may lead to redistribution and that borrowers might succumb to considerable biases. In the US sub-prime crisis, such loans were typically granted for 0–1 per cent interest rates in the first one or two years, then followed by an increase to approximately 5–7 per cent – with the hope that land prices would have risen (as was the case in previous decades).1 Redistributive effects are even stronger when, in cases of mass lay-off, rules privilege those members of the workforce (if equally qualified) that have family, children and/or are of older age – again more easily found on the European 1

For lead cases on a duty of responsible lending or similar, see also; Australian Securities and Investments Commission v. Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 and German Constitutional Court, in: BVerfGE (Official Reports) 89, 214 et seqq. See also, subsequent to the ECJ case, Directive 2014/17/ EU of the European Parliament and of the Council of 4 February on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010, OJ.EU 2014 L 60/34, enacted in response to the crisis and containing an explicit duty of responsible lending (art. 7). According to this rule, it must be decently likely that the borrower will be able to pay the interests and the loan itself from their patrimony plus salary that they are likely to have over the course of the loan; for a prior model at the national level, see the Consumer Credit Code of Conduct of the Dutch Banking Association (Gedragscode Consumptief Krediet van de Nederlandse Vereniging van Banken (NVB)) (effective as of 1 January 2012), arts. 5 and 6.

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BOX 11.1 CASE STUDY

CJEU, C-449/13 CA Consumer Finance SA v. Ingrid Bakkaus and Others, ECLI: EU:C:2014:2464 The claimant had taken out a credit from a French bank, signing a document according to which they had received the ‘Standard European Consumer Credit Information’ form. The respondent, however, could not produce evidence that this had indeed been the case, nor that a check of creditworthiness had taken place. The form provides the client with explanations of how to assess whether a credit is adapted to one’s own financial situation and, under French law, has to be followed by an individualized discussion with the borrower. French law, in case of violation of the information duties or of the duty to assess the creditworthiness, prescribes that no interests are owed (plus potential damages). It was not clear whether the claimant – in an ex ante scrutiny – could have been seen as being likely capable of paying back the loan from their patrimony or reasonably expected future income. The French court asked the ECJ via preliminary reference whether a national law or standard term could rule that fulfilment of information and assessment duties were presumed to have taken place whenever the borrower had signed a document confirming this. Moreover, it asked whether French law could allow the lending bank to rely on information given by the client on their financial situation when carrying out the creditworthiness test. The ECJ answered the first question negatively and the second positively.

continent.2 The ECJ case illustrates the core question of how autonomy goals, needs of protection and the public good are related to each other in the realm of freedom of contract. II The three sub-questions named not only seem core to the overall question but are treated in a particularly poignant way in three texts discussed here (Box 11.2). The first text stems from the context of Continental European Law of a rather pronounced social colour (with some grounding in sociology/political science/history), written by one of the leading German private law scholars, Ludwig Raiser. The second text stems from the context of economics, formulated by two of the leading exponents in law and economics of contracts, Louis Kaplow and Steven Shavell, prominently referred to in the standard textbooks of law and economics and heavily discussed (and criticized). The third text was written within behavioural sciences on biases and on (strong) 2

For (at least) a fairness-test in mass lay-offs for entrepreneurial needs see, for example, Williams v. Compare Maxam Ltd [1982] ICR 156, Employment Appeal Tribunal. In Germany today, such cases would be decided on the basis of a specific rule contained in sect. 1, para. 3 Protection Against Unfair Dismissal Act (Ku¨ndigungsschutzgesetz) – indeed granting privileges of the kind mentioned.

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BOX 11.2

L. Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, Festschrift Deutscher Juristentag 101–31 (1960). (English translation available on the book website) L. Kaplow / S. Shavell, ‘Should Legal Rules Favor the Poor? Clarifying the Role of Legal Rules and the Income Tax in Redistributing Income’, 29 Journal of Legal Studies 821–835 (2000) D. Kahneman /A. Tversky, ‘Judgment under Uncertainty: Heuristics and Biases’, 185 Science 1124–31 (1974)

BOX 11.3

Peter Benson, Justice in Transactions: A Theory of Contract Law (Cambridge / MA: Harvard University Press, 2020) Hanoch Dagan / Michael Heller, Choice Theory of Contracts (Cambridge: Cambridge University Press, 2017) Charles Fried, Contract as Promise: A Theory of Contractual Obligation (Cambridge / MA: Harvard University Press, 1981) John Harsanyi, ‘Measurement of Social Power, Opportunity Costs, and the Theory of Two-Person Bargaining Games’, 7 Behavioral Science 67–80 (1962) Louis Josserand, ‘Le contrat dirige´’, 32 Dalloz – Recueil hebdomadaire, croniques 89–92 (1933). Eric Posner, ‘Economic Analysis of Contract Law after Three Decades: Success or Failure?’, 112 Yale Law Journal 829–80 (2003) Walter Schmidt-Rimpler, ‘Grundfragen der Erneuerung des Vertragsrechts’, 147 Archiv fu¨r civilistische Praxis 130–97 (1941). Richard Thaler / Cass Sunstein, ‘Libertarian Paternalism’, 93 American Economic Review 175–9 (2003) problems with rational decision-making, written by the two leading scholars of that line of research, Daniel Kahneman and Amos Tversky. Each of these texts has its universe. Raiser’s could be contrasted to the rich US discussion on what really constitutes the basis of contract – promise, consent, reliance, etc. – and its approach to ask the core function of contract law has recently been taken up in the US again with choice theory. Raiser himself gives an answer to the fierce debates about the sensed or the real dangers that party autonomy has faced in Europe in the three decades before him. The Kaplow-Shavell paper speaks to other law and economics contract law classics, be it on the success of this approach or on the freedom-enhancing potential seen in it. Finally, Kahneman and Tversky’s ideas have met with the broadest success, even in the most rigorous formulations of the process of negotiation – in game theory. These many facets of the debate can be traced to a certain extent in the texts in Box 11.3.

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b theories, context and discussion I This chapter explores the function that negotiations and contracts fulfil in society and the extent to which consensus is a source of legitimacy for legal effects. The three texts originate on both sides of the Atlantic and are rooted in three different scholarly surroundings – law, formal economics and experimental behavioural sciences. The texts, by the legal scholar Ludwig Raiser (1960), the economists Louis Kaplow and Steven Shavell (1981/2000) and the behavioural scientists Daniel Kahneman and Amos Tversky (1974), deal with several core aspects of consensus. They are complementary and at the same time in contrast. Each discusses important questions – Raiser for example asks whether freedom of contract is the rule in private law or the exception, in which fields it predominates, to what extent limits are justified. Raiser, but also Kaplow and Shavell, asks how default rules and mandatory rules influence the formation of contracts: what should be the role of commutative, corrective or distributive justice? Kahneman and Tversky introduce behavioural issues, by asking what decisionmaking paradigm should be reflected in legal rules. These questions (especially the latter) are particularly intricate in the case of information (see Chapter 12) and power imbalances that may vitiate the fairness of the negotiation process or its outcome (see Chapters 6 and 13, but also Chapter 17). Finally, the question can be posed how insightful game theory is, the leading formalized theory on bargaining, rooted in mathematics but broad in application, particularly in economics. This theory is discussed (at least briefly) in conjunction with the text by Kahneman and Tversky. All these questions relate to core aspects of a justice of consensus. Contract and thereby consensus grounded in autonomy may be one of (if not, the) leading paradigm in private law,3 but its influence is pervasive across other fields. For example, 3

S. Grundmann, ‘On the Unity of Private Law: From a Formal to a Substance Based Concept of Private Law’, 22 European Review of Private Law 1055–78 (2010); particularly prominent in German-speaking literature are: F. Bydlinski, Privatautonomie und objektive Grundlagen des verpflichtenden Rechtsgescha¨fts (Vienna: Springer, 1967), pp. 123, 126–31; C.-W. Canaris, Die Bedeutung der iustitia distributiva im deutschen Vertragsrecht (Munich: Beck, 1997), pp. 44 et seq.; for company law, H. Wiedemann, Gesellschaftsrecht, vol. 1 (Munich: Beck, 1980), §§ 3–6; for EC Law, A. Flessner, ‘Juristische Methode und europa¨isches Privatrecht’, 57 JuristenZeitung 14–23 (2002), at 18. From the interdisciplinary methodology perspective: C. Engel / W. Scho¨n (eds.), Das Proprium der Rechtswissenschaft (Tu¨bingen: Mohr Siebeck, 2007); S. Smith, Contract Theory (Oxford: Oxford University Press, 2004); and lately P. Saprai, Contract Law Without Foundations: Toward a Republican Theory of Contract Law (Oxford: Oxford University Press, 2019); for an argument, from the United States, that contractual obligations can be derived from the autonomy of the individual and that ‘promise’ is the core of contracts and contract law, see C. Fried, Contract as Promise: A Theory of Contractual Obligation (Cambridge / MA: Harvard University Press, 1981); for the importance of private autonomy, see L. Fuller, ‘Consideration and Form’, 41 Columbia Law Review 799–824 (1941), 806–12; R. Pound, ‘The Role of the Will in Law’, 68 Harvard Law Review 1 (1954); D. Kennedy, ‘From the Will Theory to the Principle of Private Autonomy: Lon Fuller’s Consideration and Form’, 100 Columbia Law Review 94 (2000); for an account of the historical and philosophical foundations of contract law and its dominant principles, including private autonomy, over time see J. Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford: Clarendon Press, 1993); and also H. Dagan / M. Heller, Choice Theory of Contracts (Cambridge: Cambridge University Press, 2017), pp. 25–66.

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normative individualism is the core axiom of both neoclassical and institutional economics4 and contract is traditionally imagined as the foundational source of the legitimacy of state power.5 The questions raised in this chapter are therefore not only at the centre of any private law theory. They should also be the object of lively interdisciplinary exchange – even though these three texts have not previously been considered together. There is one caveat that applies, however. This chapter deals with the justice of consensus between the parties. Potential negative effects on third parties are not the focus here, but in Chapter 6. II The first paper, written by Raiser, is a keynote speech for one of the most important legal institutions in Germany. It addresses contract law and its function in the overlapping contexts of the emerging new market economy in Germany, in the European Union6 and, to some degree, in Western societies more generally. The paper is historical to a certain extent, but mainly normative. Its premise is that the proper definition of the function of contracting should serve as the basis on which to define the outer limits of freedom of contract; that is, of the ‘justice of consensus’. The paper begins by describing how German idealism (embodied in Kant and also Hegel), taking individual freedom and dignity as its core philosophical value,7 placed the act of will – the individual Rechtsgescha¨ft (juristic act) – at the centre of its considerations. 4

5

6

7

E. Furubotn / R. Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics (2nd ed., Ann Arbor, University of Michigan Press, 2005), p. 3; in more detail H.-B. Scha¨fer / C. Ott, Lehrbuch der o¨konomischen Analyse des Zivilrechts (5th ed., Berlin / New York: Springer, 2012), pp. 95–116. For company law, in particular, see S. Deakin / A. Hughes, ‘Economic Efficiency and the Proceduralisation of Company Law’, 3 Company Financial and Insolvency Law Review 169–189 (1999), at 170 et seq.; C.W. Maughan / K. McGuiness, ‘Towards an Economic Theory of the Corporation’, 1 Journal of Corporate Law Studies 141–80 (2001), at 148. This is the core of social contract theory from Hobbes through Rousseau, see W. Kersting, Die politische Philosophie des Gesellschaftsvertrags (Darmstadt: Wissenschaftliche Buchgesellschaft, 1996), but also when a societal order is philosophically construed and grounded in (hypothetical) universal (!) consent by rational people ‘under the veil of ignorance’, see J. Rawls, A Theory of Justice (Cambridge / MA: Belknap Press of Harvard University Press, 1971, revised ed. 1999), especially pp. 118–66 (‘The Original Position’). See Chapter 6 for discussion. For Italy (the other large country in Europe where an open market economy had to supplant a highly cartelized, fascist planned economy), in a very similar vein, see L. Mengoni, ‘Forma Giuridica e Materia Economica’, Studi in Onore di A. Asquini, vol. III (Padua: CEDAM, 1963), pp. 1075–93; in France, for a sketch of the contemporaneous legal structures of capitalism, see G. Ripert, Aspects juridiques du capitalisme moderne (2nd ed., Paris: Librairie Ge´ne´rale de Droit et de Jurisprudence, 1951). Today, however, it is also the core legal value, at least in constitutions such as Germany’s, which places individual dignity at the forefront of all inalienable and inalterable fundamental rights (Art. 1 Grundgesetz). See also Art. 1 of the Charter of Fundamental Rights of the European Union. For a good survey on the core ideas of German idealism before and around 1800 and on the influence of idealism on the German Civil Code of 1900, see F. Wieacker, A History of Private Law in Europe (Oxford: Oxford University Press, 1995, trans. J. Weir), pp. 279 et seqq.; H. Kiefner, ‘Der Einfluss Kants auf die Theorie und Praxis des Zivilrechts im 19. Jahrhundert’, in J. Blu¨hdorn / J. Ritter (eds.), Philosophie und Rechtswissenschaft (Frankfurt: Klostermann, 1969), pp. 3–26. On the moral foundations of a consent theory of contract see R. E. Barnett, ‘A Consent Theory of Contract’, 86 Columbia Law Review 269–321 (1986) and C. Fried, Contract as Promise (Cambridge / MA: Harvard University Press, 1981).

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This is important under the German Constitution and for a value-tracking methodology insofar as the respect of human dignity (Art. 1) receives particular emphasis among the guarantees of fundamental rights.8 Raiser observes that this may explain why the German Civil Code of 1900 attributed a rather marginal role to the concept of contract, the relationship – which, of course, was at odds with the well-known (and recognized) pivotal role of contract. While this overemphasis on the individual will had already been questioned in Germany during the 1920s and early 1930s, with case law responding to the postwar troubles and the global economic crisis,9 Raiser is concerned that the overemphasis on a communitarian philosophy during the National Socialist regime has likewise discredited this paradigm. In his view, the main question remains that of the limits that are needed to control the free will of the parties; limits which he seeks to establish in a functional way by basing them on the function of contracting and of freedom of contract. In general terms, Raiser’s answer is neither to do away with freedom of contract altogether, nor to state it as absolute. By this imposition of the question, Raiser foreshadows many of the developments that would take place in subsequent decades. He questions whether an unlimited will dogma is not in fact a rare historical exception and, normatively, whether it can be justified at all given the social function of contracting and of freedom of contract. Core is the question of how to justify, from the perspective of the function of law and of contract law in particular, both the freedom of contract and its limits (hence the title of Raiser’s paper). Even though Raiser calls this double question – what is the social function of contract and of the limits placed on it – only a ‘heuristic principle’ for approaching the question, the way he asks the question may already contain his core response. Namely, he regards party autonomy and the results it achieves as the best approximation to a socially desirable result only if it is not vitiated by excessive private power.10 This framing is typical for Raiser – as exemplified already in his habilitation thesis of the early 1930s on standard contract terms,11 pioneering in his inclusion of empirical studies combined with the question of protection of parties in contractual relationships, and in 8

9

10

11

See D. Grimm, ‘Dignity in a Legal Context: Dignity as an Absolute Right’, in C. McCrudden (ed.), Understanding Human Dignity (Oxford: Oxford University Press, 2013), 381–91; on foundations and recent developments D. Grimm / A. Kemmerer / C. Mo¨llers (eds.), Human Dignity in Context: Explorations of a Contested Concept (Baden-Baden: Nomos, 2018). For the content, development and justification of a ‘value tracking method’ in legal theory, see above ‘New Private Law Theory: The Core Ideas’, B.3; and more extensively S. Grundmann, ‘Pluralism and Private Law Theory’, manuscript 2020. See, for example, the decisions of the Reichsgericht: RG 29 November 1921, in RGZ (Official Reports) 103, 177–80; RG 3 February 1922, in RGZ 103, 328–34; RG 28 November 1923, in RGZ 107, 78–94. These decisions were influenced by the seminal work of P. Oertmann, Die Gescha¨ftsgrundlage: ein neuer Rechtsbegriff (Leipzig: Deichert, 1921); in Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, pp. 103 et seq. ‘Contracts serve the legal regulation of interpersonal relationships by granting the participants autonomy in a context where the state guarantees the absence of power imbalances’ (Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, p. 104). This is, of course, a text written at a time when competition theory was at its height while information economics (and the concept of information asymmetries) were not yet developed (see Chapter 12). Considering the prime thrust of Raiser’s text, they should certainly be included in a similar way. On the pivotal question of measuring social power see J. C. Harsanyi, ‘Measurement of Social Power, Opportunity Costs, and the Theory of Two-Person Bargaining Games’, 7 Behavioral Science 67–80 (1962). L. Raiser, Das Recht der allgemeinen Gescha¨ftsbedingungen (1st ed., Hamburg: Hanseatische Verlagsanstalt, 1935) (written before 1933 but then slowly published during Raiser’s ‘inner exile‘ under the National Socialist regime); see F. Ku¨bler, ‘Ludwig Raiser’, in S. Grundmann / K. Riesenhuber (eds.), Private Law Development

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mass-market transactions. Raiser was concerned not only with individual and exceptional cases of fraud and overreach, but – more systematically – with structural asymmetries in the contractual relationship. German case law, on the basis of general clauses such as good faith, had already developed mechanisms of protection in standard contract terms by the 1960s, not only in extraordinary cases but on the basis of a market structure approach.12 More generally, the 1950s and 1960s also saw the development of market order as the countervailing force to pure freedom of contract, namely in the area of antitrust law (with Franz Bo¨hm and the ordo-liberal school).13 Raiser provides the private law programme for this wider development, particularly as it relates to the concepts of negotiation and freedom of contract. However, Raiser reaches beyond the ordo-liberal concept in that he expressly addresses not only the protection of the market structure and third parties (antitrust law), but also the protection of weaker parties in the contractual relationship itself and even focuses on it primarily. One may summarize Raiser’s idea in this way: the thinner freedom to consent is in reality, the less legitimacy of consensus can be assumed, and the stronger therefore control should or may be. Three levels of legitimacy of consent can be formulated. At the first level, already formal consent would justify a result based on such consent. At the second level, material consent would be required, namely that both parties formed their will in a decently well-informed and free manner, having the realistic chance of understanding in essence the rationale and the consequences of that to which they consent. The third level is reached where only one party can be assumed to consent, but in society, there might be a broad consensus that the solution chosen is acceptable and even to be preferred to alternative solutions (unilateral consent coupled with societal consent). Considering these three levels and based on decades of comparative law experience, I would formulate the hypothesis that with reaching each new level, jurisdictions tend to deviate more from each other. Formal consent would seem to be recognized as some source of legitimacy in all jurisdictions. Less uniformity would already be found in the question whether material consent is asked in addition, and even less in the question whether even material consent has to be corrected in favour of one party on the basis of widespread consent only in society (see also Section III). Raiser identifies two important characteristics of contract and its function. First, it uses the advantages of autonomy of the parties. Second, it does so under the umbrella of law (attributing binding force and conveying enforcement mechanisms). Contract thus

12

13

in Context: German Private Law and Scholarship in the 20th Century, (Cambridge/Antwerp/Portland: Intersentia, 2018), pp. 349–64. See, for example, BGH (German Private Law Supreme Court) 5 October 1951, in BGHZ (Official Reports) 3, 200–3; BGH 12 February 1952, in BGHZ 5, 111–16; BGH 8 March 1955, in BGHZ 17, 1–7; BGH 29 October 1962, in BGHZ 38, 183–6; BGH 17 February 1964, in BGHZ 41, 151–6; BGH 29 May 1968, in BGHZ 50, 200–7; BGH 4 June 1970, in BGHZ 54, 106–115; BGH 8 March 1973, in Neue Juristische Wochenschrift 1194–5 (1973). See F. Bo¨hm, ‘Privatrechtsgesellschaft und Marktwirtschaft’, 17 ORDO 75 (1966); and on this concept E.-J. Mestma¨cker, ‘Franz Bo¨hm’, in S. Grundmann / K. Riesenhuber (fn. 11), pp. 125–44; S. Grundmann, ‘The Concept of the Private Law Society after 50 Years of European and European Business Law’, 20 European Review of Private Law 553 (2008) (generalizing the concept). Extensive discussion and further references in Chapter 6.

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combines autonomy with respect for the social order.14 Contract could no more function independently of the surrounding legal order, than could a prescriptive, all-encompassing, legal system achieve the superior results allowed by a system that facilitates contract. In this respect, faith in the superiority of the individual plans of the parties, with their higher innovative powers (see Chapter 12), is combined with the need to counter those forces which endanger the preconditions of such autonomous decision-taking (see Chapter 6). Thus, the genius of Raiser’s approach lies in that there is a unitary justification for party autonomy and for its limits – both are grounded in the interest of society. This is not mainstream in legal writings on party autonomy where both dimensions are rather seen as opposing each other.15 Compared to the total welfare benchmark in institutional economics (as in Kaplow/Shavell), this is astonishingly similar in one respect, but totally different in another. In both approaches, one common benchmark is declared to apply and guide the formulation of the norms applicable. Conversely, Raiser never claims that a purely scientific approach guides the search in the concrete case – that of efficiency as formulated in economics – but the political process that formulates the common good as it sees it best furthered. Thus, the one approach is grounded in faith in a scientific method (even if not shared by all), the other in the faith in democratic decision-taking (even if the results are not shared by all). After examining areas of law where freedom of contract is seen to exist only exceptionally, such as family law and the law of property transfer,16 Raiser turns to the core issue of freedom of contract, that is, why it should exist at all. He first dismisses the famous concept developed by Schmidt-Rimpler, who tried to beat a third way between a ‘will doctrine’ centred on party autonomy and communitarian concepts of contracting (prominent under the National Socialist regime); in Schmidt-Rimpler’s alternative, the consensus mechanism ensures a socially desirable outcome.17 In Raiser’s view, this result simply does not follow: the parties’ common will does not necessarily reflect what is socially desirable. 14

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17

As Raiser puts it, freedom of contract needs the ‘approval by its legal community . . . But it is not exhausted by nor does it coincide with the overall legal framework – irrespective of how strictly or how loosely the conditions of its approval may be framed in this legal order, it only acquires its independent character by virtue of its autonomous creation by the parties’ (Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, 105). A similar connection to the social order is made in Marcel Mauss’ ground-laying study on the ‘gift’ in which he entangles the role of consensus and reciprocity in a seemingly unilateral private legal act, see, M. Mauss, The Gift: Forms and Functions for Exchange in Archaic Societies (London: Routledge, 1922, reprint 1990). Serving as a leitmotif, for example, in the grandiose study by P. Atiyah, The Rise and Fall of Freedom of Contract (Oxford: Oxford University Press, 1985); for an insightful challenge to the robustness of the guiding force of private autonomy see A. Ro¨thel, ‘Privatautonomie im Spiegel der Privatrechtsentwicklung: ein mystifizierendes Leuchtfeuer’, in C. Bumke / A. Ro¨thel (eds.), Autonomie im Recht: Gegenwartsdebatten u¨ber einen rechtlichen Grundbegriff (Tu¨bingen: Mohr Siebeck, 2017), pp. 91–115. A similar unitary justification of freedom of contract and its limitations seems to lie behind the autonomy-based approach of H. Dagan / M. Heller, Choice Theory of Contracts (Cambridge: Cambridge University Press, 2017). Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, pp. 107 et seqq., pp. 109 et seqq. For a completely different account not even twenty years later (and indeed strongly stressing the advantages of autonomy in family law as well): R. Mnookin / L. Kornhauser, ‘Bargaining in the Shadow of Law: The Case of Divorce’, 88 Yale Law Journal 950 (1979); see Chapter 27. L. Raiser names labour law here as well (p. 108). For a different account, see the case of mass lay-off in Section B.III. W. Schmidt-Rimpler, ‘Grundfragen der Erneuerung des Vertragsrechts’, 147 Archiv fu¨r Civilistische Praxis 130–97 (1941). The paper has to be read against the background of the author’s times, Schmidt-Rimpler’s main

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Raiser instead provides an explanation which may often lead to similar conclusions, but which is nevertheless quite different in approach. It adopts a very functional tone. For Raiser, party autonomy is superior to positive (i.e., legislated and judge-made) law above all in its potential for innovation, that is what makes it indispensable. To facilitate the innovative role of contractual freedom, objective law must (and typically can) live with partial deviations from the common good; freedom of contract is therefore not given to the parties independently of the framework of social order, but arises within it.18 Such approach may betray an apparent bias in favour of seeing the core role of law in achieving what is socially desirable (a community- or state-centred concept) rather than accepting the individual as the ultimate source of justification (a strand of thought equally strong in the German, namely in the Kantian, tradition). However, the outcome is an equilibrium between both of Raiser’s aims (the valorization of the individual and the pursuit of social ends). Raiser describes a trade-off between community and individual needs and the decision on where to draw the line is therefore seen as a highly political one – to be democratically decided.19 At this point, Raiser explicitly refers to social theory, drawing on other disciplines of the social sciences, and identifies three points as paramount. First, the political character of the decision on where to draw the line in the trade-off described (explicitly rejecting the ‘scientific/automatic’ justification given by social sciences approaches, for instance law and economics later on). Second, the priority of democratic decision-making (with potentially different outcomes from state to state)20 and third, the integration of law and legal scholarship into the social sciences broadly conceived.

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aim being to defend core terrain for party autonomy against National Socialist inroads (though he himself was not completely uncompromised by the regime). For a later explanation of his motivations see W. SchmidtRimpler, ‘Zum Vertragsproblem’, in F. Baur et al. (eds.), Festschrift for Ludwig Raiser (Tu¨bingen: Mohr, 1974), pp. 3–26, at p. 10. Today, still relying on the approach, most authors rather require only that there was a chance for each party to reach the solution which was sound for them (Richtigkeitschance, not Richtigkeitsgewa¨hr). Thus ‘chance’ replaces ‘guarantee’. See C.-W. Canaris, Die Bedeutung der iustitia distributiva im deutschen Vertragsrecht (Munich: Verlag der Bayerischen Akademie der Wissenschaften, 1997), pp. 48–51 as well as, for an influential account from France, L. Josserand, ‘Le contrat dirige´’, 32 Dalloz – Recueil hebdomadaire 89–92 (1933). See more detail in: F. Rittner, ‘Walter Schmidt-Rimpler’; in S. Grundmann / K. Riesenhuber (fn. 11), pp. 269–92. Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, see particularly p. 119 (all three quotes): the legislature can ‘rely on the fact that the overall legal order – though not in each and every case – will impose itself “on average” and in the long run against opposing groups and contract parties, albeit only via [its] persuasive force . . . ’, ‘The independence of contract thus involves an element of flexibility for the law, and allows it to adjust to particular, changing situations and needs, which the legislator is unable to do,’ ‘This is of such value to the development of the law that the legal community can, in recognising these individual orders, happily tolerate their irregularities and inconsistencies, provided the basic requirements of justice are not violated.’ Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, see p. 120 (emphasis added): This doctrine of the ‘socio-economic function of contract’ deserves approval insofar as it directs attention to these extra-legal aspects, allows us to integrate individual contracts within the greater social context and complements the perspective of legal theory with a perspective of social sciences . . .. The theory is problematic [only] to the extent that one concludes that a judge or even an administrative authority should decide, according to its discretion, whether or not a contract is socially or economically valuable. This clearly clashes with principles of the rule of law.

20

For Germany, Raiser stresses the foundations of the so-called Rhenish capitalism: ‘Protection of the overriding public interest . . . The post-war German state, both a “social state” and adherent of the rule of law, is confronted with combining strong protection of the individual through fundamental rights with a welfare

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The final part of the paper develops the framework for the trade-off in more detail.21 Again, three points stand out in the discussion. First, Raiser stresses the importance of the constitutional law framework for setting the overall normative tone. All developments must take place under the auspices of core legal values, namely democratic legitimacy, the rule of law and fundamental rights. Second, Raiser is clear that the limits to freedom of contract are not drawn from considerations of distributive justice, but of commutative or corrective justice. In other words, the dynamics that stem from private autonomy should be maintained in principle, protected against forces which endanger autonomy per se and only corrected in extreme cases. In this respect, Raiser’s reasoning might be supplemented by the theoretical considerations of Kaplow and Shavell (see Section III). Raiser provides, as a historical example, the struggle about iustum pretium to illustrate the extent to which countervailing arguments speak against considering the legal order as well-equipped to provide for a ‘just equilibrium’ (see again Section III). Third, Raiser emphasizes that individual contracts, freedom of contract and regulation of the market order are linked – with an unseverable bond. In fact, this is the result of placing the individual will, with its advantages in terms of innovation and flexibility, in a functional interplay with the overall social framework.22 Overall, three steps stand out. First is the idea that freedom of contract (and consensus) has two justificatory functions: fostering the interests of the parties, but also those of their society. Second, the trade-off between these two is to be decided democratically and in accordance with the constitutional values. Third, individual contracts and the functioning of markets are linked. This is a prime aim and object of legal scholarship, constituted as a meta-field of inquiry, and not just a matter to be considered in individual cases decided on the basis of a general clause such as good faith. Raiser accordingly identifies the transition from a ‘natural status’, in which individual, autonomous decisions shape markets, to an ‘ordered status’, where they are shaped by law.23 Raiser’s text opens a discourse with other disciplines, such as theories regarding functional differentiation in matters of distributive and commutative or corrective justice, or game theory in the context of bounded rationality. Both are taken up later in this chapter. Conversely, these theories must also be assessed against the background of Raiser’s three guidelines; that is to say, the constitutional order within which they should influence rulesetting issues.

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state principle, and thus cannot determine the extent of protection of the public interest through a single general principle’ (Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, p. 128). Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, see pp. 127 et seq. Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, see p. 133: ‘More importantly, contract, contractual freedom and freedom to compete are now to be understood as functionally connected legal institutions of a legally shaped market economy . . . ’. Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, see p. 131: ‘This task can no longer be left to ethics, but is a task of the economic system, transforming it from a natural process into a consciously fashioned legal institution.’ The different (national) regulatory regimes (‘economic constitutions’) must be adapted to the different market structures, they ‘must take account of the existing or sought-for economic system and nature of the market; this is not merely a legal matter, but is determined by economic conditions and political aims’ (p. 131). Defining where there is need of market order (because of abuse of freedom of contract) or where there is not is seen as the mega-task – ‘of private law scholarship’ – for the decades to come (p. 134).

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III Key for Raiser’s framework establishing an equilibrium between autonomy and societal interests (including protection of weaker parties) is that the framework should be aimed at commutative or corrective justice, rather than at (re)distributive justice.24 While the framework should correct the transfer of gains or causation of damages without legitimate basis, where no properly formed consent was given, it should not aim at shifting (redistributing) wealth between parties for its own sake. This issue has subsequently aroused quite some debate between law and economics scholars. Thus, Raiser’s text can obviously be seen in conjunction with this later discussion. Relevant literature arises most directly in areas of substantive law, mainly tort law but also contract law. The debate revolves around the proper scope of consumer law – indeed a foundational question for all consumer law. The issue of commutative or corrective justice and redistributive justice has particular bearing on problems of negotiation, as most rules focusing on the heterogeneity of the contract partners – typically addressing (directly or indirectly) income and financial power (‘deep pockets’) – are related to contract formation. Such rules focus on whether the framework of the negotiation should be adapted according to the anticipated wealth of the contracting parties. One good example would be information rules or withdrawal rights that further consumer interests – typically, the financially weaker party – with redistributive effects.25 A formalized version of this argument was made by Steven Shavell in 1981 – not an entirely novel turn (as Raiser’s text shows), but original in its focused, stringent and exclusive presentation.26 Several extended versions followed, this time written by Kaplow and Shavell, in part highly formalized (like the original, thus the 1994 paper),27 in part in prose (the 2000 paper, quoted in the following and also already containing 24

25

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27

A word on the use of these terms. Corrective justice and commutative justice, distinguished by Aristotle (in the Nicomachean Ethics, 1130a1-9 and 1131b24-1132b6), are similar, both interpersonal (levelling out harm done and gains derived from certain actions), but commutative justice is typically seen as being more systematic, asking for a system of such justice. Moreover, in certain times, for instance the seventeenth century, only one term was used (commutative justice). Sometimes the two concepts are applied with the same meaning in different fields of the law. See, for instance, G. Keating, ‘Strict Liability Wrongs’, in J. Oberdiek (ed.), Philosophical Foundations of the Law of Torts (Oxford: Oxford University Press, 2014), pp. 292–311, at pp. 307 et seq.; C. Chwaszczka, ‘Can We Make Sense of Commutative Justice? A Comment on Professor Wojciech Sadurski’, in H. Micklitz (ed.), The Many Concepts of Social Justice in European Private Law (Cheltenham: Elgar, 2011), pp. 80–9; E. Weinrib, ‘Corrective Justice’, 77 Iowa Law Review 403–26 (1992). T. Wilhelmsson, ‘Consumer Law and Social Justice’, in I. Ramsay (ed.), Consumer Law in the Global Economy: National and International Dimensions (Aldershot / Hampshire, Dartmouth: Ashgate, 1997), pp. 217–32; I. Ramsay, ‘Consumer Credit Law, Distributive Justice and the Welfare State’, 15 Oxford Journal of Legal Studies 177–97 (1995); for general contract theory see A. Kronman, ‘Contract Law and Distributive Justice’, 89 Yale Law Journal 472–511 (1980). S. Shavell, ‘A Note on Efficiency vs. Distributional Equity in Legal Rulemaking: Should Distributional Equity Matter Given Optimal Income Taxation?’, 71 American Economic Association Papers & Proceedings 414–18 (1981); see also A. Hylland / R. Zeckhauser, ‘Distributional Objectives Should Affect Taxes But Not Program Choice or Design’, 29 Scandinavian Journal of Economics 264–84 (1979). L. Kaplow / S. Shavell, ‘Why the Legal System is Less Efficient than the Income Tax in Redistributing Income’, 23 Journal of Legal Studies 667–81 (1994); in German literature very prominent: C.-W. Canaris (fn. 3).

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answers to criticisms made).28 The core argument is that redistribution is better taken care of by the income tax system and that fields of private law cannot be well-calibrated towards redistribution (the latter indeed only results in multiplying distortions in incentives here – ‘double-distortion’ hypothesis), whereas the income tax system is suited to this goal. The authors hold that only the income tax system can calculate the income (wealth) of people in a pervasive and systematic manner and that it bases redistribution on this calculation, whereas, in other areas, rules can only favour or disfavour groups which are much less homogeneously composed. Consumers, for instance, may be partly well-off, partly less well-off. Moreover, in many areas, ‘such as those of contract, corporate, and commercial law’, the redistributive effect can even be eliminated by one class of contracting party calculating the burden put on them into the price at which they offer a good or service, and in competitive markets, this is even the typical consequence.29 Strong protection of weaker parties, such as consumers, may even carry the risk to favour those in the heterogeneous protected group who are the best off. Thus, the group which is most likely to receive the highest quantum in cases of damages – due to the greater scope of potential harm to their (rather luxurious) patrimony – may moreover make more systematic use of their extensive consumer rights than less well-to-do groups. In such circumstances, strong rules having redistributive effects would not only be calculated into prices, but this will likely happen in a way that poorer groups – rather paradoxically – have to share the higher prices (the cost increase is socialized) while they do not equally profit from the effect (the gains are privatized).30 The first distortion may still rather make one smile. This is that – according to both authors – taxing income induces high income taxpayers potentially to work less than they would do otherwise and rather take time for leisure (thus the bulk of the paper, pp. 823 et seqq.). The second distortion reaches further (double-distortion). Even Markovits, one of the authors’ main critics, admits this argument ‘is correct’. On the other hand, Kaplow and Shavell also admit that sometimes the income tax system may not be optimal and that a well-calibrated private law rule may help to remedy this failure in some rare cases. Indeed, one of Markovits’ main criticisms is that a poor income and inheritance tax system will fail to capture all relevant sources of fortune. However, calibration of the private law rule is also extremely difficult, unless the rule again refers to income (and private law 28

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Namely R. Markovits, ‘Why Kaplow and Shavell’s “Double-Distortion Argument” Articles are Wrong’, 13 George Mason Law Review 511–619 (2005); C. W. Sanchirico, ‘Taxes Versus Legal Rules as Instruments for Equity: A More Equitable View’, 29 Journal of Legal Studies 797–820 (2000); see also K. Logue / R. Avraham / D. Fortus‚ ‘Revisiting the Roles of Legal Rules and Tax Rules in Income Redistribution: A Response to Kaplow and Shavell’, 89 Iowa Law Review 1125–58 (2004); D. Lewinsohn-Zamir, ‘In Defense of Redistribution Through Private Law’, 91 Minnesota Law Review 326–97 (2006); for a critique based on behavioural law and economics see C. Jolls, ‘Behavioral Economics Analysis of Redistributive Legal Rules’, 51 Vanderbilt Law Review 1653–77 (1998); then C. Jolls, ‘Behavioral Economic Analysis of Redistributive Rules’, in C. Sunstein (ed.), Behavioral Law and Economics (Cambridge: Cambridge University Press, 2000), pp. 288–301. See Kaplow / Shavell, ‘Should Legal Rules Favor the Poor?’, 823; and groundbreaking R. Craswell, ‘Passing on the Costs of Legal Rules: Efficiency and Distribution in Buyer-Seller Relationships’, 43 Stanford Law Review 361–98 (1991). O. Ben Shahar / O. Bar-Gill, ‘Regulatory Techniques in the Consumer Protection: A Critique of European Consumer Contract Law’, 50 Common Market Law Review 109–26 (2013).

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would again need a good method of assessing income). In terms of design and administration, private law and private law courts are less well-positioned than tax law and fiscal authorities specializing in this question. Enhancing the income or the inheritance tax system (namely by broadening its scope to all relevant sources of fortune), or even introducing another well-calibrated tax, is a more direct way to remedy the failure. Even if tax law is more efficient for redistribution, however, contract law without any (re) distributive effects is probably unthinkable. The real question, therefore, even for Kaplow and Shavell, is that of categorizing the distributive effects and of welcoming some (for instance the redistribution of information via disclosure rules, insofar as they enhance allocative efficiency) and of rejecting others, namely the reallocation of wealth as a scope of contract law. Markovits’ criticism is particularly strong where it stresses that redistribution may still be mandated – not only via moral, but via constitutional, values. Markovits makes clear that reconstructing the powerful argument advanced by Kaplow and Shavell in legal adjudication and interpretation would require a test against the constitutional values and the fundamental principles of the field of law involved. In this sense, the criticism runs parallel to the framework advanced by Raiser and a ‘value-tracking’ methodology advocated in this book. However, while Markovits ranks the social aim of contract law first (though without defining it), and while, to the contrary, Kaplow and Shavell regard cases in which redistribution might be acceptable as exceptional, Raiser’s position is between the two camps. On the one hand, he derives limits to freedom of contract from its function in the service of society. On the other hand, he emphasizes the importance of freedom of contract for achieving the social goal of high dynamics and innovation and supports practical results closer to those advocated by Kaplow and Shavell. Raiser is indeed sceptical with respect to redistribution as a corrective device for negotiated results (as his discussion of iustum pretium control shows). For Raiser, contracting and freedom of contract are justified by the increase in utility which they create for society via the innovative potential of private initiative. In this context, it might be remembered that the cases of sub-prime lending named above were fostered in the US not only by ‘greedy’ lenders, but by state subsidized schemes. These schemes were created with the aim to have disfavoured layers of society participate in a common increase in wealth, namely in the rise of prices of land and buildings – not even unrealistic with a more adequate governance scheme of contracting around. These considerations indicate that, so long as the redistributory effects of the income and inheritance tax system are not illusory, the subsidiarity argument (the doubledistortion argument) advanced by Kaplow and Shavell remains powerful. This remains so even if reconstructed within a legal values framework, considering contract function in particular. On the other hand, Kaplow and Shavell’s line of argument can nevertheless be developed to justify redistributory effects in private law, including contract law – the question is only in how many cases. Indeed, the argument can be turned around. Where enhancing the tax system could not cure a particular source of injustice in distribution and use of wealth, then private law should do so instead – especially if it can be targeted to protect the least well-to-do. This is inherent in Kaplow and Shavell’s argument and also in

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a consistent construction of constitutional values. These are cases where groups of less wealthy persons (importantly, not all; and therefore not easily targeted by tax law) are exposed to a particular risk of losing their economic subsistence due to the use of contract. One example discussed over the last decade and particularly highlighted by the world financial crisis of 2008 is the practice of sub-prime lending. In the case described, the ECJ with respect to French law assumed a duty of responsible lending – protected against circumvention. Such duty can be construed as being in the interest of total welfare – at least, more plausibly than privileging employees with family in the cases of mass lay-off.31 Still, the clash between normative individualism – as the means advocated in standard law and economics to foster total welfare – and such a definition of total welfare cannot be negated even in this case, because formal consent was certainly found in the bulk of the cases of the sub-prime lending crisis, in a substantial number of cases probably also material consent. Borrowers often enough knew indeed that, in a later phase, the loan would exceed their means and that servicing the loan would depend on the rise of land prices. Therefore, the argument seems more plausible that presumed total welfare might be trumped by considerations of social well-being – avoiding the risk of existential disruption in the form of insolvency. While traditional contract law, with its concern for an efficiently designed incentive structure, would leave it to each contracting party to protect themself against dangers which they can foresee, a duty of banks not to give loans in sub-prime lending situations (a ‘duty of responsible lending’) might nevertheless be justified. Such a rule leads implicitly to redistributory effects (or rather, avoids redistribution from poor to rich) because the conscious creation of the excessive risk of ruining the client’s economic existence can be resisted.32 This line of argument may arise from constitutional values and considerations – trumping economic efficiency. In any case, it constitutes an interest which cannot satisfactorily be protected by income tax law. That said, in many cases the argument made by Kaplow and Shavell remains relevant to contract law. Arguing that contract parties have, or had, diverging levels of wealth appears to be questionable; such an argument must be restricted to those cases where economic existence is at stake. It would not apply as a general consideration by, for instance, 31

For total welfare as the standard ultimate benchmark invoked in institutional economics, see Chapter 6, fn. 64. In this second case mentioned above, the three lines of argument are possible. It could be argued that giving privileges to elderly married employees with children fosters total welfare, but the core instrument advanced for the search of total welfare, autonomous agreements, does not seem to foster such agreements in practice (also because the effects are unforeseeable given an unknown court will decide in the future). One would need to accept that such protection rather reflects a situation in which unilateral consent coupled with societal consent is seen as the ground of legitimacy – if at all. At a third level, one would need to accept that this is a decision based on one (politically preferred) view in a pluralist spectrum – and this would speak in favour of a pluralist input from a variety of theories and disciplines for explanation (such as social embeddedness, considerations of justice or social wellbeing vs. total welfare). 32 For the legal basis of a duty of responsible lending clarified in Europe as of 2014, see fn. 1. On earlier attempts and modes of construction, see, for instance: Y. Atamer, ‘Duty of Responsible Lending: Should the European Union Take Action?’, in S. Grundmann / Y. Atamer (eds.), Financial Services, Financial Crisis and General European Contract Law: Failure and Challenges of Contracting (Alphen: Kluwer International, 2011), pp.179–202 (favouring strong paternalism); and C. Sunstein, ‘Boundedly Rational Borrowing’, 73 University of Chicago Law Review 249–70 (2006) (favouring weak paternalism).

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providing a basis for awarding consumer remedies more broadly than required by considerations of correct will-formation, that is, of informed and ‘efficient’ choice. IV A second aspect in Raiser’s account, besides the pursuit of corrective or redistributive justice in contract law, including formation of contracts, attracts particular attention: the bargaining process itself and the question of when consensus can indeed be considered to confer legitimacy to the agreement. Raiser speaks of consensus in ‘situations not vitiated by private power’ and this criterion is widely regarded as paramount to distinguishing those agreements which are legitimate from those which are not.33 However, while Raiser offers an overall picture with high normative aspirations, by explaining and justifying contract law and the limits of freedom of contract with reference to their social function, and while Kaplow and Shavell explore the question of the ultimate goals of contract law, only the third text discussed here focuses on the negotiation process proper. This is all the more remarkable as this text not only has been formulated without a legal value hierarchy in mind, but has been formulated even completely outside any context of legal transactions (only later to be applied also to such contexts). The text by Kahneman and Tversky is taken from a strand of literature focusing on situations where choices taken can potentially be seen as ‘vitiated’. It is one of the founding texts of contemporary bounded rationality research and it prompted systematic research into biases, that is, deviations from the assumption of rational, self-interested, welfare-maximizing behaviour of the parties. The text is also particularly interesting for its broad interdisciplinary approach (as also adopted in this book). It draws on an empirical behavioural sciences approach, but is applied to the context of economic theory. ‘Behavioural economics’, which is today of increasing interest both in law and in economics, addresses a kind of weakness which was discovered and analysed later than those more obviously present in power situations. These problems already analysed earlier concern cases of restriction of competition or, potentially, of ‘mutual monopoly’ situations created by long-term relationships (see Chapters 6 and 17) or power imbalances created by structural information asymmetries (see Chapter 12). The weakness in situations of biases is less structural. Neither the structure of the market nor of the transaction creates the problem, but biases in individual behaviour compared to a standard of rational decision-making. Moreover, the problem of consensus in these cases often originates on the side of the party whose protection is at stake. The 33

¨ ber die normative Kraft Especially prominent in the German literature, for example, E.-J. Mestma¨cker, ‘U privatrechtlicher Vertra¨ge’, 19 JuristenZeitung 441–6 (1964), at 443; C. Ott, Recht und Realita¨t der Unternehmenskorporation (Tu¨bingen: Mohr, 1977), pp. 1 et seq.; W. Fikentscher, ‘Vertrag und wirtschaftliche Macht’, in P. Mo¨hring (ed.), Festschrift fu¨r Wolfgang Hefermehl zum 65. Geburtstag (Heidelberg: Verlag Recht und Wirtschaft, 1971), pp. 41–57. In England, Lord Denning suggested a similar analysis, arguing that ‘inequality of bargaining power’ could be a general concept for invalidating contracts, see Lloyds Bank Ltd v. Bundy, 1975 Q. B. 326. On the development of this doctrine, see S. Thal, ‘The Inequality of Bargaining Power Doctrine: The Problem of Defining Contractual Unfairness’, 8 Oxford Journal of Legal Studies 17–33 (1988); H. Beale, ‘Inequality of Bargaining Power’, 6 Oxford Journal of Legal Studies, 123–36 (1986); and for a US perspective D. Barnhizer, ‘Inequality of Bargaining Power’, 76 University of Colorado Law Review 139–241 (2005).

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question, therefore, of what limits to freedom of contract are functionally justified (as in Raiser’s concept of freedom of contract) is even more difficult to answer. How far should regulatory means reach to remedy these weaknesses? Indeed, having a good number of biases described and analysed without empirically conclusive results and also having a distribution of those biases in a way that certain biases are found with certain (groups of) persons, others with others (dispersed and non-homogeneous occurrence of biases), poses a problem of legal certainty. The question is namely how – outside personalization of law, that is, the aspiration to tailor law individually to the needs and weaknesses of each private law subject – can a more general approach of legal ordering be grounded in such an uneven fact basis with respect to behaviour to be expected in the addressees of such norms? The first summary of empirical research on this uneven fact basis was undertaken by Kahneman and Tversky’s text discussed here. It is primarily descriptive, listing the three main biases which their study detected. Some – slim and preliminary – normative conclusions are drawn as well, but without any regulatory perspective. This work constitutes a decisive (for law and economics probably the decisive) step in the development of the behavioural sciences, due to the authors’ focus on observing and conducting empirical experiments on individual behaviour (through field studies and in the laboratory) in previously defined problem situations and/or contexts. Their methods draw on those shared by classical psychology and the cognitive and neurosciences34 that aim to research the probabilities of certain strategies of behaviour, to capture them systematically and to thus render them foreseeable. The authors’ empirical research, duly recorded in the paper itself, laid ground for further systemization, for instance when the same authors (perhaps even better known) developed the so-called prospect theory.35 Though this empirical research on biases was completely new and original, the concept of ‘bounded rationality’ had, of course, been developed already in the 1950s. H. Simon was the first to fundamentally challenge the assumption of rational, self-interested, welfaremaximizing behaviour and to replace it with the concept of the merely ‘satisficing’ man, who uses rational search strategies in a limited way and aspires only to a satisfactory level.36 34

35

36

See the groundbreaking work by F. N. Kerlinger, Behavioral Research: A Conceptual Approach (New York: Holt, Rinehart & Winston, 1979); and the relevant entries in N. J. Smelser / P. B. Baltes (eds.), International Encyclopedia of the Social & Behavioral Sciences (Oxford: Elsevier, 2001). D. Kahneman / A. Tversky, ‘Prospect Theory: An Analysis of Decision under Risk’, 47 Econometrica 263–91 (1979); second most quoted paper in economics during the period 1975–2000 according to D. Laibson / R. Zechhauser, ‘Amos Tversky and the Ascent of Behavioral Economics’, 16 Journal of Risk and Uncertainty 7–47 (1998). The bias described here is that persons, when judging future prospects, typically set a certain expectation level (reference point) below which outcomes are seen as losses and above which outcomes are seen as gains. Then in a second step of evaluation, they typically judge the avoidance of a loss as more important than the acquisition of the same amount of gains – contrary to standard utility theory. On this idea, and demonstrating its existence even for small sums: M. Rabin, ‘Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion’, in D. Kahneman / A. Tversky (eds.), Choices, Values, and Frames (New York: Russell Sage Foundation, 2002), pp.202–8. Later on, the search for a systematic list of biases was continued, namely in: A. Tversky / D. Kahneman, ‘Extensional versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment’, 90 Psychological Review 293–315 (1983); A. Tversky / D. Kahneman, ‘Rational Choice and the Framing of Decisions’, 59 The Journal of Business 251–78 (1986). H. Simon, ‘A Behavioral Model of Rational Choice’, 69 The Quarterly Journal of Economics 99–118 (1955); H. Simon, ‘Theories of Decision-Making in Economics and Behavioral Science’, 49 The American Economic Review 253–83 (1959). For more detail, see Chapter 3.

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Although Kahneman and Tversky build on Simon’s concept, they can be seen as the start of the second, much more focused generation of contemporary research on bounded rationality. They provide more exacting detail on the patterns in which realworld behaviour deviates from rational maximizing behaviour (biases). It was only by providing such a specification that they created the basis for consideration and discussion of tools to address these biases; this paved the way for responses to behavioural biases in the form of legal ordering. At this point, a second strand of the inquiry into biases in negotiation processes would be worth considering. While Kahneman and Tversky laid the groundwork for research into decision biases (triggering a highly dynamic and still open research agenda), texts on the negotiation process itself should not be forgotten. Indeed, bounded rationality research can also be applied to game theory (which Kahneman and Tversky did not really do). The much more fundamental question is therefore whether, for law and for contract law (namely formation of contracts), insight from classic game theory is of similar importance as considerations of bounded rationality. This question is a more general one about the ‘usefulness’ of each theory to another social science. Our answer is largely negative, and therefore a little ‘excursion’ should suffice. Mainstream economics (and arguably also law and economics) holds that the leading formalized theory on bargaining is clearly game theory.37 The reason is that it examines situations where decisions have to be taken in the light of the decisions other players can be expected to take (non-parametric decision-taking); not with respect to a passive, ‘fixed’ world (that provides stable ‘parameters’ as inputs to decision-making). If the bargaining process, then, is understood as a paradigmatic situation for non-parametric decisiontaking, the question is why core texts and considerations on game theory should not be more meaningful to the issues pursued in this chapter than a text like Kahneman and Tversky’s. The choice between game theory and bounded rationality research has been discussed more broadly in the introduction. Some of the core reasoning for that choice is also important to discussions regarding negotiation, in two senses. First, classic game theory is criticized, and considered to be of limited use for law, precisely because of the assumptions it makes about individual behaviour. In its classic form, game theory assumes rational, selfishly maximizing behaviour on both sides, and most empirical research (be it on one-shot games, on repeated games with a definite end or on repeated games with an indefinite end), shows considerable deviations from this assumption, particularly in terms 37

H. P. Young, Negotiation Analysis (Ann Arbor: University of Michigan Press, 1991), p. 2 (‘principle theoretical tool for analyzing negotiations’); H. Raiffa, The Art and Science of Negotiation (Cambridge / MA: Harvard University Press, 1982) (recognizing the value of game theory as a theoretical tool, but also its limits); also R. J. Aumann / S. Hart (eds.), Handbook of Game Theory with Economic Applications, vol. I (Amsterdam: North-Holland, 1992); Stanford Encyclopedia of Philosophy, ‘Game Theory’ (D. Ross, 2010), sub 1. ‘game theory is the most important and useful tool in the analyst’s kit whenever she confronts situations in which what counts as one agent’s best action (for her) depends on expectations about what one or more other agents will do . . . ’. Game theory is widely recognized as a core concept to economics, as can be inferred from the award of so many Nobel Prizes, first to John Forbes Nash Jr, John Harsanyi and Reinhard Selten (1994), and later to William Vickrey (1996), Robert Aumann and Thomas Schelling (2005), and Alvin Roth and Lloyd S. Shapley (2012), but also to those developing the branch of bounded rationality, namely Herbert A. Simon (1978) and Daniel Kahneman (2002) (besides, to some extent, also Reinhard Selten).

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of outcomes.38 Second, and more importantly, the core research question on which game theory focuses is optimal outcomes of co-operation for both parties (the so-called equilibria). While this is certainly an interesting question for bargaining theory, it is much less relevant, perhaps even largely irrelevant, for legal ordering, that is, for general rule-setting. Raiser’s account of the history of the search for an iustum pretium (see above) is highly relevant in this respect. Long experience and consideration of countervailing arguments have led legal scholarship and practice to the (almost unanimous) decision that law should consciously avoid the issue of how to reach the optimal pay-off for both parties. It should only establish outer limits for the negotiation process via mandatory law, even if the latter has to be redefined and reassessed continuously (for instance with the advent of the consent problem in issues of data privacy). This distribution of responsibilities can be found even in the situations of severest scrutiny, that is, with respect to standard-term contracts.39 This is obvious if one considers the broader institutional setting within which formation of contracts takes place. Given nonperfect information, even less perfect for those standing outside the bargain, how can a judge be well-positioned to decide the optimum pay-off? Can a market economy, based on private initiative, function at all if every outcome of that private initiative can theoretically be second-guessed?40 Is party autonomy not an issue of fundamental rights and would judiciary scrutiny – possible for each case with the optimum as benchmark – not render it illusionary? For these reasons, only the outer limits of the question of payoffs are regulated in law; this has been a conscious choice, made with regard to legal values. The two situations where law steps in indeed are both at odds with the core issues addressed by game theory. The first is to mitigate the effect of the bargain on those third parties who cannot influence it and who, therefore, literally ‘do not count’ in game-

38

39

40

For the different situations in which game theory has radically diverging forecasts, see C. F. Camerer, Behavioral Game Theory: Experiments in Strategic Interaction (Princeton / NJ: Princeton University Press, 2003), p. 2 (‘Important steps in the 1960s were the realization that behavior in repeated sequences of one shot games could differ substantially from behavior in one shot games . . . ’); R. J. Aumann, ‘Backward Induction and Common Knowledge of Rationality’, 8 Games and Economic Behavior 6–19 (1995). For empirical work belying these forecasts to a considerable extent, see: R. McKelvey / T. Palfrey, ‘An Experimental Study of the Centipede Game’, 60 Econometrica 803–36 (1992); R. Nagel / F. F. Tang, ‘An Experimental Study on the Centipede Game in Normal Form: An Investigation on Learning’, 42 Journal of Mathematical Psychology 356–84 (1998); more broadly H. Gintis, Game Theory Evolving (2nd ed., Princeton / NJ: Princeton University Press, 2009); for a good survey, see: M. Ahlert / I. Lajtos, 60 Years After Nash’s Bargaining Solution: Trends in Bargaining Theory (Working Paper, Halle/Saale, Martin-Luther-Universita¨t, Jur. und Wirtschaftswiss. Fak., 2011). C. Vogt, Kooperation im Gefangenen-Dilemma durch endogenes Lernen: ein evolutiona¨r spieltheoretischer Ansatz (Magdeburg: VDM Verlag Mu¨ller, 2001) reports 21 per cent of co-operation in laboratory cases designed as simple prisoner’s dilemma cases – where classic game theory would expect 0 per cent. See, for instance, even in the realm of consumer contracts, Art. 4(2) of (European) Council Directive 93/13/ EEC of 5 April on unfair terms in consumer contracts, EC OJ 1993 L 95/29. See the reason given by Raiser, ‘Vertragsfunktion und Vertragsfreiheit’, 130, stressing that the overall dynamism of an economy runs counter to any (stable) iustum pretium thinking: ‘The reason that the idea of the just price has failed lies not in inherent unreasonableness of the desire for fair transactions, but rather in the inadequacy of non-evolutionary economic doctrine that pretends to possess objective and absolute benchmarks for the value of economic goods.’

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theoretical calculations.41 The second is to protect parties who are weaker because they cannot meet the standard assumptions made by classic game theory.42 For legal scholarship and practice, the task has been understood in terms of controlling those extraordinarily far-reaching deviations from the possible optimum that cannot be tolerated, but not to find the exact optimum possible. While game theory may still be relevant for contract law in certain instances, the finding described limits such cases to exceptional grounds. Thus, for contract term conditions other than price or also ancillary clauses on price, the Nash equilibrium might still serve as the point of reference from which too large a deviation could be considered abusive. However, also in this respect, considerations of democratic legitimacy would imply a need to rank solutions found by the legislature (such as default rules) more highly than the theoretical solution of a Nash equilibrium. Therefore, it became desirable that an entire ‘alternative game theory’ based on more realistic assumptions developed under the name of ‘mutual aspiration approximation theory’43 for questions of bargaining. The concept of satisficers rather than maximizers (see fn. 36) constitutes the overarching background. However, even this strand of literature focuses on how the bargaining process is shaped and how its outcome can be effectively forecast, rather than being directly concerned with when it is vitiated. This is, in contrast, the question implicitly asked by Kahneman and Tversky. It is much broader and therefore the primary issue discussed here. The three biases they studied are related to a participant’s capacity to establish the likelihood of events that have to be predicted or guessed. The participants’ ability to mathematically perform such a computation is taken for granted in rational choice decision-taking.44 In response, Kahneman and Tversky’s basic argument is that persons use heuristics to compute the likelihood of certain events – and must do so, but that these heuristics do not always lead to realistic approximations of the real world. Thus, the task is to find the

41

42

43

44

Impacts on third parties are irrelevant ‘inside’ game theory. This can be inferred from the account of how to solve the prisoner’s dilemma (i.e., how to make them co-operate in not confessing, despite the adverse conditions), for instance in the Stanford Encyclopedia of Philosophy, ‘Game Theory’ (D. Ross, 2010), sub 2.7. It is no concern for D. Ross that, for justice reasons based on the principle of retribution and on the aim of general deterrence, the legal order would indeed want to prevent co-operation. In reality, classic game theory struggles with the problem where one party is not behaving rationally, even if the other party is in fact rational (classic game theory depends on computations in light of foreseeable, rational behaviour on the other side). The so-called trembling hand problem is groundbreaking in this respect: R. Selten, ‘Re-examination of the Perfectness Concept for Equilibrium Points in Extensive Games’, 4 International Journal of Game Theory 22–55 (1975) (parties forecast that the other side may commit mistakes when deciding on their ‘shot’; i.e., may have a trembling hand). For a good more recent account of the problem, see H. Gintis, The Bounds of Reason: Game Theory and the Unification of the Behavioral Sciences (Princeton / NJ, Princeton University Press, 2009). For an early, groundbreaking paper, see H. Sauermann / R. Selten, ‘Anspruchsanpassungstheorie der Unternehmung’, 118 Zeitschrift fu¨r die Gesamte Staatswissenschaft 557–97 (1962); more recently, see M. Ahlert / I. Lajtos (fn. 38). See, for instance, C. F. Camerer (fn. 38); also R. B. Myerson, Game Theory: Analysis of Conflict (Cambridge / MA, 1991, Harvard University Press, 1997), sub 1.1; see also fn. 45.

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right balance between heuristics needed (and helpful)45 and biases occurring. Later, Kahneman and Tversky state that persons often fail to learn about these biases, even when they have already suffered from their consequences,46 thus also diverging from the typically suggested solution proposed by rational choice-oriented (evolutionary) economic theory.47 The latter assumes learning, while Kahneman and Tversky see selfserving bias in such situations. Kahneman and Tversky’s text is straightforward and easy to read. Read together with other texts, such as that on prospect theory, it lists the main biases discussed today.48 The first bias, which the authors term the heuristics of ‘representativeness’, holds that people are more impressed by a certain sense of order than by statistical probability. In people’s minds, the one trumps the other. For example, if only a tiny fraction of the population has one profession and a large fraction has another profession, most observers would still hold it to be more likely that a given person has the profession named first, if the characteristics ascribed to them are typical of that profession. Thus, a very meticulous person with fine fingers would rather be seen as a goldsmith (tiny group) than a salesperson (large group). Similarly, the question of how reliable the information may be is largely displaced by this sense for order (‘representativeness’). A second bias later received even more attention, which is that people tend to make decisions on the basis of ‘availability’, rather than on the basis of how relevant the parameters are. Availability may even be conditioned by subjective elements, so that features which are more striking (such as famous people in a list) are remembered more (even if constituting only a small fraction of the list). Thus, when distribution of sex is asked for this list, the distribution among the famous people tends to decide. The third, rather closely related, bias is that of ‘anchoring’, which has also received a great deal of attention in subsequent discussions.49 In this case, from the information available, one feature is so dominant that it anchors what follows. Thus, a high probability, even if applied various times, is discounted too little (conjunctive 45

46

47

48 49

Groundbreaking for the positive view of heuristics, G. Gigerenzer, Simple Heuristics That Make Us Smart (Oxford: Oxford University Press, 1999), G. Gigerenzer, Reckoning with Risk: Learning to Live with Uncertainty (London: Allen Lane, 2002). G. Gigerenzer, Gut Feelings: The Intelligence of the Unconscious (London: Penguin Books, 2007); G. Gigerenzer / R. Hertwig / T. Pachur, Heuristics: The Foundations of Adaptive Behavior (Oxford: Oxford University Press, 2011) (also, with Selten, fn. 50); and also D. Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus & Giroux, 2011). See Kahneman / Tversky, ‘Judgment under Uncertainty’, 1130 et seq.; prominent later: D. Kahneman, Thinking, Fast and Slow (New York, Farrar, Straus & Giroux, 2011); and as their basis, references in fn. 36. A. Alchian, ‘Uncertainty, Evolution, and Economic Theory’, 58 The Journal of Political Economy 211–21 (1950); R. R. Nelson / S. G. Winter, An Evolutionary Theory of Economic Change (Cambridge / MA: Harvard University Press, 1982); today M. G. Haselton / G. A. Bryant / A. Wilke / D. A. Frederick / A. Galperin / W. Frankenhuis / T. Moore, ‘Adaptive Rationality: An Evolutionary Perspective on Cognitive Bias’, 27 Social Cognition 733–63 (2009). See Kahneman / Tversky, ‘Judgment under Uncertainty’, 1124–30. For prospect theory see fn. 35. For more detail on both biases, see: F. Strack / T. Mussweiler, ‘Explaining the Enigmatic Anchoring Effect: Mechanisms of Selective Accessibility’, 73 Journal of Personality and Social Psychology 437–46 (1997); A. Furnham / H. C. Boo, ‘A Literature Review of the Anchoring Effect’, 40 Journal of Socio-Economics 35–42 (2011); M. Ross / F. Sicoly, ‘Egocentric Biases in Availability and Attribution’, 37 Journal of Personality and Social Psychology 322–36 (1979); N. Schwarz / H. Bless / F. Strack / G. Klump / H. Rittenauer-Schatka / A. Simons, ‘Ease of Retrieval as Information: Another Look at the Availability Heuristic’, 61 Journal of Personality and Social Psychology 195–202 (1991).

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events) and vice versa (disjunctive events). An example would be how the probability of picking a white ball seven times in a row from a box containing nine white balls and one black is almost universally predicted to be higher than picking a black ball only once in seven tries, while, statistically, the contrary is true. In the discussion of these findings, the authors highlight that experienced people are also subject to these biases; accepting, of course, that enterprises can and do take systematic countermeasures. The list of biases has been taken up, extended and systemized not only by Kahneman and Tversky themselves, but also by a considerable number of other authors from various disciplines, such as behavioural sciences, economic theory and (quite prominently) those with legal applications.50 However, even more interesting than further extending this list is to sketch how it could/ should be (and, partly, has been) used to reconstruct findings in law. After applications mostly to criminal law and government advertising, two applications might be particularly promising with respect to justice of consensus (besides ‘softer solutions’, for instance in default rules)51 – always, however, taking into consideration that what appears to be triggered by biases can often be seen also as a heuristic (fn. 45). First, disclosure and information rules could be reframed, taking into account those heuristics and biases which can be observed with the highest frequency. If it is typical in certain relationships that decisions are made only on the basis of three or four criteria, disclosure rules could, for instance, also indicate the order in which certain key decision parameters are to be disclosed, particularly in consumer contract law, potentially supplemented with a word limit. This could enhance the recognition of the elements most relevant for most consumers. More demanding might be a reconstruction and identification of biases in matters of defective consent (such as mistakes) and a consideration of when they should give rise to a right to void the contract. Second, it might also be quite promising to extend the idea of market failure (and ensuing need to regulate) from situations characterized by information asymmetries, as they have traditionally been conceived, to the area of systematic (ab)use of cognitive biases. One approach to biases is a traditional regulatory approach, asking not only for formal consent, but material consent. This might imply correcting such cognitive biases that would tend to overestimate gains in the immediate future (for instance, consumption) and underrate more distant future risks (such as severe failure to perform resulting in insolvency, so-called present bias).52 Correcting such cognitive biases could be 50

51

52

See C. Jolls / C. Sunstein / R. Thaler, ‘A Behavioral Approach to Law and Economics’, 50 Stanford Law Review 1471–550 (1998), List in Annex 1548–50; see also C. Jolls, ‘Behavioral Law and Economics’, in P. Diamond (ed.), Behavioral Economics and Its Application (Princeton / NJ: Princeton University Press, 2007), pp.115–44; C. Jolls, Behavioral Economics and the Law (Boston / Delft: Now Publishers, 2011); R. B. Korobkin / T. S. Ulen, ‘Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics’, 88 California Law Review 1051–144 (2000); G. Gigerenzer / R. Selten, Bounded Rationality: The Adaptive Toolbox (Cambridge / MA: MIT Press, 2002); for an application to tort and property law, see J. Rachlinski, ‘A Positive Psychological Theory of Judging in Hindsight’, 65 University of Chicago Law Review 571–625 (1998). For work pointing in this direction, see R. Thaler / C. Sunstein, ‘Libertarian Paternalism’, 93 American Economic Review 175–9 (2003). See in detail C. Sunstein, The Storrs Lectures: Behavioral Economics and Paternalism, 122 The Yale Law Journal 1826–99 (2013), at 1842–52.

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a strategy for all those cases where no information to the contrary has been given or where the other party even exploited the bias consciously. An illustration of such a scenario can be seen in the use of teaser interest rates at the start of a sub-prime lending agreement, coupled with a sharp increase in later years – as sketched out in the introductory case. Thus, on the basis of a structural, unavoidable information asymmetry, duties to disclose or even mandatory substantive rules may have to be formulated53 – such as the duty of responsible lending developed in the introductory case even though a fully rational consumer might also have known without. Another example might be to characterize it as an abuse of dominant position or unfair trading practice when one side of the bargain (typically the professional side) systematically uses wellknown biases in order to induce the other side to enter into contracts or contract terms to which a properly informed average individual would not agree. However, these suggestions remain lines of potential thought, rather than well-worked-out proposals for reform. V The issues raised by the three texts are not completely new to traditional doctrinal thinking in contract law, nor do they exhaust the legal questions surrounding negotiation. They may not even be completely representative of the richness of the disciplines involved.54 However, they do shed a sharper light on core questions: what is the relationship of contract law and regulation – and should they, as is seldom the case, be seen in conjunction with each other? For what reason, exactly, does private law grant freedom of contract? Is it a natural (or constitutional) right, limitations of which have to be justified? How demanding are the prerequisites for such justification? Raiser’s answer to these latter questions is that freedom of contract is granted as long as it is socially beneficial. Therefore, this freedom must be supported for its inherent innovative potential (core criterion is the function of contracting and contract law). The three texts also shed light on further sub-questions: is redistribution a legitimate goal only in exceptional circumstances, namely when private law can protect a particularly vulnerable (typically, small and rather homogeneous) group more effectively than tax law? To what extent is reaching an optimum outcome in negotiations a legitimate aim of legal ordering at all? Can typical biases be a starting point for regulation? Kaplow and Shavell would answer the first of these questions quite categorically, and in the negative. Raiser would arrive at the same result in principle, if only because he would understand such an approach to best further the function of contract. Whether the function of contract would support protection against the consequences of boundedly rational decision-making, a question raised by the findings of Kahneman and Tversky, is an important aspect of research – in my view still completely open. Open for good reason, given that the reasons for 53

54

See, for instance, on standard contract terms, G. Akerlof, ‘“The Markets for Lemons”: Quality Uncertainty and the Market Mechanism’, 84 Quarterly Journal of Economics 488–500 (1970); and H.-B. Scha¨fer / C. Ott (fn. 4), pp. 552–5. See, in this respect, E. Posner, ‘Economic Analysis of Contract Law after Three Decades: Success or Failure?’, 112 The Yale Law Journal 829–80 (2003). This text, strongly rooted in the law and economics approach and discussing problems of negotiation, is rather critical. It comes to the conclusion that even if law and economics is not of enormous help in the adjudication in concrete cases, it is nevertheless much more telling than any other approach, including traditional doctrinal thinking.

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the poor functioning of the negotiation mechanism (i.e., the reduced likelihood that the negotiation mechanism produces mutually acceptable results) are not so much structural, but personal (and arising in many individual cases differently). I would support protective measures in this respect, though only in cases where the consequences are (physically, psychologically, or financially) ruinous. In addition, one might consider whether exploiting the biases of others (i.e., consumers) can be seen as an intrinsically unfair commercial practice.55 That said, these texts remind us that legal ordering in relation to bounded rationality must be (re)constructed under the auspices of legal and constitutional values. As a result, these texts are best understood as in dialogue, and their discourse flows rather naturally over disciplinary boundaries. In any case, they broaden the theoretical understanding for legal scholarship and practice. Two sets of cases have been used to show how, in the context of the core findings of the lead texts, creativeness (freedom of contract) might have gone so far as to help disfavoured layers of society participate in increase in wealth (housing prices). They equally have been used to show how limitations to freedom of contract can be theorized in a basically similar way and how, in some cases, they can be seen as increasing total welfare, while in others they are more readily to be seen as fostering divergent values. These might be solidarity and social peace or also ‘just’ compensation (without the aim to incentivize behaviour). These cases also show how biases can be a source of abuse and whether such practices would require regulation. Still, these three texts are certainly not exhaustive of the issues considered here. Others (for example, those concerning the sociological concept of ‘negotiated order’) would add richness and insight to legal problems of negotiation and the justice of consensus.56 The question of which forms a protective rule may take, and whether and when formal requirements or outright prohibitions are preferable, is very deeply treated in sociology. However, the three texts discussed here do mark the core terrain of value judgements in the formation of contracts.

55

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See S. Grundmann, ‘Targeted Consumer Protection’, in D. Leczykiewicz / S. Weatherill (eds.), The Images of the ‘Consumer’ in EU Law: Legislation, Free Movement and Competition Law (Oxford: Hart, 2016), pp. 223–44 as well as P. Hacker, ‘Personalized Law and the Behavioural Sciences’, in C. Busch and A. de Franceschi (eds), Granular Legal Norms (Oxford/Munich: Hart/Beck, 2020), p. 241–263. See, on these issues, A. Strauss, Negotiations: Varieties, Contexts, Processes, and Social Order (San Francisco / CA: Jossey-Bass, 1978).

12 Knowledge and Information Stefan Grundmann

a topic and materials I ‘Information is a valuable resource: Knowledge is power. And yet it occupies a slum dwelling in the town of economics.’ So begins George Stigler’s article early in the 1960s, often considered to be the start of information economics, written one year after his Chicago colleague Ronald Coase published his seminal paper on ‘Social Cost’, often seen as the start of transaction cost and institutional economics.1 Contemporaneous legal scholarship had a similar blind spot regarding information as an asset; that is, at least until the last three decades of the twentieth century, during which it came to dominate regulation theory in private law. Throughout the preceding decades, competition issues had been the central occupation of economic theory, and practices that would restrict competition the core target of market regulation. Indeed, competition had been one of the four core prerequisites of the welfare theorem for neoclassical economics (economic theory), and the first wave of large-scale market regulation – put in place in Europe after World War II – was regulation against anti-competitive practices.2 The importance of information was only gradually recognized later on, through the 1960s, 1970s and 1980s. As regards economic theory, the issue of information has much in common with the problem of transaction costs (Coase), in that information probably accounts for the largest portion of all transaction costs. By discussing information as a problem, economics powerfully deviated from the neoclassical welfare theorems based on the assumption that all market 1

2

For Coase, see Chapter 3. However, each scholar taught in different faculties (the law school and the school of economics) and G. Stigler does not include R. Coase in the list of discussion partners in fn. 1, quoting instead scholars outside the institutional economics approach. D. Gerber, ‘Constitutionalizing the Economy: German Neo-liberalism, Competition Law and the “New” Europe’, 42 American Journal of Comparative Law 25 (1994); S. Grundmann, ‘The Concept of the Private Law Society after 50 Years of European and European Business Law’, 16 European Review of Private Law 553, 557, 568–9 (2008); E.-U. Petersmann, ‘Legal, Economic and Political Objectives of National and International Competition Policies: Constitutional Functions of WTO Linking Principles for Trade and Competition’, 34 New England Law Review 145, 145–9 (1999); therefore, it is far from astonishing that (to my knowledge) the first truly ‘European’ textbook addressed this topic: E.-J. Mestma¨cker, Europa¨isches Wettbewerbsrecht (Munich: Beck, 1964), 3rd ed. 2014 (with H. Schweitzer).

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participants have access to full (and costless) information. In hindsight, discussing information as problematic (in the sense that it is costly to obtain, that access to it is often mediated and that, potentially, it is highly influenced by legal rules) inevitably propels research along the path toward new institutional economics, particularly in the case of the third text discussed here. With respect to the overall development of regulation, information can be seen as the object of the second major wave of regulation (following the initial swell around antitrust law). Such regulation of information has been concentrated on the firm, feeding the rise and transformation of capital markets law in particular, and on contracting, namely with the rise of consumer law. In both areas, regulation has primarily been based on mandatory disclosure, that is, on (now globally prevalent) standard disclosure rules. Standard disclosure rules in capital markets – where financing of firms and investor or consumer protection concerns meet – are at stake in the case chosen to illustrate core problems of information (Box 12.1), and other cases discussed in this chapter. Under German law, these third-party fees are referred to as ‘kick-backs’, and a whole series of parallel cases, decided by the private law Supreme Court, can be found, all taking basically the same position as the Swiss Supreme Court.3 Conversely under English law, with much scarcer case law, in the Retail Distribution Review (RDR) of 2013, the Financial Services Authority (FSA – today Financial Conduct Authority (FCA) - introduced still more stringent rules on inducements in the Conduct of Business Sourcebook (COBS). They forbid any taking of fees other than those paid openly by the client itself.4 Taken together, the cases of Germany (here aligned with Switzerland) and of the United Kingdom show how differently jurisdictions can decide even though both are subject to the same detailed directive, MiFID I, now MiFID II,5 that contains an extensive regime on investment advice and the individual and standardized disclosure owed in this context. These inducements cases and rules shed light on various questions. Core issues that are at stake are how swift circulation of decentralized information may contribute to market functions (such as the allocation of resources) and which problems partners to transactions face without such information. Other questions concern the finding that information rules of different jurisdictions on the same problem 3

4

5

See Bundesgerichtshof (German Private Law Supreme Court), from Kick-back I-decision of 19 December 2000 BGHZ (official reports) 146, 235 via twelve numbered decisions until 2011 (Kick-back XII) to the famous decision of 3 June 2014 BGHZ 201, 310 that extended the rule to all fees paid to the intermediary by third parties, including issuers; about thirty cases decided by the Supreme Court, see S. Grundmann, in Staub-Großkommentar Handelsgesetzbuch, vol 11/2 (5th ed., Berlin: de Gruyter, 2018), part 8, paras. 243–52, esp. 249 et seq.; and also S. Grundmann / P. Hacker (fn. 5). See COBS 6.1.A.4 and 6.1.B.5; on this regime, see, for instance, L. Silverentand / J. Sprecher / L. Simons, ‘Inducements’, in D. Busch / G. Ferrarini (eds.), Regulation of the EU Financial Markets: MiFID II and MiFIR (Oxford: Oxford University Press, 2017), pp. 205–25, at 214–16. See Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC [MiFID 1], EC OJ 2004 L 145/1; now Arts. 16(3) and 23 of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2015 on markets in financial instruments and amending directives 2002/92/EG and 2011/61/EU, EU OJ 2014 L 173/349; on the disclosure rules related to investment advice, see D. Busch / G. Ferrarini (fn. 4), namely chapter 4 (L. Enriques / M. Gargantini, ‘The Overarching Duty to Act in the Best Interest of the Client in MiFID II’, pp. 85–122), chapter 6 (P. Giudici, ‘Independent Financial Advice’, pp. 147–63), and chapter 7 (S. Grundmann / P. Hacker, ‘Conflicts of Interest’, pp. 165–204).

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BOX 12.1 CASE STUDY

Swiss Foundation U v. Portfolio Management A [2006] 1 BGE 132 III 460 In this case decided by the Swiss Supreme Court, the claimant, a foundation, had been economically dominated by A who in February 2006 was convicted of financial crimes and sentenced to several years of imprisonment. During the time of A’s domination, large parts of the patrimony of the claimant had been administered by the portfolio management firm B. When, later in February and after having charged and received some 875,000 SFr of fees, B denounced the claimant itself of money laundering the claimant conversely claimed from B first, to disclose all relevant facts on the portfolio management in the time during A’s domination, also with respect to transactions with and fees received from third parties, and second, to disgorge any fees received in connection with the portfolio management or transactions for it that went beyond the fees negotiated with the claimant (and client) itself. This was explicitly targeted to so-called retrocessions as well, fees paid to a third party (for instance, an investment fund) that then refunds parts of these fees to the investment adviser or portfolio manager (as compensation for his service as a broker). The Swiss Supreme Court decided in favour of the claimant, and did so irrespective of whether the third party did explicitly intend this refund for the intermediary solely.

can still be shaped very differently because they choose different information problems as their focal point (judging one or the other as being more important). These cases equally illustrate that information is paramount not only on complicated characteristics, but also on simple parameters such as prices. II The chapter discusses three texts of reference, which map out the whole range of core questions on what social function information plays, how use of information can be conceived in a non-regulated setting and in which situations regulation of information is needed (Box 12.2). BOX 12.2

Friedrich A. von Hayek, ‘The Use of Knowledge in Society’, 35 The American Economic Review 519–30 (1945) George Stigler, ‘The Economics of Information’, 69 Journal of Political Economy 213–25 (1961) George Akerlof, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’, 84 Quarterly Journal of Economics 488–500 (1970)

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BOX 12.3

Omri Ben-Shahar, ‘The Myth of “Opportunity to Read” in Contract Law’, 5 European Review of Contract Law 1–28 (2009) Michael Spence, ‘Job Market Signaling’, 83 Quarterly Journal of Economics 355–77 (1973) Joseph Stiglitz, ‘The Theory of Screening, Education and the Distribution of Income’, 65 The American Economic Review 283–300 (1975)

With the text from 1970, the whole spectrum from liberal use of information to the need for regulation of information (disclosure) was mapped out. The two most important additions still to follow were contributions on the question of how market alternatives to mandatory disclosure might be shaped – that still satisfy the informational needs of the party lacking the necessary information – and on the question whether and beyond which threshold more information may be useless or even detrimental (‘information overkill’). These ramifications of the debate can be traced in the supplementary readings in Box 12.3.

b theories, context and discussion I The three texts selected for this chapter offer landmarks along the path from the era before ‘information research’ to the moment in which the analytical framework was fully unfolded. This path therefore runs from the time when information was entirely ignored in economics (and a subject of only narrow interest in legal circles) to the current robust analytical framework in institutional economics. An additional step could, of course, be taken by analysing contexts where even full information may be insufficient, due to information overload and/or due to the limited rationality of market participants.6 The text from von Hayek (1945) develops the powerful idea that the distribution of information – whether it is concentrated or decentralized – has profound consequences for the whole of a political-economic system. As von Hayek’s title implies, he regards the ‘Use of Knowledge’ as a concern ‘in [for] Society’ at large. The main thrust of the paper is that decentralized distribution often produces better results than central planning, an idea which influenced the later view that even regulators should compete, in order to enhance the quality of regulation.7 Where von Hayek addresses the allocation of information (to a central decision-maker or through decentralized channels?), Stigler begins a discourse, which was to subsequently become dominant, regarding the impossibility of perfectly allocating or distributing information. As price theory was already at the centre of the neoclassical welfare theorem, Stigler expressly addresses prices; his new and revolutionary 6

7

For this step, taken early on by H. Simon, but developed more broadly starting only around 1980, see Chapter 3 and later in this chapter. See moreover the discussion of the work of Kahneman and Tversky in Chapter 11. See Chapter 23.

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contribution is to recognize that, even with prices, market participants cannot achieve full information in practice, as evidenced by the mere existence of different prices for completely homogeneous commodities. The next step is to ask what this finding implies for prices and for the market mechanism more generally, and to investigate whether results can be enhanced by institutions that influence, help – or perhaps even correct – market mechanisms. Akerlof’s text poses precisely this question, but does so for heterogeneous commodities, where the problems raised by incomplete information – namely, information asymmetries – seem to be exacerbated. His text provoked investigation into institutional arrangements that could potentially enhance the market mechanism by responding to information problems. This text is the one that most pervasively inspires law, legal arrangements and regulation in particular. All three authors received the Nobel Memorial Prize in Economics for the ideas developed in the papers discussed here (in 1974, 1982 and 2001 respectively; though von Hayek was recognized for his work more broadly). With respect to the political and historical context, it is clear that von Hayek wrote his text at the beginning of the Cold War, in the shadow of a sharpening competition between the dominant systems respectively in the ‘West’ and ‘East’ (with Stigler basking in the confidence of the apparent successes of the West, and of market capitalism). In contrast, Akerlof, a US scholar with European (Swedish) roots, wrote his text during a decade marked both by early consumer law (namely in Europe) and by the relative prominence in the United States and indeed the global success of capital market law. However, it must also be stated that information economics only ‘discovered’ the adverse effects of a compromised information supply after legislatures, regulators, legal practitioners and scholars had already been discussing and enacting disclosure rules for decades; for instance, in the United States, the Securities Act of 1933 and the Securities Exchange Act of 1934. II Von Hayek’s 1945 article is a ‘manifesto’ in various respects. It starts out from the apodictic treatment of neoclassical assumptions (full information, a given system of preferences and allocation of limited resources) and with von Hayek’s view that model-building on the basis of these assumptions ‘is . . . not the economic problem’. Instead, the problem constitutes in dealing with ‘dispersed bits of incomplete and frequently contradictory knowledge’;8 and more precisely, in determining what allocation of decision-making competence – what form of political economy – is likely to function best given that dispersed knowledge. The ‘problem [is the best] utilization of knowledge not given to anybody in its totality . . . [a problem] rather obscured than illuminated by many . . . uses made of mathematics’. The article is, however, not only a manifesto against neoclassical thought (in that it deals with incomplete information as the core problem), but also a manifesto against central (state) planning of the economic order. The paper is, of course, immensely political, ‘a strong plea from London’, so-to-speak. However, it was directed not only against communist economic theory (an attack that later materialized in the famous von 8

For quotes in this paragraph, see F. von Hayek, ‘The Use of Knowledge in Society’, pp. 519 and 520, in the next paragraph pp. 521 and 522.

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Hayek–Lange dispute), but also, in England itself, against John Maynard Keynes, who identified increasing aggregate demand as the key parameter of economic success and therefore advocated deficit spending by states, particularly in times of weak economic activity. In fact, the Mont Pelerin Society, founded by von Hayek, Ludwig von Mises and colleagues in 1947, was aimed at combatting this idea. In section II, the paper raises the question of ‘who is to do the planning [and should therefore receive the information] . . . whether planning is to be done centrally by one authority for the whole economic system [as in the Soviet Union], or is to be divided among many individuals’ (as in the AngloAmerican world). This reminds one, of course, of the ‘creative destruction’ argument, already proposed by von Hayek’s Austrian compatriot J. Schumpeter, also in confrontation with communist planning. The core question then is ‘under which of [these two systems] we can expect that fuller use will be made of the existing knowledge’. The text thus starts from a given distribution of knowledge and bases its calculus on this situation, yet it neglects the question of whether the initial allocation might be influenced as well. As a result, while the article totally rejects the neoclassical assumption of full information, it does not yet address how institutions shape the allocation of knowledge and transaction costs associated with it.9 The answer to the question named, which von Hayek starts formulating from section III onwards, depends on the type of knowledge. He distinguishes ‘scientific knowledge’ (i.e., ‘premium knowledge’), which von Hayek seems to assume is indeed best created and administered centrally, from day-to-day ‘knowledge of the particular circumstances of time and place’, which is available mainly at a decentralized level. His argument is that the latter type is much more important for the economy than is commonly believed and that it should not be ‘regarded with a kind of contempt’.10 As this type of knowledge is located with the ‘man on the spot’ and, contrary to the assumptions of neoclassical theory, impossible (or at least costly) to transfer, and thus not ‘readily at the command of everybody’, decentralized decision-making becomes paramount. This already shows von Hayek’s preference for decentralized decision-making, but also reveals a sensitivity to areas where centralized administration of knowledge may be more effective. It is to be highlighted at this point that both the idea that decentralized knowledge might be more beneficial to society and the idea that there are comparative advantages to decentralized and to centralized knowledge according to which question is at stake were absolutely revolutionary and indeed path breaking for ‘knowledge in society’ and its arrangement since 1945. In contrast, one development is still to come. His later exploration of competition would extend his faith in decentralized processes. When von Hayek later discusses the concept of ‘competition as a discovery procedure’ (or ‘device’, i.e., of competition as an arena in which many solutions can be tried and tested in a decentralized way and in which errors can be levelled out in the same way), he was quite obviously now referring to all kinds of knowledge and no longer

9

10

See Chapter 3, but also the texts discussed in this chapter by G. Akerlof (Section IV) and even by G. Stigler (Section III). For quotes in this paragraph, see von Hayek, ‘The Use of Knowledge in Society’ pp. 522 and 524, in the next paragraph pp. 530 and 525–8.

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excluding scientific knowledge.11 Similarly, his work progresses to advocate for systems competition and decentralized decision-making in all areas of knowledge, not only for knowledge of the particular circumstances of time and place. This is as well the trend that research on information and on its use follows more generally. The remainder of the article is devoted primarily to showing that circumstances do change, and change often enough to strongly favour decentralized decision-making. While this already constitutes a powerful plea for subsidiarity, one remaining issue still requires attention. This is the question why and how all these decentralized decisions do not end up contradicting and counteracting each other. Thus, von Hayek’s starting point is ‘the unavoidable imperfection of man’s knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired’. His answer is that while decisions made at the decentralized level do overlap in their content, there are enough signals sent between the decision-makers, in the form of prices, that co-ordination and informational cross-fertilization take place. Therefore, the choices made are sufficiently informed at all times. Full information is not necessary; condensed and rudimentary information is sufficient. This argument already points in the direction of mere signals, which Spence was to later portray as instruments conveying sufficient information for good decision-making (see Section IV in this chapter). That said, the signals described by von Hayek are prices, still portrayed very much in the tradition of neoclassical price theory. The ‘marvel’ of the market, as von Hayek calls it, is that decentralized and atomized decision-taking nevertheless guarantees that the decisions made by others are sufficiently taken into account. ‘The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all,’ and, ‘if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind’. Von Hayek is perhaps the first to describe the phenomenon that allows the reaction of only a few market participants to prompt the whole market to adapt to, for instance, a successful miners’ strike or the announcement of a new technological innovation.12 The marvel lies also in the sharing of the benefits: 11

12

For ‘competition as a discovery device’ see F. von Hayek, ‘Competition as a Discovery Procedure’, in New Studies in Philosophy, Politics, Economics and the History of Ideas (London: Routledge & Kegan Paul, 1978), pp. 179–90; for the influence of this idea on the concept of a competition of legislatures, see Chapter 23. For earlier considerations of the idea of markets as dynamic entities, see J. Schumpeter, The Theory of Economic Development (Cambridge / MA: Harvard University Press, 1926, initially Berlin: Duncker & Humblot, 1911). For an overview on ‘catallaxies’ in the Austrian School see I. M. Kirzner, ‘Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach’, 35 Journal of Economic Literature 60 (1997). On evolutionary economics that owed a lot to these origins (mainly to the Hayekian concept of knowledge and competition), see R. Nelson / S. Winter, An Evolutionary Theory of Economic Change (Cambridge / MA: Harvard University Press, 1982); K. Dopfer / J. Potts, The New Evolutionary Economics (Cheltenham: Edward Elgar, 2014); C. Herrmann-Pillath, Grundriß der Evolutionso¨konomik (Munich: Wilhelm Fink, 2002); a short and informative survey can be found in R. Podszun, Wirtschaftsordnung durch Zivilgerichte (Tu¨bingen: Mohr Siebeck, 2014), pp. 107–32; furthermore with P. Zumbansen / G.-P. Calliess, ‘Law, Economics and Evolutionary Theory: State of the Art and Interdisciplinary Perspectives’, in P. Zumbansen / G.-P. Calliess (eds.), Law, Economics and Evolutionary Theory (Cheltenham: Edward Elgar, 2011), pp. 1 et seqq.

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‘Through it [the “price system”, or in a more abstract way: the “constant use of formulas, symbols and rules whose meaning we do not understand”] not only a division of labour but also a coordinated utilization of resources based on an equally divided knowledge has become possible.’ All this is a congenial transposition of Adam Smith’s concept of the ‘invisible hand’ to an atomized and decentralized use of knowledge, which previously, in the neoclassical welfare theorem, had been conceptualized as total, rather than fragmented and systemic. The changes in this traditional bifurcation that might stem from the increased possibilities of big data use by firms (one set of private parties) – potentially having access to tools that were traditionally open only to public administrations and central planning – are still unexplored. They might be considerable and are better approached shortly in context with a second text, written by George Stigler. III Stigler’s text of 1961 is seen as the founding essay of information economics. As with Coase’s transaction cost analysis, there simply was no prior theoretical groundwork on information. While it is true that von Hayek had already made the case for not taking full information for granted, Stigler applied a micro-analytical framework to analyse the question of how much is, or should be, invested in searching for, aggregating and distributing information. Moreover, and more specifically, he asked how high the return might be from these various costly efforts to exploit existing knowledge. Through this rubric, he tries to explain why prices for the same commodity so often diverge. Both Stigler’s and von Hayek’s texts therefore share a critique of the neoclassical assumption of costless availability of full information and choose, instead, to confront ‘the cold winds of ignorance’13 blowing through neoclassical economics. Stigler’s text furthermore analyses the consequences within a strictly micro-analytical framework. Thus, information is no longer treated as a datum, but as a variable. The text begins with the phrase that opened this chapter, lamenting both the treatment of information as costless and the contempt shown for industries that work proactively to make information available, and charge for the service. Stigler here intends not only the narrow group of information intermediaries that encompasses investment advisers or rating agencies,14 but also firms that spend money on publicity, including those that specialize in advertising (given both signalling effects and the inherent value of the information it sometimes provides). The paper consists of only two sections, one devoted to the more fundamental search for the best price and the other applying the first section’s findings to the case of advertising. The fundamental problem is seen as follows: ‘Price dispersion is a manifestation – and, indeed, it is a measure – of ignorance in the market’, and ‘dispersion is ubiquitous even for 13 14

G. Stigler, ‘The Economics of Information’, p. 224. See, for example, S. Grundmann / W. Kerber, ‘Information Intermediaries and Party Autonomy: The Example of Securities and Insurance Markets’, in S. Grundmann / W. Kerber / S. Weatherill (eds.), Party Autonomy and the Role of Information in the Internal Market (Berlin / New York: de Gruyter, 2001), pp. 264–310.

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homogeneous goods’.15 Even the search for prices is therefore costly, though the search for quality may be more costly still (an issue later treated by Akerlof, but see also Stigler). These costs account for the phenomenon of diverging prices, that is, of markets functioning less efficiently than would be the case under the assumptions of neoclassical thought. The basic formula is easy: ‘For any buyer the expected savings from an additional unit of search will be approximately the quantity he wishes to purchase times the expected reduction in price as a result of the search . . . The expected saving from given search will be greater, the greater the dispersion of prices . . . [or] the expenditure on the commodity.’ This formula raises, on the one hand, the question of a calculus of search costs, which depends on the value of the time employed (and particularly the ‘opportunity costs’ of alternative uses of this time). This formula also raises, on the other hand, the question of gains derived from any additional searching, which depends on the margin between prices offered, the amount and value of transactions done and on economies of scale that can occur via later transactions if there is a continued goodwill. The analysis of how long search results remain valid introduces a remarkable element of dynamism into the model and distinguishes the article from Coase’s parallel paper of 1960. Stigler then gives a more detailed analysis of the influences on search costs. One factor is the difficulty of identifying potential transaction partners, which accounts for the rise of exchanges and fixed market days, but also for attempts to pool knowledge on the demand side and for the rise of information intermediaries. Experience also reduces search costs. Stigler therefore considers market solutions that may help to reduce search costs without, however, giving any consideration to legal frameworks that might contribute to this aim even further. More searching reduces the ‘dispersion’ of prices; a high dispersion of prices, conversely, justifies investing more in search costs, thus explaining a trend to more homogeneous prices in thick markets where the volumes are large. The difference between resale and purchase prices for used goods is, for instance, smaller for consumers on thick second-hand markets, such as for used motor vehicles, than on thinner ones, such as for old furniture. Stigler’s specific example is advertising:16 ‘the obvious modern method of identifying buyers and sellers . . . But advertising has its own limitations: advertising itself is an expense’, that is, a search cost. By invoking the cost of search, Stigler embarks on Coase’s path of transaction cost analysis (though without quoting him). Contrary to Coase, and more similar to Williamson’s later position, Stigler not only states these costs but tries to quantify them and locate them in relationship to the gains thereby introducing, as would Williamson, a dynamic vision. Unlike Williamson, however, Stigler does not pursue an investigation of the tools and/or institutions that might lower the costs of information retrieval. Overall, Stigler’s text opens the analysis of the costs and gains of making useful information available, using a concrete, micro-analytical perspective. However, the text’s limitations should not be ignored. It does not follow an institutional 15

16

For quotes and ideas reported in this paragraph, see G. Stigler, ‘The Economics of Information’, p. 213–20; on ideas later discussed by Akerlof, see p. 224. For the example of advertising, see G. Stigler ‘The Economics of Information’, pp. 220 et seqq., for the quotes pp. 216 and 214.

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economics approach (in such light, the non-quotation of Coase’s text may be less astonishing). While it analyses the transaction costs of searching for relevant information about prices, and positions these costs in relationship to the gains derivable from such information, it does not consider the role of institutions (especially legal institutions) in enhancing and facilitating such a search. Rules that mandate interest rates to be quoted annually, for instance, might make it easier for a borrower to understand the relative prices of various loans. An annual percentage rate includes all costs and fees (from interest rates, handling fees, insurance premiums and fees for assessing the value of assets which secure the loan, to loan premiums or agio, etc.), some of which are proportional to the time of use and some of which are levied just once. Encompassing all these costs and reducing them to one figure leads to a huge increase in comparability for the consumer. These types of rules, however, remain entirely unexamined by Stigler. Considered from this angle, an institutional framework for enhancing the search for relevant information was to be the path of future research, and the most important step along that path was arguably taken by George Akerlof. The case described in the introduction relates more directly to the final text discussed, written by Akerlof, and only indirectly to the two texts discussed so far from which information concepts and information economics started off. For von Hayek, decentralized information only has advantages given that only ‘sufficient’ overlapping is necessary for markets to work. For Stigler, decentralized information is the source of differences in price that are then levelled out by arbitrage. The case, however, shows the dark side of dispersed knowledge. It shows that even if two of three partners know about a fact (payment of additional fees), this might not only lead to non-performance in the individual relation. Indeed, if an agent such as an investment advisor owes the duty to act in the best interests of their principal – and they do so in all Western jurisdictions and for good reason17 – violation accounts only for part of the losses of this duty. This individual duty was in fact violated in the case described. Disgorgement of additional fees by the third party to the investment advisor furthers the cause of the latter, potentially increases the business of the former (this is their expectation and motivation), but all this comes at the price of (at least) putting at risk the interests of the client to receive the best advice. The case, however, also shows that this does not create problems for the individual relationship alone. It also endangers the function of markets that overall should

17

See Chapter 20; and for a comparative view on the agent’s duty to act in the best interests of the principal in the EU, see R. Kraakman et al., The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd ed., Oxford: Oxford University Press, 2017), namely pp. 29–47 (J. Armour / H. Hansmann / R. Kraakman) and pp. 109–43 and 145–69 respectively (G. Hertig / H. Kideki, with J. Armour and L. Enriques and M. Purgendler respectively); M. Andenas / F. Wooldridge, European Comparative Company Law (Cambridge: Cambridge University Press, 2009), pp. 265–376 (passim); C. Gerner-Beuerle / M. Schillig, Comparative Company Law (Oxford: Oxford University Press, 2019), pp. 551–668; N. Reich, ‘The Interrelation between Rights and Duties in EU Law: Reflections on the State of Liability Law in the Multilevel Governance System of the Union’, 29 Yearbook of European Law 112–63 (2010), at 152–5.

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serve the (social!) cause that resources are allocated efficiently, that is, where they warrant most utility (for instance, measured in return). This market function is put at risk as well.18 In both respects, the source of the problem is constituted by the lack of knowledge of the client in the case described (potentially in addition also by the fact that they do not understand the mechanism of the conflicts of interest in such cases). Indeed, the core problem of market economies – based on decentralized knowledge – rests in the difficulty of finding enough overlapping knowledge – enough to warrant a functioning of markets as if the relevant information was really at hand. While von Hayek guesses that there is enough such overlapping, Stigler describes situations where there is not, but does not judge this finding to be alarming. To the contrary, he sees the incentive effect this situation has for those using differences in price for arbitrage (and thus levelling out the lack of overlapping information). An additional case would seem to address indeed more directly the concerns that such forms of use of non-overlapping information may raise. It may even be that big data processing is currently opening a whole arena for such cases. In Brazil, Decolar was convicted of using big data about the client to increase prices – similar to alleged practices of Uber in the United States, for instance, the knowledge that a client has a flight to catch shortly (and is currently at risk of missing it) or that the battery of their mobile is low and sufficient for only one or two more calls. Such use of big data was seen to constitute a crime of unfair trade practices.19 The idea behind this holding – currently discussed in many countries and internationally and indeed often shared20 – might be to distinguish three strands of cases. In the first, it is said that the use of public information, also if big data analysis was used, does not harm anybody directly. This was famously already put forward as an argument long before big data processing (even for non-public information), namely when insider dealing 18

19

20

On this overspill effect from harming the individual relationship to harming the market function, so abundantly described, see N. Moloney, EC Securities Regulation (3rd ed., Oxford: Oxford University Press, 2014), pp. 564–71; apparently, however, of little importance in UK practice, see: A. Alcock, The Financial Services and Markets Act 2000: A Guide to the New Law (Bristol: Jordan Publishing, 2000), pp. 178–80 (‘In the UK, such private resort to the courts has been much rarer’); groundbreaking for German capital market law where private law suits indeed abound in this area: K. Hopt, Kapitalanlegerschutz im Recht der Banken (Munich: Beck, 1975), pp.51 et seq., pp. 334–7; F. Ku¨bler, ‘Anlageberatung durch Kreditinstitute’, Zeitschrift fu¨r das gesamte Handels- und Wirtschaftsrecht 145 (1981) 204–38, at 205 et seq. The so-called Decolar case (Decolar.com): discrimination according to place of use of computer via geopricing mechanism contained in platform algorithm. See Inque´rito Civil n. 247/2016 5a PJDC of 25 January 2018 and Inque´rito Civil n. 359/2017 5a PJDC of 6 December 2018; 7th chamber of Poder Judiciario do Estado do Rio de Janeiro of 19 August 2019, Recourse n. 0002693–88.2019.8.19.0000; see also Bra Na Rede, ‘Brazil’s Decolar.com Is in Hot Water for Geopricing Allegations’, 22 June 2018, available at https://bit.ly/3fqLyMb. S. Barocas / A. Selbst, ‘Big Data’s Disparate Impact’, 104 California Law Review 671–732 (2016); M. Ebers, ‘Beeinflussung und Manipulation von Kunden durch Behavioral Microtargeting’, Zeitschrift fu¨r IT-Recht und Recht der Digitalisierung (MMR) 423–8 (2018); P. Hacker, ‘Personal Data – Exploitative Contracts and Algorithmic Fairness – Autonomous Vehicles Meet the Internet of Things’, 17 International Data Privacy Law 266–86 (2017); J. Mikians, ‘Detecting Price and Search Discrimination on the Internet’, 60 Association for Computing Machinery 79–84 (2012); S. Navas Navarro, ‘Discrimination and Online Platforms in the Collaborative Economy’, 8 Journal of European Consumer and Market Law 34–8 (2019); C. Tschider, ‘Regulating the Internet of Things: Discrimination, Privacy and Cybersecurity in the Artificial Intelligence’, 87 Denver Law Review 87–143 (2018).

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had been declared to constitute only a ‘victimless crime’ by H. Manne – before, at closer scrutiny, an important victim was indeed found (issuers, their cost of raising capital, and indeed the function of capital markets as such).21 In the second, use of such information – with or without big data processing – is such that it is foreseeable to all clients and applied in the same way to all. This is, for instance, the case when price discrimination is made dependent on availability (first come first served/best price served), for instance when offers typically come at a lower price when accepted earlier. In the third – part of which is the Uber case – the shocking element that allows characterization as an ‘unfair trade practice’ would seem to lie in the combination of two aspects. This is, on the one hand, discrimination based on personal data (not objective, such as the time gap still remaining until the service) and, on the other hand, an element of extraordinary need. Discovering the latter systematically, via use of big data, would seem to be considered shocking. The taking away of the freedom that lies in the fact that the overlapping of dispersed information is not total, but partial – in this particular case a unilateral taking away of that potential of freedom – is incriminated. What would not be allowed is the systematic reduction of the line of freedom that lies in a less than complete overlap of dispersed information. One might even say that von Hayek’s vision not only accepts that knowledge is dispersed and incomplete in each actor – this being cured by mechanisms of overlapping – but that the market mechanism even requires that this be the case (and that this mechanism not be circumvented). This, however, already crosses the line is to the cases where disclosure is required (see Section IV). Conversely von Hayek and Stigler are concerned with the handling of the line of efficiency of the use of knowledge. They discuss how, despite this lack of complete overlap, dispersed information might still function in society and how it may be profited from and reduced via individual action. IV Akerlof’s 1970 article is perhaps the most widely known of the three texts discussed here, at least in private law theory. It would probably best be examined along with two others, by M. Spence and by J. Stiglitz, each written within the five years following the publication of Akerlof’s key text. The three jointly received the Nobel Memorial Prize in Economic Sciences in 2001 for the ideas they developed in a close time range. These ideas all concern the question how legal institutions can enhance the distribution of information in a way that makes markets function (either better, or at all) and how the lack of such institutions can lead to adverse selection in markets, or in certain cases, to a total market failure. Akerlof describes the latter case as ‘the market for lemons’. The phrase is intended not only to invoke a market where lemons – products of poor quality – are sold, but one which 21

This characterization in: H. Manne, ‘Insider Trading and Property Rights in New Information’, 4 Cato Journal 933–57 (1984), at 937. The core problem with insider dealing is that the counterparts – professional traders – systematically lose out and therefore charge a risk premium, which accordingly and systematically increases the cost of raising capital. Gains are thus privatized, losses socialized: see P. Fenn / A. McGuire / D. Prentice, ‘Information Imbalances and the Securities Markets’, in K. Hopt / E. Wymeersch (eds.), European Insider Dealing: Law and Practice (London: Butterworths, 1991), pp. 3–19, at p. 8; H. Schmidt, ‘Insider Regulation and Economic Theory’, in: K. Hopt / E. Wymeersch (eds.), European Insider Dealing, pp. 21–37, at pp. 24 et seq. and pp. 26 et seq.

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systematically drives producers in the direction of producing lemons (i.e., to go for lemons).22 Akerlof specifies in his subtitle that he is concerned with uncertainties about quality, and thus the aspect of the market mechanism complementary to that discussed by Stigler. Whereas Stigler explicitly wanted to deal with homogeneous products (with variable prices in the same units of money) and the market mechanism, Akerlof deals with heterogeneous (good and bad) offers or products and the market mechanism. Akerlof’s aim is to provide ‘a structure [i.e., an analytical framework] . . . for determining the economic costs of dishonesty’23 (note that later authors would blunt the connotations of ‘dishonesty’ by deploying the term ‘information asymmetry’). His concern, in other words, is the potential social cost, the decrease in overall welfare, where one party to a transaction can base its decision on decisively more information than the other party has access to. This is not – or at least not primarily – about the private costs to the party thus ‘cheated’, but about the social cost. That the social cost is huge is already alluded to in Akerlof’s introductory section, where he cites ‘business in underdeveloped countries’ and indicates that unaddressed information asymmetries may account for much of the significant difference in overall welfare found between developed and underdeveloped countries or economies. This introductory section, however, also points to institutions that might help cure the problem. There are at least three. First, brand-name goods greatly increase the visibility of quality goods, in that brands act as a warranty that goods will be of consistent quality. Second, information intermediaries (‘private institutions’) can help level out information asymmetries, even where their information position may be ‘nonatomistic’, that is, characterized by concentrations of power.24 A third possibility is 22

23 24

More recent empirical studies in Europe would seem to indicate this is not necessarily the case in all markets (which raises the question of the best regulatory approach to such markets). However, these studies should not be read as questioning Akerlof’s general findings across markets: see E. Bond, ‘A Direct Test of the “Lemons” Model: The Market for Used Pickup Trucks’, 72 American Economic Review 836–40 (1982); M. Pratt / G. Hoffer, ‘Test of the Lemons Model: Comment’, 74 American Economic Review 798–800 (1984); J. Lacko, Product Quality and Information in the Used Car Market (Washington: Bureau of Economics Staff Report to the Federal Trade Commission, 1986); D. Genesove, ‘Adverse Selection in the Wholesale Used Car Market’, 101 Journal of Political Economy 644–65 (1993); R. Porter / P. Sattler, Patterns of Trade in the Market for Used Durables: Theory and Evidence (Cambridge / MA: National Bureau of Economic Research, 1999); W. Emons / G. Sheldon, The Market for Used Cars: A New Test of the Lemons Model (London: Centre for Economic Policy Research, 2002); C. Adams / L. Hosken / P. Newberry, ‘Vettes and Lemons on eBay’, 9 Quantitative Marketing and Economics 109–27 (2011). For this and further quotes in this paragraph see G. Akerlof ‘The Market for “‘Lemons”’, 488. See fn. 11. The position of information intermediaries has convincingly been explained as one which may tend towards a natural monopoly, because information is characterized by being reproducible at virtually no cost and having virtually no cost for additional uses (since there is no marginal costs for any new ‘good’; here ‘use of the information’). For the combination of high fixed (and sunk) costs, in the production of information, and low variable costs, in each re-use of information, as the source of ‘natural monopolies’, see: H. R. Varian, Intermediate Microeconomics (9th ed., New York: International Student Edition, 2014), pp. 469 et seq. On critical aspects and voices which can be seen as well, see G. L. Albano / A. Lizzeri, ‘Strategic Certification and Provision of Quality’, 42 International Economic Review 267–83 (2001); A. Lizzeri, ‘Information Revelation and Certification Intermediaries’, 30 The RAND Journal of Economics 214–31 (1999); A. R. Admati / P. Pfleiderer, ‘A Monopolistic Market for Information’, 39 The Journal of Economic Theory 400–38 (1986). Some authors claim that such monopolies should be organized or at least controlled by the state, see J. Stiglitz, ‘Knowledge as a Global Public Good’, in I. Kaul / I. Greenberg / M. A. Stern (eds.), Global Public Goods: International Cooperation in the 21st Century (New York: Oxford University Press, 1999), pp. 308–25.

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‘governmental intervention [namely: mandatory regulation which] may increase the welfare of all parties’; again, social – rather than private – cost is the main concern. Akerlof’s paper therefore deals very substantially with legal institutions that correct markets and market failure, and thus contribute to the functioning of markets. The first two sections following the introduction present examples, while at the same time already developing the analytical argument and framework. The first example is that of motor vehicles and, surprisingly, it deals primarily with used, rather than new, cars. With respect to new cars, nobody knows whether a particular vehicle being sold is a good one or a bad one (a lemon) and, because there is an expectation calculation, it seems plausible that the price paid represents an average over the possible outcomes. The picture changes dramatically, however, when cars are being resold by their initial owners (soon after the initial sale). At this point, a reseller, according to Akerlof, will have quickly realized that their car is either a good one or a bad one, while second purchasers lack this knowledge. Importantly, this example illustrates the information asymmetry between resellers and second purchasers, rather than between producers and clients (where, according to Akerlof, there is a lack of information on both sides of the bargain, but no asymmetry). Various consequences follow. The initial purchaser of bad samples will have a greater incentive to resell quickly, and secondary purchasers will accordingly expect problematic cars to be more common on the resale market, leading them to adjust the prices they are willing to pay downward. For the initial purchaser of a good car, there are two negative effects. Secondary purchasers who are not able to assess the quality of the car will: (i) pay the same expectation price for all cars, rather than paying a higher price for the better ones, and, worse, (ii) the expectation price is set at the level appropriate for the bad cars, as most sold at this moment are of low quality. This accounts, according to Akerlof, for the huge price difference between completely new cars on the one hand (purchased in a situation where there is no information asymmetry, but uncertainty or information deficit is universal) and, on the other hand, for used cars sold a short time after purchase. The difference cannot be explained as a mere discount for the use of the car made by the reseller during the first weeks or months, which would be much more limited. These two adverse effects for hopeful resellers of good cars become even more dramatic (‘even worse pathologies can exist’)25 when we consider producers who market products systematically (Akerlof discusses markets ‘with different grades of goods’): ‘It is quite possible to have the bad driving out the not-so-bad driving out the medium driving out the not-so-good driving out the good in such a sequence of events that no market exists at all.’ The sequence is characterized by the fact that the demand side can never assess the quality (where there is structural, not only casual information asymmetry). It is therefore willing to pay only the expectancy price at (or near) the price of the lowest quality. Where this price no longer suffices for the investment producers need to make to produce goodquality products the higher-quality products are gradually driven out by those of lower quality. This consequence is more dramatic in that it affects markets overall, that is, it 25

Quotes in this paragraph: G. Akerlof, ‘The Market for “‘Lemons”’, at pp. 490 et seq.

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produces a huge social cost (not only costs for one unlucky reseller, which is only a ‘private cost’). The social costs are huge, either because efficient allocation no longer takes place or because offers are not made at all. In fact, the overall effect may be that payments are made to lower-quality producers, that is, the selection is not according to quality (‘adverse selection’) and the market function of allocation according to quality and price is no longer maintained. Even worse, the market might collapse altogether. If the worst quality expected is such that the demand side is only willing to pay a price which does not suffice for production at all, the result is that ‘at no price will any trade take place at all’. At this point, the market is not only characterized by adverse selection, but disappears altogether. The same applies to old-age health insurance26 and to job selection according to race. The latter is vitiated by the fact that certain races predominantly come from schools that do not differentiate properly with respect to abilities. The healthier potential insureds, and the more gifted individuals from racial minorities are both driven out by having been bundled into the same box as those with the largest health problems or the least gifted (in each case because of insurmountable information asymmetries). The factual analysis may be questionable in certain cases. Nonetheless, the model is powerful and general. Market participants who hide the quality of what they have on offer (Akerlof speaks of dishonesty) not only produce a private cost (by cheating the other party), but generate a social cost; it is the latter that is ‘the major costs of dishonesty – [that] dishonest dealings tend to drive honest dealings out of the market. . . . The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence’. The former is a matter of private cost and is generally addressed by private law’s response to such cases. The latter is a social cost, and thus the domain of market regulation theory and practice. Akerlof not only provides a powerful analytical lens, but helps to make sense of various interventions to cure market functions.27 In the last section of his paper, he briefly analyses counteracting institutions which help cure the underlying problem. Despite his brevity on this latter point, he also names, earlier in the paper, information intermediaries as a market solution to these problems. These are persons or entrepreneurs who assess the quality of goods on offer, and sell a service that consists in reliably providing a quality guarantee for products offered in markets marked by high quality uncertainty (markets for lemons) – and thereby reducing that uncertainty. Yet another market solution is the gradual cultivation of reputation done by firms that act honestly. Finally, Akerlof points to the use of brand names and the like (including licence agreements, franchising and related ‘stamps’ of quality). One may, however, also come back to the start of the article. There, Akerlof pleads for government intervention in such markets. At almost the same moment Akerlof was developing his theory, legislatures were following this path into an area which has been convincingly characterized as the paradigm of a market for lemons: the area of unfair 26 27

G. Akerlof, ‘The Market for “‘Lemons”’, at pp. 492 et seqq.; quotes in this paragraph at pp. 494 et seq. For quotes and ideas in this paragraph, see G. Akerlof, ‘The Market for “‘Lemons”’, at pp. 496–500.

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standard contract terms.28 Today, it constitutes one of the (if not the) prime example(s) of a market where governmental intervention reaching beyond the mandatory transfer of information disclosure is needed. The case exposed in the introduction refers to the first solution named, information intermediaries. It addresses the fact that, while such intermediaries may overcome information asymmetries, they may also pose new problems (information asymmetries), now with respect to their neutrality and hence the quality of their service. Thus, investment advice given may overcome the structural information asymmetry residing in the huge amount of information needed to assess the quality of a firm into which to invest (too huge to be written off in an investment of limited amount). The case, however, shows that intermediaries themselves have incentives that can be distorted, namely when some investments made by clients lead to better remuneration for them than others do. In those cases, the intermediary may well have the necessary information base to overcome the initial information asymmetry (the intermediary can profit from economies of scale), but may, however, not have the right incentive to use this knowledge really in the best interest of the client – namely for the investment with the best ratio of risk and return for the client – but rather follow their own remuneration interest. One approach to cope with this secondary information asymmetry (and problem) is to disclose its source – the additional fees – and let the client then take a decision. A more rigorous solution, potentially cumulated with the first one, would be to do away with the source of the adverse incentive altogether. This is the approach taken by the Swiss Supreme Court by mandating not only disclosure, but disgorgement of any additional fee. Such a more rigorous solution can be motivated by either the fact that no information had been given (as in the Swiss case) and therefore no choice was taken by the client; it can, however, also be motivated by the fact that the client (even in cases where disclosure has taken place) may not have the cognitive capability of assessing the risks of adverse incentives properly (be subject to cognitive biases and therefore require protection). Two texts closely linked to the Akerlof paper (as recognized by the Nobel Prize committee) are of particular importance and complement Akerlof’s considerations about institutions aimed at curing information asymmetries. These are the papers by Michael Spence on ‘signalling’ and by Joseph Stiglitz on ‘screening’, published in the wake of Akerlof’s seminal paper.29 The concept of signalling describes the efforts of a market participant (or a member of an organization) to eliminate uncertainty about the quality or value of his products or services on offer. The dominant example is education and the job market, which is a core example used by a large number of authors

28

29

¨ konomische Begru¨ndung des AGB-Gesetzes: Vertra¨ge bei asymmetrischer Information’, See M. Adams, ‘O Betriebsberater 781–8 (1989), at 787; E. G. Furubotn / R. Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics (2nd ed., Ann Arbor: University of Michigan Press, 2005), pp. 241–6; H.-B. Scha¨fer / C. Ott, Lehrbuch der o¨konomischen Analyse des Zivilrechts (5th ed., Berlin: Springer, 2012), pp. 552–7. M. Spence, ‘Job Market Signaling’, 87 Quarterly Journal of Economics 355–77 (1973); J. Stiglitz, ‘The Theory of Screening, Education and the Distribution of Income’, 65 The American Economic Review 283–300 (1975).

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following the fundamental findings on uncertainty.30 The argument is that persons who cannot directly prove their capacity to produce better results at work can do so indirectly via signals; for instance, through exams at school, or professional qualifications which only a certain number of the participants in markets have passed. The signal given is that the capacity to study successfully implies a capacity to adapt quickly, even though the area in which the work is needed may be completely different. The concept of screening describes the efforts of the other side of the market. These are persons who suffer from their uncertainty about the quality or value of offers on the market. A particular solution, information intermediaries, is already broached in Akerlof’s paper and is developed by Stiglitz in considerable detail. Questions regarding the expertise or neutrality of such intermediaries – as in the Swiss case – then have enormous repercussions in regulatory approaches to markets and organizations; for instance in financial services regulation, the mandatory auditing of accounts or, especially today, regulation of rating activities.31 V All three texts, taken together, unfold the analytical framework for assessing the power and the effects of information. All three account for the departure from neoclassical assumptions regarding full and costless information. They thus prepare the ground for the information paradigm: the importance of information, its use for rational decision-taking and also the need for mandatory disclosure of such information to the party in need of it.32 Mandatory information rules can thus be seen as mandatory in form but not in substance; they aim to foster a party’s autonomous choice by facilitating rational decision-taking.33 30

31

32

33

See the examples given by J. G. Riley, ‘Silver Signals: Twenty-Five Years of Screening and Signaling’, 39 Journal of Economic Literature 432, 459–467 (2001); Spence also cites these ideas in M. Spence, Market Signaling: Informational Transfer in Hiring and Related Screening Processes (Cambridge / MA: Harvard University Press, 1974), at pp. 5–31. Neutrality requirements (preferably avoidance, in any case disclosure of conflicts of interests) are found in Arts. 13 and 18 Directive 2004/39/EC (see fn. 5, MiFID I], EC OJ 2004 L 145/1, then Arts. 16(3) and 23 of Directive 2014/65/EU (fn. 5, MiFID II], EU OJ 2014 L 173/349; in Arts. 22, 24, and 42 of Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC, OJ 2006 L 157/87; and in Art. 6(1) Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, O.J. EC 2009 L 302/1. On the much-debated need for regulation with respect to disclosure (not only on signalling and screening), see, for a positive view, W. Scho¨n, ‘Corporate Disclosure in a Competitive Environment: The Quest for a European Framework on Mandatory Disclosure’, 6 Journal of Corporate Law Studies 259–98 (2006); J. C. Coffee, ‘Market Failure and the Economic Case for a Mandatory Disclosure System’, 70 Virginia Law Review 717–53 (1984); N. Moloney, EU Securities and Financial Markets Regulation (3rd ed., Oxford: Oxford University Press, 2014), 127–51; J. Seligman, ‘The Historical Need for a Mandatory Disclosure System’, 9 Journal of Corporate Law 1–61 (1979); for a negative view, see S. Grossmann, ‘The Informational Role of Warranties and Private Disclosure of Product Quality’, 24 Journal of Law and Economics 461–83 (1981); Spence, Market Signaling; see also Chapter 9: Democracy and Private Law. See S. Grundmann, ‘Information, Party Autonomy and Economic Agents in European Contract Law’, 39 Common Market Law Review 269–93 (2002); W. Scho¨n, ‘Zwingendes Recht oder informierte Entscheidung: zu einer (neuen) Grundlage unserer Zivilrechtsordnung’, Festschrift for Canaris (Munich: Beck, 2007), pp. 1191–211; and more broadly: S. Grundmann / W. Kerber / S. Weatherill (fn. 14).

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The information paradigm can nowadays be seen as the dominant regulatory approach, at least in consumer law, capital market law and, in part, in corporate law as well. The paradigm seeks to cure market insufficiencies mainly through mandatory disclosure rules which emphasize private, autonomous decision-taking; that is, rules aimed at facilitating and empowering the decision-makers themselves.34 With this observation, a more general question is raised: which markets are suited to thick, standardized regulation (often mass transaction markets), and which are more conducive to private ordering or, indeed, ‘no law’ as more promising strategies (see Chapters 17 and 27)? Standardization and anonymity versus tailor-made solutions and individual trust relationships play a role in answering this question. However, for the development of information economics and theory, the following summary is proposed. While von Hayek focuses on the brute fact of a decentralized allocation of knowledge and the consequent advantages of decentralized decision-making, Stigler analyses the costs and gains of increasing the availability of information for homogeneous offers, whereas Akerlof paves the way to information regulation by analysing the detrimental – even destructive – effects of a lack of information. There is one fundamental step in the development of information theory (and economics) not yet mentioned: the fear of information overkill. While overcoming a surfeit of information is also part of the search costs approached and analysed by Stigler, another angle on the topic is found in the research on bounded rationality (on bounded rationality, see Chapter 3, Section IV with respect to its foundations in economic theory, and Chapter 11, Section IV for its role in the negotiation process).35

34

35

See the references ibid. For more detail, see U. Grohmann, Informationsmodell im Europa¨ischen Gesellschaftsrecht (Berlin / New York: de Gruyter, 2006) (company law); and S. Grundmann / W. Kerber / S. Weatherill (fn. 14) (for all areas of private law). For highly influential texts on information overkill, see (for an initial, but very controversial paper on consumer law) J. Jacoby / D. Speller / C. Kohn, ‘Brand Choice Behavior as a Function of Information Overload’, 11 Journal of Marketing Research 63–9 (1974); today particularly outspoken: O. Ben-Shahar, ‘The Myth of “Opportunity to Read” in Contract Law’, 5 European Review of Contract Law 1–28 (2009); O. BenShahar / C. Schneider, More than You Wanted to Know: The Failure of Mandated Disclosure (Princeton / NJ: Princeton University Press, 2014); E. Kieninger, ‘Informationspflichten als Allheilmittel des Verbraucherschutzrechts? Pla¨doyer fu¨r eine Dosisreduktion’, Deutscher Juristentag 1–29 (2012); rejecting the concept D. Grether / A. Schwartz / L. Wilde, ‘The Irrelevance of Information Overload: An Analysis of Search and Disclosure’, 59 Southern California Law Review 277–303 (1986); in answer to this M. Eisenberg, ‘Text Anxiety’, 59 Southern California Law Review 305–11 (1986); more recently also R. Korobkin, ‘Bounded Rationality, Standard Form Contracts and Unconscionability’, 70 The University of Chicago Law Review 1203–95 (2003). For a review of the literature from a consumer law perspective, see J. Bettman / M. Luce / J. Payne, ‘Constructive Consumer Choice Processes’, 25 Journal of Consumer Research 187–217 (1998), at 200; for a review of the literature from an information science and business perspective, see A. Edmunds / A. Morris, ‘The Problem of Information Overload in Business Organisations: A Review of the Literature’, 20 International Journal of Information Management 17–28 (2000).

13 Private Power Moritz Renner

a topic and materials I This chapter deals with the question of how constellations of private power are addressed by private law. Private law is often conceived as governing the relations of free and equal citizens (see Chapter 6). In reality, however, some private actors are more powerful than others; large corporations may have more bargaining power than their customers or employees. Competition between different market actors is never perfect and many markets, for example in the tech industry, are dominated by only a small number of players. The theory and practice of private law has long struggled with these realities. Globalization and technological innovation have, in some instances, rendered the problem even more acute. This is especially true for platforms such as amazon.com, which increasingly shape competition across various markets. Here, proponents of the New Brandeis school of antitrust law argue that antitrust policy should no longer focus on consumer price effects alone, but take into account broader measures of competition.1 The case in Box 13.1 demonstrates how powerful private actors, in this case a sports association, might wield considerable power over individuals through rules and sanctions. This inevitably raises the legal question whether and to what extent such rules and sanctions are lawful and legitimate. At first sight, the case seems to concern a rather idiosyncratic constellation: anti-doping sanctions of an ice-skating association against one of its members. At the same time, the problems that are raised in the case are pervasive problems of private law: contracts between parties with unequal bargaining power, the validity of standard terms, the law of private associations, and the relationship between arbitral tribunals and state courts. Behind these problems stands the more general issue of private power. Before the case went to the Federal Supreme Court, a German appellate court had ruled in favour of the claimant. The appellate court had argued that the respondent had abused its dominant market position and that, therefore, the arbitration agreement between the claimant and the respondent was invalid. Thus, the appellate court had tried to address the problems 1

Most notably Lisa M. Khan, ‘Amazon’s Antitrust Paradox’, 126 Yale Law Journal 564 (2017).

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BOX 13.1 CASE STUDY

Pechstein/International Skating Union, German Federal Supreme Court, judgment dated 7/6/2016 – KZR 6/152 The claimant, Claudia Pechstein, is a famous German speed skater. Before taking part in the speed skating world championship in Norway in 2009, the claimant signed a registration form issued by the respondent, the International Skating Union headquartered in Switzerland, which is the only association organizing speed skating competitions at the international level. The registration form contained, inter alia, an obligation to comply with the respondent’s anti-doping rules. In conjunction with the registration form, the claimant also signed an arbitration agreement which provided for the Court of Arbitration for Sports (CAS) in Lausanne to be the arbitral tribunal and excluded recourse to the regular courts. Blood samples were taken from the claimant at the world championship in Norway, which the respondent considered to be proof of doping. The disciplinary commission of the respondent decided to ban the claimant for prohibited blood doping from international competitions for two years, to annul the results achieved by the claimant in the world championship and to take away the points, prizes and medals of the claimant. As a result of this ban, the claimant’s status as a member of the German team for the 2010 Winter Olympics was suspended. The CAS dismissed the claimant’s appeal against the measures taken by the respondent. After unsuccessfully challenging the arbitral award in Swiss courts, the claimant asked the German Federal Supreme Court to determine that the measures taken by the respondent were illegal and that she was entitled to damages and compensation. The claimant argued that the arbitral process was fundamentally unfair as arbitrators for the CAS were appointed by sports associations, while athletes had no immediate say in the appointment procedure.

raised by the case with the instruments of antitrust law. However, the concept of market domination is not easily applied to the case. While the claimant stressed that sports associations appointed CAS arbitrators, the respondent itself was only one of six winter sports associations that together had the right to appoint one of the arbitrators. As in many cases, the mechanisms of power and domination that are at play here are not as obvious as they might seem at first sight. II The problem of private power has always been a concern of private law theory. Historically, concepts of justice in private law (see Chapter 10) have often focused on the interrelationship of freedom and equality. Both freedom and equality, however, are in 2

English translation published in Zeitschrift fu¨r Schiedsverfahren 2016, 268.

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BOX 13.2

Franz Bo¨hm, ‘Democracy and Economic Power’, in Institut fu¨r ausla¨ndisches und internationales Wirtschaftsrecht an der Johann-Wolfgang-Goethe-Universita¨t Frankfurt am Main (ed.), Kartelle und Monopole im modernen Recht (Karlsruhe: C. F. Mu¨ller, 1960), pp. 25–46 Michel Foucault, ‘Truth and Power’, in Colin Gordon (ed.), Power/Knowledge: Selected Interviews and Other Writings 1972–1977 (New York: Pantheon Books, 1980), pp. 109–33

danger when certain actors become so powerful that they can effectively impose their will on less powerful actors. In legal practice this problem has first been addressed in contract law, before specialized rules of antitrust law were developed. The debate of the problem has always been highly politicized, as is evidenced by the first reference text of this chapter, an article by Franz Bo¨hm (see also Chapter 6), one of the masterminds of the so-called ordo-liberal school and one of the early proponents of antitrust law in Germany. In Germany before World War II, Bo¨hm’s ideas met with a rather hostile political reception. The German discussion of the time is evidence of the struggle between proponents of a liberal market economy and defenders of the traditionally oligopolistic structure of the German economy. The reference text, however, dates from the 1960s, a time when an effective regime of antitrust law had finally been established under European and German law. The text is particularly interesting, however, because it draws a connection between private power and political freedoms, relating the absence of economic power with the very possibility of liberal democracy. The second reference text of this chapter dates from the early 1970s, but it takes a completely different view on the problem of private power. Michel Foucault, one of the most influential public intellectuals in post-war Europe, explains in this famous interview how, in his view, power is a creative force that permeates all social relations, public and private. This implies a very broad, and sometimes varying, concept of power that acknowledges the highly ambivalent – and not purely negative – effects of power relations. Foucault’s praise of the positive effects of power, however, does find some parallels in the work of early institutional economists such as Manne and Williamson (see Chapters 17 and 21). (See Box 13.2.) While Bo¨hm’s writings have been quite influential on the theory and practice of competition law in Continental Europe, the influence of Foucault’s work on legal thought remains harder to grasp. Foucault himself deals with some legal aspects of his concept of power in his influential book Discipline and Punish, which, however, focuses on criminal law. It is only in more recent publications, such as the article by Victor Tadros, that the broader import of Foucault’s theory of power for legal theory has been discussed. In the social sciences, the influence of Foucault’s theory has been considerable, as is evidenced in Steven Lukes’ book. (See Box 13.3.)

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BOX 13.3

Michel Foucault, Discipline and Punish: The Birth of the Prison (2nd ed., New York: Vintage Books, 1995) Steven Lukes, Power: A Radical View (2nd ed., Basingstoke: Palgrave Macmillan, 2004) Victor Tadros, ‘Between Governance and Discipline: The Law and Michel Foucault’, 18 Oxford Journal of Legal Studies 75–103 (1998)

b theories, context and discussion I The concept of private power is not a concept of private law. Yet the concept is pervasive in private law thinking. In contract law, unequal power relations between the contracting parties are addressed by apposite protective rules, most visibly in the field of labour and consumer law. Family law seeks to limit and legally bind the power of parents and to balance out inequalities in the relationship between spouses. Most importantly, antitrust and competition law aims at preventing the accumulation and limiting the scope of private actors’ economic power. Yet, the relationship between competition law and classical private law doctrine has always been an uneasy one because it is not only complex but may even seem paradoxical. Private law empowers economic actors to use their freedom of contract in order to pursue their economic goals. It protects property rights in order to set incentives for economic activity. At the same time, such economic activity always threatens to undermine its own normative preconditions: contracts can be used to form cartels or trusts and thus to limit freedom of contract, whereas monopolistic property rights arguably cancel out incentives for economic innovation.3 It was only in the late nineteenth and early twentieth century that these threats were first addressed by antitrust law. In many countries, the courts began to develop a ban on cartels by reinterpreting the general clauses of private law, such as the principle of good faith. In the United States, the Sherman Antitrust Act was introduced in 1890. In Germany, however, the courts refused to tackle the monopoly problem that arose from the abuse of contractual freedom, holding cartels and trusts to be conducive rather than harmful to economic prosperity and stability.4 3

4

This is a matter of dispute in competition theory. The argument of a strong connection between competition and innovation has been brought forward most notably by Kenneth J. Arrow, ‘Economic Welfare and the Allocation of Resources for Invention’, in Universities-National Bureau Committee for Economic Research (ed.), The Rate and Direction of Inventive Activity: Economic and Social Factors (Princeton / NJ: Princeton University Press, 1962), pp. 609–26. The contrary position is taken, among others, by Joseph Alois Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper, 1942). This stance was epitomized in the decision of the German Reichsgericht in the Holzstoffkartell case, RGZ 38, 155.

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Against the background of these developments, in the 1920s and 1930s the lawyer Franz Bo¨hm, together with economist Walter Eucken and others, laid the foundations for the ordo-liberal school of economics, which posits as one of its main goals the protection of a workable economic competition through antitrust law, led by the idea that any market economy is based on a set of certain ‘rules of the game’ - an economic ordo established by the state (see also Chapter 6). Bo¨hm’s article on ‘Democracy and Economic Power’, the first reference text of this chapter, was published much later. In this article, which is based on a lecture given in 1960, Bo¨hm sets out to analyse the conceptual connections between a competitive market economy and a democratic society. He thus tries to integrate the concept of the economic ordo into the reality of the European democracies after World War II. The works of Franz Bo¨hm remain highly influential for contemporary debates in European antitrust law as well as for the more general discussion of private power and the law. Bo¨hm’s concept of economic power, however, remains rather limited in its reach. It is largely oriented alongside the classic definition of power by Max Weber, according to which power is ‘the probability that one actor within a social relationship will be in a position to carry out his own will despite resistance, regardless of the basis on which this probability rests’.5 In social sciences, many concurring definitions of power in social relations have evolved in the last decades. Most notably, Michel Foucault’s analysis of the ‘dispositives of power’ has shown how power relations, rather than being a mere exception, pervade social relations and institutions as a ‘normalizing force’: in our use of language, in educational institutions, religion and the law.6 These developments in the social sciences are condensed in a famous interview with Michel Foucault, which serves as the second reference text of this chapter. They have yet to be taken up by the theory of private law. Yet already today, they seem to be – more or less consciously – mirrored by current trends in private law legislation. Specifically, the European law on anti-discrimination aims at addressing those social power structures that perpetuate discriminatory and socially exclusive behaviour beyond clearly established cause-and-effect relations, be it through a certain use of language or seemingly neutral contracting practices disproportionally affecting minority groups. II Franz Bo¨hm’s lecture on ‘Democracy and Economic Power’ begins with a question: are free market economies incompatible with economic power? Bo¨hm’s initial answer to this question is negative: even in a ‘monopoly-ridden free market economy’ the price mechanism is, in principle, functional.7 A monopolized economy may or may not lead to more 5

6 7

Max Weber, Economy and Society: An Outline of Interpretive Sociology (Berkeley: University of California Press, 1978), p. 53; similarly Robert A. Dahl, ‘The Concept of Power’, 2 Behavioral Science 201 (1957). Michel Foucault, The History of Sexuality: An Introduction (New York: Pantheon Books, 1978). Franz Bo¨hm, ‘Demokratie und o¨konomische Macht’, in Institut fu¨r ausla¨ndisches und internationales Wirtschaftsrecht an der Johann-Wolfgang-Goethe-Universita¨t Frankfurt am Main (ed.), Kartelle und Monopole im modernen Recht (Karlsruhe: C.F. Mu¨ller, 1960), pp. 1–24 (English translation), p. 26.

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efficiency and lower consumer prices. Bo¨hm would assume that monopoly markets lead to suboptimal results. But the more important argument is, and here Bo¨hm meets with approaches such as the New Brandeis school of antitrust: the accumulation of economic (and that is private) power runs counter to a basic principle underlying all modern market economies, the principle of competition.8 But why is the competition principle so fundamental for market economies? This is the second and more important question Bo¨hm’s lecture poses. The way he answers the question seems – from today’s perspective – most surprising because Bo¨hm claims that the justification for establishing the competition principle in market economies is not an economic justification. Instead, he starts from the intuition that the rationale of antitrust legislation in the first half of the twentieth century was not concerned with ‘economic efficiency and the effectiveness of economic control, but social justice and civil liberties . . . were held to be threatened by monopolies’.9 For Bo¨hm, the idea of freedom is central in analysing the monopoly problem. He places the concept of economic competition in the context of the modern ‘private law society’ (see Chapter 6), in which all citizens can be considered free in two different regards. First, the reach of government is clearly delimited by the rule of law. Public authority is only legitimate to the extent that it is based on democratic procedures and does not infringe on individual civil liberties. Bo¨hm’s firm stance on this matter is clearly influenced by his experience under the Nazi dictatorship in Germany. Second, the interactions of private individuals are based on the principles of freedom and equality. Only under this condition can they be considered an expression of private autonomy. Against the background of this ideal-typical model of a liberal society, the phenomenon of economic power poses a conceptual problem. It is ‘developed on the soil of private law’,10 but it undermines the principles of freedom and equality by replacing market competition with structures of coercion. It thus establishes a form of authority, but this authority has no democratic source and is not limited by individual rights. Thus, the problem of economic power is in its core a problem of legitimacy: ‘Does economic power, if viewed from the angle of our political constitution and from the order content of our system of private law constitute legitimate power or not?’ and ‘Shall we, as citizens of a democratic state and members of a free system of society based on the rights of the individual, hand over such power to some of our fellow-citizens?’11 This is why Bo¨hm also sees the problem of economic power as a problem of democracy (see also Chapter 7). He understands democracy ‘as a system embracing both state and society’.12 For him, democracy ‘had in no way confined itself to transforming the absolute or limited monarchy into a democratic state’ but had 8

9

10 11 12

For an updated version of the argument Lisa M. Khan, ‘Amazon’s Antitrust Paradox’, 126 Yale Law Journal 710 (2017), 737–46 (‘Why Competitive Process and Structure Matter’). Franz Bo¨hm, ‘Demokratie und o¨konomische Macht’, in Institut fu¨r ausla¨ndisches und internationales Wirtschaftsrecht an der Johann-Wolfgang-Goethe-Universita¨t Frankfurt am Main (ed.), Kartelle und Monopole im modernen Recht (Karlsruhe: C. F. Mu¨ller, 1960), pp. 1–24 (English translation), at p. 28. Ibid. (English translation), at p. 30. Ibid. (English translation), at p. 32. Ibid., at p. 34.

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always also aimed at ‘replac[ing] the feudal society by a society ruled entirely by the rights of the individual’.13 The danger that arises from economic power is ‘the danger of a refeudalization of society’.14 This idea is explained with the consideration that economic power leads not only to economically detrimental effects such as rising consumer prices but has spill-over effects to all areas of society. Economic power is always contested, it will be fought for. It is this fight for economic power which ‘throws our system of society out of gear and threatens to corrupt the constitutional life of our democracy’.15 For Bo¨hm, private power inevitably leads to abusive practices and an infringement of individual liberties such as ‘private property and patent rights, but also the rights to trade-marks, firm names and other names’, a ‘destruction of values’.16 In the course of this process, the instruments of private law ‘transform themselves . . . into injurious weapons, means of starvation and paralysation, methods of subjection, dispossession and exploitation of other subjects of private law’.17 The development perpetuates itself by ever more inflating the size of enterprises for reasons of power politics rather than out of economic necessity. Bo¨hm sees two possible solutions to the problem of economic power: either a ‘prophylactic prevention of the establishment of economic power already in its incipient stages’ or ‘subjecting economic power to the control of constitutional state authorities’.18 Before World War II, Western democracies had predominantly opted for the second solution or a ‘mixed system’.19 For Bo¨hm the first, preventative solution seems preferable: it is more easily reconciled with the basic principles of free market economies, while the second solution is always in danger of leading to ‘a paralysation of the system of private law, an overburdening of the machinery of government and an entanglement of an unbalanced private sphere with an equally unbalanced public sphere threatened by corruption’.20 With this approach, Bo¨hm and the ordo-liberal school stand in direct opposition to socialist ideas aiming at a ‘democratization’ of economic power. In Weimar Germany, the ordo-liberal model of the economic constitution (see Chapter 6) was a response to contemporary theories of ‘economic democracy’. In 1928, Fritz Naphtali elaborated his influential theory of Wirtschaftsdemokratie,21 explicitly referring to earlier concepts of ‘industrial democracy’ developed in Great Britain.22 Naphtali’s theory aimed at ‘a democratic constitution of the economy as opposed to economic autocracy’.23 This goal was to 13 14 15 16 17 18 19 20 21

22 23

Ibid. Ibid., at p. 36. Ibid., at p. 39. Ibid. Ibid., at p. 40. Ibid., at pp. 42–3. Ibid., at p. 44. Ibid., at p. 43. Fritz Naphtali, Wirtschaftsdemokratie. Ihr Wesen, Weg und Ziel (Cologne: Europa¨ische Verlagsanstalt, 1977 [1928]). Sidney Webb / Beatrice Webb, Industrial Democracy (London: Longmans, Green, 1897). Fritz Naphtali, Wirtschaftsdemokratie. Ihr Wesen, Weg und Ziel (Cologne: Europa¨ische Verlagsanstalt, 1977 [1928]).

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be reached not by preventing the concentration of market power but by way of a ‘democratization of the economy’, that is, ‘the abolishment of all authority and the transformation of the leading organs of the economy from organs of capitalist interest into those of the common interest’.24 In the United States, similar ideas were developed by corporate lawyer Adolf A. Berle. In his 1959 book on Power without Property,25 Berle took up his earlier ideas about economic power in order to develop a theory of legitimacy, reflecting the ‘reality of economic democracy’.26 In stark contrast to ordo-liberal thought, these ideas do not aim at abolishing private economic power but rather at subjecting it to state control. Effectively, this approach has certain similarities to the earlier MarxistLeninist doctrine of ‘state monopoly capitalism’ advocating a fusion of business cartels with government institutions.27 Although ordo-liberal thought has never become mainstream economic thinking outside Germany, today most states have antitrust laws aiming at a prevention of dominant market positions.28 The EU treaties have, much earlier than German law, constitutionally enshrined an ordo-liberal concept of competition law (see Chapter 24). These provisions can indeed be attributed to the influence of German ordo-liberals such as Walter Hallstein.29 Today, Bo¨hm’s ideas have gained a new relevance. The quandaries of platform markets show the persistence of the problem of private power – and how to legally address it. In the ambit of the globalized financial system, it seems that new forms of private power arise which are not based on market shares but on interconnectedness and the inherent complexity of the financial system.30 Arguably these new forms of private power can no longer be held in check by antitrust law but need to be addressed by new regulatory approaches, among them stricter rules on the regulatory capital of banking institutions.31 The example case of this chapter, Pechstein v. International Skating Union (Box 13.1), shows that the mechanisms of private power are complex in other sectors as well. Oftentimes, there is an intricate interplay of different instruments that is enabled by the freedom of contract and of association as well as by private arbitration. In the Pechstein case, the German Federal Supreme Court was ultimately unable to determine an abuse of a dominant market position on part of the International Skating Union. 24 25 26 27

28

29

30

31

Ibid. Adolf A. Berle, Power Without Property (New York: Harcourt, Brace, 1959). Ibid. The concept of state monopoly capitalism can be traced back to Wladimir I’lich Lenin, The State and Revolution (London: Allen & Unwin, 1919). For an overview of the international regulatory landscape see Ju¨rgen Basedow, Weltkartellrecht (Tu¨bingen: Mohr Siebeck, 1998). Christian Joerges, ‘What is Left of the European Economic Constitution? A Melancholic Eulogy’, 30 European Law Review 461 (2005). For this argument see, for example, Moritz Renner, ‘Death By Complexity: The Financial Crisis and the Crisis of Law in World Society’, in Poul Kjaer et al. (eds.), The Financial Crisis in Constitutional Perspective: The Dark Side of Functional Differentiation (Oxford: Hart, 2011), pp. 93–111. An especially strong case for stricter regulatory capital standards is made by Anat Admati / Martin Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It (Princeton / NJ: Princeton University Press, 2013).

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III In the writings of Michel Foucault, the concept of power is always present.32 It is even one of the central categories of his writings, be they on the origins of language and economy,33 on the sublimation of sexuality in the Victorian age,34 on the treatment of madness in society,35 or on the disciplinary mechanisms of the prison system.36 However, in Foucault’s work, the concept of power is rather a tacit background assumption than a clearly defined variable. Seldom is the concept formulated as straightforwardly and conclusively as in the interview that is the reference text for this chapter. In his answer to the first question of this interview, Foucault makes it clear that his concept of power has been shaped by his study of scientific knowledge (savoir).37 He briefly alludes to the example of the biologist Trofim Lysenko, whose theories were scientifically unsound but forcefully put into practice in the agricultural sector of the Stalinist Soviet Union. Foucault argues that the example of Lysenko is more than a singular case, in that it reflects a more general problem of the interrelation between scientific knowledge and the political and economic structures of society. His central argument is: knowledge is not produced in a continuous process gradually leading to objective truth but rather as a consequence of changing discursive regimes. This approach shows resemblances to Thomas Kuhn’s theory of the structure of scientific revolutions and Kuhn’s idea of shifting epistemological paradigms.38 Yet Foucault takes a more radical position – or rather, his notion of discursive regimes is more encompassing than Kuhn’s concept of scientific ‘paradigms’. For Foucault, as for Kuhn, the discursive regime is not only a set of interpretive guiding principles which inform scientific progress, but much more: the discursive regime is, ultimately, equivalent to knowledge itself. Thus, Foucault’s research aims at an encompassing analysis of the social and historical preconditions under which knowledge is generated. Because of this very general scope, however, Foucault’s approach struggles with a certain vagueness of concepts. Furthermore, it remains rather unclear how the ensemble of the conditions of knowledge generation can be grasped methodically. The methodological statement Foucault makes in the reference text39 remains ambivalent with regard to Foucault’s stance towards the theory of structuralism, yet it transpires that his approach is a historical one. Foucault makes this clear by stating that he acknowledges the contingency of historical events while believing that history is still ‘intelligible and should be susceptible of analysis down to the 32 33

34 35

36 37

38 39

Steven Lukes, Power: A Radical View (Basingstoke: Palgrave Macmillan, 2004), pp. 60 et seq. Michel Foucault, The Order of Things: An Archaeology of the Human Sciences (New York: Pantheon Books, 1970). Michel Foucault, The History of Sexuality: An Introduction (New York: Pantheon Books, 1978). Michel Foucault, Madness and Civilization: A History of Insanity in the Age of Reason (New York: Pantheon Books, 1965). Michel Foucault, Discipline and Punish: The Birth of the Prison (New York: Vintage Books, 1995). Michel Foucault, ‘Truth and Power’, in Colin Gordon (ed.), Power/Knowledge: Selected Interviews and Other Writings 1972–1977 (New York: Pantheon Books, 1980), pp. 109–33, at pp. 109–11. Thomas S. Kuhn, The Structure of Scientific Revolutions (Chicago / IL: University of Chicago Press, 1962). Michel Foucault, ‘Truth and Power’, in Colin Gordon (ed.), Power/Knowledge: Selected Interviews and Other Writings 1972–1977 (New York: Pantheon Books, 1980), p. 109–33, at pp. 114–15.

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smallest detail’.40 The object of this analysis is a certain ‘discourse’, understood as the conditions of knowledge generation in a specific social field. Foucault equates these conditions with power.41 Thus, the concept of power is much wider than in the classic definition by Max Weber (‘the probability that one actor within a social relationship will be in a position to carry out his own will despite resistance, regardless of the basis on which this probability rests’),42 or economic power in the sense of the ordo-liberal school (see Section II). It is defined as the totality of social-historical conditions that determine what can be said, written – and thought. Foucault terms his approach as ‘genealogical’.43 His interest lies not so much in the prohibitive, ‘negative’ function of power but in its productive, generative function. For him, power ‘does not only weigh on us as a force that says no, but it traverses and produces things, it induces pleasure, forms of knowledge, produces discourse’.44 Therefore, he holds the concept of repression to be under-complex for analysing power and its effects, to be a ‘juridical schematism’.45 Foucault’s theory of power seeks to overcome this juridical schematism and the fixation on the state and its apparatuses. For him, the state is only ‘superstructural in relation to a whole series of power networks that invest the body, sexuality, the family, kinship, knowledge, technology and so forth’.46 This quasi-Marxist dismissal of the state and its juridical forms of action has been heavily criticized in the later reception of Foucault.47 Indeed, it seems that Foucault, in marginalizing juridical power and focusing on the subtle forms of normalizing power in society, loses sight of the power that law as such can hold over individuals.48 Against this critique, it has been argued that Foucault’s concept of law is much wider than his concept of the juridical and that Foucault’s later writings do address the central role that law plays in modern techniques of governance (gouvernementalite´)49 where his analysis of the legal system in particular is much more nuanced.50 He acknowledges that the law is not simply

40 41 42

43

44 45 46 47

48

49

50

Ibid., at p. 114. Ibid., at p. 116. Max Weber, Economy and society: An Outline of Interpretive Sociology (Berkeley: University of California Press, 1978), 53; similarly Robert A. Dahl, ‘The Concept of Power’, 2 Behavioral Science 201 (1957). Michel Foucault, ‘Truth and Power’, in Colin Gordon (ed.), Power/Knowledge: Selected Interviews and Other Writings 1972–1977 (New York: Pantheon Books, 1980), pp. 109–33, at pp. 116–17. Ibid. at p. 119. Ibid. at p. 120. Ibid. at p. 122. For example, Alan Hunt, ‘Foucault’s Expulsion of Law: Toward a Retrieval’, 17 Law & Social Inquiry 1–38 (1992). For example, in Michel Foucault, The History of Sexuality: An Introduction (New York: Pantheon Books, 1978), pp. 89–90. Foucault expressly focuses on ‘the new methods of power whose operation is not ensured by right but by technique, not by law but by normalization, not by punishment but by control’. For the first position see Victor Tadros, ‘Between Governance and Discipline: The Law and Michel Foucault’, 18 Oxford Journal of Legal Studies 75–103 (1998); for the latter position see Thomas Biebricher, ‘Macht und Recht: Foucault’, in Sonja Buckel et al. (eds.), Neue Theorien des Rechts (Stuttgart: Lucius & Lucius, 2008), pp. 139–61, 153. Especially in Michel Foucault, Security, Territory, Population (Basingstoke: Palgrave Macmillan, 2007) and Michel Foucault, The Birth of Biopolitics (Basingstoke: Palgrave Macmillan, 2008), both based on his 1977–1979 lectures at the Colle`ge de France.

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replaced by more subtle forms of power, but that law is both the subject and the object of the disciplining forces active in any societal order. This can be illustrated well by looking at social inequalities and the way they are treated by the legal system. On the one hand, it is obvious that lawmaking is heavily influenced by social power relations, that powerful social groups will shape the law according to their needs and aims. As Wieacker and others have demonstrated for the private law codifications of the nineteenth century, behind the formal equality guaranteed by private law there may lie a whole history of social inequality (see Chapter 10). Here, the discursive regimes of social power directly translate into legal norms. On the other hand, however, it is the law itself which makes and stabilizes such power relations. Private law itself becomes a normalizing force when it defines the ‘default rules’ for labour, family and business relations. Contemporary anti-discrimination laws increasingly take into account the twofold role that private law plays within societal power relations. The EU anti-discrimination directives51 set out from the fact that certain groups of the population are discriminated against in their day-to-day dealings – and by means of private law – when applying for a job, when leasing an apartment or even when visiting a nightclub. Here, the formal rules of private law seem to mask a discursive regime which allows for discrimination based on race, gender or disability. But at the same time, private law can be employed, as is done by the EU regulations, to act as a normalizing force which effectively aims at banning such discrimination from daily life. Under member state laws implementing the directives, it is no longer possible to, for example, base the rejection of a job application on the applicant being black or a woman. In the Pechstein example case (Box 13.1), the claimant – ultimately unsuccessfully – relied on the protective provisions of state antitrust law in order to challenge the perceived domination of the respondent association. In all these instances, the disciplinary force of law may have an emancipative effect. Foucault, however, would be very sceptical of such reformist endeavours. This is because Foucault’s analysis of power leads him to the assertion that intellectual criticism can no longer take a position of ‘truth and justice’, can no longer appeal to the universality of legal and moral values.52 Instead, critical analysis must focus on the specific contexts in which power is exerted, in which social knowledge is generated.53 The decisive political struggles, he thinks, will no longer be ‘over law, right, the constitution, the just in reason and law, that which can and must universally apply’.54 Instead, they will take place within what Luhmann (see Chapter 4) would call the functional sub-systems of society: education, science, technology, health care and so forth. It is in these specialized fields, Foucault argues, that power produces knowledge, produces truth.55 For the Pechstein case (Box 13.1),

51 52

53 54 55

Directive Nos. 2000/43/EC, 2000/78/EC, 2002/73/EC, 2004/113/EC. Michel Foucault, ‘Truth and Power’, in Colin Gordon (ed.), Power/Knowledge: Selected Interviews and Other Writings 1972–1977 (New York: Pantheon Books, 1980), pp. 109–33, at p. 126. Ibid., at pp. 127–8. Ibid., at p. 128. Ibid., at pp. 131–3.

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this insight offers little comfort at first sight. It can hardly be translated into a normative evaluation let alone guidance. Yet it can serve as a necessary reminder of the complexities of power relations in different social fields and thus inspire a more nuanced empirical analysis. IV The two texts discussed here stand for two fundamentally opposed concepts of power. Franz Bo¨hm and the ordo-liberal school develop a narrowly defined concept of economic power. It is a cautious application of the Weberian definition of power (see above) to the economic realm. It tackles a specific socio-economic problem, the concentration of market power, and – although always contested – it was widely taken up in economic policy and legal reform. The Pechstein example case (Box 13.1) shows that it is in principle applicable to a wide range of different constellations. Yet at the same time, the case shows that positions of power in private law relations can be hard to determine when they are based on a complex interplay of different legal instruments. Michel Foucault, in contrast, develops a concept of power that decidedly departs from the Weberian tradition. For Foucault, power is not simply a repressive force, but it denotes the whole set of social-historical conditions which have ‘normalizing’ effects on discursive statements. So far, there have been only few attempts in legal theory to address such ‘normalizing effects’.56 This is quite surprising, as Foucault’s theory of power might prove fruitful specifically for the analysis of private law in two different respects. First, it makes it possible to analyse the subtle effects of social power relations that are only hesitantly addressed in the field of anti-discrimination (see Chapter 14). Second, it shifts the analytical focus away from state institutions to the institutions of civil society – and thus the institutions of private law: the family, the firm, contractual relations, reputation and relations of trust. It is in these specific contexts that private law theory can – and should – make use of the Foucauldian analysis of power, which has long been successfully employed in history, philology and the social sciences. In recent years, first promising attempts to do so have been made in the field of transnational regulatory regimes (see also Chapters 25 and 26).57 An analysis of the informal regimes governing, for example, production safety in transnational corporations can gain much from Foucault’s ‘genealogical’ approach, which focuses not on the formal quality of rules but on their actual effect in framing social communication and behaviour. Similarly, the Pechstein example case (Box 13.1) looks different when viewed through a Foucauldian lens. Such a perspective would focus not on the formal appointment rights of the respondent association but on the totality of the circumstances that determine the role of athletes vis-a`-vis their associations: the often informal relations between national and international sports organizations, media, host communities of events and sponsors 56

57

On possible reasons see Alan Hunt, ‘Foucault’s Expulsion of Law: Toward a Retrieval’, 17 Law & Social Inquiry 1–38 (1992); Victor Tadros, ‘Between Governance and Discipline: The Law and Michel Foucault’, 18 Oxford Journal of Legal Studies 75–103 (1998). For example, Martin Herberg, ‘Global Governance and Conflict of Laws from a Foucauldian Perspective: The Power/Knowledge Nexus Revisited’, 2 Transnational Legal Theory 243–69 (2011).

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that effectively set the rules of the game for modern sports. It is these rules that determine the shifting boundaries for athletes’ acceptable behaviour, in public and in private. The German Federal Supreme Court based its judgment on the correct intuition when it focused on the procedural question of how exactly decisions are made in the sports community. However, the judgment might have benefitted from a more detailed analysis of the interplay between the relevant actors and their influence on athletes’ behaviour.

14 Non-discrimination Moritz Renner

a topic and materials I This chapter discusses the relationship between private law and anti-discrimination law. Both conceptually and politically, the relationship between these two fields of law is as close as it is problematic. The principle of equal treatment is a fundamental and indispensable element of modern constitutional orders – and of law in general. It is clear that this principle is binding for public authorities: governments must treat all citizens equally, the courts must decide like cases alike. The scope of the principle for private actors, however, is much less clear. Private law is based on the principle of private autonomy, and the autonomous decisions of private actors follow private preferences, not the principle of equal treatment. Private actors’ decisions, then, might have discriminatory effects. It is only in the last few decades that private law thinking has gradually integrated the principle of equal treatment. Often, this has happened as an apparently necessary next step after the implementation of anti-discrimination laws addressed at the public sector. In the United States, the impetus of the civil rights movement and of the 1954 landmark decision Brown v. Board of Education,1 concerning the unconstitutionality of US state laws establishing racial segregation in public schools, led to a number of leading Supreme Court decisions on the prohibition of discriminatory practices also in private law relations in the 1960s.2 The federal legislator caught up by enacting the far-reaching Civil Rights Acts of 1964 and 1968.3 In Europe, however, anti-discrimination legislation was not introduced before 2000. The European Anti-Discrimination Directive4 has since been implemented by all member states of the European Union. The often cumbersome implementation and enforcement of the directive is a prime example of the tensions that still exist between the 1 2

3 4

Brown v. Board of Education of Topeka, 347 U.S. 483 (1954). For example, Burton v. Wilmington Parking Authority, 365 U.S. 715 (1961); Jones v. Alfred H. Mayer Co., 392 U.S. 409 (1968); Sullivan v. Little Huntington Park, Inc., 396 U.S. 229 (1969). For a thorough discussion and more examples see Michael Gru¨nberger, Personale Gleichheit (Baden-Baden: Nomos, 2013), pp. 190–204. For more details see Michael Gru¨nberger, Personale Gleichheit (Baden-Baden: Nomos, 2013), pp. 204–18. Council Directive 2000/43/EC of 29 June 2000 implementing the principle of equal treatment between persons irrespective of racial or ethnic origin (OJ 2000 L 180, p. 22).

261

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BOX 14.1 CASE STUDY

European Court of Justice Centrum voor gelijkheid v. Feryn, ECJ C-54/07 The applicant, Centrum voor gelijkheid, is a Belgian body established under the EU Anti-Discrimination Directive to promote equal treatment. The defendant, Firma Feryn NV, is a Belgian company specializing in the sale and installation of up-andover and sectional doors. The director of the respondent had publicly stated that the company would not employ immigrants because its customers were unwilling to give them access to their private residences for the period of the works. The applicant argued that, given its public behaviour, the respondent had presumptively put in place a directly discriminatory recruitment policy. The respondent replied that it had never acted with the intent to discriminate but only wanted to ‘meet customers’ requirements’ because otherwise it would be ‘putting [itself] out of business’.

institutions of private law and the principle of equal treatment. The example case in Box 14.1 is further evidence of this point. The case raises difficult questions that go to the core of the conflict between private autonomy and the principle of equal treatment: to what extent is a private employer bound by rules of non-discrimination when making business decisions? Can customer preferences justify the discriminatory behaviour of a private employer? II The history of anti-discrimination law closely mirrors the development of social movements. In the twentieth century, feminists and civil rights advocates have laid the groundwork for the modern anti-discrimination laws. Sexual and racial discrimination cases have provoked the landmark decisions on both constitutional and private law issues of equal treatment. It is for this reason that feminist legal theory has had an important, and lasting, impact on private law concepts of non-discrimination. Catharine MacKinnon, the author of the first reference text for this chapter, has personified this close intellectual connection: MacKinnon is both a feminist activist and a lawyer. Her writings have been influential in politics and in legal discourse. The reference text is an excerpt from her book on sexual harassment, which combines feminist theories of discrimination with meticulous legal analysis. It has been widely cited not only in academia but also in legal practice. The second reference text for this chapter is a translated article by the Austrian legal philosopher Alexander Somek. It takes a more distanced perspective on the issue of nondiscrimination in two different respects. On the one hand, the article looks back on several decades in the development of anti-discrimination law. On the other hand, it takes a philosophical, external position in order to observe the complex interrelationship of private law and anti-discrimination laws. (See Box 14.2.)

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BOX 14.2

Catharine MacKinnon, Sexual Harassment of Working Women: A Case of Sex Discrimination (New Haven / CT: Yale University Press, 1979), pp. 106–27 Alexander Somek, ‘Neoliberale Gerechtigkeit’, 51 Deutsche Zeitschrift fu¨r Philosophie 45–59 (2003) (English translation available on the book website)

BOX 14.3

Judith Butler, Gender Trouble: Feminism and the Subversion of Identity (New York: Routledge, 1990) Ju¨rgen Habermas, ‘Paradigms of Law’, 17 Cardozo Law Review 771–84 (1995–1996) Alexander Somek, Engineering Equality: An Essay on European Anti-Discrimination Law (Oxford: Oxford University Press, 2011)

Somek has further elaborated on the regulatory approach of European antidiscrimination laws in Engineering Equality, a suggested further reading particularly for readers from the United States. A broader narrative of the intellectual history of antidiscrimination law in Western democracies is provided by Ju¨rgen Habermas’ concise article on ‘Paradigms of Law’ (see also Chapter 4). The further development of feminist theory, which still informs legal discussions of non-discrimination, has been marked by Judith Butler’s seminal – and controversial – book Gender Trouble, which carries further MacKinnon’s insights on the social construction of gender identities. (See Box 14.3.)

b theories, context and discussion I No other recent development in German private law was as heavily contested as the entry into force of the General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz) in 2006, a bill that implemented the European anti-discrimination directives. While opponents of the bill went as far as comparing it to the virtue-driven ‘terreur’ of Jacobin fashion,5 those in favour of the act defended it as an example of legislation ‘informed by fundamental rights’.6 On the one hand, this controversy can be understood as the culmination of an ongoing debate about the growing importance of ‘material justice’ in private law, the gradual transformation of 5

6

Franz Ju¨rgen Sa¨cker, ‘“Vernunft statt Freiheit!” Die Tugendrepublik der neuen Jakobiner’, Zeitschrift fu¨r Rechtspolitik 286 (2002); Eduard Picker, ‘Antidiskriminierung als Zivilrechtsprogramm?’, Juristenzeitung 540 (2003). Susanne Baer, ‘“Ende der Privatautonomie” oder grundrechtlich fundierte Rechtsetzung?’, Zeitschrift fu¨r Rechtspolitik 290 (2002).

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private law through protective regulations for the benefit of structurally disadvantaged parties (see Chapter 10).7 On the other hand, the controversy points to a question inherent to the classical formal-liberal model of private law: of what substance is the freedom of private law subjects? Whom does it include, whom does it exclude? If what is at the heart of private law is a promise of freedom, then anti-discrimination law takes up on that promise. It aims at granting the empowering tools of private law to those who traditionally did not have full access to them: women, ethnic and religious minorities, LGBTI persons or people with disabilities. Yet there remains a conceptual problem: how can private law doctrine explain that a discrimination of these groups – which has long been forbidden under constitutional law – is to be prohibited in private law relations that are based on the free choice of contracting parties? Are private actors accountable for nondiscrimination to the same extent as public officials? Is the traditional private law paradigm of pro ratione stat voluntas to be transformed into a maxim of stat pro voluntate ratio?8 Will anti-discrimination laws transform private law into a means of redistribution in order to overcome the historical discrimination of certain social groups? Both reference texts for this chapter provide possible answers to these questions. The excerpt from Catharine MacKinnon’s Sexual Harassment of Working Women: A Case of Sex Discrimination serves as an example of early feminist critical legal theory, a movement that had close ties to the 1970s civil rights movement and denounced the structural discrimination of women in various legal domains. Decades later, Alexander Somek, the author of the second reference text, takes up this critical position. He can look back on the different stages in the gradual development of anti-discrimination law and can thus contextualize what he calls the European Union’s neoliberal anti-discrimination law within a set of different approaches to fighting discrimination. II Catharine MacKinnon’s Sexual Harassment of Working Women first appeared in 1979 and is one of the most influential works in US legal sociology. It has informed both legislation and case law. Numerous court decisions adapted MacKinnon’s central argument that sexual harassment at the workplace is an unlawful act of gender-related discrimination.9 Following these decisions, US employers started to take concrete measures against sexual harassment such as the establishment of grievance procedures. Beyond these immediate effects, MacKinnon’s text was important because it gave significant theoretical impulses to feminist legal critique. The reference text, in which she identifies and analyses different models of anti-discrimination law, outlines some of her core theoretical positions. MacKinnon’s methodological approach is comparable to Wieacker’s and Habermas’ attempts to identify ‘social models’ and ‘paradigms’ that guide the ‘materialization’ of 7 8

9

On these links Moritz Renner, ‘Paradigmen des Antidiskriminierungsrechts’, KritV 53 (2010). Franz Ju¨rgen Sa¨cker, ‘“Vernunft statt Freiheit!” Die Tugendrepublik der neuen Jakobiner’, Zeitschrift fu¨r Rechtspolitik 286 (2002), 287. First in Alexander v. Yale, 631 F.2d 178 (2nd Cir. 1980); ultimately, the Supreme Court followed in Meritor Savings Bank v. Vinson, 477 U.S. 57 (1986).

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private law (see Chapter 10). Just like Wieacker, she tries to identify the ‘secret design’ that determines judicial decisions on matters of discrimination – be it explicitly or implicitly. According to MacKinnon, two distinct models of gender-related antidiscrimination doctrines have influenced common law to a similar extent, but with different theoretical backgrounds and different practical consequences: the ‘sex differences approach’ imposes a burden of justification on individual acts of discrimination, whereas the ‘sex inequality approach’ focuses on the systematic differences in the treatment of certain social groups.10 MacKinnon makes it clear that every individual choice implies a differentiation between several options and thus requires discrimination. The question, then, is which criteria may legitimately guide an individual decision and which must not. According to MacKinnon, the law of her time only provided a provisional solution to the extent that the courts developed a catalogue of ‘presumptively suspicious-to-forbidden group characteristics now commonly including race, sex, religion, and national origin’.11 Her analysis of the two major theoretical approaches to justifying the existence of anti-discrimination law shows that even the application of this simple catalogue posed numerous problems. The jurisprudence of the time largely followed, in MacKinnon’s terms, a sex differences approach. The theoretical structure of this approach is modelled after the 14th Amendment’s Equal Protection Clause that requires treating equal things equally and unequal things unequally. Applying this rule means finding adequate classifications: when are individuals classified as equal and thus to be treated equally? As MacKinnon wrote her book, the Supreme Court had already established a complex equal treatment doctrine, first of all for cases of race discrimination. The doctrine required that each discrimination made with regard to ‘presumptively suspicious-to-forbidden group characteristics’ be justified by a ‘legitimate state purpose’. Following this doctrine, the Supreme Court had abolished racial segregation in public schools in the landmark decision Brown v. Board of Education.12 In 1964, the US legislator adopted this doctrine when the Civil Rights Act declared racial segregation in places of public accommodation to be unlawful, even if these places were run by private parties (Title II of the Civil Rights Act). Title VII also prohibited workplace discrimination based on ‘race, color, religion, sex or national origin’. Thus, Title VII directly transposed constitutional principles into labour law. As a consequence of this transposition of constitutional principles into the ambit of private labour relations, the point of reference for an eventual justification of unequal treatment was no longer a public regulatory purpose but the advertised job itself: ‘the similarities and differences are measured in relationship to the job’.13 However, the application of this justification principle in labour law gave rise to hitherto largely unresolved problems: which 10

11 12 13

Catherine MacKinnon, Sexual Harassment of Working Women: A Case of Sex Discrimination (New Haven / CT: Yale University Press, 1979), pp. 106–18. Ibid., at p. 107. Brown v. Board of Education of Topeka, 347 U.S. 483 (1954). Catherine MacKinnon, Sexual Harassment of Working Women: A Case of Sex Discrimination (New Haven / CT: Yale University Press, 1979), at 107.

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differences are so relevant for the respective position that they can justify unequal treatment? Are, in our example case (Box 14.1), customers’ discriminatory preferences enough to justify a discriminatory hiring policy? With regard to sex-related unequal treatment, MacKinnon shows that it is very often justified by reference to biological differences between the sexes, for example, in the case of professional disadvantages arising from pregnancy. For a long time, courts accepted professional disadvantages for mothers due to pregnancy-related absence from the workplace. While sex alone was not, the seemingly neutral yardstick of absence from the workplace was considered a legitimate criterion of differentiation.14 This is what MacKinnon identifies as the central weakness of the sex differences approach: it draws on the employer’s intentions rather than on the social consequences of their behaviour. Factual differences between the sexes are thus perpetuated. In order to overcome this problem, legal rules on non-discrimination must take a different approach. MacKinnon has made this point forcefully for the case of sex discrimination. In the reference text, she argues for a shift towards a sex inequality approach that focuses on actual social differences between the sexes.15 To give an example, she quotes from a Supreme Court decision that found unequal treatment of men and women in regard to insurance fees to be in violation of Title VII of the Civil Rights Act. While the treatment was based on a mere biological difference, that is, the higher life expectancy of women, it led to systematic disadvantages for women. Here, MacKinnon argues the paradigm underlying the sex differences approach must be reversed: actual differences between the sexes may not justify unequal treatment, but must be overcome or at least compensated for by the means of the law. As MacKinnon argues, this is achieved by the sex inequalities approach which does not aim at legal rationalization of unequal treatment, but at ‘empowering that group whose depowering is the problem’.16 Against this backdrop, affirmative action becomes a legitimate policy tool. Contrary to what the sex differences approach would suggest, it is not a form of reverse discrimination but a necessary step towards the realization of equal opportunities. The pioneers of feminist legal theory such as MacKinnon have early identified the opposing conceptions of gender differences that underlie different theories of nondiscrimination. The sex differences approach is grounded on the idea of real, biological differences that it considers to be legitimate starting points for differentiation. The sex inequality approach, in contrast, takes into account that many gender differences that we commonly observe are created by society with little or no biological foundation.17 This is later taken further by feminist legal theorists, and first of all by Judith Butler in her analysis of the social construction of gender.18 For MacKinnon this idea is the necessary ground for any society that aims at overcoming social stereotypes such as ‘most men hire women as

14 15 16 17 18

Ibid., at pp. 111–12. Ibid., at pp. 116–18. Ibid., at p. 118. Ibid., at p. 121. Judith Butler, Gender Trouble: Feminism and the Subversion of Identity (New York: Routledge, 1990).

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secretaries, because they are better at it than men’.19 Similar stereotypes seem to be behind the discriminatory statements of the employer in our example case (Box 14.1): the employer’s customers might hold stereotypical views of immigrant workers, but even the employer’s assumption that his customers hold these views might be a stereotype. The reach of the law in a fight for social equality is necessarily limited, however, a point already made by MacKinnon.20 At the same time, it is clear that the stance the law takes on questions of equality is never without consequences. According to MacKinnon, the sex differences approach leads to problematic social consequences in that it supports those members of society who undertake the biggest efforts of assimilation to a privileged majority: ‘women who for all purposes are socially men, blacks who for all purposes are socially white’.21 If the law wishes to avoid the perpetuation of these social differences, there is only one possible way: the actual consequences of legal rules and decisions for underprivileged groups need to be continuously reflected and to become the starting point of targeted legal interventions: ‘The only remedy is redistribution.’22 III In his paper ‘Neoliberal Justice’, the second reference text for this chapter, Austrian legal theorist Alexander Somek discusses the same conflict between a liberal paradigm of equal treatment and a social paradigm of actual equality that MacKinnon identifies in her analysis as a conflict between a sex differences approach and a sex inequality approach. Yet Somek writes under completely different historical circumstances. His point of reference is not the civil rights movement. Instead, he focuses on the anti-discrimination regulations that came along with the creation of a European Single market. In order to understand the context of his reflections, one needs to bear in mind that in many civil law countries the implementation of these regulations was accompanied by heated debates and the deployment of a presumed decline of the much-cherished freedom of contract. As Somek’s analysis shows, the starting point of all discussions is the relationship between anti-discrimination law and freedom of contract. Against this background, antidiscrimination law can be defined as an instrument that prohibits discrimination in certain market sectors and certain domains of social interaction.23 Discrimination by public agents is thereby excluded from the analysis, which focuses on the particular problems that arise from anti-discrimination law for the interactions of private parties. Anti-discrimination law, then, needs to answer the question: which private parties are bound to what extent by anti-discrimination law? As Alexander Somek makes clear for mere reasons of practicability anti-discrimination law cannot be applied to every part of daily life. Beyond questions of practicability, the differentiation between those bound by 19

20 21 22 23

Catherine MacKinnon, Sexual Harassment of Working Women: A Case of Sex Discrimination (New Haven / CT: Yale University Press, 1979), at p. 123. Ibid., at p. 125. Ibid., at p. 126. Ibid., at p. 127. Alexander Somek, ‘Neoliberale Gerechtigkeit’, 51 Deutsche Zeitschrift fu¨r Philosophie 45–59 (2003), 45.

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anti-discrimination law and those whom it does not concern is also of programmatic nature. Anti-discrimination law, as Somek observes, only concerns ‘distribution agents’ that are active in socially important fields of distribution such as housing and labour. For Somek’s analysis, the distributive function of anti-discrimination law that MacKinnon has identified in her work on sex discrimination is the conceptual point of departure. In MacKinnon’s terms, Somek clearly adopts an inequality approach. Just like MacKinnon, he is aware of the inconsistencies between his and the more widespread differences approach. Somek conceives the mutual tension between these two as the opposition of two different languages: the ‘distributive language of a theory of social justice’ on the one hand, and the ‘deontological perspective of legal thinking’ on the other.24 According to Somek, elements of both the inequality and the differences approach operate in anti-discrimination law. For even if anti-discrimination law aims at establishing factual equality, it always needs to translate its goals into the language of the law. Somek characterizes this translation as a translation from the ‘outside’ to the ‘inside’ of the law (see Chapter 1), and as a translation between disciplines. The distributive language of philosophy can articulate which social disadvantages require legal compensation and which are to be deferred to the realm of individual responsibility (‘social division of responsibility’).25 The deontological language of the law, however, can only address concrete individual behaviour and its motivations but is unable to address the social consequences of individual decisions.26 The translation of distributive into deontological principles that anti-discrimination law needs to provide is thus necessarily imperfect. The deontological language of the law reaches its limits especially in cases of indirect discrimination. In these cases, it usually requires that ‘distribution agents’ give legitimate reasons for their decisions, for example, the legitimate purpose referred to in the leading cases of the US Supreme Court (see Section II). Under EU law, indirect discrimination is forbidden unless it is justified by a legitimate interest pursued with reasonable means. Certain criteria such as race, religion, disabilities or age are excluded from the range of admissible motivations. The problem with indirect discrimination is that it does not openly rely on one of the inadmissible criteria but nonetheless leads to systematic social inequality. In an example that has close parallels to the Feryn case discussed in this chapter (Box 14.1), the reference text by Somek seeks to reveal the absurdity of the justification paradigm that the deontological language of the law uses to establish principles of non-discrimination. Somek offers the following hypothetical situation: ‘The owner of a bar indicates in a job offer that he will not hire “gays”.’27 At first glance, this is a prototypical example of direct discrimination: ‘One can hardly discriminate in a more direct and ungainly way.’28 At second glance, however, the hypothetical example loses some of its unambiguity. One has only to assume that the reason why the bar owner will not hire gay men is that his 24 25 26 27 28

Ibid. (English translation), at 47. Ibid. (English translation), at 47–8. Ibid. (English translation), at 48–9. Ibid. (English translation), at 51. Ibid. (English translation)

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customers do not want to be served by them. From the owner’s perspective it is anything but irrational to respect the preferences of his clients29 – as miserable as these preferences might be. Thus, even direct discrimination can hardly be seized with the deontological accusation of irrationality alone. Or, to put it another way, indirect discrimination is not necessarily more irrational than its direct counterpart. Rather, direct discrimination can sometimes be read as ‘indirect indirect discrimination’, using the seemingly irrational and inadmissible criterion of discrimination only as a proxy for quite rational considerations.30 In our case (Box 14.1), the European Court of Justice held that the respondent’s recruitment policy could be presumed to be directly discriminatory. The legal consequence is that the discrimination could not be justified – this would only have been permissible in a case of indirect discrimination. From Somek’s perspective, however, the case is in fact a perfect example of indirect indirect discrimination, as behind the openly discriminatory recruitment policy stands the purportedly rational recourse to customers’ preferences. This is not to say that the case should necessarily be decided differently. It might be for a good reason that the discrimination against immigrant workers in our case cannot be justified with a view to customer preferences – but these reasons are not reflected in the court decision. Even Somek admits that the doctrine of direct discrimination translates distributive principles rather successfully into deontological mechanisms, since the exclusion of certain distinctive features effectively forces distribution agents to fight systemic discrimination.31 In our case it makes sense to bind the employer as a distribution agent for labour opportunities to a strict standard of non-discrimination – and bar recourse to potential justifications. In this context, Somek raises the more general concern whether the paradigm of rational justification is a suitable basis for anti-discrimination law at all. The shortcomings of the approach are particularly salient in our example case. Consider that the European Court of Justice might have decided the case differently, holding that the reliance on customer preferences was a merely indirect discrimination. The employer could then justify his recruitment policy with the necessity to adapt to the market. The reliance on market preferences, however, stabilizes the same social preferences that are at the origin of unequal treatment of disadvantaged groups.32 Therefore, Somek and MacKinnon both argue that anti-discrimination law should openly admit its distributive dimension instead of veiling it under the deontological rhetoric of equal treatment.33 As Somek’s article shows, it is not easy to draw concrete conclusions from this general statement. So far, anti-discrimination law still lacks rules that would allow for an explicit consideration of distributive concerns when assessing the lawfulness of a given act.34 Such distribution rules would force the courts to decide discrimination cases on the basis of testable assumptions of a given decision’s social impact. This is why Somek pessimistically 29 30 31 32 33

34

Ibid. (English translation), at 52. Ibid. (English translation), at 51–2. Ibid. (English translation), at 54–5. Ibid. (English translation), at 55–6. Ibid. (English translation), at 57; Catherine MacKinnon, Sexual Harassment of Working Women: A Case of Sex Discrimination (New Haven / CT: Yale University Press, 1979), at p. 127. Alexander Somek, ‘Neoliberale Gerechtigkeit’, 51 DZPhil 45–59 (2003), at 58–9.

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states that until such rules come into existence anti-discrimination law has hardly any normative substance: ‘The norms are failing to provide what you expect from norms: normalization.’35 IV Alexander Somek’s pessimistic outlook is symptomatic of the disenchantment that followed the heated debates on the relationship between anti-discrimination and classic contract law. The German General Equal Treatment Act did not provoke the flood of lawsuits that its opponents had feared. However, this also means that – at least from a German perspective, and probably similarly so in many Western democracies – Catherine MacKinnon’s hope for a more equal distribution of social participation through the means of anti-discrimination law might have been in vain. Somek’s explanation for this is quite plausible: considerations of social consequences and the ‘distributive language’ in which they are expressed are not easily translatable into individual legal duties. MacKinnon had already expressed the same scepticism with regard to the law’s potential to bring about social change on a large scale. Yet even if the immediate distributive potential of anti-discrimination law is smaller than typically assumed, that does not mean it is altogether ineffective. The deontological language of the law cannot change social structures immediately. However, it can have long-lasting effects on the attitudes and convictions of individuals. To put it in Foucauldian terms (see Chapter 13), anti-discrimination law might be effective through the productive force of discursive power relations: if the discrimination of social groups is legally condemned, this condemnation can bear fruit in public discourses beyond the law. In the US debate, such hopes have been vehemently contested in recent years.36 Dean Spade and others have pointed out that legal rights to equal treatment transfer a social problem to the level of individual responsibility. Once the individual has been granted certain rights it is up to them to have them enforced. The once progressive slogan ‘fight for your rights!’ is thus transformed into the cynical chant of those who do not have to fear the enforcement of these rights because of high procedural barriers. If one takes into account the long-term effects that anti-discrimination law can have on the social reality, there is reason for more optimism. While it may still be possible for employers to discriminate against disadvantaged groups for seemingly neutral reasons (justified indirect discrimination), they can no longer openly communicate discriminatory motivations (direct discrimination). Thus, the way we talk about professional qualifications and job market opportunities changes and, to the extent that social reality is the result of communication, these shifts in public discourse are not entirely ineffective. In

35 36

Ibid., at 59. For an overview see Dean Spade, ‘What’s Wrong with Rights?’, in Dean Spade (ed.), Normal Life: Administrative Violence, Critical Trans Politics, and the Limits of Law (New York: South End, 2001), pp. 79–100.

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such an optimistic vein, one might well argue that the gentle pressure of antidiscrimination law contributes to an ongoing negotiation of legal positions in a rational discourse of private law subjects (see Chapters 4 and 10). It might make a difference, after all, that the European Court of Justice presumed the employer’s recruitment policy in our example case to be directly discriminatory: the employer is effectively barred from publicly referring to immigrants in a discriminatory manner.

15 Risk, Tort and Liability Hans-W. Micklitz

a topic and materials I On 16 February 2017 the European Court of Justice had to decide the preliminary reference of Elisabeth Schmitt against TU¨V Rheinland (Box 15.1).1 Thousands of women around the world were affected by substandard breast implants and suits were filed in a number of countries, including France and Germany. E. Schmitt’s case is paradigmatic for how courts struggle to apply tort law to this multifaceted constellation of facts and law. This case makes a good starting point for a discussion on the transformation of liability in the changing economic and political environment.2 II The texts on the basis of which we discuss key societal developments of liability law, written by Louis Josserand,3 Guido Calabresi4 and Ulrich Beck5 – were chosen in a way to be representative of three jurisdictions, that is French law, in discussing the grand doctrinal and 1 2

3 4 5

Case C-219/15, Schmitt [2017] ECLI:EU:C:2017:128. Discussions on these issues is based on the following texts in particular, as they beautifully span across the theoretical landscape of the main trends, disciplines and issues in the 20th twentieth century: L. Josserand, ‘L’e´volution de la responsabilite´ (confe´rence donne´e aux Faculte´s de Droit de Lisbonne, de Coimbre, de Belgrade, de Bucarest, d’Orades, de Bruxells, a` l’institut franc¸ais de Madrid, aux centres juridiques de L’Institut des Hautes E´tudes marocaines a` Rabat et a´ Casablanca)’, in L. Josserand (ed.), E´volutions et Actualite´s:. Confe´rences de Droit Civil, (Paris: Receuil Sirey, 1936), chapter ch. 29, s. 5; G. Calabresi, ‘Some thoughts on risk distributions and the law of torts’ (1961) 70 Yale Law Journal 499–553; U. Beck, Risikogesellschaft:. Auf dem Weg in eine andere Moderne (Berlin: Suhrkamp, 1986). Moreover, the following texts are also of particular significance for the discussion development and for the argument in this chapter: G. Bru¨ggemeier, Common Principles of Tort Law: A Pre-Statement of Law (London: British Institute of International and Comparative Law, 2004); S. Shavell, ‘Strict liability vs. negligence’ (1980) 9 Journal of Legal Studies 1–13;. G. Wagner, ‘The project of harmonising European tort law’ (2005) 42(5) Common Market Law Review 1269–312. Josserand, ‘L’e´volution de la responsabilite´’. Calabresi, ‘Some thoughts on risk distributions’. Beck, Risk Society.

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273

BOX 15.1 CASE STUDY

C-219/15, Elisabeth Schmitt v. TU¨V Rheinland LGA Products GmbH ECLI:EU: C:2017:128 On 1 December 2008, Mrs Schmitt had breast implants fitted in Germany which were manufactured in France. The manufacturer of those implants, which became ¨ V Rheinland for assessing its quality insolvent, had been using the services of TU ¨V system. In the course of its involvement during the period 1998 to 2008, TU Rheinland made eight visits to the manufacturer’s premises, all of which were ¨ V Rheinland never inspected business records or ordered announced in advance. TU that the devices be inspected. In 2010, a competent French authority established that the manufacturer in question had been producing breast implants using industrial silicone which did not comply with the required quality standards. Consequently, Mrs Schmitt had the implants removed in 2012. Mrs Schmitt filed suit demanding ¨ V Rheinland before EUR 40,000 as compensation for non-material damage from TU German courts. Mrs Schmitt argued that due inspection of the delivery notes and ¨ V Rheinland to ascertain that the manufacturer had invoices would have enabled TU not used an approved type of silicone.

BOX 15.2

L. Josserand, ‘L’e´volution de la responsabilite´ (confe´rence donne´e aux Faculte´s de Droit de Lisbonne, de Coimbre, de Belgrade, de Bucarest, d’Orades, de Bruxells, a` l’institut franc¸ais de Madrid, aux centres juridiques de L’Institut des Hautes E´tudes marocaines a` Rabat et a´ Casablanca)’, in L. Josserand (ed.), E´volutions et Actualite´s: Confe´rences de Droit Civil (Paris: Receuil Sirey, 1936), chapter 29, s. 5, (English translation on the book website) G. Calabresi, ‘Some thoughts on risk distributions and the law of torts’ (1961) 70 Yale Law Journal 499–553 U. Beck, Risk Society: Towards a New Modernity (London: Sage, 1992) also sociological development, the US law and economics movement, and a foundational text on risk by a German sociologist that was well-received worldwide, even more so in the Anglo-American world than in Germany (Box 15.2). The three texts originate from diverse legal and cultural circles, were written in different languages, and are meant to give ground to the assessments that were made, from the perspective of traditions, languages, but mainly speaking for those strands of theoretical underpinnings which have most powerfully driven or conceptualized the development of liability law. Each text represents a certain tradition and school of thought and stands for a particular strand of the interplay between harm, risk and liability. Josserand analyses the role of tort

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BOX 15.3

G. Bru¨ggemeier, Common Principles of Tort Law: A Pre-Statement of Law (London: British Institute of International and Comparative Law, 2004) G. Calabresi, The Future of Law and Economics: Essays in Reform and Recollection (New Haven, CT: Yale University Press, 2016) C. van Dam, European Tort Law, 2nd ed. (Oxford: Oxford University Press, 2013) M. Geistfeld, ‘Risk distribution and the law of torts: carrying Calabresi further’ (2014), 77(2) Law and Contemporary Problems 165–90 E. De Jong, ‘Tort law and judicial risk regulation: bipolar and multipolar risk reasoning in light of tort law’s regulatory effects’ (2018) 9(1) European Journal of Risk Regulation 14–33 L. Kaplow and S. Shavell, Fairness versus Welfare (Cambridge, MA: Harvard University Press, 2006), pp. 85–154 G. Wagner, ‘The project of harmonising European tort law’ (2005) 42(5) Common Market Law Review 1269–312 E. Weinrib, The Idea of Private Law (Oxford: Oxford University Press, 1995)

law in view of the growing cry for social justice. Twenty to thirty later, Calabresi advocates economic efficiency as a parameter for the distributive allocation of risk. Finally, Beck addresses the particularities of the ‘risk society’ which highlight a series of unsolved legal issue underlie in today’s law of liability. Together these texts reflect the spectrum of the relations between risk and liability in the transformations of the role of law in society over the nineteenth, twentieth and early twenty-first century. Besides the ongoing debates on the philosophical foundations of private law, on the refinement of the law and economics approach and the handling of risks, the European Union has added a new layer to the role and function of tort law. The political initiative of the European Parliament and the European Commission to develop a Common Frame of Reference – the idea of a European Civil Code – has triggered intense research on how future tort law should be designed and what kind of role should be attributed to the economic analysis of law. Box 15.3 provides a list of further reading covering some of this research.

b theories, context and discussion I What is the societal role of liability law? The debate is dominated by the dispute between economic analysis of law versus philosophy of tort law.6 This chapter addresses 6

J.Coleman, S. Hershovitz and G. Mendlow, ‘Theories of the common law of torts’, The Stanford Encyclopedia of Philosophy (2015), E. Zalta (ed.), https://plato.stanford.edu/archives/win2015/entries/tort-theories.

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liability through a socio-legal lens, as well as the interconnection between law, harm and risk in its distortions over the last two centuries. This required and created feedback from society and at a theoretical level led to the creation of two main schools of law: social justice through liability and efficient distribution of risks. The two dominant strands of theorizing tort law economics and philosophy need to integrate the societal dimension: the risk society.7 The starting point for understanding the relationship between liability and risk was the emergence of a unified, philosophically coherent legal system that occurred with the onset of the French Revolution. Liability is a matter of holding individuals responsible for their autonomous acts when they harm others and builds on a personal notion of risk. Risk and harm mirror the freedom of action. Fault distinguishes those acts that are impermissible risks from those attributed to nature. Fault is a breach of conventional standards of interpersonal right conduct, whereas risk emerging in the industrialized society transforms into a concept with broader societal implications. It is no longer concerned primarily with individual conduct; instead, risk is understood as statistically measurable – calculable – and therefore controllable.8 Individual actions become data in overall aggregative considerations.9 The question is who is in the best position to reduce the risk, what kind of alternatives are out there to tighten liability law or to transfer the risk via insurance? Two different strands of thought steer the debate in the twentieth century. On the one hand there are all those who analyse the allocation of risks under aspects of social justice, first along the lines of the labour movement, later of the consumer movement.10 On the other hand, there is the law and economics assumption that liability for risk needs to be efficiently distributed in society. Both strands are united in the belief and conviction that risks are measurable, calculable and localizable.11 The third strand is emergent and furnishes societal risk.12 In contrast to the first two, societal risk is no longer calculable. Instead it is indeterminate or uncertain, it cannot simply be priced in by actors, whether

7

8

9

10

11

12

W. Lucy, ‘Method and fit: two problems of contemporary philosophies of tort law’ (2007) 52 McGill Law Journal 605–56; G. T. Schwartz, ‘Mixed theories of tort law: affirming both deterrence and corrective justice’ (1997) 75 Texas Law Review 1801–34. E. Durkheim, The Division of Labour in Society (New York: Free Press, 1893); F. Ewald, L’Etat Providence (Paris: Grasset, 1986). This is one of the criticisms, incidentally, of EAL by corrective justice theorists – that is, if it is all about allocative efficiency, why focus on the individuals to a tort action at all, their freedom, their responsibility. The idea is that EAL fails to account for the structure of tort law: E. Weinrib, ‘Correlativity, personality, and the emerging consensus on corrective justice’ (2001) 2(1) Theoretical Inquiries in Law 107–59. For a critique, P. Cane, ‘Corrective justice and correlativity in private law’ (1996) 16(3) Oxford Journal of Legal Studies 471–88. D. Kennedy, ‘Three globalizations of law and legal thought: 1850–2000’, in D. M. Trubek and A. Santos (eds.) The New Law and Economic Development: A Critical Appraisal (Cambridge: Cambridge University Press, 2006), pp.19–73. Associated to one legal order, for a deeper discussion of the calculability of risk see F. Ewald, ‘The return of Descartes’s malicious demon: an outline of a philosophy of precaution’, trans. S. Utz, in T. Baker and J. Simon (eds.), Embracing Risk: The Changing Culture of Insurance and Responsibility (Chicago: Chicago University Press, 2002), pp. 273–302. U. Beck, Risk Society: Towards a New Modernity (London: Sage, 1992).

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enterprise or individual, and its consequences are potentially catastrophic. The risks are unforeseeable because the causal relationship is so uncertain. Courts have improvised, for example, in cases of asbestos, breast implants (PIP),13 lead-based paint (Sindell v. Abbott)14 but largely in a theoretically unsatisfying way. Gunther Teubner would call these judgments ‘legal irritants’.15 Risk is reflexive and subject to pervasive uncertainty. The risk society shifts the focus from liability to precaution, towards managing uncertainties proactively, and it ‘irritates’ tort law and the courts. This chapter is not a comprehensive treatment of tort scholarship. It differs from the UK-US debate on the significance of risk in terms of autonomy-based16 versus economic theories of tort law.17 Instead, it puts emphasis on economic analysis of law (EAL) as being post-classical in that it brings economics closer to reality. Economic analysis of law questions and refines the four major assumptions18 on which the neoclassical economic model is based: fully informed players, rational decision-making, competitive markets, limited resources.19 Or to put it differently: it builds on those assumptions, but at the same time questions their correctness in real life while attempting to bring them closer together. The steps that are the best known are the most characteristic: the discovery of transaction costs (Ronald Coase), the emphasis on private party arrangements (Oliver Williamson) and bounded rationality (Herbert Simon) opened up a new perspective20 on the interplay between economics and the role and function of law. The lesson to learn from EAL is that law arguably has two main functions, the reduction of transaction costs and the allocation of risks. The former dimension is fully developed in Chapter 3 and, with regard to information economics, in Chapter 11. What matters in our context is the allocative, but potentially also the redistributive function of law. Therefore, in line with the search for the societal role of liability law, the question to be

13 14 15

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Case C-219/15, Schmitt [2017] ECLI:EU:C:2017:128. Sindell v. Abbott Laboratories, 26 Cal. 3d 588 (1980). G. Teubner, ‘Legal irritants: good faith in British law or how unifying law ends up in new differences’ (1998) 61 Modern Law Review 11–32. D. Owen (ed.), Philosophical Foundations of Tort Law (Oxford: Oxford University Press, 1995); J. Oberdiek (ed.), Philosophical Foundations of the Law of Torts (Oxford: Oxford University Press, 2014), J. Oberdiek, Imposing Risk (Oxford: Oxford University Press, 2017). R. Coase, ‘The problem of social cost’ (1960) 3 Journal of Law and Economics 1–44; R. Posner, ‘A theory of negligence’ (1972) 1(1) Journal of Legal Studies 29–96. E. Furubton and R. Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics, 2nd ed. (Ann Arbor: University of Michigan Press, 2005), pp. 1–14. S. Grundmann, Chapter 3, A.I discussing R. Coase ‘The problem of social costs’; O. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Rational Contracting (New York: Free Press, 1990); and H. Simon, ‘A behavioural model of rational choice’ (1955) 69(1) The Quarterly Journal of Economics 99–118. Perhaps the most revolutionary and not yet fully developed challenge results from bounded rationality or, more broadly, from behavioural law and economics, due to its emphasis on cognitive psychology which could only unfold through putting emphasis on behavioural science instead of behavourial economics. See A. Alemanno and A.-L. Sibony (eds.), Nudge and the Law: A European Perspective (Oxford: Hart, 2015); E. Zamir and D. Teichmann, Behavioral Law and Economics (Oxford: Oxford University Press, 2018). Critical on the possibility to disconnect BLE from economic efficiency: H.-W. Micklitz, ‘The politics of the behavioural economics of law’, in H.-W. Micklitz, A.-L. Sibony and F. Esposito (eds.), Research Methods in Consumer Law (Cheltenham: Edward Elgar, 2018), pp. 513–56.

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answered is whether and to what extent the way in which EAL allocates risks meets the needs of the changing social concept of risk.21 The relationship between codified law, modern legal theory and contemporary society dates back to 1804, the date of the enactment of the French Code Civil and to the Austrian Civil Code of 1811, which marked the beginning of a codified system of liability, linked to personal responsibility. The nineteenth century witnessed the liberation of the individual.22 Individual autonomy and its restriction through fault-based liability in cases of unlawful conduct are constitutive for the new society.23 The French Code Civil determined the philosophical foundations of all subsequent codifications on which a modern civil law order is based:24 the freedom and formal equality of all individuals independent of their social standing and status, the guarantee of private property, contract as the core instrument of transactions,25 and tort law to protect the personal integrity and property rights of the individual. In such a system of personal freedom and responsibility, liability could, in principle,26 only be premised on individual fault. The German Bu¨rgerliches Gesetzbuch (BGB) of 1900 followed this model of liability, but fault remained the key concept. Common law is older than the French Code Civil, the Austrian General Civil Code and the German Civil Code. Nonetheless, the grand codifications led to significant changes. Tort law emerged as a coherent body of law, whereas previously it was a form of action.27 The Industrial Revolution put the system of individual liability for fault to the test. The rising number of work accidents, railway accidents, industrial accidents and what we would today call traffic accidents that resulted from the use of new technology and spread 21

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R. Condon, ‘Tort Law beyond the Reasonable Man’, PhD thesis, European University Institute, Florence (2017), pp. 29, 55, under reference to Ewald, L’Etat providence, and K. H. Ladeur, ‘The social epistemology of risk observation and management: modern law and the transformation of its cognitive infrastructure’ in H.W. Micklitz and T. Tridimas (eds.), Risk and EU Law (Cheltenham: Edward Elgar, 2015), pp. 49–68. S. Maine and H. Maine, Ancient Law: Its Connection with the Early History of Society, and its Relation to Modern Ideas, ed. J. H. Morgan (London: J. M. Dent, 1917); thereto now K. I. Schmidt, ‘Henry Maine’s “Modern Law”: from status to contract and back again?’ (2017) 65 The American Journal of Comparative Law 145–186. F. du Bois, regarding ‘what is special about private law’, characterized this argument as Hegelian, describing the constitutive role of private law focusing on torts; see F. du Bois, ’Social purposes, fundamental rights and the judicial development of private law’, in D. Nolan and A.Robertson (eds.), Rights and Private Law (Oxford: Hart, 2012) pp. 89–114. With regard to the French Code Civil, J. Domat and R. J. Pothier deserve to be mentioned. For a European perspective F. Wieacker, A History of Private Law in Europe, trans. T. Weir (Oxford: Oxford University Press, 1995); J. Gordley, ‘The architecture of the common and civil law of torts: an historical survey’, in M. Bussani and A. J. Sebok (eds.), Comparative Tort Law: Global Perspectives (Cheltenham: Edward Elgar, 2015), pp. 173–200. C. Fried, Contract as Promise (Cambridge, MA: Harvard University Press, 1981), p. 7 says: ‘It is a first principle of liberal political morality that we be secure in what is ours – so that our persons and property not be open to exploitation by others, and that from a sure foundation we may express our will and expend our powers in the world.’ J. Gordley, Tort Law in the Aristotelian Tradition (Oxford: Oxford University Press, 1997). With regard to common law and civil law in Europe see Gordley, ‘The architecture of the common and civil law of torts’, p. 192; G. E. White, Tort Law in America: An Intellectual History (New York: Oxford University Press, 2003), chapters 1 and 2, who refers in this analysis to Oliver Wendell Holmes; D. Ibbetson, A Historical Introduction to the Law of Obligations (Oxford: Oxford University Press, 1999).

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at a breathtaking pace challenged the existing system of liability. National legal authorities, courts and lawmakers, democratic and autocratic alike, reacted by complementing fault-based liability for accidents with liability for the failure to manage risks inherent in the operation of industrial enterprises and/or risks resulting from new technologies. Legal systems acted in different ways (see Chapter 22 on varieties of capitalism) but did not question fault-based liability as a rule.28 Liberal market economies (LMEs) remained quite reluctant and called for clear benefits prior to statutory intervention,29 whereas coordinated market economies (CMEs) were more prone to break away from fault-based liability systems, at least in selected fields. The process of social democratization (Fritz Scharpf)30 of society that experienced both the rise and decline of the E´tat Providence (welfare state) did not lead to a closer approximation of the liability systems in LMEs and CMEs.31 Liability for individual misconduct has gradually lost its overall centrality. Enterprise liability became increasingly detached from individual responsibility and differentiated into various strands. One building block is vicarious liability with all its differences between the common and civil law, but also between the different civil law systems.32 Organizational fault constitutes another strand reaching from colpa d’apparato, the Learned Hand Formula, to liability with or without shift of the burden of proof.33 A tendency towards objective liability for defectiveness and occasionally strict liability standards remained the exception to the rule. The legislator adopted sector- and/or riskrelated laws, often accompanied by mandatory insurance which covered damages up to a particular ceiling. The transformation of the industrial society into a consumer society did not affect the dominance of a fault-based liability system in industrial and social relations. The battle over the appropriate product liability regime is a stand-alone example of the complexities and uncertainties of a liability regime that seeks to combine fault-based liability with patterns of strict liability. The origins of product liability are older than the consumer society. Even in UK common law, a bastion of individual fault

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F. Werro and E. Bu¨yu¨ksagis, ‘The bounds between negligence and strict liability’, in Bussani and Sebok, Comparative Tort Law, pp. 201–25. For an early assessment see O. W. Holmes, The Common Law (New York: Sterling Publishing, 2004), pp. 59–60: The state might conceivably make itself a mutual insurance company against accidents, and distribute the burden of its citizens’ mishaps among all its members. . . . The state does none of these things, however, and the prevailing view is that its cumbrous and expensive machinery ought not to be set in motion unless some clear benefit is to be derived from disturbing the status quo.

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F. Scharpf, Crisis and Choice in European Social Democracy (Ithaca, NY: Cornell University Press, 1991). Ewald, L’Etat Providence; see also D. J. Ibbetson, European Legal Development: The Case of Tort (Cambridge: Cambridge University Press, 2012) who discuss the different trajectories and hints at the relative weight given to alternatives to tort such as insurance. P. Giliker, Vicarious Liability in Tort: A Comparative Perspective (Cambridge: Cambridge University Press, 2010). The particular importance of the liability of a trustee (Sachwalter), which in this particular shape only exists in France, will be discussed later on. US v. Carroll Towing, 159 F 2d 169, 173 (2nd Cir. 1947).

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liability, a nascent organizational liability emerges.34 The House of Lords (today the Supreme Court) did not call it product liability, using instead the terminology of manufacturer and consumer.35 However, the consumer society only unfolded after World War II. The US set the tone when John F. Kennedy coined the phrase ‘consumers by definition include us all’ in his message before Congress in 1962, introducing the ‘right to safety’. Ralph Nader’s Unsafe at Any Speed, published in 1965, raised political awareness. In reaction to the rising number of risks and accidents, consumer lawyers and consumer activists advocated strict liability of manufacturers of dangerous products. Proactive courts were encouraged by the second restatement, which favoured the consumer. The 1997 third restatement settled the different strands in US courts disregarding the appeals of consumer advocates.36 Strict liability for defective products did not turn into a common standard. In 1985, after highly controversial discussions, the European Union adopted the Product Liability Directive, a liability regime between fault-based and strict liability, as documented in the treatment of development risks and the exemption of compensation for pain and suffering.37 In its recitals it reflects a social view of liability.38 The impact of the directive remained limited, perhaps with the exception of Austria. Outside Europe, the directive served as a blueprint of legislative action for many countries.39 Over time, the battle over strict liability versus liability for fault as the guiding principle of tort law has lost impetus.40

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This must be read against the growing demand for strict liability, that is, Rylands v. Fletcher [1868] UKHL 1, as well as the emergence of devices aimed at making causal attribution more feasible, Grant v. Australian Woollen Mills [1936] AC 85. But, on the contrary, Evans v. Triplex Safety Glass [1938] 1 All ER 283; more broadly J. Stapleton, Product Liability (Cambridge: Cambridge University Press, 1994). However, these did not point in the one direction. There is significant unease about imposing strict liability in the UK. Donoghue v. Stevenson [1932] UKHL 100. In May 1997, the American Law Institute completed the Restatement (Third) of Torts: Products Liability. The reporters of the Third Restatement were Professor J. Henderson of Cornell Law School and Professor A. Twerski of Brooklyn Law School, who were assisted in its preparation by a twenty-person advisory committee composed of judges, law professors, and practising members of the plaintiff and defence bars; www.ali.org/publications/show/torts-third/. The Product Liability Directive 85/374/ECC only establishes an incomplete rendition of strict liability since it has conferred the possibility for the member states to allow exculpatory evidence for the manufacturer in the case of development defaults. In a historical perspective, with emphasis on the factors that drive the development in legal systems, S. Whittaker (ed.), The Development of Product Liability (Oxford: Oxford University Press, 2010); P. Machnikowski (ed.), European Product Liability: An Analysis of the State of the Art in the Era of New Technologies (Cambridge: Intersentia, 2018). See the preamble of Council Directive 85/374/EEC of 25 July 1985 on the approximation of the laws, regulations and administrative provisions of the member states concerning liability for defective products, OJ L 210, 7.8.1985: ‘Whereas liability without fault on the part of the producer is the sole means of adequately solving the problem, peculiar to our age of increasing technicality, of a fair apportionment of the risks inherent in modern technological production . . . ’ (emphasis added). M. Reimann, ‘Product liability in a global context: the hollow victory of the European product liability model’ (2003), 11 European Review of Private Law 128–54. Werro and Bu¨yu¨ksagis, ‘The bounds between negligence and strict liability’.

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The lesson to draw from the 100 years of debate and battle is that strict liability remains the exception to the rule; in common law even more so than in civil law.41 The transformation took place within the tort law regime, through legislative action and judicial activism, depending on the country and the business sector. Even where the concept of individual faultbased liability remained formally unaffected, its function changed in line with the transformations of the economy and the society.42 However, even concepts mutate over time. This can be seen in the appearance of enterprise liability and also with regard to defective products.43 Inspired by the Chicago School, economic considerations of risk distribution gained ever stronger ground from the 1960s on. This is the other side of the coin: allocation of risks not on the basis of social justice but on the basis of efficiency. The EAL does not focus on strict liability per se. Its starting point was the tort of negligence which still remains at its core. For current law and economics approaches, Richard Posner set the tone in ‘A Theory of Negligence’, published in 1972,44 eleven years after Calabresi’s ‘Risk Distributions and the Law of Torts’, which will be discussed further in this chapter.45 Law and economics, said to originate in the US,46 stripped the discussion about the pros and cons of the correct standard of liability of moral considerations, reducing tort law to the perspective of utilitarianism. The advocates of law and economics, inspired by David Hume and Adam Smith, refer to the distinction between efficiency and values.47 Autonomy-based theories attacked the mainstream understanding of law and economics through moral arguments,48 while behavioural economics challenges the neoclassical assumptions through extensive empirical research.49 41

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In Reid v. Lyons [1947] AC 156 the House of Lords cut the wings of the rule in Rylands v. Fletcher [1868] UKHL 1, which has been diminished ever since; see S. Deakin, A. Johnston and B. Markesinis, Markesinis and Deakin’s Tort Law, 7th ed., Oxford: Oxford University Press, 2013, pp. 503–24. However, employers’ liability and vicarious liability are clear examples of risk internalization via tort. One might argue that the notion of fault was redefined in terms of running an unreasonable risk; again Deakin, Johnston and Markesinis, Markesinis and Deakin’s Tort Law, p. 201 on the standard of care, similar to the Learned Hand test. In a broader comparative perspective, G. Bru¨ggemeier, ‘Risk and strict liability: the distinct examples of Germany, the US and Russia’, EUI Working Paper 2012/29. Holmes, The Common Law and K. Renner, Die Rechtsinstitute des Privatrechts und ihre soziale Funktion: Ein Beitrag zur Kritik des bu¨rgerlichen Rechts, ed. J. Karner (Vienna: Wiener Volksbuchhandlung, 1904) both made similar points on concepts remaining the same while their function changes. Overview in Werro and Bu¨yu¨ksagis, ‘The bounds between negligence and strict liability’. Posner, ‘A theory of negligence’. G. Calabresi, ‘Some thoughts on risk distributions’. Although G. Bru¨ggemeier, Common Principles of Tort Law, chapter 1, traces the functional approach, including economic ‘deterrence’ and social ‘compensation’ arguments, to Mataja (an Austrian), at the end of the nineteenth century. For a critical analysis of the distinction see R. Dworkin, ‘Is wealth a value?’ (1980) 9(2) Journal of Legal Studies 191–226. For example, T. Honore´, ‘The morality of tort law: questions and answers’, in Owen, Philosophical Foundations of Tort Law, p. 74: ‘Efficiency must be pursued within a morally defensible framework; so we must ask, and ask first, what aims it is morally desirable and defensible to pursue by imposing tort liability.’; S. Perry ‘Risk, harm and responsibility’, in Owen, Philosophical Foundations of Tort Law. The central contention is that if there is a general capacity to avoid harm in principle, even if not in a given situation in practice, then this is a sufficient basis on which to hold someone liable. Hence, foreseeability and duty are defined objectively re the relevant amount of risk acceptable, but liability depends on the ‘capacity of avoidance’, the idea of outcome responsibility. There is an abundant literature, see O. Ben-Shahar and C. E. Schneider, More Than You Wanted To Know: The Failure of Mandated Disclosure (Princeton, NJ: Princeton University Press, 2014); Zamir and Teichmann, Behavioral Law and Economics, Alemanno and Sibony, Nudge and the Law.

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Putting emphasis on the societal role of liability law changes the focus. The question then is no longer whether law and economics advocates strict or fault-based liability, but rather one of strict or fault liability is economized in terms of aggregative utility and efficiency. Appropriate levels of risks are efficient levels of risk (the Learned Hand Formula); the causal-ethical attribution of liability fades away. This does not mean that there is no added value in analysing tort law through the lens of economic efficiency. One of its major strengths is the emphasis on uncomfortable truths or, to frame it in the language of the societal role of liability law, on the economic implications of social justicerelated laws and judgments. Although post-classical law and economics brings economics closer to reality, empirical research occurs only occasionally. George Priest claims that the US insurance crisis is the direct result of the Second (consumerfriendly) Restatement on Torts.50 Yet, it took behavioural economics to change the research landscape. The last step in the development of liability law reaches beyond the correct allocation of risks under the regime of social justice and/or economic efficiency. In the risk society, risks are no longer calculable. The socio-legal debate is ahead of the liability law as it stands, whereas courts struggle with uncertain causation, widespread harm, plurality of employers (asbestos), manufacturers (DES blood products), or polluters, and the consequences of these phenomena for liability. The academic debate focuses on causation, proportional market share, joint or several liability with internal reapportionment, without receiving much guidance from the legislator.51 Precious hints can be found in academic exercises that were triggered in 2001 by the European Commission through the idea of elaborating a European Civil Code. The so-called Academic Draft of a Common Frame of Reference provides for a fully fledged tort law regime. This draft was developed by 200 academics from across Europe. The proposal is similar to Art. 1384 of the Code Civil, but less comprehensive as strict liability does not apply if the keeper of hazardous substances, installations and energies does not exercise control over them. Less known is the European group of tort lawyers who presented, around the same time, the Principles of European Tort Law (PETL).52 Like the study group, PETL also opts for strict liability, which is, however, bound to ‘an abnormally dangerous activity’ rather than the ‘control of dangerous things’.53 The three selected texts reflect the developments in tort law due to economic, social and political transformations since the industrial revolution. Josserand analyses the shift from a subjective, individualized liability, which is fault-based, and its transition under the pressure of the industrial society to an objective non-fault liability in French civil

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G. Priest, in ‘The current insurance crisis and modern tort law’ (1987) 96(7) Yale Law Journal 1521–90, says that the insurance crisis of the 1980s in the United States is a direct result of the Second Restatement (very proconsumer) pricing out these very consumers from, for example, driving. Deakin, Johnston and Markesinis, Markesinis and Deakin’s Tort Law, pp. 522–3. https://en.wikipedia.org/wiki/European_Group_on_Tort_Law; F. Busnelli et al. (European Group on Tort Law), Principles of European Tort Law (Vienna: Springer, 2005). See Werro and Bu¨yu¨ksagis, ‘The bounds between negligence and strict liability’, p. 216, elaborating on the difference between ‘hazardous thing standard’ and ‘hazardous activity standard’.

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law – a development in which the legislator played a limited role (with the exception of the Workers’ Compensation Act, adopted in 1897 and introducing the new approach to risk). Raymond Salleilles54 and Le´on Duguit,55 who have essentially framed the academic debate in France, must be mentioned alongside Josserand. Each of them has left his mark. Josserand placed the emphasis on the change within the French Code Civil; Saleilles focused on the redefinition of fault on the basis of risk; Duguit dealt with the necessity of an equivalent treatment of private enterprises and the state.56 They all insist on the ethical dimension of liability. To this day, France has been paradigmatic for a recurring debate, which does not take place in a uniform way and is spread over time, but follows similar parameters, certainly not in the solutions, but in the way liability addresses social justice.57 Calabresi contrasts these justifications for objective or objectified liability, which are based on strongly ethical-moral reasons both on the European continent and in the United States, with the economic analysis of its potential costs. The result of Calabresi’s analysis is the rule of the cheapest cost avoider, who would be able to bear the costs of an accident best and should be incentivized to choose between avoiding the damage or compensating it/taking precaution for it – a system which has to be hedged against certain unavoidable risks by means of a redistribution mechanism. Nine years later, in The Costs of Accidents, Calabresi elaborates on the approach that he had first formulated in 1961.58 54

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Both are contemporaries; R. Salleilles, Les accidents du travail et la responsabilite´ de´lictuelle (Paris: A. Rousseau, 1897). Tending to analyse from the perspective of public law and more radical with regard to his claims, L. Duguit, La Transformation Ge´ne´rales du Droit Prive´ depuis le Code Napole´on (Paris: Alcan, 1912): ‘On essayait de justifier le syste`me en torturant quelques textes du Code Napole´on, notamment les articles 1384 et suivants,’ criticizes L. Josserand, De la responsabilite´ du fait des choses anime´es (Paris: Hachette Livre BNF, 1897) and R. Saleilles, Les accidents du travail. Duguit refers to A. Comte, Syste`me de politique positive, 3rd ed. (Paris: Larousse, 1890). Duguit’s theory is one of those function-based on a concept of interdependence. He strips the state of its pretention to sovereignty, stating that just like any other body in society it has duties towards others. The state’s duties are equivalent rather than equal because the state serves a different function than private enterprises; nevertheless, there is nothing ‘special’ about the state to justify excluding it from liability; see B. Cirhuza Nyamazi, ‘De la responsabilite´ sans faute de l’administration en droit compare´s franc¸ais, belge et congolais’, 2007, s. III: La theorie de la responsabilite´ sans faute et pour risque de l’administration: ‘Ces deux doctrines aboutissaient en de´finitive, a` substituer a` la notion de la faute un principe de responsabilite´ plus large, celui du risque. Mais en re´alite´, il y eut plusieurs the´ories du risque dont le seul de´nominateur commun e´tait la recherche de solutions favorables aux victimes en dehors de toute ide´e de faute’ (https://bit.ly/39SKm39). J. Gardner, ‘What is Tort Law For? Part 2. The Place of Distributive Justice’ in J. Oberdiek (ed.), Philosophical Foundations of the Law of Torts (Oxford: Oxford University Press, 2014), pp. 335–53; P. Cane, ‘Distributive justice and tort law’ (2001), 4 New Zealand Law Review 401–20. In the United States, see, for example, G. E. White, Tort Law in America: An Intellectual History (Oxford: Oxford University Press, 2003), pp. 291–338; J. G. Culhane, ‘Tort, compensation, and two kinds of justice’ (2003) 55(4) Rutgers Law Review 1027–107. German scholars seem to become more conservative in distinguishing between corrective justice and social justice – even O. von Gierke, Die Soziale Aufgabe des Privatrechts (Berlin: Springer, 1889), p.33, claims that corrective justice is the main guiding principle of tort law; see also H. Koziol, Basic Questions of Tort Law from a Germanic Perspective (Vienna: Jan Sramek Verlag, 2012). For a general overview see also I. Englard, Corrective and Distributive Justice: From Aristotle to Modern Times (Oxford: Oxford University Press, 2009), pp. 177–208. G. Calabresi, The Costs of Accidents: A Legal and Economic Analysis (New Haven, CT:Yale University Press, 1970).

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It precedes Posner’s ‘A Theory of Negligence’ and Louis Kaplow and Steven Shavell’s book Fairness versus Welfare.59 Beck argues, instead, that legal systems fight in vain against the ubiquitous dangers of today’s risk society with the instrumental toolbox of the nineteenth and twentieth centuries. They would only end up perpetuating and legitimating the risks they are trying to contain. The economic crisis following the collapse of Lehman Brothers provides ample evidence of the risk society we live in and of the difficulties the legal system faces in handling the liability issues.60 Beck claims a different, new liability law order, different from the one which appears under existing law, where the judiciary identifies new pathways,61 while the legislative and the executive bodies become entangled with the regulated industries – something that Beck characterizes provocatively as ‘organised irresponsibility’.62 II Louis Josserand’s text is taken from a collection of lectures about the current developments of civil law, published in 1936.63 Josserand, who is considered to be a founder of modern French liability law alongside Saleilles, presents the dramatic developments of liability law during the preceding decades since the beginning of industrialization.64 He refers to the pressure which is exerted from the outside on the foundations of liability law, contract and tort, vicarious liability, objective and subjective, fault and non-fault, individual and collective. This short text covers the whole spectrum of questions which, to this day, determine the discussion about liability law, with the exception of organizational liability,65 although rudimentarily included in the ‘responsabilite´ du fait des choses’ (‘la responsabilite´ du gardien’/‘liability of the guardian’). The text combines legal-factual developments with legal effects. It is characteristic of the zeitgeist of the 1930s, the influence of legal sociology in the period between the two world wars.66 What follows is a highly compressed outline of the social history of accidents. There was no (full) control over life. Later on, Beck will

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L. Kaplow and S. Shavell, Fairness versus Welfare (Cambridge, MA: Harvard University Press, 2006). J. Vogl, The Specter of Capital (Stanford, CA: Stanford University Press, 2015). See the leading case Urgande in Chapter 9. U. Beck, Gegengifte: Die organisierte Unverantwortlichkeit (Frankfurt: Suhrkamp, 1988), p. 9 and in particular chapter 3, ‘Der Industrielle Fatalismus: Die organisierte Unverantwortlichkeit’ (‘Industrial fatalism: organised irresponsibility), pp. 96–112, the book is not translated into English. Josserand, ‘L’e´volution de la responsabilite´’. Of course, Josserand is not the only one who described and analysed this change of liability law following the Industrial Revolution. See G. Bru¨ggemeier, Common Principles of Tort Law, p. 158, which consists of two lines: ‘(i) it is vicarious liability to the extent that it involves liability for direct injury through the wrongful action of concrete employees; (ii) it is within certain bonds strict liability to the extent anonymous production and service processes are involved’. I am alluding to the culture of superiority; see H.-G. Haupt, Sozialgeschichte Frankreichs seit 1789 (Berlin: Suhrkamp, 1989), who analyses, in a very sensitive way, cultural stereotypes.

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address the ubiquitous character of the risk society in bringing together the feeling of being surrounded by risks and their mainly technological character. The meaning of ‘accident’ changed radically with industrialization. An accident is no longer considered as an act of God, but as a result of human-induced mechanization through industrial machines, the invention of the automobile and airplanes. Under reference to Friedrich Nietzsche,67 Josserand emphasizes that life itself has become dangerous and that we have no choice except to learn to cope with the daily risks. Josserand’s credo is that humanity applauds technical progress but joyfully plunges into dangers to life and limb, immediately calling for a safety net by holding someone responsible. Beck turned the ‘secure society’ into the paradigm of the Modern Age, merging subjectively perceived and objectively increased risks. Steven Pinker, quite to the contrary, argues that we are living in the least dangerous times ever.68 The connection to Franc¸ois Ewald is obvious.69 Roman law was already familiar with the principle of neminem laedere. The French proverb says ‘who breaks the glasses, pays for them’ (‘qui casse les verres les paie’) and the Italian might even fit better with private law: ‘chi rompe paga e i cocci sono sui’ (‘who breaks, pays and owns the pieces’). However, this wisdom did not prevent our ancestors from taking on their God-given part of the damage without complaint, sometimes like Montaigne with black humour: ‘le dommage de l’un est le profit de l’autre’ (‘the damage of one person is the profit of another’). Our ancestors did not claim distributive justice – these are Josserand’s words, although it is rather a question of corrective justice, that is, of the compensation for the damages suffered individually.70 As early as the 1930s, the perspective changed completely, virtually taking a U-turn. Accidents and perils of life were no longer to be attributed to a higher authority, to a God who punishes people with an epidemic; instead they were attributed to specific persons, no be it physical or legal or whether acting individually or collectively. The legal system is supposed to provide us with the responsible agent that can be held accountable for insufficient risk management and, if the risks cause damage, for compensation. Here lies the origin of the ever broader and ever more sophisticated endeavour to trace responsibilities between the different actors and to find new legal concepts such as enterprise liability. Josserand continues to discuss the adaptation processes to which the French Code Civil was (and still is) exposed. In line with nineteenth- or twentieth-century codification, the French Code Civil links liability to the existence of fault, liability being based on three

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F. Nietzsche, Fro¨hliche Wissenschaft, vol. 2 (quoted according to the Bu¨chergilde Gutenberg edition, p. 7). The ‘claim’ or the ‘plead’ for a ‘dangerous’ life can be found there. S. Pinker, The Better Angels of our Nature: Why Violence Has Declined (New York: Viking Books, 2011). See F. Ewald, L’Etat Providence. On iustitia commutativa versus iustitia distributiva, see Chapter 14. For a stimulating argument about how cause and our understanding of reality impacts on its concept see N. E. Simmonds ‘Justice, causation and private law’, in M. Passerin d’Entreves and U. Vogel (eds.), Public and Private: Legal, Political and Philosophical Perspectives (London: Routledge, 2000), pp. 149–76.

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prerequisites: dommage (damage), faute (fault) and causalite´ (causality).71 In his perspective, the legislator forced liability into a Procrustean bed, which needs to be broadened to be adapted to industrial society: (1) the assumption of fault characterized by two techniques: abuse of rights and liability for the omission to act. The latter is meant to cause de facto and de jure an obligation on the entrepreneur to constantly adapt their products to the most recent state of the art;72 (2) the recognition of a presumption of fault, to be established de jure according to Arts. 1384, 1385 and 1386 of the French Code Civil; (3) the partial substitution of the fault-based liability with strict liability in 1897,73 which gave rise to Bismarck’s social legislation (1883 health insurance and 1884 accident insurance);74 and (4) the advocacy of contractual strict (guarantee) liability in personal transport, gambling on a funfair, rent contracts, and maybe one day doctor-patient contracts. The liability of the ‘gardien des choses’ – trustee liability (in German Sachwalterhaftung)75 – and contractual liability to tortious fact76 played an essential role in the development of strict product liability.77 The two legal concepts formulated could have legitimized strict liability, but gained importance only with regard to products that are characterised by an inherent dynamic, such as exploding gas bottles or televisions.78 Along that line, the French judiciary might even be inclined to submit self-driving cars which have caused an accident to trustee liability.79 Instead, the judiciary searched for the solution in contract law. According to Art. 1645 CC, the seller bears liability for damages if they knew of the defect. The French Court of Cassation essentially changed this rule in 1960.80 The knowledge of the seller is irrevocably presumed and the seller cannot even exonerate themself. The buyer can assert their claim 71

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Here the baselines might be sufficient. German law traditionally adds illegality, which is often indicated, and focuses on the violation of a legally protected right instead of the damage. It also distinguishes between the justification and resulting causality. According to G. Bru¨ggemeier, these prerequisites are only fulfilled with regard to the liability for intentional, but not for negligent, behaviour. Haftungsrecht: Struktur, Prinzipien, Schutzbereich (Berlin, Heidelberg: Springer, 2006), pp.49–51. Josserand, ‘L’e´volution de la responsabilite´’, pp. 39–40; see the nice description by M. Renner, ‘Death by complexity: the financial crisis and the crisis of law in world society’, in P. Kjaer, G. Teubner and A. Febbrajo (eds.), The Financial Crisis in Constitutional Perspective: The Dark Side of Functional Differentiation (Oxford: Oxford University Press, 2011), pp. 93–111. Josserand, ‘L’e´volution de la responsabilite´’, p. 44. In 1897 the UK also adopted the Workmen’s Compensation Act. Josserand, ‘L’e´volution de la responsabilite´’, lists a whole number of laws on p. 46. See also F. Ewald, L’Etat Providence. Article 1384 of the Code Civil provides that: ‘One shall be liable not only for the damages he causes by his own act, but also for that which is caused by the acts of persons for whom he is responsible, or by things which are in his custody.’ With regard to the parallel development in state liability, D. Fairgrieve, State Liability in Tort: A Comparative Law Study (Oxford: Oxford University Press, 2003); C. Harlow, State Liability: Tort Liability and Beyond (Oxford: Oxford University Press, 2004). N. Reich and H.-W. Micklitz, Consumer Protection Law in the EEC: A Comparative Analysis (New York: Van Nostrand Reinhold, 1981), fn. 105 and 106, give an overview prior to the adoption of Directive 85/374/EEC. J. Calais-Auloy, H. Temple and M. Depince´, Droit de la consommation, 10th ed. (Paris: Dalloz, 2020), pp. 342–343, by referring to Civ. 1er, 3 oct. 1980 (RTD civ. 1980.358, obs. Durry). S. Chopra and L. White, A Legal Theory for Autonomous Artificial Agents (Michigan: The University of Michigan Press, 2011), pp. 161–2. The trigger was the question of the liability for poisoned bread, Nıˆmes, 25 ap. 1960 (D. 1960 J 725) and Civ. 1er, 19 jan. 1965 (D. 1965, J. 389).

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against every third party in the distribution chain including the manufacturer.81 Under pressure from the Product Liability Directive, France had to change its law to the detriment of the consumer.82 Only damages caused ‘by an element of the human body or by products thereof’ remain subject to strict liability, Art. 1386–12 CC.83 The most important finding – the one Josserand characterizes as the ‘objective’ upshot of his article – is that liability shifts from fault-based to strict liability and that the driving force behind this development is the judiciary and not the legislative authority. Paradoxically enough, but also very enlightening for the power of French legal thought, this development took place in a country in which, according to Montesquieu, the judge should only be the mouthpiece of the words of the law: ‘Le juge n’est que la bouche qui prononce les paroles de la loi.’ III In the decades following World War II, it was a young scholar, later a federal judge in the United States, who originated one of the longest-lasting theoretical contributions in the area of risk, tort and liability (and beyond). With his groundbreaking article entitled ‘Some Thoughts on Risk Distribution and the Law of Torts’,84 Calabresi, together with Coase and (a bit later and probably less groundbreaking) Posner, is considered to be one of the founding fathers of law and economics. There is a strong link between Coase and Calabresi, ‘The Problem of Social Cost’85 (Chapter 3) and ‘Some Thoughts on Risk Distribution and the Law of Torts’, published more or less at the same time. Coase offers an analysis of different strands of tort law cases, with an emphasis on nuisance. He is interested in identifying allocations that increase or maximize overall welfare. Whether the losses are compensated is not his concern. Already the title of Calabresi’s article indicates that his perspective differs from Coase’s. His focus is on risk allocation, which quite necessarily brings him closer to ‘fairness’, even if he seeks the answer in economic considerations. Indeed, in The Costs of Accidents he is at pains to stress that his point of view is not the only one.86

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On the inconsistencies M. Fabre-Magnan, Droit des obligations, vol. 1 (Paris: Presses Universitaires de France, 2012), pp. 589 et seq. France has twice been condemned by the ECJ for failure to transpose directives within the set time limit. A central role was then played by the equal treatment of the seller and the manufacturer, which had been established by the judiciary according to French law. Critical with regard to the three judgments: G. Viney, ‘L’interpre´tation par la CJCE de la directive du 25 juillet 1985 sur la responsabilite´ du fait des produits de´fectueux’ (2002) 44 La Semaine Juridique Edition Ge´ne´rale at 177; J. Bell, S. Boyon and S. Whittaker, Principles of French Law (Oxford: Oxford University Press, 2008), p. 404; S. Whittaker, Liability for Products: English Law, French Law and European Harmonisation (Oxford: Oxford University Press, 2005), pp. 149–51, 315–19, 324, 391–401. J. S. Borghetti, ‘The scope of application of the directive on product liability and the impact of the directive on French law’ (2011) 4 Zeitschrift fu¨r Europa¨isches Privatrecht 919–29. Calabresi, ‘Some thoughts on risk distribution’. Coase, ‘The problem of social cost’. See Calabresi, The Costs of Accidents, pp. 301–8, where he claims that his deterrence-based approach to tort law is more consistent with the notion of justice than the traditional fault system.

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For a classical or classically educated lawyer in Continental Europe of the early 1960s, this article must astonish, especially if one reads Calabresi after Josserand. In 1961, traditional legal scholarship in Europe still dominated. Europe, including the common law world (i.e., the United Kingdom), was too busy with the confrontation between free market economy and communist planned economy, with law as part of a free and liberal social market order as opposed to law as part of the political structure to enforce socialism (see Chapter 24). ‘Classical Legal Thought’ (Duncan Kennedy) dominated the agenda in France as well as in Germany. It took the political and theoretical ripples of the student revolution in 1968 to question the mainstream legal thinking. The discussion that began slowly in the early 1960s pointed towards a completely different direction of political, legaltheoretical, legal-sociological and legal-philosophical nature.87 At least in Continental Europe, calls for social justice gained pace with the rise of the welfare state. Calabresi enquires into what ‘risk distribution’ really is. Unlike Coase, he investigates how the risk can be distributed through three questions:88 ‘do they (he refers to the lawyers that deal with risk distribution) wish as broad a spreading of all losses as possible? Or do they want the burden of losses to be borne by those classes considered the most able to pay? Or do they seek something entirely different – that those enterprises, which give rise to a loss should bear the burden, whether or not this accomplishes the prior two aims?’ Under each of the three questions, the distinction between fault-based and strict liability on which Walter Blum and Harry Kalven focused has to be brushed aside.89 Calabresi criticizes that lawyers would not differentiate clearly enough between ethic-moral principles (guilt, fault, objective liability) and economic arguments and that they would mix them both in their explanation and justifications. Calabresi tries to find purely economic arguments for the distribution of liability that align with the necessity and the functioning of the economy, as well as and a particular vision of society. If these explanation patterns are strong enough, ethic-moral justifications are of marginal importance. Calabresi treats economics and society as antithetic. The future of law and economics seems to lie in the combination of efficiency considerations with moral-ethical arguments.90 One reason is certainly that the ideologically loaded conflict between strict liability and negligence has lost importance. Calabresi could be read as paving the way for much more pragmatic solutions, as his search for the cheapest cost avoider implies the need to make value-guided choices between different

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For France, M. Miaille, Une Introduction au Critique du Droit (Paris: F. Maspero, 1976); for Germany, J. Esser, Grundsatz und Norm in der richterlichen Fortbildung des Privatrechts (Tu¨bingen: Mohr Siebeck, 1956); L. Raiser, Grundgesetz und Privatrechtsordnung, Deutscher Juristentag: Verhandlungen des sechsundvierzigsten Deutschen Juristentages Essen (Munich: C. H. Beck, 1966), all are not translated into English. Maybe inspired by the ongoing preparation of the second restatement on tort, Calabresi, ‘Some thoughts on risk distribution’ at 499. It began with Calabresi’s contribution entitled ‘Fault, accidents and the wonderful world of Blum and Kalven’ (1965) 75 Yale Law Journal 216–38; the response: W. Blum and H. Kalven, ‘The empty cabinet of Dr. Calabresi’ (1967) 34 University of Chicago Law Review 239–73; and Calabresi’s riposte, The Costs of Accidents, pp. 11–13. G. Calabresi, The Future of Law and Economics: Essays in Reform and Recollection (New Haven, CT: Yale University Press, 2016).

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options. On the other hand, morally-ethically guided attempts at tightening negligence liability through enterprise liability, vicarious liability and objective standards of care include economic considerations.91 That is why a holistic view on the relationship between law and society is more appropriate as it allows economic considerations to be given a legitimate place. Calabresi examines three potential justification patterns, which are formulated following the three questions presented above: (1) ‘Enterprise Liability – or the Allocation of Resources Justification’ – ‘activities should bear the costs they engender’; (2) ‘The Spreading of Losses Justification’ – ‘if losses are broadly spread and over time – they are the least harmful’;92 and (3) ‘The Deep Pocket Justification’ – ‘a dollar removed from a rich man causes the rich man less pain than a dollar removed from a poor man’.93 Calabresi does not deny that his analysis is based on certain ethical considerations94 – for example, the superiority of the market economy over the planned economy, the idea that the autonomy and the freedom of action of the enterprise, employees and consumers have to be defended as far as possible against interventions by the state and that state interventions of whatever form should only be considered on a subsidiary basis (see Chapter 12 on information economics). Calabresi repeatedly uses the same fictitious example of a manufacturer who wants to produce a widget and finds himself confronted with the potential costs that result from his liability for the product risks. Depending on the model of liability, that is, on the three constellations above, different consequences arise that determine the persuasive power of the justification pattern. Enterprise liability – in Calabresi’s perception – is, in principle, superior to a system of social insurance (he speaks of social insurance which involves all possible forms of insurance, insurance of the enterprise, of the workers and of the consumers) since it promotes an appropriate distribution of risks. Calabresi exemplifies these findings by means of an analysis of examples, in particular nuisance, incidents of pollution, which play a central role in the seminal contribution by Coase to the ‘problem of social cost’.95 The reader is strongly encouraged to read Chapter 3 in order to understand better the relationship between Coase and Calabresi.96 The justification of the optimal (the most efficient97) distribution of resources (enterprises should pay for accidents that they produce) is based on the consideration that

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S. Grundmann, in ‘The fault principle as the chameleon of contract law’ (2009) 107(8) Michigan Law Review 1583–99, argues that an intelligent combination of fault and strict liability requires to distinguish according to market expectations, specifically the ability to compare offers. Calabresi, ‘Some thoughts on risk distribution’ at 517. Calabresi, ‘Some thoughts on risk distribution’ at 527. Especially clear Calabresi, ‘Some thoughts on risk distribution’ at 502 and 531–3, which must be understood as pleading in favour of a market economy. Even more outspoken in G. Calabresi, ‘Torts: the law of the mixed society’ (1978) 56 Texas Law Review 519–34. R. Coase, ‘The problem of social cost’. On the development after Coase and Calabresi see R. Cooter and T. Ulen, Law and Economics, 6th ed. (Boston, MA: Pearson), pp. 199–229. Not fairer – this would be the argumentation of social theorists – although one might wonder whether there is not such an undertone in the text.

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people want to know the relative costs of the manufacturing of a good. The absence of this information, economics argues, leads to a misallocation. Such transparency is only possible if the entrepreneur cannot pass on the costs of the misallocation through prices.98 As a consequence, the person who caused the accident has to bear the costs, irrespective of the existence of fault.99 Beck would probably say this no longer matters if a catastrophic risk materializes (e.g., Chernobyl), because there is no one left to pass costs on to. Economics faces difficulties in answering the essential question: ‘which is the party that should bear the costs?’ This party can be the entrepreneur, the worker, or the employee, since the potential costs would find their way into the salaries or the prices. With reference to Coase, Calabresi searches for the answer in the concept of the ‘cheapest cost avoider’. This is indeed a revolutionary step, as no longer are only the entrepreneur and the worker/employee potential addressees of the liability rule, but also the victim themself (who would not incur liability, but forgo compensation of the loss): ‘Whenever one party is in fact in a better position to allocate the cost of the particular loss to the appropriate activity or merchandise, allocation of resources requires that party to bear the original burden of the loss.’100 Calabresi has to find arguments for the allocation of resources. He does so by examining how additional costs – for example of supplied products – find their way into pricing.101 The wording ‘better position’ conceals a normative evaluation which, in case of conflict, requires a lawyer since an assessment is necessary which cannot be drawn from Calabresi’s formula and which might not even be achieved by harkening back to the famous formula of Judge Learned Hand.102 The question of who is the cheapest cost avoider has indeed been abundantly discussed in the law and economics literature post-Calabresi,103 and again I would like to encourage the study of Chapter 3. TU¨V Rheinland is not an easy case and it is worth

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Calabresi, ‘Some thoughts on risk distribution’ at 501. Calabresi only deals with the distribution of cost risks in the second example (spreading of losses, at 517). In this context comprehensively R. Pardolesi and B. Tassone, ‘Guido Calabresi on torts: Italian courts and the cheapest cost avoider’ (2008) 4 Erasmus Law Review 7–39. Calabresi, ‘Some thoughts on risk distribution’ at 506–7. One may wonder whether this is not what Holmes already said – although Holmes never elaborated on this laissez-faire idea, just noted the inconvenience of loss shifting. Does Calabresi systemize Holmes’ original insights? Calabresi, ‘Some thoughts on risk distribution’ at 509 et seq. essentially uses two theories, the theory of marginal costs and the cost plus theory. United States v. Carroll Towing Co., 159 F.2d 169 (1947): ‘The owner’s duty, as in other similar situations, to provide against resulting injuries is a function of three variables: (1) The probability that she will break away; (2) the gravity of the resulting injury, if she does; (3) the burden of adequate precautions.’ Since the formula is linked to the assumption that the risks are measurable, it depends on ‘measurability’ – something that is rarely, if ever, possible with big enterprises. If this possibility is omitted (as claimed by Beck in Risk Society), the Learned Hand formula fails as well. Furthermore, in practice there are often several parties involved, some of which are able to avoid the damage. Recently, E. Carbonara, A. Guerra and F. Parisi, ‘Sharing residual liability: the cheapest cost avoider revisited’ (2016) 45 Journal of Legal Studies 173–201.

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recalling the transnational legal setting. The European Union has liberalized the market for medical devices and has equally paved the way for certification bodies to testify that production complies with EU standards. The European Union has set a regulatory frame which introduces a new potential addressee of liability. The company is bankrupt and the victim has identified the German certification body as the addressee. Who then is the cheapest cost avoider if the potentially best candidate drops out? The victim was not in a position to examine the breast implants and assess their compliance with EU standards. ¨ V looks like a promising candidate. However, in the eyes of the ECJ, EU It seems that TU law does not provide clear guidance on the set of responsibilities the certification body incurs. The deadlock forms a convenient bridge to the second justification pattern advanced by Calabresi; the justification for risk spreading. Josserand highlights that the states of Europe have increasingly established risk liability in the course of industrialization, not least as an answer to the social question in order to protect employees (accident insurance) and consumers (train, airplane). Calabresi successively examines two possible justifications: that the burden of a loss is smaller if it is carried by several people, and that a burden is easier to accept if it is spread over a longer period.104 Both justifications have their counterparts in economic theory. The first brings the theory of the diminishing marginal utility of money into play. Its value and significance depend on empirical studies. They demonstrate, however, that it is the influence on the social status rather than the diminishing marginal utility that matters.105 Calabresi does not clarify his own position.106 The same can be said with regard to the inter-temporal risk spread. The theory of the diminishing marginal utility of money would advocate a governmental accident relief programme, which applies in favour of the whole population and is financed through taxes. New Zealand had established this model with regard to product liability.107 Calabresi reveals sympathy for a model of risk spreading, provided it is linked to certain 104

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Calabresi, ‘Some thoughts on risk distribution’ at p. 517. There is a rich literature that dates back to British philosophers – J. Bentham and J. Stuart Mill, as well as the Austrian School. For an overview see G. Stigler, ‘The development of utility theory: I’ (1950) 58(4) Journal of Political Economy 307–27; J. Stigler,‘The development of utility theory: II’ (1950) 58(5) Journal of Political Economy 373–96. Calabresi, The Costs of Accidents, pp. 39–40: ‘[A] relatively small loss, if it can be borne without giving up certain symbols of social status – be they a house on the right street or a television set – feels infinitely smaller to people than an only slightly larger loss that does involve a loss in status.’ Calabresi refers to M. Friedman and L. J. Savage, ‘The utility analysis of choices involving risk’ (1948) 56(4) Journal of Political Economy 279–304. Even though Calabresi seems sceptical about the marginal utility of money theory, he still claims, in The Costs of Accidents, p. 40, that ‘the basic justification for loss spreading remains strong. We need merely recognize that social dislocations, like economic ones, will occur more frequently if one person bears a heavy loss than if many people bear light ones to find an adequate support for the spreading of losses’. However, he is against too-extensive loss spreading, since it does not provide enough incentives for avoiding accidents (Calabresi, The Costs of Accidents, p. 64: ‘A system that compensates for accidents perfectly once they have occurred but does nothing to prevent them in the first place is obviously not desirable’). Fair Trading Act 1986, Public Act 1986 No 121 (1986), www.legislation.govt.nz/act/public/1986/0121/64.0 /DLM96439.html. Very early on this approach see E. von Hippel, Verbraucherschutz, 1st ed. (Tu¨bingen: Mohr Siebeck, 1974), but not in the third edition of 1986.

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conditions. A system of accident insurance financed through taxes does not leave the costs to the enterprises, but involves consumers, and ‘resource owners’ as well (so-called secondary loss spreading). If entrepreneurs compete with each other, the levy of the costs on the price is excluded and the result would be sinking profits and ultimately a faltering economy.108 At the time of writing the ECJ has to deal with the follow-on reference to TU¨V Rheinland, where the victim sues the insurance company.109 Unlike Germany, France has introduced a mandatory insurance obligation for the producers of medical devices.110 Any decision, be it by the legislature or by the court, embraces a value judgement which is not directly related to the search for the cheapest cost avoider. The question remains whether in a scenario of functioning competition, enterprise liability might not rather serve as a filter to the disadvantage of those companies manufacturing products with harmful potential.111 In monopolist industries increases in the market price during a period of sinking profits ‘only’ result in a substantial reduction of sales figures. In Calabresi’s view, a real risk spreading towards consumers would only be possible in an oligopoly though a price adaption in an oligopoly may lead to price-fixing cartels or a ‘concerted action’. The European Union has intensively dealt with this problem, which finally led to a clarification in European antitrust law.112 The remaining topic is the ‘deep pocket’ question. Calabresi again refers to the theory of the diminishing marginal utility of money and even shows certain sympathy for it (‘some support for enterprise liability in these cases may nevertheless be found’). But without going into details he contents himself with the remark that the deep pocket argument is ‘currently out of favour’.113 Deepening the argument would lead him to ethical and moral considerations. Just like Kaplow and Shavell decades later,114 Calabresi pleads for an open political discussion about the redistribution that is aspired to by society and would be achieved by means of social insurance and taxes. This is exactly what the TU¨V Rheinland case requires; a final decision by the EU legislature. Calabresi’s approach and in particular the starting point of ‘parties know best’ has been criticized from two standpoints. The first criticism is based on his failure to distinguish

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Calabresi, ‘Some thoughts on risk distribution’ at 524, and The Costs of Accidents, pp. 46 and 55; see also Cooter and Ulen, Law and Economics, pp. 236–40. CJEU, Case C-581/18 RB v. TU¨V Rheinland LGA Products and Allianz IARD, ECLI:EU:C:2020:453. The ¨ V. Court rejected the claim of the plaintiffs against TU H.-W. Micklitz, N. Reich and L. Boucon, ‘L’Action de la vicime contre l’assureuer du producteur’, Re`vue Internationale de Droit Economique (2015), 37–68. Grundmann, ‘The fault principle as the chameleon’ at 1583. Communication from the Commission – Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements Text with EEA relevance, OJ C 11, 14.1.2011, paras. 60–85. About the (vain) attempts of the Monopolies and Mergers Commission to prove price arrangements against the mineral oil companies, see N. Reich, Markt und Recht (Neuwied und Darmstadt: Herrmann Luchterhand, 1977), pp. 269–83, (keyword: control of structure instead of behavioural control). Calabresi, ‘Some thoughts on risk distribution’ at 527. L. Kaplow and S. Shavell, ‘Should legal rules favor the poor? Clarifying the role of legal rules and the income tax in redistributing income’ (2000) 29 Journal of Legal Studies 821–35, at 823. See also Chapter 11, and Chapter 5 on the legal origins theory.

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between strangers that do not have a contractual relation and constellations in which a contractual relation does exist – such as in accidents at work or product liability.115 Even more central is Shavell, who criticizes the starting point as being too narrow, as Calabresi does not integrate all main criteria that should guide adjudication, the ‘incentives’ (faultbased liability versus strict liability), the risk-taking and insurance, the administrative costs, the liability factors (damage, causality, distribution of the burden of proof and manufacturer’s liability) as well as the alternatives to liability.116 Indeed, Calabresi focuses on possible costs of a liability system, but does not deal with the possible benefits. However, this criticism does not affect the central significance of Calabresi’s analysis. He bridged the gap between law and economics by proffering the first systematic account of what the stakes are. In Europe, the significance of law and economics has remained limited, even if the willingness to accept core insights has increased in recent years. The path towards an opening of legal education to more theory – politics, sociology and economy – is bumpy. The integration into legal and judicial practice meets resistance, not least because of the difficulties in turning economic considerations into legal dogmatic arguments.117 Law and economics has not yet made its way into the case law of the ECJ. IV With the publication of Risk Society118 in 1986, Ulrich Beck119 shifted the discussion from the risks of the industrial society of the nineteenth and twentieth century to the risks of the ‘second’ modernity of the late twentieth and now twenty-first century.120 Beck writes as a political scientist on the relationship between risks and law. His language certainly does not do justice to the degree of sophistication in legal discourse, as will be documented in the various quotations that follow. The dangers of the industrial society of the nineteenth and twentieth century manifest themselves in accidents, as already stated by Josserand and Calabresi, which can be attributed to a perpetrator and for which the latter can be held liable in a subjective way, according to their fault, or occasionally objectively, as a person responsible for the danger, or following the principle of economic reality and efficiency as the cheapest cost

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M. Adams, O¨konomische Analyse der Gefa¨hrdungs- und Verschuldenshaftung (Heidelberg: R. v. Decker, 1985), p. 20. Shavell, ‘Strict liability vs. negligence’. ¨ konomische Analyse und Haftungsrecht: eine Zwischenbilanz’ (1996) 196 Archiv fu¨r die J. Taupitz, ‘O civilistische Praxis 114–67; also C. B. Ehlgen, Probabilistische Proportionalhaftung und Haftung fu¨r den Verlust von Chancen (Tu¨bingen: Mohr Siebeck, 2012), p. 123. For a more optimistic view see G. Wagner, ‘The project of harmonising European tort law’. Beck, Risk Society. Original publication in 1986, as U. Beck, Risikogesellschaft. A. Burgess, J. Wardman and M. Mythen, ‘Considering risk: placing the work of Ulrich Beck in context’ (2018) 21 Journal of Risk Research 1–5. Readers seeking to catch up on U. Beck should have a look at the Wikipedia entry that provides the reader with a short and appealing analysis of his most important works: http://de .wikipedia.org/wiki/Ulrich_Beck. Of course, U. Beck has his precursors as well, one of the first in the legal context was R. Salleilles, Les Accidents du Travail, who analysed the transition from faute to risque.

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avoider. Beck is interested in the risks that materialize in ubiquitous catastrophes – Bhopal (still rather constrained), Chernobyl, Fukushima, and perhaps most scattered in effect: Lehman Brothers – or less spectacular and less obvious in the creeping contamination of the environment, the soil, the air, the water, the food, the houses121 – but not in the dangers of an accident at work, a car accident or the scope of product liability for defective or unsecure consumer goods. The efforts of lawyers and sociologists122 to distinguish between the different dangers and risks fill libraries. Dangers may be abstract, but they materialize in the form of a concrete accident. Dangers can be experienced. They are tangible, visible and audible. Risks lie in the far (or near) future. Their realization depends on the degree of probability. They exist, but they cannot be perceived by our senses. They can only be understood by reason.123 As Bhopal, Chernobyl and Fukushima prove, risks may materialize despite all probability statistics. The damage exceeds the dimensions of the imaginable and breaks all categories of applicable liability law. In Europe, the answer to the risks invoked by Beck lies in the creation of preventive risk management in order to avoid a disaster situation, or at least to delay it as long as possible, and, if it occurs, to make it manageable.124 As important as this dimension might be, it is recommendable to focus together with Josserand and Calabresi less on the case of a catastrophe and more on the case of damage, on the mechanisms to cope with the ubiquitous creeping materialization of the contamination of the environment and humankind. Courts all over the world fight with the means of the nineteenth century against the materializing risks of the end of the twentieth century and the still young twenty-first century. The controversy about the damage claims of the workers who were hurt or died in Bhopal or of the population that suffers in the aftermath bear witness to this.125 If this example appears far-fetched, one need only look to the thousands of women who have suffered knowing that they have received breast implants which may be hazardous to health and who are now attempting to obtain compensation payments (see Box 15.1).126 But following the paradigm of the risk society, it remains unclear whether these implants are in fact hazardous. One may only speculate that they are, and this is represented not in harm but in a statistically increased chance that they are harmful. Following the danger versus risk dichotomy, tort law takes over a precautionary function. 121 122 123 124

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See already R. Carson, Silent Spring (Boston, MA: Houghton Mifflin, 1962). N. Luhmann, Risk: A Sociological Theory (Berlin: Walter de Gruyter, 1993). Beck, Risk Society, p. 28. J. Scott, ‘Reach: combining harmonization with dynamism in the regulation of chemicals’, in J. Scott (ed.), Environmental Protection: European Law and Governance (Oxford: Oxford University Press, 2009), pp. 56–91. M. Galanter, ‘Introduction: the study of the Indian legal profession’ (1968–1969) 3(2/3) Law and Society Review 201–18. See also contributions by B. von Leeuwen; H.-W. Micklitz, N. Reich and L. Boucon; P. Rott and C. Glinski in (2015) 29(1) Revue internationale du droit economique; in particular, with regard to the topic of certification authorities, see B. von Leeuwen, ‘PIP breast implants, the EU’s new approach for goods and market surveillance by notified bodies’ (2014) 5(3) European Journal of Risk Regulation 338–50. Helpful for a deeper understanding, https://en.wikipedia.org/wiki/Poly_Implant_Prothe`se.

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Beck contrasts the ‘logic of wealth distribution in a society of scarcity’ with the ‘logic of risk distribution in late modernity’:127 ‘In advanced modernity [Beck uses the terms ‘modernity’ ‘reflective modernity’ and ‘radicalized modernity’ also for the industrial age and the present time], the social production of wealth is systematically accompanied by the social production of risks. Accordingly, the problems and conflicts relating to distribution in a society of scarcity overlap with the problems and conflicts that arise from the production, definition and distribution of techno-scientifically produced risks.’ This change is said to take place primarily where the non-existence of genuine material need of most parts of the population has been reduced and, secondly, where the ‘hazards and potential threats [realise] which have been unleashed to an extent previously unknown’.128 At the time of the publication of the ‘Risk Society’, directly before Chernobyl, Beck focused on the risks of nuclear energy as well as on the ubiquitous risks of the chemical industry in the working and consumer environment. The continuous relevance of his line of thought rings true in the economic crisis after the collapse of Lehman Brothers and after the euro crisis. Beck’s text may not only resonate with the examples given (of the environmental and health sector), but also with the new financial risks for the financial sector129 and sovereign debts.130 Beck analyses the change from the logic of wealth distribution to the logic of risk distribution in five theses. It is exactly this transformation, the second grand transformation after industrialization, that should attract the attention of lawyers. Taking the ‘Risk Society’ seriously would mean to question whether liability law as it stands and whether the promoted reforms suffice. A glimpse at the variety of pending proceedings with regard to PIP (SA Poly Implant Prothe`se France) might promote the search for a solution beyond the existing legal frame. (1) ‘Risks induce systematically and often irreversible harm, generally remain invisible, are based on causal interpretations,131 and thus initially only exist in terms of the (scientific or anti-scientific) knowledge about them.’132 As risks are classified in scientific categories, truth claims collide with each other. The borderline between the dangerous and not dangerous cannot be exactly drawn from a scientific perspective. There are two further problems: first, the disregard of the social, political and cultural dimension of risk evaluation. The turn away from Max Weber could hardly be more radical. There is no trace left of the insight upheld in political sciences and critical legal thought that any determination of a limit

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Beck, Risk Society, p.19. Beck, Risk Society, p.19. J. Vogl, The Specter of Capital (Stanford, CA: Stanford University Press, 2015). S. Picciotto, ‘Dis-embedding and regulation: the paradox of international finance’, in C. Joerges and J. Falke (eds.), Karl Polanyi, Globalisation and the Potential of Law in Transnational Markets (Oxford: Hart, 2011), p. 157; see also U. Beck, German Europe (Cambridge: Polity Press, 2013). The idea that risks are based on causal interpretations and exist only in terms of scientific knowledge introduces themes reminiscent of Kelsen’s distinction between casual laws in science and normative imputations in law. Confusing law and science introduces major problems, see Deakin, Johnston and Markesinis, Markesinis and Deakin’s Tort Law, pp. 218–22. Beck, Risk Society, pp. 22–3.

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involves a political decision as well.133 Second, not mentioned by Beck, the danger of technocracy, highly visible in the EU risk management policies which often leads to democratic deficits.134 (2) Risks do not necessarily affect exclusively the weaker members of society, but hit even those who have brought the risks into the world. They cross national boundaries, but also create new inequalities in relation to the so-called Third World, to which the risks of the second modernity are shifted to a large extent.135 Risk positions do not correspond to class positions. The class of the affected does not confront a class that is not affected.136 The risk society adds a new layer to the unequal society – the ‘insecure society’.137 Physical security and personal integrity become the all-dominant values.138 Beck might be wrong, at least as far as environmental and food toxins are concerned; it is instead social indifference that arises. In a world where new risks can materialize anywhere at any moment and it is only a question of time until the next environmental or food scandal occurs, a habituation effect arises. Risks are perceived as ‘risk fate in developed civilization’,139 a modern version of the act of God which nobody can resist; it is the return of the Greek tragedy, for example Sophocles. (3) The distribution and the marketing of risks takes the development logic of capitalism to a new level. Civilization risks are a bottomless barrel of demands, unsatisfiable, infinite, self-producible: ‘with the economic exploitation of the risks it sets free, industrial society produces the hazards and the political potential of the risk society’.140 Whether it would help, as Beck states, if blades of grass and earthworms had an active and passive right to vote, remains open. It is not just recently that lawyers have discussed the standing of trees and animals in court.141 This expansion is not without consequences for the legal and the political system. By conferring rights to nature, the legal system questions the fundaments of the Enlightenment and of rationalism.142 Beck draws the conclusion that there is 133

134

135 136 137 138

139 140 141 142

Beck, Risk Society, pp. 35–45. For a broader understanding of the sociology of knowledge see E. Durkheim, The Elementary Forms of Religious Life, trans. J. Swain (London: George Allen and Unwin, 1912); M. Foucault, Madness and Civilization (New York: Vintage, 1988); P. L. Berger and T.Luckmann, The Social Construction of Reality (New York: Anchor Books, 1966). See A. Somek, Individualism: An Essay on the Authority of the European Union (Oxford: Oxford University Press, 2008), pp. 82–110, where he discusses the European tobacco control legislation and the emergence of a new theory of regulatory power developed by the ECJ in the Tobacco Advertisement judgments. This is preceded by a more general discussion on risk regulation and democratic legitimacy, pp. 33–81. Beck, Risk Society, p. 23. Beck, Risk Society, p. 40. Beck, Risk Society, p. 65. Beck, Risk Society, p. 26. Josserand would have been proven right in a strange and new way. The promise of security, which was and has to be continuously repeated, correlates with the growth – as Beck would say – of self-produced risks. Beck, Risk Society, p. 45. Beck, Risk Society, p. 23. O. Stone, Should Trees Have Standing? (Oxford: Oxford University Press, 2010), first published in 1972. Sierra Club v. Morton, 405 US 727 (1972), dissenting opinion of Judge W. D. Douglas; in New Zealand a standing was conferred to a river, cf. T. Vines, V. Bruce and T. Faunce, ‘Planetary medicine and the Waitangi Tribunal Whanganui River report’ (2013) 20(3) Journal of Law and Medicine 528–41.

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complicity matched by a lack of responsibility – ‘[o]ne can do something and continue doing it without having to take personal responsibility for it’. In ‘Gegengifte’ (Antidote) he offers a rather crude view on the liability law:143 ‘The established rules of attribution and liability – causality, guilt, and justice – break down. This means that their careful application to research and jurisdiction has the opposite effect: the dangers increase and their anonymization is legitimated.’ The developments in the European Union and in the United States drift apart. The United States relies on ex post risk control by the judiciary and personal criminal liability of managers. The European Union adheres to risk management ex ante and state liability. In Francovich, the ECJ established member states’ liability for the non-late-insufficient implementation of EU directives into national law.144 It is highly doubtful whether the existing legal mechanisms on both sides of the Atlantic suffice to keep political resistance under control. Beck writes: ‘The social effect of risk definitions are therefore not dependent on their scientific validity.’145 (4) ‘One can possess wealth, but one can only be afflicted by risks; they are, so to speak, ascribed by civilization.’146 The risk society reverses the relation of being and awareness in terms of Marxist theories. The class position, the being, determines the awareness in industrial society, as opposed to the risk society, in which the awareness of risks represents a necessary prerequisite for being. Only someone who clearly imagines the risks of food that is contaminated by pesticides and are the result of industrial production is able to eat in a healthy way, provided they have the necessary financial resources. It is not surprising that Beck’s provocative statement caused criticism.147 (5) ‘What was until now considered unpolitical becomes political – the elimination of the causes in the industrialization itself.’148 A smog alarm can mobilize the public and politicize the question of the causes of smog. But politicization of the issue can also turn into its opposite. The risk society produces the de-politicization of economic policy while causing politicization of the currency policy at the same time. The founders of the European Union had imagined the opposite in the Maastricht Treaty. Claire Kilpatrick has shown that politicization does not lead to increased state liability either of member states or of the European Union itself for measures taken to save the Euro that harm social rights.149 Beck speaks of the ‘political potential of cosmopolitan catastrophes’, which 143 144

145 146 147 148 149

U. Beck, Gegengifte, pp. 9, 96–112. Joined cases C-6/90 and C-9/90, Francovich and Bonifaci v. Italy [1991] ECR I-5357. Member states integrated Francovich state liability with only limited success, see R. Condon and B. von Leeuven, ‘Bottom up or rock bottom harmonization? Francovich state liability in national courts’ (2016) 35(1) Yearbook of European Law 229–90. Beck, Risk Society, p. 32. Beck, Risk Society, p. 23. Burgess, Wardman and Mythen, ‘Considering risk’. Beck, Risk Society, p. 24. C. Kilpatrick, ‘On the rule of law and economic emergency: the degradation of basic legal values in Europe’s bailouts’ (2015) 35(2) Oxford Journal of Legal Studies 325–53.

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became a central topic in subsequent publications150 and which lifts the search for a solution to the international level (Chapter 25). V For a lawyer, it is challenging to engage with Beck’s argumentation, not only because he paints the law with a broad brush, but also because it is simply difficult to connect his analysis to legal systems. However, his analysis can be linked to the unsolved issues behind Schmitt v. TU¨V Rheinland. The risk inherent in the breast implants is ubiquitous. The litigation brought forward in many countries around the world demonstrates the difficulties for the judiciary to locate the case in between contract and tort law, to distinguish a potential risk from a defect, to engage with causality and last but not least to identify the ‘correct’ responsible entity, be it the insurance company which is insuring women resident in France, be it the certification body which testified the now bankrupt company, be it the surgeon or be it the hospital where the surgery took place, or be it the French state or even the EU. Schmitt v. TU¨V Rheinland contains many if not most of the unresolved issues that are currently discussed in tort law. Josserand’s plea for objective liability sounds familiar to a Continental lawyer, but Schmitt v. TU¨V shows that an appropriate solution cannot be found without including all potential addressees of liability into the search for an appropriate – ethically tolerable and economically efficient – solution. The attentive reader might wonder whether the inherent risk of medical devices can only be governed through a collective insurance system as discussed by Calabresi, which, however, is not mandatory in the EU. But who is the cheapest cost avoider when the company is bankrupt? Are we back to the deep pockets argument? In the follow-on litigation the plaintiff focused on the insurance company, the German Allianz, a typical deep-pocket company, but failed.151 The European judiciary does not seem ready to pave the way for a solution that stretches liability beyond the manufacturer, by extending the addressees of the European Product Liability Directive to include certification bodies, by holding the insurer liable for citizens residing in the European Union or even more boldly by referring to a joint network liability,152 thereby bringing the risk society to the forefront.153 As the ECJ shies away from a grand solution, the vast majority of the women will be left without compensation. This would confirm Beck’s provocative thesis of ‘organized irresponsibility’, where member states open up the European market for medical devices without making sure that the potential harm can be compensated through appropriate European and national liability systems.

150

151 152

153

U. Beck, Weltrisikogesellschaft: Auf der Suche nach der verlorenen Sicherheit (Frankfurt: Suhrkamp, 2007); U. Beck, ‘Cosmopolitanism as imagined communities of global risk’ (2011) 55 American Behavioral Scientist 1346–61. Case C-581/18, TU¨V Rheinland LGA Products und Allianz IARD S. A., ECLI:EU:C:2020:453. M. Amstutz and G. Teubner (eds.), Networks: Legal Issues of Multilateral Co-operation (Oxford: Hart, 2009); F. Cafaggi, ‘Contractual networks and the small business act: towards European principles’ (2008) 4 European Review of Contract Law 493–539. See Condon, Tort Law beyond the Reasonable Man.

16 Digital Architecture of Private Law Relations Hans-W. Micklitz

a topic and materials I With the emergence of the Internet, the world of private law has changed. There are new modes of governing relations which interfere in its fabric. Private law relations are increasingly built on the availability, accessibility and functioning of the Internet. Online platforms are the visible intermediaries, but behind and underneath lies the Internet technology that structures private relations and social norms of communication and interaction. Google v. Spain1 demonstrated how traditional private law relations intermingle with data privacy and fundamental rights. The judiciary interferes in private law relations via constitutional rights (Chapter 8), thereby shaping the digital architecture of private law relations (Box 16.1). The starting point of the litigation was a private relationship between two parties, performed via Google as an intermediary. Data privacy rules on both sides of the Atlantic follow different patterns. In the United States data privacy is contract law, in the European Union it is statutory law.2 The services online platforms offer via the Internet form an integral part of the digital economy and digital society. What is the role of a transnational court from a regional organization in a case which requires it to interfere not only in the building of the transatlantic economic and political relations but also in structuring Internet communication and thereby private law relations? II This chapter discusses two texts which are foundational for the understanding of the interplay between digital code and the law and for pinpointing the new modes of transnational governing relations (Box 16.2). 1 2

Case C-131/12, Google Spain v. AEPD and Mario Costeja Gonza´lez [2014] ECLI:EU:C:2014:317. J. Whitman, ‘The two western cultures of privacy: dignity versus liberty’ (2004) 113 Yale Law Journal 1151–221; A. Bradford, ‘The Brussels effect’ (2012) 107(1) Northwestern University Law Review 1–68; on the joint initiative of the US and European Law Institute attempt to find a bridge, C. Wendehorst, ‘The ALI-ELI principles for a data economy’, in A. De Franceschi and R. Schulze (eds.), Digital Revolution: New Challenges for Law (Munich: C. H. Beck, 2019), pp. 42–56.

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BOX 16.1 CASE STUDY

C-131/12, Google Spain v. AEPD and Mario Costeja Gonza´lez [2014] ECLI:EU: C:2014:317 On 5 March 2010, Mr Costeja Gonza´lez, a Spanish national resident in Spain, lodged with the AEPD (Agencia Espan˜ola de Proteccio´n de Datos) a complaint against La Vanguardia Ediciones SL, which publishes a daily newspaper with a large circulation, in particular in Catalonia (La Vanguardia), and against Google Spain and Google Inc. The complaint was based on the fact that, when an Internet user entered Mr Costeja Gonza´lez’s name in the search engine of the Google group (Google Search), they would obtain links to two pages of La Vanguardia of 19 January and 9 March 1998 respectively, on which an announcement mentioning Mr Costeja Gonza´lez’s name appeared for a real-estate auction connected with attachment proceedings for the recovery of social security debts. The AEPD upheld the complaint insofar as it was directed against Google Spain and Google Inc. Google Spain brought a separate action against that decision. It raises the question of what obligations are owed by operators of search engines to protect personal data of persons concerned who do not wish that certain information, which is published on third parties’ websites and contains personal data relating to them that enable that information to be linked to them, be located, indexed and made available to Internet users indefinitely.

BOX 16.2

L. Lessig, ‘The law of the horse: what cyberlaw might teach’ (1999) 113 Harvard Law Review 501–49 G. Teubner, ‘Societal constitutionalism: alternatives to state-centred constitutional theory?’, in C. Joerges, I.-J. Sand and G. Teubner (eds.), Transnational Governance and Constitutionalism (Oxford: Hart, 2004), pp. 3–28 The last ten years have seen a blossoming literature, a kind of boom where it has become fashionable for lawyers and legal theorists to discuss the implications of artificial intelligence, today’s buzzword, for the economy, for society and for the law. One might distinguish between two different strands of debate: one more theoretical engages with computer sciences, tries to understand algorithms, machine-learning techniques and neural networks so as to define the potential role law may or should play in the incubation of the new technology. The other strand is more down to earth and debates the legal implications for private law relations, for the legal subject, for the contract, for tort, for copyright relations and the like. Topics for further reading in these areas are covered in Box 16.3.

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BOX 16.3

R. Brownsword, Law, Technology and Society: Reimaging the Regulatory Environment (London: Routledge, 2019) J. A. Kroll, S. Barocas, E. W. Felton, J. R. Reidenberg, D. G. Robinson and H. Yu, ‘Accountable algorithms’ (2017) 165 University of Pennsylvania Law Review 632 M. U. Scherer, ‘Regulating artificial intelligence systems: risks, challenges, competencies and strategies (2016) 29 Harvard Journal of Law & Technology 353 A. De Franceschi and R. Schulze (eds.), Digital Revolution: New Challenges for Law (Munich: C. H. Beck, 2019) M. Ebers and S. Navas (eds.), Algorithms and Law (Cambridge: Cambridge University Press, 2020.) S. Grundmann, H. Collins, F. Go´mez, J. Rutgers and P. Sirena (eds.), European Contract Law in the Digital Age (Cambridge: Intersentia, 2018)

b theories, context and discussion I ‘Digitalization’ refers to the transformation processes of the economy and society.3 In private law it evokes connotations with Internet transactions and the comprehensive rules adopted with regard to e-commerce, electronic signatures, distance selling and data privacy.4 Digitalization has a technical, an economic and a societal component.5 Digitalization has already changed the forms of economic transactions most visibly through the role and the power of online platforms as well as social communication through the rising importance of social media. Digitalization affects the future of the economy,6 society7 and democracy.8 There are strong voices from computer science and from philosophy which question the endurance of individual personal autonomy and the 3 4

5

6

7

8

‘Digitalization’ is a broader term than ‘digitization’, as it includes the societal transformations. Contributions in A. Savin and J. Trzaskowski (eds.), Research Handbook on EU Internet Law (Cheltenham: Edward Elgar, 2014); on the particular German background of data privacy G. Spindler, Perso¨nlichkeitsschutz im Internet. Anforderungen und Grenzen einer Regulierung: Gutachten zum 69. Deutschen Juristentag 2012 (Munich: Grin Verlag, 2013). E. Brousseau, M. Marzouki and C. Me´adel (eds.), Governance, Regulations and Powers on the Internet (Cambridge: Cambridge University Press, 2012). F. Pasquale, The Black Box Society: The Secret Algorithms that Control Money and Information (Cambridge, MA: Harvard University Press, 2015). S. Zuboff, The Age of Surveillance Capitalism: The Fight for a Human Future at the New Frontier of Power (New York: Public Affairs, 2019); M. Hildebrandt, Smart Technologies and the End(s) of Law (Cheltenham: Edward Elgar, 2016). A. Trechsel, ‘Towards a paparazzi democracy’, manuscript 2014, on file with the author; C. Prins, C. Cuijpers, P. L. Lindseth and M. Rosina (eds.), Digital Democracy in a Globalized World (Cheltenham: Edward Elgar, 2017); A. Karim Schapals, A. Bruns and B. McNair, Digitizing Democracy (London: Routledge, 2018).

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rule of law.9 There is no doubt: digitalization transforms private law concepts; the legal subject – how to classify robots, contracts – consent and smart contracts, tort – liability of robots and liability for self-driving cars, property – data ownership and remedies – blockchain technologies.10 In the words of Christian Twigg-Flesner, ‘disruptive technology creates disruptive laws’.11 Roger Brownsword distinguishes between ‘coherentism’ and ‘regulatory interventionism’ – the former advocating continuity in private law, the latter advocating rupture and regulation.12 Lawrence Lessig and Gunther Teubner look beyond the mere appearances of a Google type of litigation and examine how the digitalization of society changes the role and the function of private law relations. Lessig focuses on the relation between the law, norms coercively enforceable by the state and code, software programs and architectures (see Section III). He argues that regulation, the way in which human action is influenced, results from the combination of the two. Human action is guided by legal permissions and prohibition, by enablements and disablements by the code. The law can regulate the code, and thus induce the code to achieve the goals of the law. The growing shift towards regulatory intervention, in order to integrate legal value judgements into the code, seems to confirm Lessig’s insights,13 although there are many open issues on the regulatability of the code.14 The code, on the other hand, can resist the law, by enabling what is prohibited and disabling what is permitted. Lessig focuses on the United States and the possibilities of 9

10

11

12

13

14

For an overview of the different strands of discussion, G. von Westphalen, ‘Individual human autonomy: the rule of law vs. the rules of smart technologies and their inherent manipulations’, in De Franceschi and Schulze, Digital Revolution, pp. 99–115. For a recent overview De Franceschi and Schulze, Digital Revolution; M. Ebers and S. Navas (eds.) Algorithms and Law (Cambridge: Cambridge University Press, 2020); S. Grundmann, H. Collins, F. Go´mez,J. Rutgers and P. Sirena (eds.), European Contract Law in the Digital Age (Cambridge: Intersentia, 2018); directly to the point, but in German only, the contributions in (2018) 218(2–4) Archiv fu¨r Civilistische Praxis 151–609, with contributions by G. Teubner (digital legal subject), M. Gru¨nberger (contracts on digital products), A. Engert (digital platforms), K. Langenbucher (digital financial services), M. Amstutz (data property) and C. Budzikiewicz (digital heritage). C. Twigg-Flesner, ‘Disruptive technology – disrupted law? How the digital revolution affects (contract) law, in A. De Franceschi (ed.), European Contract Law and the Digital Single Market (Cambridge: Intersentia, 2016), p.22. R. Brownsword, ‘After Brexit: regulatory-instrumentalism, coherentism, and the English law of contract’ (2017) 34(2) Journal of Contract Law 139–64, at 142–3. Reports on consumers in the digital world (2016), digital sovereignty (2017) and consumer-friendly scoring (2018) are available also in English on the website of the Advisory Council for Consumer Affairs, www.svrverbraucherfragen.de/en/documents/documents/. The opinion of the German Datenethikkommission confirms and concretizes the findings, https://bit.ly/2OOFwKq . On the black box phenomenon, J. A. Kroll, J. Huey, S. Barocas, E. W. Felten, J. R. Reidenberg, D. G. Robinson and H. Yu, ‘Accountable algorithms’ (2017) 165(3) University of Pennsylvania Law Review 633–705, peering into the ‘brain’ computational processes (procedural regularity) and purpose specifications (fidelity to substantive policy choices) prior to use and to be verified afterward; on co-regulation: M. U. Scherer, ‘Regulating artificial intelligence systems: risks, challenges, competencies, and strategies’ (2016) 29(2) Harvard Journal of Law and Technology 353–400, proposing a voluntary AI certification process (at 357: ‘manufacturers and operators of certified AI systems would enjoy limited tort liability, while those of uncertified AI systems would face strict liability’); see also M. Perel and N. Elkin-Koren, ‘Black box tinkering: beyond disclosure in algorithmic enforcement’ (2017) 69(1) Florida Law Review 181–221, promoting a method called black box tinkering, that is, social activism and running experiments, not ex ante regulation, nor ex post after infringement, but constant monitoring by activists.

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the national legislative authority to remedy abuses and distortions through regulation. In Europe the European Union is, if anything, the regulator.15 Although he does not explicitly mention private law, the text is based on the assumption that private law represents the conveyor belt of change. A state-centred picture does not capture the importance of social norms as they evolve in the transnational dimension (Chapters 25 and 26). These social norms can be viewed as law, even though they are not adopted and enforced by states, since they comprise different mechanisms which provide for their adoption and ensure compliance.16 Teubner rejects attempts to regain the state’s central regulatory role in the digital world. He considers the ‘digital constitution’, that is, the development of basic rules that control the Internet, as an exemplary case of a nascent network-compatible private law that breaks through established categories of democratic states with regard to the separation of powers in the fields of legislation, application of law and law enforcement. Teubner focuses on the selfconstitution of the private law society (Privatrechtsgesellschaft) (with regard to the different forms of constitutionalization see Chapter 8; more particularly on private law society, Chapters 6 and 24). The chapter aims at describing the triadic relation between state law, code and transnational social norms. How do they interact contributing to regulate individual and social behaviour in the Internet-AI era? The answer paves the way for the digital architecture of private law relations. Google v. Spain points to the potential role of the judiciary. II In 1999, Lessig published his groundbreaking article entitled ‘The Law of the Horse: What Cyber Law Might Teach’.17 His contribution heralded a new era in the discussion regarding the position or special role – as claimed by Lessig – of Internet law. The title is the same as that of a lecture given by Judge Easterbrook in 1996 at the University of Chicago.18 In that speech Judge Easterbrook advanced the argument that ‘the law of the horse’ and ‘Internet law’ are basically the same, that the Internet as well as every other new or old phenomenon can be subsumed into the main body of private law. Judge Easterbrook, to use R. Brownsword’s distinction, is a coherentist. Lessig takes a different view, the one of regulatory interventionism:19 15

16

17

18

19

On the approach of the European Commission, G. Mazzini, ‘A system of governance for Artificial Intelligence through the lens of emerging intersections between AI and EU law’, in De Franceschi and Schulze, Digital Revolution, pp. 245–97. As promoted by system theory: G.-P. Calliess and M. Renner, ‘Between law and social norms: the evolution of global governance’ (2009) 22(2) Ratio Juris 260–80; G. Teubner, Constitutional Fragments: Societal Constitutionalism and Globalization (Oxford: Oxford University Press, 2012); for a critique, A. Somek, The Cosmopolitan Constitution (Oxford: Oxford University Press, 2014). L. Lessig, ‘The law of the horse: what cyberlaw might teach’ (1999) 113 Harvard Law Review 501–49; later also L. Lessig, Code: And Other Laws of Cyberspace (New York: Basic Books, 1999); L. Lessig, Code: Version 2.0 (New York: Basic Books, 2006). Published as F. H. Easterbrook, ‘Cyberspace and the law of the horse’ (1996) 207 University of Chicago Legal Forum 207–16. Lessig, ‘The law of the horse’, at 502.

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I believe that there is an important general point that comes from thinking in particular about how law and cyberspace connect. This general point is about the limits on law as a regulator and about the techniques for escaping those limits. [. . .] By working through these examples of law interacting with cyberspace, we will throw into relief a set of general questions about law’s regulation outside of cyberspace.

A clarification of the terms ‘architecture’ and ‘code’ is essential. Architecture means ‘the physical world as we find it’, even if ‘as we find it’ is simply ‘how it has already been made’ – that is, the social reality, which also applies to the cyber world, just as we perceive it in this moment. ‘Code’ refers to the ‘software and hardware that make cyberspace the way it is’ and constitutes ‘a set of constraints on how one can behave’. For Lessig, ‘Code is law’; he does not discuss whether the real world also has a code and he occasionally uses both terms as synonyms.20 This is problematic as the code provides for the architecture of digital spaces.21 Primavera de Filippi and Aaron Wright22 have turned the formula upside down and argue that law is code, that law itself can be codified. This is exactly what is happening in LegalTech. Although in some aspects Lessig’s article are outdated now, its main insight may still be illuminating, especially with regard to the distinction between architecture and code, and how this distinction affects processes of regulation and self-regulation. Lessig renders himself methodologically vulnerable by using Internet law as paradigmatic. However, legal-political developments oftentimes move from the edges to the centre. A striking example is the rise of labour law in the early twentieth century or of consumer law in its second half.23 Seen in this light, Internet law indicates a third phase of development, after labour and consumer law.24 On the other hand, it can certainly be claimed that digitalization heralds a new era – rupture, which can barely, if it all, be compared with developments in the fringe areas of private and economic law. Digitalization is universal and involves each field of law, albeit to differing degrees. Lessig uses two examples to illustrate the innovative character of the Internet. He contrasts these examples with the respective context of the cyber world and the real world: pornography and data protection. Minors and children can access pornography through the Internet since websites do not distinguish age. In the real world, children do not have access to pornography provided that sellers adhere to the law. The Internet allows a collective anonymization behind which the individual child, wanting access,

20

21 22

23

24

Lessig, ‘The law of the horse’, at 518, fn. 59: ‘my use of the term architecture is somewhat idiosyncratic, but not completely’. I would like to thank G. Sartor for this pointer. P. De Filippi and A. Wright, Blockchain and the Law: The Rule of Code (Cambridge, MA: Harvard University Press, 2018). D. Kennedy, ‘Three globalisations of law and legal thought: 1850–2000’, in D. M. Trubek and A. Santos (eds.), The New Law and Economic Development: A Critical Appraisal (Cambridge: Cambridge University Press, 2006), pp. 19–73, distinguishing between classical legal thought, the social and new formalism. H.-W. Micklitz, ‘The digital economy, digital society and private law’, in P. Drahos, G. Ghidini and H. Ullrich (eds.), Kritika: Essays on Intellectual Property, Vol. 4 (Cheltenham: Edward Elgar, 2020), pp. 47–74.

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can hide. One may wonder whether such a statement still holds true in the age of personalized advertising, personalized prices and even personalized law.25 The same differences are said to exist with regard to data protection, but the consequences for the individual are reversed. The person who walks into a store, asks for information, takes a look at the goods, compares products and prices, touches the merchandise, perhaps tries it out and finally makes a choice or not, is protected in their private sphere – apart from the cameras or security guards, observing their behaviour in order to intervene in the case of theft. The person who buys on the Internet submits to the rules of the Internet. Each of their steps, each individual search, each request for a website, is documented and traceable. By examining the cohort of clients that conduct research on the Internet, the seller can recognize the individual buyer and their singular behaviour, subject to the reach of data privacy. Lessig is not interested in the social consequences or possibilities of economic exploitation of aggregated data, but focuses on the results that these differences cause in law: should the law or indeed the legislative authority – Lessig exclusively thinks in categories of the US legislator – intervene in order to protect collectively all children, or the individual private sphere of each client in the Internet? This would require an intervention in the architecture of the Internet, thereby inverting the interplay of collectivization and individualization. It would be necessary, but also possible, to intervene in a concept that Lessig and others call the code of the Internet. Lessig sides with those who consider the Internet to be controllable. The hidden addressee is the US legislator.26 One needs to distinguish between controllability per se and deciding who controls and who enforces. Today, it seems that the European Union is regulating the US market, mainly through the General Data Protection Regulation and the ECJ. Google v. Spain was just the beginning of a series of cases where the ECJ submitted US companies to its jurisdiction.27 25

26

27

On personalized advertising S.-A. Elvy, ‘Paying for privacy and the personal data economy’ (2017) 117(6) Columbia Law Review 1369–459; R.-B. Esteves and J. Resende, ‘Personalized pricing and advertising: who are the winners?’ (2019) 63 International Journal of Industrial Organization 239–82; on personalized pricing, O. Bar-Gill, ‘Algorithmic price discrimination when demand is a function of both preferences and (mis) perceptions’ (2019) 86(2) University of Chicago Law Review 217–54; F. Zuiderveen Borgesius and J. Poort, ‘Online price discrimination and EU data privacy law’ (2017) 40(3) Journal of Consumer Policy 347–66; on personalized law, A. Casey and A. Niblett, ‘The death of rules and standards’ (2015) Coase-Sandor Working Paper Series in Law and Economics No. 738 and ‘The death of rules and standards’ (2017) 92 Indiana Law Journal 1401–47; A.Porat and L. J. Strahilevitz, ‘Personalizing default rules and disclosure with Big Data’ (2014) 112(4) Michigan Law Review 1417–78; A. Porat and O. Ben-Shahar, ‘Personalizing mandatory rules in contract law’, University of Chicago Law Review (University of Chicago Coase-Sandor Institute for Law and Economics Research Paper No. 855) and ‘Personalizing Mandatory Rules in Contract Law’ (2019) 86 University of Chicago Law Review 255–82. In the affirmative G. Sartor, ‘Virtual rules and Internet law’, in J. Ta¨ger and A. Weibe (eds.), Informatik – Wirtschaft – Recht – Regulierung in der Wissensgesellschaft (Baden-Baden: Nomos, 2004), pp.561–80; for the opposite position, according to which the market could provide the different architectures itself and therefore there would be no need for state interventions, see D. G. Post, ‘What Larry doesn’t get: code, law, and liberty in cyberspace’ (2000) 52(5) Stanford Law Review 1439–59; Y. Benkler and H. Nissenbaum, ‘Commons-based peer production and virtue’ (2006) 14(4) Journal of Political Philosophy 394–419. See, for example, Case C-498/16, Schrems [2018] ECLI:EU:C:2018:37; Case C-210/16,Wirtschaftsakademie Schleswig-Holstein [2018] ECLI:EU:C 2018:388; Case C-136/17, GC and Others (De´re´fe´rencement de donne´es sensibles) [2019] ECLI:EU:C:2019:773.

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Lessig considers the Internet as a product of regulation, through which the behaviour of the users is directed. Autonomous action is directed into technically determined lanes.28 However, it seems that it is the architecture of the Internet that delivers regulation and thereby directs action. The Internet is not a single space. There is a general framework (such as Internet protocols) that regulates very little, and then there are codes of different platforms that regulate much more. Lawyers associate regulation with regulation through law. Sociologists refer to social norms, economists and also lawyers, if they link law to the economy, point towards the market. As a fourth modality Lessig adds architecture. These four modalities exist in the real world as well as in the cyber world. Important differences between these two worlds can be seen in the way in which these four modalities interact. If we consent on the Internet to the saving of data about our behaviour, we do not know what particular data is being saved, how easily the harvesting software settings might be changed and, above all, for what purposes. Thus, questions of data protection arise, to which Lessig, however, does not pay any attention. After having given these necessary explanations, Lessig gets right to the heart of his research: what are the differences between both worlds and how can they be overcome?29 For practical reasons, Lessig focuses on the interaction between law, architecture, code and behaviour, which produces either direct (‘how does law affect architecture’ – a law-code behaviour) or indirect (‘how does architecture affect law’ – a code-law behaviour) effects. I have two reservations: I do not understand in what sense code influences the law. It provides the matter to be regulated by the law and determines what can be effectively regulated; for example, it may not be possible to eliminate fake news, given the way in which the Internet functions and I consider this constraint to be problematic since the dividing line between social and legal norms is blurred (with regard to the relationship between social norms and legal norms, see Chapter 25). The lack of controllability is probably the essential innovation of the Internet, of which Lessig loses sight.30 The law enforces itself through the regulation of architecture. Architecture selects what kind of choices to enable and to disable. Choice is bound to the rule of the game. Legal enforcement becomes superfluous since illegal activities cannot be performed from a technical point of view, therefore architecture affects the concept of human agency.31 The newly introduced controllers, however, establish an intermediary, which is allowed to break the rules.32 In order to illustrate the interactions between law and architecture, Lessig continually harkens back to the two initial examples (access of children to pornography and data 28

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This aspect is emphasized by R. Brownsword, ‘Whither the law and the law books? From prescription to possibility’ (2012) 39(2) Journal of Law and Society 296–308, at 300–2. Lessig, ‘The law of the horse’, at 510, 514–21 (law-code-behaviour), 521–33 (code-law-behaviour). See T. Wu, ‘When code isn’t law’ (2003) 89(4) Virginia Law Review 103–70. G. Sartor, ‘Virtual rules and Internet law’; on the impact of architecture on human agency, R. Brownsword, ‘The E-Commerce Directive, Consumer Transactions, and the Digital Single Market: Questions of Regulatory Fitness, Regulatory Disconnection and Rule Redirection’, lecture given on 18 June 2016 at the SECOLA Conference in Tartu, Estonia, www.secola.org. M. Riesebeck Digitale Drecksarbeit: Wie uns Facebook & Co. von dem Bo¨sen erlo¨sen (Munich: dtv Verlagsgesellschaft, 2017).

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protection). Law can influence the technology of identification, such as the introduction of biometric methods that allow the identification of children or the conferring to individuals, by law, a commercial property right over their data (Lessig refers to Guido Calabresi33) that might require network providers to obtain the individuals’ consent. This would not be possible without the intervention of the state but Lessig’s view is that ‘it is not clear that such a framework could develop’. This evaluation is diametrically opposed to Teubner’s petition for a self-imposed law, which produces its own limits. For the reverse form of interaction, this means that the law remains the same, but has different effects on architecture. The values inherent to law can be enforced or undermined. The examples chosen serve to defend law against architecture: ‘code displacing property rights’34 and ‘code displacing law: contract’. The apprehensions of the early days of the Internet, according to which industrial property rights, especially copyright, would be undermined, have not been borne out. On the contrary, code allows the holders to expand their protection rights far beyond the possibilities which could ever exist in the real world.35 The relevant software tends to undermine the functions of industrial property rights in a one-sided fashion to the detriment of fair use. The architecture of the Internet makes an unlimited expansion of industrial protection rights possible. The control mechanisms of the real world that are opposed to a one-sided limitation of free speech and allow the defence of free access to information as a commons all too often fail in the cyber world. The intense debate on fair use proves how the outlook has changed.36 The advocates of free access are on the defensive. There are countermovements like open access and Wikipedia. Architecture or the code gains the upper hand over law and regulation, at least in theory, but enforcement is far from being complete. It is also rare that free speech is really at issue in copyright cases. The second variant is far more dramatic. It is the question of the substitution of one of the pillars of private law by the Internet: state-guaranteed enforcement of contract law is displaced by the enforcement of contract law that is implemented technically.37 Lessig bases his criticism on one example only, which is the obligation, imposed by Internet providers, to log in with one’s own name. This process comes close to a contract, in fact it is 33 34

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Lessig, ‘The law of the horse’, at 519, fn. 61. On digital property, P. Palka, ‘Virtual property: towards a general theory’, PhD thesis, European University Institute, Florence (2017). The Directive (EU) 2019/790 of the European Parliament and of the Council of 17 April 2019 on copyright and related rights in the Digital Single Market and amending Directives 96/9/EC and 2001/29/EC, PE/51/ 2019/REV/1, OJ L 130, 17.5.2019, pp. 92–125. A. Fo¨rster, Fair Use: Ein Systemvergleich der Schrankengeneralklausel des US-amerikanischen Copyright Act mit dem Schrankenkatalog des deutschen Urheberrechtsgesetzes (Tu¨bingen: Mohr Siebeck, 2008); M. Kleinemenke, Fair Use im deutschen und europa¨ischen Urheberrecht? Eine rechtsvergleichende Untersuchung zur Flexibilisierung des urheberrechtlichen Schrankenkatalogs nach dem Vorbild der USamerikanischen Fair Use-Doktrin (Baden-Baden: Nomos, 2013); P. Aufderheide and P. Jaszi, Reclaiming Fair Use: How to Put Balance Back in Copyright, 2nd ed. (Chicago, IL: University of Chicago Press, 2018); P. Rott, ‘Download of copyright protected Internet content and the role of (consumer) contract law’ (2008) 31 (4) Journal of Consumer Policy 441–57; D. Burk, ‘Algorithmic fair use’ (2019) 86(2) University of Chicago Law Review 283–308. J. Zittrain, ‘Perfect enforcement on tomorrow’s Internet’, in R. Brownsword and K. Yeung (eds.), Regulating Technologies: Legal Futures, Regulatory Frames and Technological Fixes (Oxford: Hart, 2008), pp.125–56.

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a kind of ‘as if’ contract.38 The ‘as if ’ contract is self-executing; there is no need for authorities to execute it and the application of self-imposed law is not open to interpretation. If the name is wrong or misspelled, the ‘as if ’ contract is concluded. Lessig denies the existence of a contract sensu stricto, although it looks like a contract and carries the public values of a ‘true’ contract.39 Code and law may compete with each other, but it should not be forgotten that states might compete with corporations, various business groups with civil society, etc. Code and law are just two different modalities in which different actors operate. Each action on one side provokes reactions on the other; giving rise to new forms of regulation, new defences and new circumvention strategies. This results in a ping-pong game between law and code. If the other two modalities, that is, the market and social norms, were also taken into consideration, this would possibly result in a different picture.40 Here it suffices to refer to how possible conclusions can be drawn from the competition between the two characteristics – code and law. First, code restricts the functionality of law; second, a lack of transparency can turn out to be an efficient support in the regulation process; and third, the legislator has to tailor precisely their measures to the operating conditions of the Internet, a fact that is contrary to the universal applicability of law.41 However, if the Internet is different from the real world, special measures do not act against Fuller’s desiderata of the inner morality of law.42 For Lessig the consequences are clear: ‘the values of real-space sovereigns will at first lose out’. But is this convincing? Assume that free speech is a legal value, in liberal countries. Digital technologies can expand the realization of this right, thus co-operating with the law. They may also restrict it through online censorship, going against the law, or with the law, provided the law is illiberal. The law can prohibit online censorship, or require it to be imposed. The law may require that all speakers identify themselves, or allow for anonymous pseudonyms, so law and code can go in the same liberal direction (the United States?) and in the same illiberal direction (China?).43 Lessig at least flatly contradicts Judge Easterbrook. His final comment is telling, since he puts his own thesis into perspective: ‘The threats to values implicit in law – threats raised by changes in the Architecture – are just particular examples of a more general point that more 38

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Lessing says they are ‘like contracts’; for more depth on the problem behind this see P. Palka, ‘Terms of service are not contracts: beyond contract law in the regulation of online platforms’, in S. Grundmann, H. Collins, F. Go´mez, J. Rutgers and P. Sirena (eds.), European Contract Law in the Digital Age (Cambridge: Intersentia, 2018), pp. 135–62. Lessig, ‘The law of the horse’, at 529. Lessig has partly tried this himself in Lessig, Code: And Other Laws, and Lessig, Code: Version 2.0. See L. Fuller, The Morality of Law (New Haven and London: Yale University Press, 1964), pp.46–9. Fuller, The Morality of Law, pp. 33–94, enlisting: (1) the generality of law; (2) its promulgation; (3) prohibition of retroactive laws; (4) the clarity of laws; (5) the lack of contradictions in the laws; (6) the lack of laws requiring the impossible; (7) constancy of the law through time; and (8) congruence between official actions and declared rules. L. C. Backer, ‘Blacklists and social credit regimes in China’, prepared for the interdisciplinary symposium Super-Scoring? Data-driven societal technologies in China and western-style democracies as a new challenge for education Cologne, 11 October 2019: https://bit.ly/31SlZk7; D. M. Sı´thigh and M. Siems, ‘The Chinese social credit system: a model for other countries?’ (2019) 82(6) Modern Law Review 1034–71.

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than law alone enables legal values, and law alone cannot guarantee them.’44 In light of 100 years of socio-legal and intense debates about the regulatory function of the market in law and economics, this statement appears non-specific and weak. The question is, rather, whether architecture and the code transcend the previous interplay of all four characteristics. Lessig does not provide an answer.45 It can be found in the work of Teubner, who examines the production of social and legal norms in the cyber world. III Teubner’s text ‘Societal Constitutionalism: Alternatives to State-Centred Constitutional Theory’ can be understood from two perspectives: as a contribution to global constitutionalism and as a call for a transnational society of private law that generates its rules beyond the nation state and that manifests itself in a ‘network-adequate private law’.46 Digitalization represents the model and the reference point of Teubner’s theory of societal constitutionalism.47 Both perspectives are closely intertwined. In order to understand the lex digitalis it is necessary to understand societal constitutionalism (see also Chapter 25). Teubner starts with reference to the Tribunal de Grande Instance de Paris that instructs Yahoo to block French users from purchasing Nazi memorabilia in online auctions. National courts prohibit users from their respective countries from accessing information that can be freely obtained in other parts of the world.48 Such cases quickly gain a constitutional dimension once Internet users base their claim on fundamental and human rights. The parallel to Lessig and Google v. Spain is obvious, as is the direction of the abundant ECJ case law on market freedoms striving to increase consumer choice.49 Teubner raises the question how constitutional theory responds:50 [. . .] to the challenge arising from the three current major trends – digitisation, privatisation and globalisation—for the inclusion/exclusion problem? [. . .] Will constitutional theory manage to generalise its nation-state tradition in contemporary terms and re-specify it? Can we, then, make the tradition of the nation-state constitution fruitful, while, at the 44 45

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Lessig, ‘The law of the horse’, at 546 (emphasis added). Basic approaches in L. Lessig, Remix: Making Art and Commerce Thrive in the Hybrid Economy (London: Penguin Books, 2008); further developed by Y. Benkler, The Wealth of Networks: How Social Production Transforms Markets and Freedom (New Haven, CT: Yale University Press, 2006). G. Teubner, ‘Societal constitutionalism: alternatives to state-centred constitutional theory?’, in C. Joerges, I.J. Sand and G. Teubner (eds.), Transnational Governance and Constitutionalism (Oxford: Hart, 2004), p. 9, fn. 21, by referring to K.-H. Ladeur, ‘Rechtsfragen des Ausschlusses von Teilnehmern an Diskussionsforen im Internet: Zur Absicherung der Kommunikationsfreiheit durch netzwerkgerechtes Privatrecht’ (2002) 5 Multimedia und Recht 787–92. G. Teubner, Constitutional Fragments. For an overview of the recent case law from different countries, see P. S. Berman and J. Daskal, ‘Legal challenges of data dominance: Yahoo! v. LICRA and Microsoft – Ireland cases’, in H. Muir Watt, L. Bı´zikova´, A. Branda˜o de Oliveira and D. P. Fernandez Arroyo (eds.), Global Private International Law: Adjudication without Frontiers (Cheltenham: Edward Elgar, 2019), pp. 392–414. This was formulated in a wonderful way by G. Davies, ‘Freedom of contract and the horizontal effects of free movement law’, in S. Weatherill and D. Leczykiewicz (eds.), The Involvement of EU Law in Private Law Relationships (Oxford: Hart, 2013), pp.53–70. Teubner, ‘Societal constitutionalism’, pp. 4–5.

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same time, changing it to let it do justice to the new phenomena of digitisation, privatisation and globalisation?

Teubner rejects attempts to understand the UN and GATT/WTO as a constitutional order.51 He separates constitution and state and understands the global constitution as a constitution without a state. In such a theoretical construct there is no central instance as subject or object of the constitution. He criticizes equally that the European academic discourse excludes non-state actors and non-state regimes52 as producers of a European constitution. Teubner aligns with Hugh Collins’ attempts53 to develop a European civil law ‘from below’ by means of trade associations, employee and consumer organizations. A global constitution cannot be built out of individual rights; it requires institutions and structures which carry and legitimize the process of societal constitutionalism. Even direct horizontal effect on fundamental and human rights cannot compensate for the lacking institutional dimension. Teubner relies on the driving forces of civil society which sharply contrasts with Lessig who at the end of the day trusts in the US state to remedy potential deficits of the code. Teubner calls for ‘constitutionalization without the state’. The global perspective requires the separation of political processes of constitution building from societal processes. In the nation state of the nineteenth and twentieth century both might have aligned with each other, since the constitution of the nation state represented the society. Teubner knows that his theory meets strong resistance in constitutional theory.54 He combines theoretical and empirical considerations: ‘the constitution of world society comes about not exclusively in the representative institutions of international politics, nor can it take place in a unitary global constitution overlying all areas of society, but emerges incrementally in the constitutionalisation of a multiplicity of autonomous subsystems of world society’. The organizational law of a digital constitution, the lex digitalis, serves Lessig, and Gralf-Peter Calliess and Peer Zumbansen,55 as evidence. The choice of words suggests – Teubner will elaborate on this later – that trade associations could not only develop a ‘network-adequate private law’ by means of co-regulation (by involving state actors),56 but also be given the responsibility to determine by themselves the limits of their actions with regard to human rights. However, one might wonder whether what might 51

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For an overview of the different theories of transnational law see Cahier a` The`me, Les Grandes The´ories du Droit Transnational, with contributions from K. Tuori; B. Kingsbury, N. Krisch and R. B. Stewart; H. Muir Watt; C. Joerges and F. Roedel; F. Cafaggi; R. Zimmermann; G.-P. Calliess and M. Renner; A. FischerLescano and G. Teubner; P. Schiff Berman, ‘Le nouveau pluralism juridique transnational’ (2013) 1–2 Revue internationale de droit e´conomique 1–256. On ‘regime-collisions’ see A. Fischer-Lescano and G. Teubner, ‘Regime-collisions: the vain search for legal unity in the fragmentation of global law’ (2004) 25(4) Michigan Journal of International Law 999–1046; as well as Chapter 25. H. Collins, The European Civil Code: The Way Forward (Cambridge: Cambridge University Press, 2008). A. Somek, The Cosmopolitian Constitution, pp. 26, 245. G.-P. Calliess and P. Zumbansem, Rough Consensus and Running Code: A Theory of Transnational Private Law (Oxford: Hart, 2010). On the conceptual differences between self-regulation and co-regulation, F. Cafaggi, ‘Rethinking private regulation in the European regulatory space’, in F. Cafaggi (ed.), Reframing Self-Regulation in European Private Law (Alphen aan den Rijn: Kluwer Law International, 2006), pp. 3–75.

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work for lex digitalis is equally true for food safety standards (Codex Alimentarius) or financial products (IOSCO).57 The lex digitalis goes beyond the scope of national statehood and requires new forms of transnational regulation.58 Teubner identifies three trends that accelerate the process of a global social constitutionalism, which will have to be introduced before their implications with regard to the lex digitalis can be discussed. (1) ‘Dilemma of rationalization’:59 Teubner identifies societal constitutionalism as the only counterforce against the massive evolutionary drift manifested in four thrusts: the fragmentation of the logics of action, dominance of instrumental calculation, replacement of informal co-ordination through bureaucratic organization and increasing confinement to the ‘iron cage of servitude to the future’. There is a link between societal constitutionalism and deliberative constitutionalism, which temporarily attracted attention in the European integration process following the rise of ‘comitology’.60 Teubner refers to the system-theoretical importance of the constitution that from a historical point of view goes far beyond statutory organizations and individual rights by guaranteeing a multitude of social differentiations. Constitutions arise as counterbalance to autonomous social spheres (on Karl Polanyi see Chapter 2, on transnational law see Chapter 25). Emerging markets are claimed to simultaneously yield rules of social order. Strengthening the freedom to act in an autonomous way appears to be the only solution against the dilemma of rationalization.61 (2) ‘Polycentric globalization’:62 the global society has to be perceived and understood as a multidimensional phenomenon that involves a whole range of actors.63 Globalization cannot be equated with global capitalism, but with global differentiation. Indeed, whole sectors such as telecommunication, energy, finance and transport are generating their own rules at a global level. The differentiation corresponds to Kaarlo Tuori’s many constitutions.64 Teubner considers his thesis confirmed through the global importance 57

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See H. Bremmens and K. Purnhagen (eds.), Regulating and Managing Food Safety in the EU: A LegalEconomic Perspective (Cham: Springer, 2018); A. Marcacci, ‘Protecting investors in financial times: the design and functioning of the legal protection of retail investors’, PhD thesis, European University Institute, Florence (2013). Exemplary for the difficulties and challenges of a regulation see U. Gasser, ‘Regulating search engines: taking stock and looking ahead’ (2006) 8 Yale Law Journal of Law and Technology 201–34. Teubner, ‘Societal constitutionalism’, pp. 10–13. J. Falke, ‘Comitology after Lisbon: what is left of comitology as we have praised it?’, in C. Joerges and C. Glinski (eds.), The European Crisis and the Transformation of Transnational Governance (Oxford: Hart, 2014), pp. 271–92; C. Joerges and E. Vos (eds.), EU Committees: Social Regulation, Law and Politics (Oxford: Hart, 1999). Luhmann argued that fundamental rights were institutions aiming at ensuring social differentiation, and that property protects the economic system against the political system. But in a competitive market, the most efficient solutions (the most ‘rational’ ones) are assumed to emerge through autonomous actions. In the communication domain it may be different: fake news and trolling are efficient relatively to the interest of those who issue them, but the negative externalities are superior to the benefits. Teubner, ‘Societal constitutionalism’, pp. 13–15. With regard to the definition of globalization, Teubner refers to D. Held, Democracy and the Global Order: From the Modern State to Cosmopolitan Governance (Stanford, CA: Stanford University Press, 1995). K. Tuori and S. Sankari (eds.), The Many Constitutions of Europe (Farnham: Ashgate, 2010).

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of human rights65 that can be claimed by their holders against states. In light of Kiobel66 this appears to be a rather optimistic point of view, although there are slightly more positive examples.67 The competition rather resembles the race between the hare and the hedgehog, whereby law fails to finish the race, independent of whether the law is enforced by the state (Lessing) or is self-enforced (Teubner). (3) ‘Creeping constitutionalization’ starts at the edges, from the specialized sectors and regimes, an estimation that Teubner shares with Lessig. Juridification and constitutionalization become entangled. But how can social norms turn into legal norms and how can self-imposed norms be measured against self-imposed, higher-ranking law? The transformation of social norms into legal norms is a process that needs time and space. Calliess and Moritz Renner use the ICANN dispute settlement body as an example.68 Teubner refers to Herbert L. A. Hart’s secondary rules and the ‘ultimate rule of recognition’ to legitimate self-regulation.69 Teubner rejects the argument that big enterprises exploit their freedom beyond the state to transform their power into quasi-coercive rules. He is far more concerned with the risk of a structural corruption through the medium of money. The economic seduction is said not to be counteracted by constitutional guarantees of human rights. The only counter-means against the power of the big Internet companies is competition70 (on power see Chapter 13). There is competition between the different service providers and platforms; however, the Internet seems to favour monopolies, which explains why competition law plays an ever more dominant role in the shaping of the lex digitalis, practically71 and theoretically.72 Teubner transfers his ambitious far-reaching theoretical framework to the lex digitalis. Three characteristics mark the move towards the constitutionalization of the Internet: (1) The structural linking of sub-systems and law (on system theory see Chapter 4). A civil constitution requires the interaction between autonomous social processes and the 65 66 67

68 69

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Fischer-Lescano and Teubner, ‘Regime-collisions’ and the writings of S. Moyn on human rights. Kiobel v. Royal Dutch Petroleum Co., 569 US 108 (2013). UK Supreme Court Vedanta Resources PLC and another (Appellants) v. Lungowe and others (Respondents) before Lady Hale, President Lord Wilson, Lord Hodge, Lady Black, Lord Briggs, (2019), available at www.supremecourt.uk/cases/docs/uksc-2017–0185-judgment.pdf; AAA v. Unilever (2018) EWCA Civ, p. 1532, and Okpabi v. Royal Dutch Shell Plc (2018) Business Law Review 1022. Calliess and Renner, ‘Between law and social norms’. D. Wielsch, ‘Global law’s toolbox: how standards form contracts’, in H. Eidenmu¨ller (ed.), Regulatory Competition in Contract Law and Dispute Resolution (Oxford: Hart, 2013), pp. 71–112, advocating for an extension of Hart’s rule of recognition of non-state law. Teubner, ‘Societal constitutionalism’, p. 19. For the EU, G. Monti and S. Augenhofer, ‘Consumer choice and fair competition on the Digital Single Market in the areas of air transportation and accommodation’, study requested by the IMCO committee, https://bit.ly/2PncxxN; for the United States, M. Patterson, Antitrust Law in the New Economy (Cambridge, MA: Harvard University Press, 2017). With regard to an (ordo-)liberal model of competition to govern the Internet architecture, V. Karavas, Digitale Grundrechte: Elemente einer Verfassung des Informationsflusses im Internet (Baden-Baden, Nomos: 2007), with discussion by M. Renner, ‘Rezension von Vagios Karavs: Digitale Grundrechte: Elemente einer Verfassung des Informationsflusses im Internet’ (2009) 95(2) Archiv fu¨r Rechts- und Sozialphilosophie 298–300.

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emerging transnational law. National legal interventions may have a disturbing effect in this context.73 The possible structural corruption is countered through the ‘illegalisation of corrupting influences . . . and increase of legitimate irritability’.74 Teubner refers optimistically to the economy, which resolves problems of structural corruption by means of property and contract. Contractual design mirrors the structural problems resulting from market power which the economic constitution cannot eliminate (see Chapter 13). The power issue is shifted from the economic constitution towards contract. (2) Hierarchy of norms – procedures and values. As Lessig makes unambiguously clear, ICANN does not cover the code. This is left to institutions such as the Internet Engineering Task Force (IETF).75 Teubner focuses on the procedures that organize the production of law. A key issue is mechanisms to protect third parties. Even if those obstacles can be overcome,76 there still remains the question of where the values with which the procedures should align might come from.77 Teubner wants to see the first generation of human rights to be integrated into the code. Lessig would agree that the law, social norms or economic pressures can induce those who produce the code to make it embed certain values.78 (3) Judicial review. Teubner considers the review of standard contract terms as an example of a ‘de facto constitutional review of non-legislative law’. In line with Oliver Gerstenberg, he attributes an institutional creative power to constitutional rights in private domains.79 Institutional procedural rights could be derived from constitutional rights. This might apply to individuals, particularly if one were to adopt a retrospective or, in some cases, a prospective outlook80 but it seems over-ambitious to imagine that structural principles can be derived from an individual right. Advocate General van Gerven failed in his attempt to deduce an institutional dimension out of the proportionality principle.81 One might 73

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The German Supreme Court (VIII ZR 375/03), had submitted eBay auctions to the Distance Selling Law and granted the buyer a right to withdrawal: https://bit.ly/33qfaXJ; see the criticism against the BGH decision in G.-P. Calliess and P. Zumbansen, Rough Consensus Running Code: A Theory of Transnational Private Law (Oxford: Hart, 2012), pp. 163–8. Teubner, ‘Societal constitutionalism’, p. 22. Lessig, ‘The law of the horse’, at 506, fn. 15. The production of technical standards might serve as a blueprint, H. Schepel, The Constitution of Private Governance: Product Standards in the Regulation of Integrating Markets (Oxford: Hart, 2005); R. Van Gestel and P. Van Lochem, ‘Private standards as a replacement for public lawmaking?’, in M. Cantero Gamito and H.-W. Micklitz (eds.), The Role of the EU in Transnational Legal Ordering: Standards, Contracts and Codes (Cheltenham: Edward Elgar, 2020), pp.27–53. H.-W. Micklitz, The Politics of Judicial Co-operation in the EU (Cambridge: Cambridge University Press, 2005), pp. 424–502. Also G. Sartor, ‘Virtual rules and Internet law’. Teubner, ‘Societal constitutionalism’, p. 20, under reference to O. Gerstenberg, ‘Privatrecht, Verfassung und die Grenzen judizieller Selbstregulierung’ (1999) 199 Archiv fu¨r Rechts- und Sozialphilosophie: Beiheft 141–56; later: O. Gerstenberg, ‘Private law and the new European constitutional settlement (2004) 10(6) European Law Journal 766–86. Retrospectively the right to a fair hearing or the violation of the right to a fair hearing; in this context see the extensive case law of the ECHR, prospectively with regard to the interpretation of Article 38 of the German constitution (GG) by the German Federal Constitutional Court (BVerfGE). Advocate General W. van Gerven tried to apply the principle of proportionality to the ‘Sunday trading’ cases in order to demarcate the responsibilities between the European Union and the member states, see H.-W. Micklitz, The Politics of Judicial Co-operation, p. 108.

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wonder how Google v. Spain fits in here. The right to be forgotten which the ECJ created requires institutional safeguards, lest it remains an empty shell. The ECJ is on entirely new territory and might experiment in the direction Gerstenberg and Teubner suggest. Teubner searches for meta-rules through which individual and institutional autonomy can be defended against the code (‘the digital incorporation of behavioural norms in the Architecture of the cyberspace’82). Teubner identifies three issues as possible risks: (a) the self-enforcing character of the code – illustrated by Lessig through the ‘login’ that Teubner, in contrast to Lessig, would qualify as a contract;83 (b) the collapse of the triad of behavioural regulation, construction of expectation and conflict resolution; and (c) the loss of normativity through the interpretation of rules. In cyberspace, normative assumptions are transformed into rigid cognitive expectations of the inclusion or exclusion an act of communication. IV Lessing and Teubner propose two different views on the mutual relations between law, code and social norms, where the former embraces a rather traditional, state-centered approach, and the latter opens the discourse on code and state law towards transnational social norms. Whereas Lessig is rather pessimistic regarding possible infringements of human rights and the influence of big companies in the constitutional processes within the digital environment, Teubner is in the optimists’ camp, relying on the transnational society and societal actors to counterbalance the loss of state power in lex digitalis. The only persons who can break the code are hackers, who are the Robin Hoods of cyberspace. This perception is shared by Eben Moglen:84 ‘the most significant difference between political thought inside the digirati and outside it is that in the network society, anarchism (or more properly, anti-possessive individualism) is a viable political philosophy’. The societal forms of counteraction on which Teubner can rely are the following: the open source movement, the claim for competition within the production of law and its judicial review as well as the successful defence of a dual transnational constitution, which guarantees the parallel existence of the organized (political) and the spontaneous (social) sectors. Lessig pointed out the risks that result from a possible merger of economy and politics, if they collusively envelop the spontaneous sector of the lex digitalis with a dense surveillance network. This is exactly what happened in the NSA scandal.85 All big firms have been providing the NSA with data, not only in the United States, but also in Europe. 82 83 84

85

This is Lessig’s definition to which Teubner refers in ‘Societal constitutionalism’, p. 25, fn. 70. For a fuller analysis see Palka, ‘Terms of service’. E. Mogelen, ‘Anarchism triumphant: free software and the death of copyright’, (1999) 4(8) First Monday; quoted by Y. Benkler, ‘Practical anarchism: peer mutualism, market power and the fallible state’ (2013) 41(2) Politics and Society 213–51, at 214, which is of direct relevance in this context. P. Bobbitt, ‘NSA is upholding, not subverting, the law’, Financial Times, 10 June 2013; www.ft.com/content/ 2da229bc-d1bc-11e2-9336-00144feab7de.

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Teubner opposes this idea. It is not a question of fighting against new cyber-corporatism, but of managing the differences between economy and politics. Even if Teubner’s argument were acceptable – how could it be transformed into practice without any institutional provisions that could not even be derived from the constitutional rights? What remains is selective resistance in social movements.86 What about Google v. Spain, what about the role of the European judiciary and its instrumentalization via public interest litigation – the Schrems type of litigation?87 The ECJ is a supranational body, which has no competence to make final decisions, but is bound to interpreting European law. Google v. Spain, however, looks much more like a final decision, which does not leave much room for the referring national court. The ECJ exercises pressure on the transatlantic economic and political relations, what Anu Bradford has termed the ‘Brussels effect’.88 It seems that courts are needed as a forum in which the societal conflicts can crystallize and where the digital architecture on private relations is gradually taking legal shape.

86

87 88

See the case studies of M. Akrich and C. Me´adel, ‘Policing exchanges as self-description in internet groups’, pp. 232–56; C. Aguiton and D. Cardon, ‘The coordination of International civil society and uses of the internet’, pp. 257–93; N. Elkin-Koren, ‘Governing access to user-generated content: the changing nature of private ordering in digital networks’, pp. 318–43; B. Deffains and J. Winn, ‘The effects of electronic commerce technologies on business contracting behaviours’, pp. 344–66; all in Brousseau, Marzouki and Me´adel, Governance, Regulations and Powers. Case C-362/14, Schrems [2015] ECLI:EU:C:2015:650; Case C-498/16, Schrems [2018] ECLI:EU:C:2018:37. A. Bradford, The Brussels Effect: How the European Union Rules the World (Oxford: Oxford University Press, 2020).

17 Between Market and Hierarchy Stefan Grundmann

a topic and materials I Among the most revolutionary findings of twentieth-century contract theory is that the divergence between spot contracts – discrete agreements for immediate exchanges – and the long-term, co-operative contracts now generally called relations or relational contracting may be just as great as (or even greater than) the divergence between relational contracts and organizations such as companies. Relational contracts, moreover, are often situated in larger networks, that is, multi-party arrangements. Such contracts are, in practice, generally the basis of a stable organizational arrangement. Thus, rather than a single dichotomy between the market and firm forms (see Chapter 19 and Coase’s paper of 1937 – and more generally for the firm and its embeddedness, see Chapters 20–22), hybrids and intermediate solutions become a core issue of consideration, suggesting functional neighbourhoods that depart considerably from those suggested by the traditional legal categorizations. Contracts are not all born equal: functionally, an important group of multi-party and long-term contracts lies at a distant remove from the rest – a finding which has admittedly reached mainstream doctrinal thinking only very recently, if at all. It is even possible to conceive of these arrangements as a legal form in their own right – a third pillar besides discrete contracts (markets) and firms. The high importance of this organizational side of contract is very clearly evidenced by the fact that in most rulesetting contexts, chains or networks of contracts play the core role. This is so when it comes to corporate social responsibility (CSR, Chapter 22), transnational law (Chapter 25) and private ordering or self-regulation (Chapter 26). Even the discussion of competition among legislatures (Chapter 23) has also reached the organizational contract arena – namely with the idea of an Optional European Contract Code (again Chapter 23). Both long-term and network dynamics – and also how different these arrangements are from simple market transactions – are exemplified by a recent case involving a globally acting manufacturer of motor vehicles and one of its suppliers (Box 17.1). A considerable part of the judgment delivered by the antitrust senate of the Dortmund Court deals with antitrust issues (‘dominant position’ of Volkswagen Group), overall 315

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BOX 17.1 CASE STUDY

Landgericht (Higher District Court) Dortmund (antitrust senate) of 27 February 2019 – 8 O 19/18 Kart, ECLI:DE:LGDO:2019:0227.8019.18KART.00 This recent German case, decided by the Higher District Court in Dortmund, is typical for a network of suppliers organization. Volkswagen as currently the largest producer worldwide was, at the same time, in a surprisingly weak position in this case. This case was triggered by a supply stop that one subsidiary of a group of companies (Prevent Group) inflicted on Volkswagen AG and on some of its subsidiaries in 2016. The basis for this case is that several subsidiaries of Prevent Group supplied different types of backseat armrests for different brands of cars produced by Volkswagen and its subsidiaries. In the relevant contracts of 2010/11, a period of seven years had been set down during which termination was excluded (to write off specific investments needed). The supply stop inflicted by this one subsidiary was conceived as a reaction to a non-consideration by the Volkswagen Group of another subsidiary of Prevent Group in a new tender. Certain Volkswagen chains of production came to a complete halt for five to seven days (causing losses beyond EUR 100 million). Prevent Group was forced via preliminary injunction by several courts to resume supply, but did so only after forcing Volkswagen to accept a price increase of about 25 per cent in a new agreement (‘cornerstone agreement’ for easing transition) that Volkswagen later attacked successfully in court on the basis of the doctrine of duress. Prevent Group advanced the argument that such increase was legitimate given the positive development of gains – to which the overall economic compound contributed. Volkswagen eventually terminated all contracts (with all members of Prevent Group and for all members of their own group) via ordinary termination in 2018 (with twelve months’ notice) – insisting, however, that there was also serious cause for termination. Volkswagen also invoked that the holding company of Prevent Group had leaked confidential papers between the two groups to the press.

dismissing abuse of dominant position (and even negating dominant position at all).1 The core structural aspects of this case were about the de facto and de iure constitution of Prevent Group – and each side invoked primarily one of the two aspects. On the one hand, Prevent Group consisted of different companies that form legally separate entities. On the other hand, trust was put into the network (group) of companies and there were de facto (or legally grounded) possibilities of influence across the group. Only very few words – 1

The judgment falls into three sections, on contract law (paras. 89 et seqq.), antitrust law (paras. 107 et seqq.) and on the adequacy of the notice period of one year (paras. 126 et seqq.); on background information indicated in the following, see N. Doll / P. Vetter, ‘Wie der “Apple-Effekt” die Autoindustrie vera¨ndert‘, Welt, 16 May 2017, available at www.welt.de/wirtschaft/article157906275. Both this source and the judgment itself contain indications of the size of Volkswagen (the largest producer of motor vehicles globally) and yet its weakness in this particular kind of scenario.

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a side-argument in one of fifty-one paragraphs forming the decision proper (para. 105) – was spent on the issue that Prevent Group had made large investments specifically for this Volkswagen-type of backseat armrest, not easily transformable into a production chain for other producers. II To deal with the theme sketched out and addressed in the case, we propose to consider what we think are the core approaches in three lead texts on the long-term and on the network character of organizational contracts. The first stems from a legal scholar (with a legal sociology background), Stewart Macaulay, who first drew scholarly attention to ‘relational’ contracts – and who wrote with amazement about just how different they are, especially when it came to how little they seemed to rely on legal instruments and arrangement. The second text was written by a leading institutional economist, Oliver Williamson, who showed how the long-term character of such arrangements entails a shift in the core vulnerabilities of the parties and requires a modification in the legal responses to those vulnerabilities. The third text is more on the network character or the arrangements and was written by a true protagonist of new economic sociology, Walter Powell, and emphasizes even more the self-standing/hybrid character of organizational contracts – between markets and firms – and not only places greater stress on the network character of these arrangements, but indeed characterizes them as a separate type entirely. The organizational contract is now of a distinct ‘third’ kind2 and the ‘lead texts’ that have made it such are given in Box 17.2. Not long after Macaulay, another legal scholar, Ian Macneil, has taken up the research much more systematically, highlighting many important aspects of relational contracts, but not – as Williamson then did – the one paradigmatic difference. For Williamson the ignorance of future developments is core, and this one aspect then triggered a whole series of writings on contracts that – because of this ignorance – better remain ‘incomplete’. On the network side of the arrangement, while economic sociologists contributed more to the conceptualization, there are as well economists like Victor Goldberg, translating findings

BOX 17.2

Stewart Macaulay, ‘Non-Contractual Relations in Business: A Preliminary Study’, 28 American Sociological Review 55–67 (1963) Oliver Williamson, ‘Transaction-Cost Economics: The Governance of Contractual Relations’, 22 Journal of Law & Economics 233–61 (1979) Walter W. Powell, ‘Neither Market nor Hierarchy: Network Forms of Organization’, 12 Research in Organizational Behaviour 295–336 (1990) 2

This terminology has been introduced by S. Grundmann / F. Cafaggi / G. Vettori (eds.), The Organisational Contract (Cheltenham: Ashgate, 2013).

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BOX 17.3

Ron Gilson / Charles Sabel / Robert Scott, ‘Vertical Disintegration and Interfirm Collaboration’, 109 Columbia Law Review 431–502 (2009) Victor P. Goldberg, ‘Relational Exchange: Economics and Complex Contracts’, 23 American Behavioral Scientist 337–52 (1980) Ian Macneil, ‘Relational Contract: What We Do and Do Not Know’, 60 Wisconsin Law Review 483–525 (1985) Gunter Teubner, ‘Coincidentia Oppositorum: Hybrid Networks beyond Contract and Organization’, in Marc Amstutz / Gunter Teubner (eds.), Networks: Legal Issues of Multilateral Cooperation (Oxford: Hart, 2009), pp. 3–30 Jean Tirole, ‘Incomplete Contracts: Where Do We Stand?’, 67 Econometrica 741–81 (1990)

into economic theory. The network side, however, is the one where not only vulnerabilities, but also chances of innovation and collaboration have become a core area of research by lawyers as well. These ramifications of the debate can be traced in the supplementary readings in Box 17.3.

b theories, context and discussion I This chapter explores the function that contracts fulfil in society and the extent to which organizational contracts (long term and in networks) show particular kinds of vulnerabilities, of trust relationships and of possibilities – different both from simple contracts for exchange and from firms. The texts discussed come from three different disciplines, we also consider the path that their discussion has taken. The first text is written by a law professor applying social science tools, specifically those of sociology – a relatively more common borrowing in the 1960s and early 1970s.3 The second text is by one of – if not the – founder(s) of institutional economics and governance research, the core texts in this area dating from 1979 and 1985. The third is by one of the founders of new economic sociology and network analysis. The three core disciplines of social sciences thus ‘collaborated’ in the development of the analytical framework of the organizational contract. The first text, like seminal texts written by Macneil, has a broad concept of relational contracts or relations. It stresses indeed that every contract, while characterized by a promise (and planning), is also nested within a broader relationship, which may include such diverse aspects as duties of good faith, mutual dealing and respect, possible limits on party autonomy (‘promise’), and a broader organization of contractual relations. The most important finding, however, may well be 3

See also the texts following a little later by I. Macneil (proposed as secondary reading); see moreover the discussion in Chapter 1 on J. Esser.

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that these arrangements give rise to certain behaviour – irrespective of legal consequences. It is an obvious corollary of this finding that legal instruments have quite a different importance (according to Macaulay, much reduced importance). Williamson on the other hand not only extensively discusses these findings, but quite consciously distinguishes both mere spot contracts and long-term (‘relational’) contracts, from the particular governance problems they are devised to overcome. Thus, where the early socio-legal scholarship developed the idea of a social relation that served as an important complement to the legal promise proper, Williamson gave this concept a new direction, by sharply dividing contractual arrangements into two sets of phenomena which, from a policy and governance perspective, should be treated differently. A great deal of theory, mainly in institutional economics, has been inspired by, and drawn from, this second article. In practice, however, the long-term character mostly goes along with a network arrangement, and this aspect in particular (rather marginal for Williamson) has been the object of even broader social theory, and recently of innovation research as well. The network aspect – in which the relation forms the core object of analysis, rather than the individual’s actions and the incentives which guide them – is made paramount only in economic sociology texts. This is quite understandable given sociology’s focus on relations and social contexts more generally. The founders in this respect are Mark Granovetter, who worked to distinguish different types of network links – in his case ‘weak links’ and ‘strong links’ – which achieve varying amounts of success in different situations,4 and Powell, who then triggered a systematic and comparative analysis of advantages and disadvantages of markets, firms and networks from a relational perspective. Therefore, Powell, in the text discussed here, is still more important than Granovetter and links directly to Williamson while, at the same time, reaching well beyond the latter with his economic sociology perspective. One puzzle needs to be briefly addressed: why had relational thinking so little success in Europe? One could, of course, argue that the sales contract remained the paradigm on which contract law was constructed, in the international instruments, in the Sales Directive as key EU act, in the national codes and doctrinal circles. An explanation might, however, also point to a combination of stronger theory orientation in the United States and a particular lack of relational aspects in US contract law in these decades, in particular in areas of economic action, while these aspects were already being considered much more in European law – German law being particularly pronounced in this. The core of relational thinking, the foundation in a social and in a trust relationship, forms the overarching principle of German contract law, enshrined in the first paragraph, and French law followed (with legislation, however, rather late).5

4

5

See more detail in Chapter 27 on Granovetter’s concept of social embeddedness and on new economic sociology as well as Section IV in this chapter. On the role of good faith and trust in German contract and private law, see M. Auer, ‘Good Faith: A Semiotic Approach’, 10 European Review of Private Law 279–301 (2002) and G. Teubner, Alternativkommentar zum Bu¨rgerlichen Gesetzbuch (Neuwied: Luchterhand, 1980), § 242; on the French reform leading to an alignment of both jurisdictions in this respect (after many previous doctrinal moves in this direction): special issue, 13 European Review of Contract Law 2017, 337–490; for a comparative European view M. Hesselink, ‘The

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II Macaulay’s 1963 article was written by a legal scholar taking a (tentatively) empirical social sciences approach. It is still rooted in the Weberian tradition of the sociology of law (or actually returning to it after decades of non-concern with economic questions in sociology), a tradition which focuses on the economy as the single most powerful expression of society, and on its relationship to law.6 In content, however, there is little left in Macaulay’s text of Weber’s belief in an increasing rationalization of the law. In content and in form (though not in the subject matter analysed), the article is close to the sociology of law of the late 1960s and 1970s which, often driven by left-wing political commitments, questioned mainstream thinking and establishment values. On the one hand, the article is very tentative in form and style – a true ‘preliminary study’ as it suggests – and its key takeaway is a matter of broaching one fundamental issue: why does law matter so little? Preliminary or not, however, by broaching this issue (and by making the positive statement that law matters so little), the article can be seen as innovative, even radical: ‘[M]any, if not most, exchanges reflect no [contract terms] planning, or only a minimal amount of it . . . .’7 According to Macaulay’s findings, the issue is not just that legal planning in business transactions is not, or is only to a very limited extent, done in practice (a bit more though when it comes to some firm activities, such as accounting) but that legal planning is often seen as actually dysfunctional or detrimental. Macaulay identifies this twofold thesis as his core finding right at the outset. He then discloses the sample of interviews, which are rather limited in number (sixty-eight) and in regional coverage (Wisconsin) and thus not necessarily statistically significant as Macaulay himself states. And even the form of the interviews is seen as very tentative, the author admits having mainly fished around for the relevant questions, focusing on the functions and dysfunctions of contract in real life, not so much on the legal force (legally binding oral or written agreement). This implies focusing mainly on (a) whether there was rational planning of the transaction with careful provision for as many future contingencies as can be foreseen and on (b) whether actual or potential legal sanctions were used to induce performance or compensation.8 Thus in his view, contract does not mean the exchange itself, but a certain way of handling the exchange (which is seen as a rather exceptional case). In the rest of the text, Macaulay sets out, though not very systematically, both the cases and the persons/functions which typically involve more intensive contract planning (and sanctions), and those where instead other aspects of what Macaulay calls the ‘relationship’, namely social norms, are more important. His use of relationship here unquestionably led to

6

7 8

Concept of Good Faith’, in The New European Private Law: Essays on the Future of Private Law in Europe (The Hague: Kluwer Law International, 2002), pp. 195–226. M. Weber, Wirtschaft und Gesellschaft: Grundriß der verstehenden Soziologie (Tu¨bingen: Mohr, 1922)(subtitle as of the 1956 ed.), see chapter 7, p. 378–513. Macaulay, ‘Non-Contractual Relations in Business’, 60. For all this and quotes, see Macaulay, ‘Non-Contractual Relations in Business’, 56. Much of earlier legal sociology resonates in his work, for example, on the idea of law as one among many institutions governing social relations E. Ehrlich, Grundlegung der Soziologie des Rechts (Munich/Leipzig: Duncker & Humblot, 1913).

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the discussion of the relational contract,9 although Macaulay emphasizes that every contract comes along with an associated social relationship. Relational contract research today generally emphasizes the way in which the formal/legal contract can be used to formally shape that broader (generally long-term) relationship. Macaulay identifies prior planning and responses to non-performance as two contexts where the relationship can be more contractual (legal), but soon afterwards he goes into a bit more detail, and distinguishes the subject matters that might be addressed in the formation of an exchange relationship. These are (i) the object of the performance duties themselves, (ii) the influence of unforeseen contingencies, (iii) a description of what should happen in the case of certain contingencies or non-performance, and finally (iv) legal sanctions. He also distinguishes various degrees of attention the parties can give to these questions: (i) explicit and (ii) tacit bilateral agreement, (iii) unilateral assumptions; and (iv) complete unawareness (see Table 17.1). The graph that demonstrates the interaction between subject matters and degree of attention is supplemented by an analysis of ‘standardized planning’ (via standard contract terms). Right from the outset, however, Macaulay draws the reader’s attention to an astonishing finding: it is by no means the case that large companies always use contracting/planning in an extensive way, while small private parties do not. Rather, long-standing business relationships and large private transactions (such as the purchase of a house) may well run in opposite directions. This may sound counter-intuitive at first, but at the same time it opens up a considerable research agenda – one which O. Williamson, by focusing simultaneously on the long-term character of exchange relationships and on their ex post governance, gives a convincing treatment (see Section III). Game theory has also provided a useful perspective in its explanation of how repeated games with unknown time horizons promote co-operation to a much larger extent (without reliance on legal sanction) (see Chapter 11). Yet Macaulay did not take into account yet another factor that would come to be conceptualized only some time later in social theory broadly speaking, namely that parties mostly negotiate and handle contracts ‘under the shadow of the law’. While they may not explicitly refer themselves to the legal status quo, their actions are nevertheless shaped by their knowledge or at least awareness of it and it serves as the background for their actions.10 9

10

This paragraph refers namely to Macaulay, ‘Non-Contractual Relations in Business’, 56–9. For the use of the term relational contract, see namely I. Macneil, ‘The Many Futures of Contract’, 47 Southern California Law Review 691–816 (1974); ‘ I. Macneil, Relational Contract: What We Do and Do Not Know’, 60 Wisconsin Law Review 483–525 (1985); V. P. Goldberg, ‘Relational Exchange: Economic and Complex Contracts’, 23 American Behavioural Scientist 337–52 (1980); O. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (New York / London: Macmillan, 1985); M. Hviid, ‘Long-Term Contracts and Relational Contracts’, in B. Bouckaert / G. de Gheest (eds.), The Encyclopedia of Law and Economics, vol. III: The Regulation of Contracts (Cheltenham: Edward Elgar, 2000), pp. 46–72 (with an extensive international list of literature); and prominent since then: R. Austen-Baker, ‘A Relational Law of Contract?’, 20 Journal of Contract Law 125–44 (2004); R. Austen-Baker, ‘Comprehensive Contract Theory: A Four-Norm Model of Contract Relations’, 25 Journal of Contract Law 216–43 (2009); M. A. Eisenberg, ‘Why There is No Law of Relational Contracts’, 94 Northwestern University Law Review 805–21 (2000); for recent productive references see D. Schepker et al., ‘The Many Futures of Contracts: Moving Beyond Structure and Safeguarding to Coordination and Adaptation’, 40 Journal of Management 193–225 (2014) and J. Salminen, ‘Contract-Boundary-Spanning Governance Mechanisms: Conceptualizing Fragmented and Globalized Production as Collectively Governed Entities’, 23 Indiana Journal of Global Legal Studies 709–42 (2016). See Chapter 27.

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In Macaulay’s analysis, the following are among the cases/persons/aspects that impact on the use of contracts and the degree of planning.11 The object of the contract proper is the subject of more explicit agreement, in comparison to the treatment of contingencies and sanctions, and there is greater planning and insistence on sanctions when the potential loss from non-performance would create an existential risk for the firm. Moreover, accountants and controllers insist more on planning than both sales personnel and managers/executives. More generally, planning is often used merely as a means to reliably structure the internal distribution of competences and decision-making. Finally, there is also more insistence on legal tools with respect to termination of the relationship – understandably so, given there is no longer much relationship value that might be destroyed by struggling through a protracted dispute.12 Yet the general trend is that sales personnel, and even executives, seldom give sufficient attention to carefully planning the legal framework, even, according to Macaulay, when it comes to specifying the object of the contract itself – which, unsurprisingly, turns out to be the most common source of disputes. Instead, they understand the solution as a matter of re-negotiation of terms in good faith (as does Williamson, see Section III). Thus, explicit contract planning is not simply ignored, but is in some cases even seen as dysfunctional (‘You can settle any dispute if you keep the lawyers and accountants out of it’, even in carefully planned contracts). The prime reason for such behaviour, the risk of losing a business relationship, is specified later on. Nowadays, however, the question arises (beyond the statistical reliability of Macaulay’s sample) whether today’s more anonymous, increasingly international and often global trading environment would turn out to be comparable to the narrow context of Wisconsin industrial players. On the other hand, modern emanations of digital capitalism illustrate how much platforms seek to invest in community building in order to consolidate consumer loyalty and benefit from repeated transactions, for example, by implementing consumer protection beyond the standard required by law. In any case, the text represents a milestone in methodological terms. Not only does it once again employ a sociological approach to matters of business (after decades where this had been taboo), but, in principle, the findings made are based on a micro-sociological method – in this sense, surpassing even Max Weber – insofar as the main focus of inquiry is individual actors and their decision-making methods. The text is often cited as one of the founding texts for long-term contracting, as the first truly giving the term relation its due. In such cases, contract serves more as the basis of an 11

12

For the content of this paragraph (and quotes), see Macaulay, ‘Non-Contractual Relations in Business’, 58, 60–6. On the status of interests which induces a legal fight at the moment of termination where the same parties would not have waged such a fight even over equally important/costly issues within an ongoing business relationship, see I. Macneil, ‘Contracts: Adjustment of Long-Term Economic Relations under Classical, Neoclassical, and Relational Contract Law’, 72 Northwestern University Law Review 854–905 (1978) at 889–90; P. J. Kaufmann / L. W. Stern, ‘Relational Exchange Norms, Perceptions of Unfairness, and Retained Hostility in Commercial Litigation’, 32 The Journal of Conflict Resolution 534–52 (1988); a core finding also for game theory when it distinguishes between one-shot games and repeated games (without known end), see for example J. Heide / A. Miner, ‘The Shadow of the Future: Effects of Anticipated Interaction and Frequency of Contact on Buyer-Seller Cooperation’, 35 The Academy of Management Journal 265–91 (1992); and Chapter 11.

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organization than as the tool for a mere exchange (even though many exchanges may then be handled on that basis). The article is, however, not very explicit in this respect. It is true that the text both speaks quite extensively of contingencies – that are, of course, more difficult to forecast in an open, long-term relationship – and alludes to the possibility of a ‘reaction of the other party in the particular exchange’ – a particularly important possibility in long-term relationships.13 Nonetheless, Macaulay does not clearly distinguish contracts whose object can be completely and clearly defined ex ante – that is, typical spot contracts – from those where such a complete definition of the primary undertaking is not possible. In this second scenario, what can be defined is limited to a framework duty to behave in good faith or in the interest of the other party, rather than the action owed as such. Nor more specifically does Macaulay distinguish between those contracts where the scope of the duty (delivery, time, quality) can be defined in the moment for contract formation, from those that can only be fully specified once the shape of future events has been revealed by the passage of time. This may be among the reasons why Macneil – another legal scholar with a sociological background – later claimed prime authorship of the concept of relational contracting.14 Not even this author, however, really took the final important step (even though Williamson relies more on him than on Macaulay). This leads to a string of criticism of each other: Macneil answers Macaulay in a 1974 text which is then taken up in the paper written by Williamson in 1979; Macneil again answers in his own article in 1985.15 The entirety of the research done by Macneil is characterized by two main features: first, a much broader interdisciplinary perspective on the phenomenon (including economics, behavioural sciences and history, mostly very critically), and, second, a more systematic 13

14

15

See Macaulay, ‘Non-Contractual Relations in Business’, 63. On the importance of this element for the construction of long-term relationships, see, for instance, R. E. Scott, ‘Conflict and Cooperation in Long-Term Contracts’, 75 California Law Review 2005–54 (1987); D. G. Baird, ‘Self-Interest and Cooperation in Long-Term Contracts’, 19 The Journal of Legal Studies 583–96 (1990). Macaulay continues in the next phrase by alluding to a mechanism which, on the other hand, is important again also for mere spot contracts and simple exchanges, the reputation mechanism (with black listing), p. 63; for the reputation mechanism, see, for instance, J. Klewes / R. Wreschniok (eds), Reputation Capital: Building and Maintaining Trust in the 21st Century (Heidelberg Dordrecht London New York: Springer, 2010); T. R. Lewis, ‘Reputation and Contractual Performance in Long-Term Projects’, 17 The RAND Journal of Economics 141–57 (1986); C. Shapiro, ‘Premiums for High Quality Products as Returns to Reputations’, 98 The Quarterly Journal of Economics 659–80 (1983); M. W. Cripps, ‘Reputation’, in S. N. Durlauf / L. E. Blume (eds.), The New Palgrave Dictionary of Economics (Basingstoke: Palgrave Macmillan, 2008), pp. 105–12. I. Macneil, ‘Relational Contract: What We Do and Do Not Know’, 60 Wisconsin Law Review 483–525 (1985), 483. The most famous contribution is I. Macneil, ‘The Many Futures of Contracts’, 47 Southern California Law Review 691–816 (1974); and (from the same year) the rebuttal by G. Gilmore, Death of Contract (2nd ed., Columbus: The Ohio State University Press, 1995 (1st ed. 1974)) who conceives remedies in contracts, including in relational contracting, as mainly tort based: I. Macneil, ‘Restatement (Second) of Contracts and Presentation’, 60 Virginia Law Review 589–610 (1974). Earlier work on the concept of relational contracts in: I. Macneil, ‘Whither Contracts?’, 21 Journal of Legal Education 403–18 (1969); later on: I. Macneil, ‘Contracts: Adjustment of Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract Law’, 72 Northwestern University Law Review 854–905 (1978); I. Macneil, Contracts: Exchange Transactions and Relations (2nd ed., Mineola / NY: Foundation Press, 1978 (1st ed. 1971, 3rd ed. with P. J. Gudel 2001)); and in particular: I. Macneil, The New Social Contract (New Haven / CT: Yale University Press, 1980).

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definition of the relational underpinning of exchanges. This definition focuses much more on the multiparty aspects (networks of contracts) and on the long-term dimension of exchanges, or rather of exchange organizations. This is, for the first time, the full picture of a relationship of the kind discussed in the Volkswagen/Prevent Group case, and the element of trust – placed in a multitude of players that can be seen as a common network at least in social terms – is core both for relational thinking and for the case at hand in particular. This is why Macneil could indeed claim (at least in part) authorship of the concept of relational contracting.16 Thus, both authors share their focus on the relationship between legal form (promise) and the social context (the relation). It must, however, also be noted, that relational contracts for Macneil also cover phenomena which are equally important (or even more important) for spot contracts. Thus, Macneil also refers to the limits of party autonomy, such as in cases of unconscionability, as expressions of the relational nature of most contracts. On the other hand, Macneil goes so far as to characterize mere spot contracts as being of minor practical importance and to conceive of longterm relations and organizations alone as economically relevant basic forms. This constitutes a statement that would seem to be at odds with a form of production aimed at retail distribution as its endpoint, and to too easily disregard both what distinguishes the retail relationship – that choice is available at each new instance – and the central role this repeated choice plays in driving competition in market economies.17 This is where Williamson starts off and introduces his radical change. III It is indeed only Oliver Williamson, an institutional economist, who put an end to the efforts to define away the spot contract, that is, the classical sales contract that had been the archetype of contract law for at least a century (though even he does not make spot exchanges his core object of inquiry). His innovation was to define relations solely as long-term arrangements – typically organized within networks – and to focus more narrowly on these arrangements in particular, and especially on their phenomenological and legal peculiarities. It was thus left to the economist to define the (legally applicable or usable) case patterns and to set out the prerequisites for their presence. He indeed pioneeringly took the next important step of clearly discriminating between discrete (spot) contracts and long-term contracts and making this distinction the core of his inquiry. In his words: ‘The transactions that I wish to emphasize here, however, are exchanges of the recurring kind . . . [reason for which] the . . . critical dimensions for characterizing [the] transactions [analysed] are (1) uncertainty, (2) the frequency with 16

17

The references made in the following are to the contribution of 1985, Macneil, ‘Relational Contract’, 483, 486 et seqq., 498. In this article (and beginning with ‘Many Futures’ in 1974), Macneil also developed the distinction into three periods, which Williamson takes up again in his own piece, of a classical concept of contract law (until 1933), then a neoclassical one and finally the period of truly relational contract law thinking. It is yet another statement that an economy based on discrete spot contracts only (as Adam Smith still conceived it) would be weak. Indeed, as Macneil puts it: ‘Such a discrete economy would . . . have low productive capacity . . . ’, in ‘Relational Contract’, 490.

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which transactions recur.’18 Thus, Williamson proposes to deal with the core of the problem. This paper complements chapter 2 of his seminal 1985 book, discussed in Chapter 3. While both overlap and certain parts of the 1979 paper are taken up in chapters of that book, the book chapter named is primarily concerned with transaction costs more generally, while the 1979 paper discussed here specifically addresses longterm contracts and their similarities and differences with other modes of organization, that is, markets, hierarchies and – above all – hybrids between the two. The bases that are common need not be discussed again here at length. At the very outset, the 1979 paper stresses the importance of transaction costs as the starting point for institutional economics (quoting the so-called Coase theorem). It also characterizes the strict alternative between the market and the firm (discussed by Coase in his 1937 paper, and by Williamson himself in a paper dating back to 1971)19 as a limited subset of the possibilities amenable to a comparative transaction costs analysis. Indeed, this expansion of the analytical categories is proposed as the way to give new institutional and transaction cost economics more precision, and to thereby overcome the vagueness which characterized this approach in its first couple of decades. Williamson’s main question is indeed ‘for each abstract description of a transaction, identify the most economical governance structure [among the whole range of possible organizational arrangements]’. In the first substantive section, Williamson ties this question back to the articles already examined here, namely Macaulay’s and, more importantly, Macneil’s. Williamson gives a beautiful summary of the historic part of Macneil’s 1978 paper on long-term economic relations describing classical, neoclassical and relational contracting.20 Williamson finishes by formulating the main reservation (made here as well). Macneil’s complicated apparatus is of little use as a basis for concrete application, the ‘critical dimensions of contract not [being] expressly identified, and the purposes of governance not [being] stated’. Here, Williamson sets as his purpose the clarification of the relationship between three typical features of long-term relationships which significantly distinguish them from spot contracts/discrete exchanges: (i) uncertainty, (ii) frequency of the transactions made in this relationship and (iii) ‘the degree to which durable transactionspecific investments are incurred’. Among these three, ‘[t]he crucial investment distinction is . . . to what degree are transaction-specific (nonmarketable) expenses incurred’.21 The reason for the importance of this distinguishing feature is given right away as well: ‘Items that are unspecialized among users pose few hazards, since buyers 18 19

20

21

Williamson, ‘Transaction-Cost Economics’, 241 and 239, quote at the end of the paragraph at 234 et seq. See Chapter 19; and O. Williamson, ‘The Vertical Integration of Production: Market Failure Considerations’, 61 The American Economic Review 112–23 (1971). See Williamson, ‘Transaction-Cost Economics’, 235–8 (in the first era condensing all contract problems into one moment; in the second era encountering problems with this approach in case of long-term relations; in the third era professing the relational contract); for the rest of the account in this paragraph (and also the other quotes), see 236 and 239. Williamson, ‘Transaction-Cost Economics’, 239 (also next quote); this had already been introduced as a key criterion in 1971 by O. Williamson, ‘The Vertical Integration of Production: Market Failure Considerations’ 61 American Economic Review 112–23 (1971); then developed by B. Klein / R. G. Crawford / A. A. Alchian, ‘Vertical Integration, Appropriable Rents, and the Competitive Contracting Process’, 21 Journal of Law &

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in these circumstances can easily turn to alternative sources, and suppliers can sell output intended for one order to other buyers without difficulty’. In other words, two fundamentally different governance mechanisms for balancing the parties’ opposing interests are distinguished, namely competition on markets, and tailor-made governance schemes. This is a divide that could hardly be more fundamental for the whole of a market economy. Where there is a market – for unspecialized, marketable goods and services – there is no need to establish an alternative governance scheme. Where, however, such a market solution is not readily at hand – for specialized nonmarketable goods and offers (based on a transaction-specific investment) – there is, indeed, a need for the parties to establish their own governance scheme. How important this divide is, and how many areas it can affect, can be seen from a single example addressed in his conclusions, namely ‘the interface between manufacturing and distribution [that] reflects similar investment considerations’. Here, more generally marketable goods are directed through general distribution channels – such as supermarkets and on a competitive basis–, while more specialized – or even non-marketable – goods move through bilateral, more specialized distribution channels. From an antitrust perspective, this distinction is responsible for allowing ‘exclusive dealing’ agreements in the so-called selective distribution scheme for products which, because of their very quality or refinement, would hardly be marketable at all through general distribution channels, but disallowing such agreements otherwise (where there is unrestricted competition on markets).22 Transaction specificity is mainly a result of specific investment into equipment (machines, premises), the development of relationship-specific procedures, or expenditures on training (human capital).23 The core problem that arises is that once a party has made more of such investments, the termination of the relationship or even the threat of termination from the other party (ex post opportunism) produces the effect that the party ‘is effectively locked into the transaction’. While there may be competition up until moment the long-term contract is completed (i.e., many suppliers may compete to get the bid), ‘thereafter [the relationship is] transformed into one of bilateral monopoly’. The Volkswagen/Prevent Group case clearly shows the bilateral monopoly situation so typical for long-term relationships. The Dortmund Court, however, does not seem to be fully aware of the bilateral monopoly structure of the relationship. While the dominant position

22

23

Economics 297–326 (1978); and is broadly accepted today, see E. G. Furubotn / R. Richter, Institutions & Economic Theory: The Contribution of the New Institutional Economics (2nd ed., Ann Arbor: The University of Michigan Press, 2005), pp. 251 et seq; J. Tirole, ‘Incomplete Contracts: Where Do We Stand?’ 67 Econometrica 741–81 (1999). On this point see B. Klein / K. Murphy, ‘Vertical Restraints as Contract Enforcement Mechanisms’, 31 Journal of Law and Economics 265–97 (1988). Both the European Commission and the ECJ have upheld selective distribution agreements on the basis of several conditions, the nature (i.e., the quality) of the product concerned being the first; see for instance, ECJ case C-99/79 Lancome SA etc. v. Etos BV [1980] ECR 2511; EGC (Court of First Instance) case T-19/92 Groupement d’achat E´douard Leclerc v. Commission [1996] ECR II-1961 (known as the YSL case). For the passages on investment specificity (this paragraph, with quotations) and on legal reactions proposed (next paragraph, with quotations), see Williamson, ‘Transaction-Cost Economics’, at 240 et seqq. and at 245 et seqq. respectively.

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of Volkswagen may be of some importance (discussed by the Dortmund Court at length), the core vulnerability of the supplier rather stemmed from the fact that a specific investment was needed on the side of the supplier (arguably also on the side of the producer) to arrange for machinery and procedures to provide a tailor-made product. Hence, fixing an amortization period (with no right to termination) was a sound governance instrument. The court, however, discusses the specific investments very superficially. In substance, however, and for arranging the incentives correctly, the court is right in that there should again be a possibility to terminate after such amortization period. It does not, however, even mention two aspects paramount in the analysis by Williamson (and therefore, while reaching the correct result, does not highlight a good number of the core criteria). In principle, the parties have superior knowledge in fixing the exact duration of the nontermination period. Therefore, there should be strong presumption that free termination is possible afterwards. Moreover, the right to terminate is even more important in a longterm relationship to establish a sensible regime for incentives for both parties.24 The Dortmund Court even overemphasized the protection via balancing of interests to some extent and thus lowered the ‘bite’ of this governance instrument (still reaching, however, the conclusion that termination was possible, as this was a rather extreme case). Finally, the case nicely shows how, because of the mutual monopoly situation, sometimes the much smaller enterprise, here Prevent Group, can be the much stronger party, at least for the period where it can use the lock-in effect better (or can use public media, in this case with considerable leverage in the middle of the diesel scandal). By consequence and as also shown by the case, the termination regime must have its bite (even in favour of the enterprise with much higher resources). Had Prevent Group not been of some size, but an SME, the court insinuates that it might even have tipped into the other direction. One proviso would seem to follow from the issues discussed. Specific investment is not so problematic an issue if the relationship, with respect to the specific investment, can be arranged in an equilibrated way, namely when (as Williamson puts it) the ‘exchanges [are] of the recurring kind’. The aim of the governance scheme is therefore to avoid or contain asymmetric arrangements with regard to transaction-specific investments. This analysis of particular kinds of vulnerabilities is then followed by the proposal of possible legal instruments to address them. With respect to the specialized nonmarketable goods and services, Williamson, in the rest of the text once again distinguishes three situations. Where such exchanges are relatively infrequent between the parties, it will probably not pay off to set up a bespoke governance scheme, and the parties should refer to a third person (arbitration etc.). Where, however, there is a high frequency of transactions between the parties, it should pay to set up a custom-built 24

On the importance of the termination regime as arguably the most sensible governance element in long-term relationships, namely on the mutual punishment element inherent in it, see F. Cafaggi, ‘Enforcing Transnational Private Regulation: Models and Patters’, in F. Cafaggi (ed.), Enforcement of Transnational Regulation: Ensuring Compliance in a Global World (Cheltenham: Edward Elgar, 2012), pp. 75–130, at 107 and S. Grundmann / F. Cafaggi / G. Vettori, ‘The Contractual Basis of Long-Term Organizations: The Overall Architecture’, in S. Grundmann / F. Cafaggi / G. Vettori (eds.), The Organizational Contract: From Exchange to Long-Term Network Cooperation in European Contract Law (London / New York: Routledge, 2016), pp. 3–38, at pp. 33–4.

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governance scheme. If the good or service at stake is partly transaction-specific, but also partly marketable, that governance scheme should be contractual. Conversely, if the good or service is completely specific to the transaction, then the scheme should typically take the form of a joint venture, since in such cases, the inputs are all being intended for a single purpose. In this case, the hierarchical structure is seen as being the best way to eliminate any ongoing questions about the distribution of benefits. Trust, both personal and institutionalized, is seen as being paramount in these relationships and therefore any governance device supporting as being helpful. Nevertheless, Williamson does not presuppose such trust, nor does he inquire into the conditions which give rise to it – and this is one main point of criticism raised against him in the subsequent economic sociology, specifically in the work of Granovetter (see Chapter 27). Williamson’s overall aim is to show how transactions are possible – because they are beneficial to both parties – even though market solutions are not at hand in at least some phases of production. This is seen to hold true despite the risk of ex post opportunistic behaviour by one side threatening to frustrate the relationship from the beginning (where trust is not sufficient to overcome these doubts). Williamson’s overall aim therefore lies in ‘economizing on bounded rationality [not over-investing in regulating and planning future contingencies] while simultaneously safeguarding the transactions in question against the hazards of opportunism’. This is an endeavour in optimizing the equilibrium between ex ante certainty and the costs of governance. Yet another discussion is linked to the findings in this paper. Williamson insinuates that there are different types of instruments suitable for different types of situations and this implies as well that the allocation of the rule-setting power is an issue. Should it be the legislature (as in Italy with the law on supply relationships, sobfornitura), arguably for reasons of protection or as well for the better supply of standard solutions (as in Dagan and Heller’s choice theory)?25 Or should it rather be a code of conduct for the whole industry formulated by its organs, or should it be standard contract terms and a tailor-made arrangement? The substance of the rule and the person of the rule-setter are seen as being intimately linked questions in governance research. In any case, von Hayek’s idea of distributed knowledge as discovery procedure (or device) would speak in a particularly strong way for the involvement of industry in these questions, as the variety of forms is particularly high here and information therefore particularly diverse as well. Williamson’s text did more than clarify the essential distinction between discrete and long-term contracts. It also triggered an extensive literature on so-called incomplete contracts – those left incomplete with respect to crucial duties to be executed because full ex ante definition of terms would be too costly (because it would depend on anticipating all contingencies) or even dysfunctional (because it would reduce flexibility and incentives for co-operative behaviour).26 Later relational contract theory 25

26

H. Dagan / S. Heller, The Choice Theory of Contracts (Cambridge: Cambridge University Press, 2017), passim. See O. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (New York / London: Free Press, 1975), passim; O. Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985), pp. 56–67; and also I. Ayres / R. Gertner, ‘Filling Gaps in Incomplete Contracts: An Economic Theory of

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is often associated with the strand of literature that focuses on self-executing mechanisms in long-term contracts or relationships that serve to stabilize them – with one example entailing a ‘sanctioning capacity’ on the side of the party ‘faithful to the (spirit of) the contract’.27 This can be achieved, for instance, by giving a trainee in a firm who is expected to earn more once the traineeship has ended a right to terminate at any time if renegotiation at the end of the traineeship does not lead to a satisfactory level of remuneration.28 The contract term could then be that the level of remuneration stays the same until successful renegotiation, but that, as of the end of traineeship, there is an unlimited right to terminate on the side of the trainee. The example shows the structure of the problem. If no agreement is reached, it may be difficult for a third party to set adequate terms, or to assess which party behaved opportunistically and which was ‘faithful to the spirit of the contract’, and the clause addresses this dilemma. It lowers planning security for the employer and strengthens the capacity of the employee to react quickly to unexpected offers. An up-front sacrifice in salary acts in this case like a fee for the trainee’s increased capacity to react. Yet another strand of literature can contribute to enhancing governance in long-term contractual relationships, although it is much more discussed in the corporate setting, and this is principal-agent theory.29 IV Williamson took the term relations from the context of law and sociology/law and society; in institutional economics, an almost synonymous (and probably more common) term would be incomplete contracts (see fn. 21). A more neutral term that encompasses the other two might be long-term contract. It is, however, not only and perhaps not even primarily the long-term character of such contracts which makes it clear why legal scholarship, economics and sociology had to come together – in quite an exemplary way – to create the concept of a long-term organizational contract. This fact becomes especially obvious in light of a second aspect, seen today as paradigmatic for hybrids between hierarchies (that is, firms) and markets – but rather weakly expressed in Williamson’s text30 – namely the network arrangement in which long-term contracts are typically grouped.

27

28 29

30

Default Rules’, 99 Yale Law Journal, 87–130 (1989); J. Tirole, 67 Econometrica 741–81 (1999); Furubotn / Richter, Institutions & Economic Theory, pp. 135–54, 251–85, 342–51 et passim. L. G. Telser, ‘A Theory of Self-Enforcing Agreements’, 53 The Journal of Business 27–44 (1980); see also B. Klein / K. B. Lefller, ‘The Role of Market Forces in Assuring Contractual Performance’, 89 Journal of Political Economy 615–41 (1981). See Telser, ‘A Theory of Self-Enforcing Agreements’, 36. Groundbreaking M. Jensen / W. Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, 3 Journal of Financial Economics 305–60 (1976); E. Fama / M. Jensen, ‘Separation of Ownership and Control’, 26 Journal of Law and Economics 301–25 (1983); K. J. Arrow, ‘The Economics of Agency’, in: J. W. Pratt / R. J. Zeckhauser (eds.), Principals and Agents: The Structure of Business (Boston / MA: Harvard Business School Press, 1985) pp. 37–51; for more detail, see Chapter 20. See, however, certain ‘traces’ in Williamson, ‘Transaction-Cost Economics’, at 238, 240, 242, 245, 260. Of some importance among Williamson’s own writings and for institutional economics and governance research on contractual networks also and more broadly: O. Williamson, ‘Credible Commitments: Using Hostages to Support Exchange’, 73 American Economic Review, 519–40 (1983); outstanding in current

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The development would not seem to be fortuitous – both with respect to terminology and with regard to the focus of inquiries. Typically in economic sociology, the focus of inquiry is placed much less on the isolated individual and the structure of their incentives, in accordance with the methodological individualism applied in institutional economics,31 but much more on the relationship between two (or more) persons (so-called relational sociology).32 This concept is clearly visible in the term of a relation superimposed on the – still two-sided – contract as a technical device. This difference in concepts becomes even more striking when it comes to the focus of inquiry. The inquiry into networks – primarily social networks, but with entrepreneurial networks very prominent as well – forms a centrepiece of the new economic sociology that emerged in the 1980s and 1990s (and for sociology more generally), and may in fact be the defining characteristic.33 Particularly prominent in this regard is the far-reaching concept used by the sociologist Manuel Castells, who sees the network – conceived much more broadly than just for entrepreneurial purposes – as the crucial, overarching feature of modern societies.34 In institutional economics, by contrast, and despite prominent conceptualization of the enterprise as

31

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34

interdisciplinary research on network arrangements and their contribution to innovation: R. Gilson / C.Sabel / R. Scott, ‘Vertical Disintegration and Interfirm Collaboration’, 109 Columbia Law Review 431–502 (2009); R. Gilson / C.Sabel / R. Scott, ‘Contracting for Innovation – Braiding – The Interaction of Formal and Informal Contracting in Theory, Practice and Doctrine’, 110 Columbia Law Review 1377–447 (2010). On methodological individualism (and also on its distinction from normative individualism) see: Furubotn / Richter, Institutions & Economic Theory, p. 3; K. J. Arrow, ‘Methodological Individualism and Social Knowledge’, 84 (2) The American Economic Review 1–9 (1994), at 1–2; H.-B. Scha¨fer / C. Ott, Lehrbuch der o¨konomischen Analyse des Zivilrechts (5th ed., Berlin Heidelberg New York: Springer 2012), p. 46; P. Behrens, Die o¨konomischen Grundlagen des Rechts. Politische O¨konomie als rationale Jurisprudenz (Tu¨bingen: Mohr Siebeck, 1986), pp.34 et seqq. See, for instance, S. Mu¨tzel, ‘Netzwerkperspektiven in der Wirtschaftssoziologie’, in A. Maurer (ed.), Handbuch der Wirtschaftssoziologie (Heidelberg: Springer, 2008), pp. 185–206, at 186; seminal M. Granovetter, ‘Economic Action and Social Structure: The Problem of Embeddedness’, 91 American Journal of Sociology 481–510 (1985) (see Chapter 27). The (re)naissance of (new) economic sociology would indeed seem to be closely linked to network analysis. Certainly the protagonists of the two fields are closely linked. See references in fn. 32 and fn. 40. Good surveys can be found in A. Maurer, ‘Institutionalismus und Wirtschaftssoziologie’, in Maurer, Handbuch der Wirtschaftssoziologie, pp. 62–84; R. Hedtke, Wirtschaftssoziologie (Konstanz / Munich: UVK Verlag / UTB, 2014), pp. 159 et seq.; Gablers Wirtschaftslexikon (Wiesbaden: Springer, 2013), sub ‘Wirtschaftssoziologie’ (J. Beckert / S. Mu¨nnich); S. Wasserman/ K. Faust, Social Network Analysis: Methods and Applications (Cambridge: Cambridge University Press, 1994); L. Freeman, The Development of Social Network Analysis: A Study in the Sociology of Science (North Charleston / SC: Empirical Press, 2004). No important economic sociology textbook fails to give network analysis in-depth treatment; see (besides those already named in this note), among many others: J. Beckert / M. Zafirovski (eds.), International Encyclopedia of Economic Sociology (London: Routledge, 2006); F. Dobbin (ed.), The Sociology of the Economy (New York: Russell Sage Foundation, 2004); M. Granovetter / R. Swedberg, The Sociology of Economic Life (3rd ed., Boulder / CO: Westview Press, 2011); N. J. Smelser / R. Swedberg (eds.), Handbook of Economic Sociology (Princeton / NJ: Princeton University Press, 1994 2nd ed. 2005); and also J. Wright (ed.), International Encyclopedia of Social and Behavioral Sciences (2nd ed., Oxford: Elsevier, 2015), sub ‘Economic Sociology’ (N. Fligstein / C. Dioun); and also: M. Granovetter, Society and Economy: Framework and Principles (Cambridge / MA: Harvard University Press, 2017); from the founder of economic sociology, H. C. White, Markets from Networks (Princeton / NJ: Princeton University Press, 2002). M. Castells, The Information Age: Economy, Society and Culture, vol. 1: The Rise of the Network Society (2nd ed., Chichester: Wiley Blackwell, 2010; 1st ed. 1996).

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a network of contracts,35 ‘network’ has a completely different meaning. Here, the aim is to unpack the ‘black box’ that had previously allowed the enterprise to be seen as nothing more than a unitary actor towards the outside world, and to instead conceive of the enterprise as a network of legal relationships. This not only when it comes to internal relations between management, shareholders, stakeholders etc., but also in the firm’s relations with the outside world. Obviously, this implies a blurring of the boundaries of the firm, and the creation of a continuum between all those relationships – inside and outside – in which each actor has their bundle of ‘property rights’. Conceived in this way, the network of contracts concept lends itself rather well to methodological individualism – and for economics this image of networks is relatively unimportant. Conversely, economic sociology – and Powell in particular – inquire primarily into the relationship as a whole unit – and for economic sociology, relations are core object of investigation. Thus, while it was institutional economics that gave the strongest push to the concept of a long-term contractual relationship, economic sociology turned out to be far more influential for investigating and articulating the problem of networks – each discipline developing an area of particular expertise. This example therefore shows in a particularly striking way how economic sociology also reclaimed its characteristic view of the world with respect to questions of business organization.36 The network arrangement is indeed typical for most long-term contracts and thus forms a second important pillar of the law on organizations based on contractual arrangements. Without a doubt, the literature on this subject has still developed less extensively than discussions of the long-term dimension (with principal-agent theory, the theory of incomplete contracts and also a lot of the governance literature). Nevertheless, this is a characteristic that bears striking resemblance to the theory of the organization itself, particularly with the network (or nexus) theory of the firm mentioned above.37 Moreover, the core question is the same as it was for long-term contracts. The comparative assessment test, which, per Williamson, compares the organizational advantages of one arrangement or another, applied in equal measure when what is at stake is the relative advantage of a network of contracts over a single, common contract (i.e., charter), just as would be done within a firm (organization). Indeed, just as in the company world, the legal arrangements – a multitude of contracts coming together in a network – form the basis of a stable 35

36

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See Chapter 19; groundbreaking R. Coase, ‘The Nature of the Firm’, 4 Economica 386–405 (1937); then A. Alchian / H. Demsetz, ‘Production, Information Costs, and Economic Organization’, 72 The American Economic Review 777–95 (1972); M. Jensen / W. Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, 3 Journal of Financial Economics 305–60 (1976). S. Cheung, ‘The Contractual Nature of the Firm’, 26 Journal of Law and Economics 1–21 (1983). The half century following Max Weber had been dominated by Talcott Parsons’ separation thesis, leading to a situation in which rationality of means was a tool of analysis (mainly with respect to economic activities) left exclusively to economics, while sociology was directed to the analysis of values and their creation – until the paradigm of economics was extended to all areas of life, namely by G. Becker (‘economics’ imperialism’) and sociology ‘rediscovered’ economic activity as a field of inquiry (New Economic Sociology). See J. Beckert / S. Mu¨nnich (fn. 33); T. Parsons, The Social System (Glencoe / IL: Free Press, 1951); T. Parsons, The System of Modern Societies (Englewood Cliffs / NJ:Prentice-Hall, 1971). On this similarity, see S. Grundmann, ‘On the Unity of Private Law: From a Formal to a Substance Based Concept of Private Law’, 18 European Review of Private Law, 1055–78 (2010), at 1067–9.

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organization. It is thus fair to conceive contract(s) here as an ‘organizational contract’ (or contracts).38 Again, contracts integrated into networks pose particular problems. The comparison of contractual networks, markets and firms is, however, not at the core of Williamson’s inquiries (or of institutional economics more generally), nor even those of Granovetter. While it is true that Granovetter had already distinguished and compared different types of network linkages (weak links and strong links) with respect to their properties and effects,39 it is only Powell who analysed their specificities, the reasons why and when they come into being, and their advantages and disadvantages as modes of organization as compared to markets and firms. It was left to him to establish contractual networks as a third mode of organization on their own merits, with their advantages and disadvantages, but seen from the perspective of social contexts!40 Thus, the comparison of these three modes of organization is again at the core of Powell’s analysis. Though his first writings are indeed about organizational theory more generally,41 this theory reaches further than network analysis in two respects. First, the object is broader, 38

39

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41

See S. Grundmann / F. Cafaggi / G. Vettori (eds.), The Organisational Contract (Farnham: Ashgate, 2013), especially the introduction; for an earlier precursor (‘controrgs’): G. Teubner, ‘Beyond Contract and Organisation? The External Liability of Franchising Systems’, in C. Joerges (ed.), Franchising and the Law: Theoretical and Comparative Approaches in Europe and the United States (Baden-Baden: Nomos, 1991) pp. 105–32, at pp. 129–32; G. Teubner, ‘Coincidentia oppositorum: Hybrid Networks beyond Contract and Organization’, in M. Amstutz / G. Teubner (eds.), Networks: Legal Issues of Multilateral Cooperation (Oxford: Hart, 2009), pp. 3–30. M. Granovetter, ‘The Strength of Weak Ties: A Network Theory Revisited’, 78 American Journal of Sociology 1360–1380 (1973); M. Granovetter, Getting a Job: A Study of Contacts and Careers (1st ed., Cambridge / MA: Harvard University Press, 1974, 2nd ed. 1995) (with the counter-intuitive and therefore rather striking key observation that ‘weak ties’ typically are more important, for instance in the search for jobs); on M. Granovetter see more extensively below chapter 27; see for yet another famous monograph on this phase of development of economic sociology: R. S. Burt, Structural Holes: The Social Structure of Competition (Cambridge / MA: Harvard University Press, 1992) (being close to such structural holes is particularly helpful). It is not by chance that entrepreneurial networks (organizational contracts) are often analysed in economic sociology starting from Powell: see, for example, Hedtke, Wirtschaftssoziologie, pp. 159–61. For important monographs or surveys on entrepreneurial networks: J. Beckert, ‘Soziologische Netzwerkanalyse’, in D. Kaesler (ed.), Aktuelle Theorien der Soziologie: Von Shmuel N. Eisenstadt bis zur Postmoderne (Munich: Beck, 2005), pp. 286–312; R. S. Burt / M. J. Minor (eds.), Applied Network Analysis: A Methodological Introduction (Beverly Hills / CA: Sage, 1983); N. Fligstein, The Architecture of Markets: An Economic Sociology of Twenty-First Century Capitalist Societies (Princeton / NJ: Princeton University Press, 2001); D. Jansen, Einfu¨hrung in die sozialwissenschaftliche Netzwerkanalyse (3rd ed., Opladen: Leske & Budrich / UTB, 2003); N. Nohria / R. G. Eccles, Networks and Organizations: Structure, Form and Action (Boston / MA: Harvard Business School Press, 1992); J. Rauch / A. Casella, Networks and Markets (New York: Russell Sage Foundation, 2001); White, Markets from Networks; for a beautiful survey, based on systems theory, of social theory and its importance for the legal treatment of these phenomena: Teubner, ‘Coincidentia oppositorum’. P. DiMaggio / W. Powell, ‘The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields’, 48 American Sociological Review 147–60 (1983); then (in parallel to the contribution discussed here) W. Powell / P. DiMaggio (eds.), The New Institutionalism in Organizational Analysis (Chicago / IL: University of Chicago Press, 1991); see also more general surveys on organization theory, for example: E. Frese (ed.), Grundlagen der Organisation: Entscheidungsorientiertes Konzept der Organisationsgestaltung (10th ed., Wiesbaden: Gabler, 2012); A. Kieser (ed.), Organisationstheorien (8th ed., Stuttgart:Kohlhammer, 2019); J. Pfeffer, Organizations and Organization Theory (Boston: Pitman, 1982); F. B. Simon, Einfu¨hrung in die systemische Organisationstheorie (5th ed., Heidelberg:Auer, 2015); M. Hatch / A. Cunliffe, Organization Theory: Modern, Symbolic, and Postmodern Perspectives (3rd ed., Oxford:Oxford University Press, 2013); groundbreaking, J. D. Thompson, Organizations in Action: Social Science Bases of Administrative Theory (New Brunswick / NJ: Transaction Publishers, 2003, first published 1967).

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whereas network analysis is focused on only one type of organization (besides markets and firms). Organization theory is typically also broader with respect to disciplines, is in fact a highly multidisciplinary endeavour and far from being limited to institutional sociology (as in the case of Powell’s work), and surpasses network analysis in drawing on a wide array of disciplines, and on many branches of economics in particular. Powell himself is a thirdgeneration economic sociologist – a disciple of Granovetter’s who himself studied at Harvard with White, who is in turn rightfully seen as the founder of the field (see fn. 33 and 40). This also explains the increasingly micro-sociological orientation, not only with respect to the object of investigation, namely networks as an innovation scheme, but also in core practical areas, life sciences, local industries and non-profit organizations. Powell’s 1990 article, however, sets out a complete framework of analysis and develops one core thesis. The first section (on markets and firms), which discusses the contributions already made by Macneil and Williamson (though not by Macaulay), also rebuts the thesis of a bipolar structure of markets and firms in which only hybrids between the two are to be analysed. His own thesis, perhaps exaggerating his differences to Williamson,42 is that the network is a third important form with its own merits (‘neither fish nor fowl, nor some mongrel hybrid, but a distinctly different form’). It is seen as a form different in kind, in form, in its conditions of creation, and in its advantages and disadvantages (‘mixed mode . . . not particularly helpful . . . historically inaccurate, overly static, and it detracts from our ability to explain many forms of collaboration that are viable means of exchange’). Powell sees his own most direct precursor to his own research in Goldberg (1980), who had stressed the particularity of network structures, but not really analysed them. With respect to a legal analysis, Powell’s findings would seem to speak against any approach that simply integrates parts of existing company law with parts of spot contract law (discussed further below). The market in particular is portrayed as a spin-off of networks, therefore the hybrid, historically speaking, instead forming the original. More important still, Powell specifies what are in his view the core characteristics of networks. Above all, the arrangement is seen as being reciprocal, namely with respect to exchange of value and with respect to the flow and distribution of information, and based on individual responsibility of each partner. If this description, backed up by the socio-empirical study, is correct, this would rather strikingly move the arrangement away from a company law starting point. Indeed, Powell clearly stresses that there is typically no pooling of inputs in the arrangements established by the parties. The remainder of the article is dedicated to developing Powell’s thesis about networks as a form in their own right and the main characteristic of reciprocity he ascribes to them. The body of the article is intended to explain why and when networks come into being, or equivalently, what advantages they have over the two alternative forms. His answer – typical 42

Powell ‘follows’ Williamson (and also Macneil) in much of their thought: he admits that uncertainty about the future triggers the risk of ex post opportunism (except in situations of solid and unshaken trust) and that this influences the choice of forms used, he also admits that hierarchies can alleviate the problem. It is then already founded more in economic sociology (and indeed Williamson does not go into this direction) that ‘being under a common roof’, the feeling of joint responsibility (as in networks) is also seen as a device alleviating the problem (Powell, ‘Neither Market nor Hierarchy’, 296 et seq.). The other elements and quotations referred to in this paragraph can be found at 298–301.

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for economic sociology – is not mono-causal, in the sense of depending, for example, only on transaction costs. This last part of the article falls into two parts whose themes are closely intertwined. The first part deals with the thesis itself and, the second part with the conditions in which networks typically come into being.43 In both, the advantages and strengths of networks are analysed and compared, and this is the common thread that weaves through the paper. In between the two parts, perhaps inevitably for research in economic sociology, Powell inserts a long empirical excursus, comprising almost half of the article, which includes arrangements that can be found and data on which the conclusions are then based. These details are less analytically interesting than they are empirically informative. Powell summarizes the most interesting examples as follows: (i) One of the main consequences has been to blur the boundaries of the firm – boundaries are being expanded to encompass a larger community of actors and interests that would previously have either been fully separate entities or absorbed through merger; (ii.) A new constellation of forces is being recognized as crucial to economic success: whether in the Third Italy of Silicon Valley, spatially concentrated production involves the cooperation of local government, proximity to centers of higher education, a highly skilled labor pool, extensive ties to research institutes and trade associations, and cooperation among firms with specialized skills and overlapping interests; (iii.) The spread of technologically advanced, smaller units of enterprise – a growth that comes at the expense of larger companies and is not explained solely by the shift from manufacturing to services.

The essence of the large empirical part is then laid out in the conclusions – an arrangement also reflecting the empirical method. Elements are tentatively isolated and listed which favour the creation of networks, that is, that encourage the parties in a particular situation to opt for networks rather than other forms. The key finding is genuinely inspired by economic sociology rather than by institutional economics: Powell interprets the empirical material so as to contradict any claim that parties choose arrangements solely, or even primarily, because of their relative transaction costs. Combining the main points made in both parts discussed above, the following are the most striking findings: networks are much more dependent on reciprocity and continuing mutual trust than either of the alternatives; in markets, exit is convenient, and in organizations, a command structure exists and solves most problems.44 This has two consequences: first, the Dortmund Court in the Volkswagen/Prevent Group case is totally right in pointing to the fact that trust is placed in the network and paramount for it, even if, for the sake of liability, it may be split into separate legal entities. Second, this explains why market and firm are institutions with a clear legal structure and clear instruments, while networks are more flexible and vague (also in the instruments applying).45 Because of these 43

44

45

Powell, ‘Neither Market nor Hierarchy’, at 301–5 (part 1) and 305–28 (part 2), the long quote below summarizing the examples at 313. Powell, ‘Neither Market nor Hierarchy’, at 296–302, and later – for the destruction of trust as core problem – 304 et seq. In this book, theory of markets is the core interest in Chapters 6 (freedom of restrictions, regulatory market order), 11 (consensus) and 12 (information, of course important also beyond markets). Conversely, firms are dealt with in Chapters 19–21 mainly, with their overall constitution, the interplay between the main actors and

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structural characteristics, the information flow is seen as being of particular relevance, denser than in other relationships and based on an equal footing of peers (expecting reciprocity and reliability, based, of course, on good experience). Networks therefore win over markets where information is complex and individualized, but also prevail over organizations where it is complex, individualized and rapidly changing, in both cases because the exchange between peers makes a difference. Markets co-ordinate, but are seen as being weak with respect to highly complex, innovative information. Firms are seen as particularly strong in mass production, and in repetition of processes, but not for sharp and innovative change. This raises one question: what might this imply for capital markets, for the instruments traded there and for the techniques used? Does the dominance of highfrequency trading ensue from this perspective, is it desirable? Powell consistently draws on economic theory (including institutional economics) as a background, but often refers as well to the insufficient complexity of such approaches, for instance when he draws on game theory, which nonetheless, in his view, relies too heavily on a strict expectation of equivalence in exchange (do ut des), which he rebuts in favour of an alternative model. In line with sociological models, Powell sees how trust reduces complexity (N. Luhmann). Therefore, while it is true that there is an expectation of reciprocity which may not be trumped very often, there is no expectation of strict equivalence of exchanges, since such an expectation would destroy the very basis of networks. In his view, his alternative model does a better job of explaining why such networks can maintain a balance among equals for a long time and offer good (and better) environments for learning and proliferation of information (as in Silicon Valley). It also explains why they are more prevalent when relationships deal with values which are intangible, not easy to grasp and hard to protect by legal instruments. He regards transaction cost considerations as much less important than those strategic considerations for which quantification is simply impossible: ‘an exclusive focus on the transaction – rather than the relationship – as the primary unit of analysis is misplaced’.46 Transfer of know-how, speed of adaptation and long-term trust are the three core characteristics which Powell finds. This is, indeed, a remarkable analytical framework. Rather early on in the contribution, Powell distinguishes markets, hierarchies and longterm networks (hybrids, organizational contracts) according to the features described in Table 17.1. The characteristics listed as key features for the column on ‘networks’, namely normative basis, methods of conflict resolution, tone and actor preferences all specify this basic understanding of the network primarily as a relationship of peers who exchange fairly, and who further each other’s affairs. It is interesting that with respect to the long-term character ‘amount of commitment’, the durability of the arrangement is considered to be just as high as that of a firm: severable, but typically not severed (‘medium to high’). The core question for our purposes is what relevance all this might have for legal assessment. If Powell is correct that networks constitute a third mode, distinct from both

46

the empowerment of the ‘principal’ actor. The core instruments used to ‘govern’ behaviour of others are freedom of contract on the one hand and the right to instruct on the other. Powell, ‘Neither Market nor Hierarchy’, at 302 et seq., but also 322 et seq., Table 17.1 reproduced from 300.

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table 17.1 Stylicized Comparison of Forms of Economic Organization (according to W. Powell) Key Features

Market

Hierarchy

Network

Normative Basis

Contracts – property rights Prices

Employment relationship Routines

Complementary strengths Relational

Administrative fiat – supervision Low Medium to high

Norm of reciprocity – reputational concerns Medium Medium to high

Formal, bureaucratic Dependent

Open-ended, mutual benefits Interdependent

Means of communication Methods of conflict resolution

Haggling – resort to courts for enforcement Degree of flexibility High Amount of commitment Low among the parties Tone or climate Precision and/or suspicion Actor preferences or Independent choices

spot contracts and from the firm, this thesis would make it difficult to maintain that the category of networks adds nothing meaningful to the law of spot contracts.47 In current legal literature, in the already relatively few cases where networks are dealt with specifically at all, there is a common recognition that traditional contract doctrine has to be modified and adapted if it is to properly capture this phenomenon.48 The two core questions, however, where there is dispute, are whether and to what extent the two most important principles of the organization also typically apply to networks of contracts, or whether they do so only in exceptional cases. These principles are whether and to what extent unforeseen gains and burdens have to be shared among all the partners to the network, and to what degree a member of the network has a direct claim against other members, even when there is no direct contractual link between them.49 With respect to the first question, Powell’s findings may be determinative in the following way: excluding network members from a presumptive share in unforeseen profits (generated at the hub of the network) in no way deprives any of 47

48

49

Quite outspoken in this sense, while still one of the two leading textbooks on commercial law in Germany: C.-W. Canaris, Handelsrecht (24th ed., Munich: Beck, 2006), § 17 para. 13 and § 18 para. 20; in a similar vein, often quoted: R. Buxbaum, ‘Is “Network” a Legal Concept’, 149 Journal of Institutional and Theoretical Economics 698–705 (1993), 704: ‘Network is not a legal concept.’ For a legal doctrine of network of contracts, see, for instance, references in fn. 49, and earlier: W. Mo¨schel, ‘Dogmatische Strukturen des bargeldlosen Zahlungsverkehrs’, 186 Archiv fu¨r die civilistische Praxis 187–236 (1986); M. Rohe, Netzvertra¨ge: Rechtsprobleme komplexer Vertragsverbindungen (Tu¨bingen: Mohr, 1998); and also M. Amstutz (ed.), Die vernetzte Wirtschaft: Netzwerke als Rechtsproblem (Zurich: Schulthess, 2004). See, for a more extensive application of these company law paradigms also to networks of contracts: G. Teubner, Networks as Connected Contracts (Oxford: Hart, 2011), with a preface by H. Collins, passim; G. Teubner, Netzwerk als Vertragsverbund: Virtuelle Unternehmen, Franchising, Just-in-time aus sozialwissenschaftlicher und juristischer Sicht (Baden-Baden: Nomos, 2004), pp. 25–8, 141–3, 161 et passim; for a restriction of these cases to exceptional instances: S. Grundmann, ‘Contractual Networks in German Private Law’, in F. Cafaggi (ed.), Contractual Networks, Inter-Firm Cooperation and Economic Growth (Cheltenham: Edward Elgar, 2011), pp. 111–62, at pp. 126–42.

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these parties from a gain already promised in the initial contract. Conversely, granting such a right would create a risk of lawsuits, and thereby destabilize the network (also to the potential detriment of others). From the outside, it may be difficult to assess how this additional gain was created, whether by additional particular activities carried out by the hub. In any case, this additional gain may at least create a feeling of indebtedness for this party, which adds to the stability of the network (being profitable) – and thus to the benefit of all – and moreover plays a role in future negotiations. Together, these aspects speak rather against having a remedy that requires these gains to be disgorged. In the Prevent Group case, it was not seen as constituting an argument on the basis of which modes of pressure would be seen as legitimate. V All three texts, taken together, develop the idea of an organizational contract with two main aspects – the long-term relationship and a network character. The first, and firstaddressed, aspect is the long-term relationship that differs from a spot contract exchange. Macaulay’s text analysed here focuses on the social context of contracting more generally and therefore defines a much larger array of phenomena as relational. It is the long-term arrangement, however, that lies at the core of relational contracting, and only Williamson’s article and the work on incomplete contracts that followed it were focused more narrowly on such long-term, and network, relationships. That restriction makes the inquiry sufficiently focused to describe situations of particular vulnerability in a normative way, allowing the relevant factual patterns to be clearly defined and the potential reactions to these vulnerabilities to be analysed. Williamson develops his comparison – between long-term contracts, markets (spot contracts) and firms – by comparing the structure and scale of their respective transaction costs. As paradoxical as it may sound, the lawyers who dealt with relational contracting, both Macaulay and Macneil, presented a theory about law, while Williamson, an institutional economist, developed a true theory of law, a law of long-term network contractual relationships with relevant fact patterns being concisely defined. The essence of that fact pattern, however, is only fully perceived once the second core aspect is also taken into consideration, namely when, as of the 1990s, research also turned attention to the network structure in which many such long-term relationships are typically nested. Powell’s paper is an important complement to Williamson’s for two reasons. He compares the same set of arrangements as Williamson (markets, firms, hybrids/ networks) yet methodologically speaking, while presupposing the transaction costs rationale, he also goes well beyond it: he makes it clear that decisions are taken on the basis of criteria other than mere cost factors, criteria that are just as important in real life, and often much more important. Finally, Powell also establishes the longterm contract – with network structure – as a third form in its own merits, not just as a hybrid between market and firm (as had been done before). Altogether, however, there is probably more of a continuum of different shades of white, grey and black between the three forms, the long-term network having four core characteristics (to be

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protected and furthered by law). These are (i) the need of a governance mechanism for future decisions, (ii) the (potentially strong) involvement of third parties as mediators, (iii) the mutual possibility to sanction misbehaviour by the other(s) in the course of relationship and in a more informal way and (iv) the strength and paramount importance of social ties.

p a r t iv

Persons and Organizations

18 Person, Civil Status and Private Law Hans-W. Micklitz

a topic and materials I This chapter addresses one of the most prominent developments in private law in the twentieth century; the introduction of status-related rights, where a person’s status is connected to a higher degree of protection in law than as compared to that offered by default. The European Union is playing a prominent role in this development, in the field of non-discrimination (Chapter 14), but also in the field of consumer law. The difficult question is the decision on what makes a consumer and when and under which conditions they may enjoy a higher degree of protection. An example case is given in Box 18.1. Mr Gruber is using his house for a double purpose: for his private needs but also for his business as a farmer. In his complaint he is putting himself on the weaker side. He refers to the status as a consumer which grants him particular protection in that he is entitled to sue the supplier at his place of residence (Austria) and not based on domicile of the defendant (Germany). This case showcases the problematic of status-related rights. Once the legislature introduces the distinction between the normal person and persons with particular rights, everybody will feel tempted to make use of the special rights to their benefit. But what is more, Gruber stands for all dual-use consumers. How should they be treated? Is Gruber a kind of representative for the collective interests of dual-use consumers? II The three seminal texts in Box 18.2 stem from three jurisdictions and span over a period of nearly 100 years. At first sight Rene´ Demogue, Neil MacCormick and Norbert Reich do not seem to be directly related, although they represent a seamless fit in the big picture of the transformation ‘from status to contract and back again’. Rene´ Demogue examines the concept of the legal subject (sujet de droit) from the perspective of legal theory, in light of the upcoming industrialization impacting the law. The link between individual rights and the legal subject is beginning to falter, since the social question points to collective interests, for which a legal subject has yet to be found. 341

New Private Law Theory

342 BOX 18.1 CASE STUDY

ECJ Case C-464/01, Gruber [2005] ECR I-439 Mr Gruber, a farmer, owns a farm building situated in Upper Austria, close to the German border. The area of the farm building used for residential purposes is slightly more than 60 per cent of the total floor area of the building. He bought tiles for his farm building from Bay Wa’s premises located in Germany. Mr Gruber considered that the tiles delivered by Bay Wa to tile the roof of his farm building showed significant variations in colour despite the warranty stating that the colour would be uniform. As a result the roof would have to be re-tiled. Mr Gruber launched a complaint before the Austrian Court referring to the Brussels Convention which grants consumers the right to sue at their place of residence. The ECJ had to decide if and how the dual use of the farm building affects Mr Gruber’s status as a consumer.1

BOX 18.2

R. Demogue, ‘La notion de sujet de droit’ (1909) 8 Revue Trimestrielle de Droit Civil 611–55, (English translation available on the book website) N. MacCormick, Legal Right and Social Democracy: Essays in Legal and Political Philosophy (Oxford: Clarendon Press, 1984) N. Reich, ‘Zivilrechtstheorie, Sozialwissenschaft und Verbraucherschutz’ (1974) 7(8) Zeitschrift fu¨r Rechtspolitik 187–94, (English translation available on the book website) In his scepticism towards the ‘collective legal subject’, Demogue anticipates a discussion which Duncan Kennedy associates with the ‘third globalisation of law and legal thought’, where the legal subject is broken down into numerous legal identities.2 Neil MacCormick searches for a politico-philosophical justification for substantive equality in the theory of the state, in our context for the adoption of labour and consumer protection rules. MacCormick is neither interested in private law nor in the legal subjects simpliciter. He focuses on civil freedoms and property rights which, on their own, cannot solve the social question. MacCormick paves the way for state interventions in the economy, of which Tony Blair and New Labour approved, as the so-called third way. He explains why the discussion about the protection of employees and consumers is conducted less under the aspect of status-based subjective rights than in the context of legitimacy of state interventions, which serve the protection of politically determined, collective interests. Norbert Reich breaks new ground in 1974 with the trisection of civil law – business to business, 1 2

Case C-464/01, Gruber [2005] ECR I-00439. D. Kennedy, ‘Three globalisations of law and legal thought: 1850–2000’, in D. M. Trubek and A. Santos (eds.), The New Law and Economic Development: A Critical Appraisal (Cambridge: Cambridge University Press, 2006), pp.19–73.

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BOX 18.3

D. Kennedy, ‘Three globalisations of law and legal thought: 1850–2000’, in D. M. Trubek and A. Santos (eds.), The New Law and Economic Development: A Critical Appraisal (Cambridge: Cambridge University Press, 2006), pp. 19–73 O. Ben-Shahar, ‘The paradox of access justice, and its application to mandatory arbitration’ (2016) 83 The University of Chicago Law Review 1755–817

business to consumer and consumer to consumer, in which rights and obligations are assigned according to status. To underpin his argument, Reich refers to socialist theories of civil law.3 The central significance of Reich’s contribution lies in its attempt to adapt the private law of the nineteenth and twentieth century to the changing economic and social conditions, not only in Western democracies but also in the European Union. The fragmentation of the private legal order through status-related rights has triggered the development of a whole series of casebooks that try to give shape to the different fields of private law, where status-related rights matter (Box 18.3). At the more theoretical level, attention is focused on what the move back from contract to status entails, on the theoretical and conceptual consequences of ever more subjectrelated rights, as well as on the doubtful distributional effects that status-related rights produce.

b theories, context and discussion I The title of this chapter could be: ‘From status to contract to status’.4 The French Code Civil, an intellectual achievement of the French Revolution, abolished a legal order that was aligned to the status of the right holder. The privileges of aristocracy, aristocratic class society and feudalism were eliminated. Equal rights for all citizens replaced status-based rights.5 Almost 100 years later, the German Civil Code (BGB) formulated in Art. 1: ‘The legal capacity of a human being begins on the completion of birth.’ It has to be complemented as follows: ‘regardless of the status in which the individual was born’. Through their birth, each individual automatically becomes the holder of rights. But the economic and political circumstances which triggered a revolution and helped the bourgeois society emerge no longer appeared revolutionary by 1900 when the German BGB entered into force. Nevertheless, questions remain as to how and why private law creates legal subjects 3 4

5

See his postdoctoral thesis, N. Reich, Sozialismus und Zivilrecht (Frankfurt: Athena¨um, 1973). H. Maine, Ancient Law: Its Connection with the Early History of Society, and Its Relation to Modern Ideas (Cambridge: Cambridge University Press, 2013), p. 170; K. I. Schmidt, ‘Henry Maine’s “Modern Law”: from status to contract and back again?’ (2017) 65 The American Journal of Comparative Law 145–86. F. Wieacker, A History of Private Law in Europe, trans. Tony Weir with a foreword by Reinhard Zimmermann (Oxford: Clarendon Press, 1995), p. 195.

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and legal subjectivity and as to why the legal subject is of such primary importance.6 From a politico-economic point of view, the answer is rooted in the transformation of the aristocratic class to a bourgeois society, in which each citizen enjoys formally identical rights. Equal treatment linking the legal subject to the ownership of rights enabled the unprecedented dynamic of the capitalistic economic order in the nineteenth century.7 From a legal and historical-cultural perspective, the first constant of the European legal culture of ‘personalism’ was extended to all citizens equally for the first time. Personalism separates subject and object; conceptualizes the human relation as ‘vis-a`-vis of two individuals’ and not as ‘a collective we’ (Chapter 5). Industrialization in England, and since the second half of the nineteenth century in Continental Europe, entailed a massive upheaval of the economy and society. The latter not only provided the subject with unexpected opportunities for actions and private liberties, but led at the same time to the division, analysed by Karl Marx, between producers, who controlled the means of production, and workers, who kept the industrial production process going with their manpower.8 Towards the end of the nineteenth century, the ‘social question’ began to dominate the political discourse.9 States had to deal with political claims of workers (today we use the more distinguished term ‘employees’). If these claims did not aim at the complete abolition of the capitalist economic order, they targeted improvements of working conditions, reflected legally in the call for balanced labour contracts. Hugo Sinzheimer claimed that social law required to move from ‘person’ as a legal construct to ‘human being’.10 The French Code Civil and the German BGB adopt the optic of workers as legal subjects with their own set of rights, not as human beings. Newly founded political parties and trade unions called for secure employment relations, pension rights and protection of health and safety at work for workers whose collective interests they represented. The twentieth century marked the birth of statusbased rights to be granted to workers. The labour movement advocated a special private 6

7

8

9

10

For a thoughtful philosophical discussion S. Klingbeil, ‘Der Begriff der Rechtsperson’ (2017) 217(6) Archiv fu¨r die civilistische Praxis 849–85. He distinguishes between the legal person, the holder of rights and duties, the legal personality and the legal subject. K.-H. Ladeur, ‘The evolution of general administrative law and the emergence of postmodern administrative law’ (2011) Comparative Research in Law and Political Economy. Research Paper No. 16, at 11–12 on the links between capitalism, law and innovation. K. Marx, ‘Manifesto of the Communist Party’, available at https://bit.ly/2Dj9iVz; K. Marx, Capital, vols. 1 and 2 (Ware: Wordsworth Editions, 2013). The secondary literature on Marx is huge, see, for example, T. Carver (ed.), The Cambridge Companion to Marx (Cambridge: Cambridge University Press, 1991); G. A. Cohen, History, Labour and Freedom (Oxford: Oxford University Press, 1988); P. Singer, Marx: A Very Short Introduction (Oxford: Oxford University Press, 2000). H.-W. Micklitz, The Politics of Justice in European Private Law (Cambridge: Cambridge University Press, 2018), pp. 47–118, 172–80. H. Sinzheimer, ‘The development of labor legislation in Germany’ (1920) 40 The Annals of the American Academy of Political and Social Science 35–40, trans. D. B. Shumway; R. Dukes, The Labour Constitution: The Enduring Idea of Labour Law (Oxford: Oxford University Press, 2014), chapter 2 ‘Hugo Sinzheimer and the Economic Constitution’, pp. 12–32; O. Kahn-Freund, ‘Hugo Sinzheimer’ in R. Lewis and J. Clark (eds.), Labour Law and Politics in the Weimar Republic (Oxford: Oxford University Press, 1981); E. Livneh, ‘Hugo Sinzheimer: the father of German labour law’ (1975) 10(2) Israel Law Review 272–5; A. Seifert, ‘Von der Person zum Menschen im Recht: zum Begriff des sozialen Rechts bei Hugo Sinzheimer’ (2011) 2 Soziales Recht 62–73.

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law: a labour law, linked to the worker’s status and to an imperative right to protection.11 The French Code Civil could not yet deal with labour law, since at the beginning of the nineteenth century the French economy was mainly agrarian. When the Prussian government gave German legal scholarship the mandate to elaborate the BGB, the economic and political circumstances had already changed. Industrialization was omnipresent. The failure to tackle the social question – think only of Otto von Gierke’s12 famous words lamenting the missing drop of ‘socialist oil’ in the BGB and its refusal to acknowledge the special features of labour contracts – provoked strong criticisms.13 If the founding fathers of the BGB – there were only fathers – had dealt with the social question, they would have had to ask themselves how the liberty empathically proclaimed in paragraph 1 can be reconciled with the lack of equality in labour relations and whether and to what extent liberty and equality have to be balanced.14 The materialization of private law (Max Weber, Chapter 2) is addressed to the legal subjects who benefit from social values. The twentieth century is characterized by the fight over the social question (on the transformation of liability see Chapter 15). The first half of the century led to special rules and regulations to the benefit of employees in industrial states which, however, were not integrated into the French and German civil codes – whereas they were in Italy (1942). These special private law rules and regulations, ‘outsourced’ from the grand codifications, did not question the theoretical and ideological structure of the two civil codes. Contract not status continued to govern private law relations. In Europe, a similar development took place after World War II in the rising consumer society. What was unthinkable 100 years earlier turned into reality. Today private consumption forms a central pillar of the economies of all developed democracies in Europe and in the world.15 Since the political debate on the dark side of the consumer society was not linked to the call for a new socialist order,16 the old social question arose in a new guise. Do consumers need a distinct legal regime or can their problems, whether they are of individual or collective nature, be solved by means of the existing instruments of private law?17 The 11 12

13 14

15

16

17

T. H. Marshall, Citizenship and Social Class (Cambridge: Cambridge University Press, 1950). O. von Gierke, Die soziale Aufgabe des Privatrechts (Berlin: Springer, 1889), p.15; English version O. von Gierke, ‘The social role of private law’, trans. E. McGaughey (2018) 19(4) German Law Journal 1017–116, at 1050. H. Kantorowicz, ‘Was ist uns Savigny?’ (1911) 1 Recht und Wirtschaft, at 47–54, 76–9. On liberty and equality in our times see H. Dagan, ‘Between regulatory and autonomy-based private law’ (2016) 22(5) European Law Journal 644–58. On the impact in the age of financialization see G. Comparato, The Financialisation of the Citizen: Social and Financial Inclusion through European Private Law (Oxford: Hart, 2017); I. Domurath, Consumer Vulnerability and Welfare in Mortgage Contracts (Oxford: Hart, 2017); H.-W. Micklitz, I. Domurath and G. Comparato (eds.), ‘The over-indebtedness of European consumers: a view from six countries’ (2014) EUI Working Paper EUI-ERC No. 10. However, some contributions in D. Kochenov, G. de Burca and A. Williams, Europe’s Social Justice Deficit? (Oxford: Hart, 2015), are outspokenly critical on the impact of the EU internal market on the social and political democratic order, which goes along with the rise of the debate on the political economy of the law; see P. Kjaer (ed.), The Law of Political Economy: Transformation in the Function of Law (Cambridge: Cambridge University Press, 2020). For two rather opposite views on the relation between consumer law and private law S. Grundmann, ‘Consumer law, commercial law, private law: how can the sales directive and the sales convention be so similar?’ (2003), 14 European Business Law Review 237–57 and H.-W. Micklitz, ‘Do consumers and business

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answer was the same for all Western industrial countries. Based on the experience in the shaping of labour law, urgent problems were delegated to special consumer protection legislation. The basic structure of private law, based on contract instead of status, remained untouched, at least initially. Countries that adopted a consumer law code compiled widespread special rules and regulations and merged them in one piece of law.18 The Netherlands and Germany integrated consumer law in their codifications, albeit rather late, only towards the end of the twentieth century or in the new millennium. Whilst the integration upgraded the standing and recognition of consumer law in particular in legal education, consumer law in Germany perhaps more than in the Netherlands remained an alien segment within the established private law academia.19 The theoretical and conceptual question as to whether consumer law as an autonomous subject can or even must exist independently of the civil code and whether it must be internally coherent remains unsettled.20 The transfer of competences in consumer law towards the European Union changed the interaction between status and contract. European private law seems aligned along the status of the participating parties, workers, consumers in their relationship to business, business to business etc.21 This has certainly had an impact on national law. It looks as though we were moving from status to contract and now back to status, although status- and non-status-related private law are still standing side by side. However, there are two important countermovements under way which shed new light on status-related law. Efficiency-driven law and economics point to the distorting effects of status-related laws, which might lead to the consequence that those in whose name the status-related laws are legitimized end up paying for those who benefit, being usually those who are better off. Behavioural economics, to the contrary, promotes ever more sophisticated differentiation in status-related laws (Chapter 5 with regard to LOT, Chapter 6 with regard to law and economics). Employee and consumer rights could be replaced by situational protection mechanisms, orientated towards the cognitive abilities of employees and consumers.22 The sharing economy challenges the distinction between the consumer and the producer and leads to new uncertainties involved in the consumer

18

19

20

21

22

need a new architecture for consumer law? A thought provoking impulse’ (2013) 32 Yearbook of European Law 266–367. For instance in Italy: G. Vettori, Codice del consumo: Commentario a cura (Padua: CEDAM, 2007); V. Cuffaro, Codice del doncumo: Commentario a cura (Milan: Giuffre`, 2012); as well as France: J. CalaisAuloy, H. Temple and M. Depince´, Droit de la Consommation 10th ed. (Paris: Dalloz, 2020). Non-code law shatters the pre-understanding of civil lawyers, but outside of the Continental institutional tradition, that is, the common law, such bric-a-brac is less troubling. The common lawyer is more concerned with the decline of lex, see M. Oakeshott, On Human Conduct (Oxford: Clarendon Press, 1975), pp. 130–41. With regard to the attempts in France: Proposition pour un nouveau droit de la consommation, rapport de la commission de la refonte du droit de la consommation au secre´taire d’E´tat aupre`s du ministre de l’E´conomie, des Finances et du Budget charge´ du Budget et de la Consommation, 1985. H. Ro¨sler, Europa¨isches Konsumentenvertragsrecht: Grundkonzeption, Prinzipien und Fortentwicklung (Munich: C. H. Beck, 2004); S. Weatherill, EU Consumer Law and Policy (Cheltenham: Edward Elgar, 2nd ed. 2013); M. Tamm, Verbraucherschutzrecht (Tu¨bingen: Mohr Siebeck, 2011); M. Tamm, K. Tonner and T. Bro¨nneke (eds.), Verbraucherrecht: Rechtliches Umfeld, Vertragstypen. Rechtsdurchsetzung. Beratungsbuch 3rd ed. (Baden-Baden: Nomos, 2020). In this spirit, M. Engel and J. Stark, ‘Verbraucherrecht ohne Verbraucher’ (2015) 23 Zeitschrift fu¨r Europa¨isches Privatrecht 32–51.

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status, not to mention the much deeper impact of digitization on the personal autonomy of all users of the Internet (Chapter 16). II In 1909, Rene´ Demogue wrote his work ‘La notion de sujet de droit’,23 predating by two years his masterpiece entitled ‘Les notions fondamentales du droit prive´’.24 Why refer to a contribution from 1909 – a text that is more than 100 years old and limited to the role of the ‘individual’ and ‘his legal position’ in a rapidly changing environment?25 Demogue does not form part of the collective memory of French civil lawyers.26 The key positions in the history of private law are held by others: Carbonnier, Duguit, Ge´ny, Capitaint, Josserand, Ripert, Saleilles. Duncan Kennedy27 has brought Demogue’s potential for today’s debate on the position of the legal subject back into the light. Demogue radically questions the feasibility of solving the social question by way of an appropriate method that allows the French Code Civil to adjust to the changing economic and social conditions. He asks the crucial question: is there a legal subject behind the social question and, if so, how does such a legal subject look and how could such a subject be justified in their existence? Demogue belongs with all those private law theorists who confronted legal formalism and legal individualism with the social question. How should and could the individualism of the bourgeois nineteenth century be reconciled with the requirements of solidarity in the twentieth century (Chapters 7 and 11)?28 Franc¸ois Ge´ny29 searched for the answer by developing a scientifically justified method of interpretation, which attributed a central role to the courts and awarded a leading position to scholarship. It was not by coincidence that the French authors at the beginning of the twentieth century relied on a comparative legal analysis, especially by involving German private law jurisprudence. Demogue agrees with the necessity to adapt the French Code Civil to social realities. This brings him closer to Sinzheimer’s move from the person to the human being. However, he does not share the belief and the hope that there is a possibility to substitute the objective law, which is anchored in statutory law, with general rules of interpretation or with ‘notions fondamentales’. Neither legal scholarship nor the judiciary would be able to 23 24

25

26

27

28

29

R. Demogue, ‘La notion de sujet de droit’ (1909) 8 Revue Trimestrielle de Droit Civil 611–55. R. Demogue, Les notions fondamentales du droit prive´: essai critique pour servier d’introduction a` l’e´tude des obligations (Paris: Rousseau, 1911). H.-W. Micklitz, ‘The legal subject, social class and identity based rights’, in L. Azoulai, S. Barbou des Places and E. Pataut (eds.), Constructing the Person in EU Law: Rights, Roles, Identities (Oxford: Hart, 2016), pp. 285–310. C. Jamin, ‘Demogue et son temps: re´flexions introductives sur son nihilisme juridique’ (2006) 56 Revue Interdisciplinaire d’Etudes Juridiques 5–19. D. Kennedy and M.-C. Belleau, ‘La place de Rene´ Demogue dans la ge´ne´ologie de la pense´e juridique contemporaine’ (2006) 56 Revue Interdisciplinaire d’Etudes Juridiques 163–211, who discuss his influence in the United States, but also his link to P. Heck. Saleilles basically represents a Christian third way, a bit like the way in the UK where the emergence of the Labour Party is tied to a Christian as opposed to a socialist programme. F. Ge´ny, Me´thode d’interpre´tation et sources en droit prive´ positif 2nd ed. (Paris: Librairie Ge´ne´rale de Droit et de Jurisprudence, 1919); as well as F. Ge´ny, Science et technique en droit prive´ positif: nouvelle contribution a` la critique de la me´thode juridique (Paris: Societe du Recueil Sirey, 1913).

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manage the adjustment objectively; subjective elements would become part of legal interpretation. This may not sound very exciting in light of the discussion about methods in the twentieth century (Chapter 1). Jamin and Duncan Kennedy build a direct bridge between American legal realism and critical legal studies, well aware of the German Free Law School.30 It is Demogue’s argument that private law would irretrievably lose its inner coherence by opening up towards factual reality. The tensions between individualism and (collective) solidarity cannot not be reconciled. Ge´ny blames Demogue as a legal nihilist, but at the same time felt inspired to write his renowned work.31 It was not Philipp Hecks’ jurisprudence of interests, but Demogue32 who recognized the irrevocable contradiction intrinsic to balancing. Together with Oliver Wendell Holmes, Demogue and Heck rank among the founders of the so-called balancing approach, which rejects conceptual jurisprudence.33 To quote the words of Kennedy:34 ‘when one thing goes up (security of transaction), something else must go down (static security)’. Balancing cannot be considered scalar in Demogue’s approach, that is, there is no higher synthesis between values.35 Demogue concentrates on the analysis of tensions between the rights that the individual can exercise as legal subject and collective interests, which must in principle be protected by the objective legal order, which Demogue calls objective law and which is the law adopted in parliament. Demogue recognizes that collective interests eventually need a legal subject as well. The question is when and under what conditions. Whether there is a legal subject depends on the purpose of the law. Demogue refers to Edmund Bernatzik, but also discusses Rudolf Jhering. He distinguishes between two categories: law as an object of enjoyment (les sujets de jouissance) and law as an object of disposition (les sujets de disposition). The first one refers to collective interests, the second to individual rights, although he admits himself that the line between them is difficult to draw. Law as an object of enjoyment is far-reaching since enjoyment is not a matter of wanting or of being allowed to want. The proximity to Le´on Duguit and Jhering is obvious here. Animals and, more generally, all beings can be holders of rights, provided they show

30 31

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Precisely on this problem see Kennedy and Belleau, ‘La place de Rene´ Demogue’, at 191. F. Ge´ny, ‘Les Notions fondamentales du droit prive´ by R. Demogue’ (1911) 35 Nouvelle revue historique de droit franc¸ais et e´tranger 110–25, at 125, quoted by Jamin, ‘Demogue et son temps’, at 11. On legal nihilism, Nietzsche, American realism and Critical Legal Studies see Kennedy and Belleau, ‘La place de Rene´ Demogue’, at 198–211. For a deeper insight on legal nihilism, see P. Mechem, ‘The jurisprudence of despair’ (1936) 21 Iowa Law Review 669–92, at 670–2 as well as P. Schlag, ‘Missing pieces: A cognitive approach to law’ (1989) 67 Texas Law Review 1195–250. For Demogue and Heck see Kennedy and Belleau, ‘La place de Rene´ Demogue’, at 181. On similar problems in the application of the now ubiquitous proportionality principle: K.-H. Ladeur and R. Prelle, ‘Judicial control of administrative procedural mistakes in Germany: a comparative European view on environmental impact assessments’, in K.-H. Ladeur (ed.), The Europeanisation of Administrative Law: Transforming National Decision-Making Procedures (Dartmouth: Aldershot, 2002), pp. 93–111. D. Kennedy, ‘A transnational genealogy of proportionality in private law’, in R. Brownsword, L. Niglia, H.W. Micklitz and S. Weatherill (eds.), The Foundations of European Private Law (Oxford: Hart, 2011), p.197. For that reason one might consider Demogue as an initiator of value pluralism. With a particular focus on adjudication, see W. Lucy, ‘Adjudication’, in J. Coleman, K. Himma and S. Shapiro (eds.), The Oxford Handbook of Jurisprudence and Philosophy of Law (Oxford: Oxford University Press, 2004), pp. 206–67.

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feelings and emotions.36 This goes along with the more recent focus in legal theory on cognitive psychology and behavioural economics (BE) (Chapter 3). The only ones excluded from the enjoyment of law are those who only benefit from a ‘Rechtsreflex’ (legal reflex, or the indirect effects). The distinction between third parties as addressees of legal rights and those who are affected by a legal reflex preoccupied the jurisprudence in the twentieth century (Chapter 15 on tort law). In contrast, law as object of disposition (sujet de disposition) is distinctly narrow. Only a reasonable person is able to conduct legal transactions. Demogue avoids discussing the will theory. The search for determination of the legal subject through the legal purpose of law does not overcome the difficulties in identifying the legal subject. It allows him to involve social realities (interests, purposes, enjoyment) and to highlight that the enforcement of interest requires a ‘titulaire d’exercise’ (holder of the performance of the right).37 For Demogue, Duguit and Jhering’s approach to determining the legal subject is wrongheaded. It is not so much about whether it is desirable, under the existing circumstances, to qualify a being (eˆtre) as legal subject because the purpose is worthy of protection, but ‘what are the principles that can explain them . . . Stated differently the problem is of pure legal technicality’.38 First and foremost, the desired results have to be determined by means of objective law, on the basis of reasonable benchmarks. This is French rationalism. According to Demogue, the cause of confusion (of the wrong question) stems from the missing demarcation line between content (reasonable principles) and legal technique (technique juridique). Mere techniques can develop into principles if they manifest themselves as ideas, as is the case with regard to human rights.39 Demogue opposes individualistic social philosophy (both he and Georg Jellinek follow Hegel in this regard), which is orientated towards the needs of individual security and undermines the ‘objective order in terms of reasonable rules’.40 The entire construct collapses since a different concept of the legal subject ultimately results from the confusion of content and technique, of idea and principle, of law as enjoyment (jouissance) and law as disposition (disposition). Demogue uses the distinction between legal reflexes and the subjective right (in the public interest) to illustrate the consequences of over-individualization. He is concerned about the existence of an objective order that remains diffuse and cannot be guaranteed 36

37 38

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Demogue, ‘La notion de sujet de droit’, at 619: ‘[A right] follows a material end, to make men live, but also and above all a psychological end.’ Demogue, ‘La notion de sujet de droit’, at 645. Demogue, ‘La notion de sujet de droit’, at 622: ‘il s’agit en effet de savoir, e´tant donne´ des re´sultats qui nous semblent raisonnables, quels sont les principes qui peuvent les appliquer tous. Autrement dit le proble`me est de pure technique juridique’ (referring to Michoud and Ge´ny). Demogue, ‘La notion de sujet de droit’, at 624: ‘Recognising that each man is the subject of law, it is to drill the right in to his person, in a way that he is its thing, that it is in him, that it embodies him, and then, cannot be torn from him.’ Demogue does not use the term, he does not really explain what such an order should look:, ‘La notion de sujet de droit’, at 624 he speaks of: ‘Il s’agit simplement, e´tant donne´ la construction de notre esprit, qui a besoin d’ordre et de clarte´, d‘y classer des solutions et de cre´er un instrument, imparfait et dangereux d’ailleurs, de de´couverte, qui nous gardera du moins de la confusion et de l’impre´cisions.’ This corresponds to the thinking in the categories of French rationalism.

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by means of an unlimited expansion of subjective right, what might be called the Hegelian twist.41 Fundamental and human rights have found their way into private law to the benefit of the individual, who obtains higher enjoyment, at the expense of the objective order, contradictions and complex consideration processes of diverging legal positions (Chapter 8).42 Demogue poses the rhetorical question as to whether there are no easier ways to determine the legal subject. His search brings him back to the category of the will (volonte´), without which it would not be possible to give shape to the legal subject. He chooses Bernatzik as his starting point: ‘Le sujet de droit est le support du but humain que l’organisation juridique re´gnante reconnait come but en lui-meme, par cela qu’elle confe`re la force juridique a` la volonte´ ne´cessaire a` sa re´alisation’. Demogue concludes: ‘Ainsi le sujet de la volonte´ n’est pas sujet de droit, et le droit n’est pas un Wollendu¨rfen.’43 This would be the only way to bypass the pitfalls of Jhering and Duguit. Objective order and legal subject fall apart. Demogue lists a whole string of examples to illustrate that the determination of the legal subject is based on a mere legal technique, which can be solved by the use of traditional means of legal argumentation and reason. However, to him the decisive question is and remains how to differentiate between classic individualistic legal positions, which materialize in a legal subject, and those which cannot easily be assigned to a legal subject, as they hide collective interests, in his words, since they sit on the shoulders of an undetermined number of right holders (titulaires des personnes encore inde´termine´es). The search for a ‘ranking of profit participation rights’ leads him to Planiol, Barthelemy, Orlando, Jellinek, Michoud and Jhering. He sympathizes with Jellinek’s distinction between interests that are worthy of protection and mere legal reflexes. He differentiates whether the advantage of an undetermined number of persons is the causal purpose of the law (in his words, ‘l’avantage de ces personnes’ is the ‘cause finale’) or a simple causality, a simple result (simple causalite´, simple re´sultat).44 This is exactly how the European Court of Justice (ECJ) has been arguing for decades, resorting to the ‘effet utile’, which allows the recognition of an undetermined variety of subjective rights, citizen rights, non-discrimination rights, rights for the weaker party, rights to protect the environment.45 In that sense Gruber only 41

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Demogue, ‘La notion de sujet de droit’, at 625. Again, Demogue criticizes this tendency, but it does not become clear what he wants to defend. He surely would have defended himself against the accusation of legal nihilism. He constantly has a legal order in mind, which has to be kept. See D. Kennedy, ‘A transnational genealogy of proportionality’ and N. Reich, ‘Balancing in private law and the imperatives of the public interest: national experiences and (missed?) European opportunities’, in R. Brownsword, L. Niglia, H.-W. Micklitz and S. Weatherill (eds.), The Foundations of European Private Law (Oxford: Hart, 2011), pp. 185–220, 221–48. Demogue, ‘La notion de sujet de droit’, at 627: ‘“The subject of rights”, he said, “is the support of the human purpose that the reigning legal organisation recognises as a purpose in itself, by that which it confers legal force to the will necessary for its realisation.” As such the subject of will is not subject of rights, and a right is not a Wollendu¨rfen.’ Demogue, ‘La notion de sujet de droit’, at 642. N. Reich, Bu¨rgerrechte in der Europa¨ischen Union, Subjektive Rechte von Unionsbu¨rgern und Drittstaatsangeho¨rigen unter besonderer Beru¨cksichtigung der Rechtslage nach der Rechtsprechung des EuGH und dem Vertrag von Amsterdam (Baden-Baden: Nomos, 1999).

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confirms a development which started prior to the adoption of secondary EU law with Cassis de Dijon (Chapter 5). Demogue’s prediction becomes true, courts turn into obstetricians. Demogue realizes that this line of thought leads, inexorably, to an expansion of the protection of collective interests by means of individual rights. Unlike the authors to which he refers, Demogue reverts to the distinction between the two objectives of law and considers the determination of the person who exercises the right (titulaire d’exercise) as counterparty (contre-partie). It is my understanding that the right of enjoyment and the right of disposition clash. The first one reaches very far, and can be borderless. Only the second one, the right of disposition, the exercising of which requires a rational person, sets the necessary limits to the enjoyment. For Demogue it is a matter of far more than legal technique, it is a question of ‘la force des choses’, of the cohesion of the exercise of rights and the ‘objective order’. The legal subject, who exercises the right to which an undetermined variety of persons is entitled, becomes a social authority.46 Demogue explains convincingly how the exercise of an individual right, if an undetermined variety of persons are entitled to it, can have such a broad impact. I assume that the distinction between enjoyment and disposition vanishes away. If citizens can take the use of their social rights into their own hands, the political system comes close to direct democracy and maybe also to syndicalism.47 III While Demogue might be credited for laying the foundations for private law value pluralism 100 years ago, Neil MacCormick is considered the founder of constitutional pluralism.48 He emphasizes that national constitutions are not replaced by the EU legal order but coexist with it, and that conflicts of supremacy can only be solved politically under his radical concept of pluralism. Several decades later, this body of thought reached European private law,49 not least as a reaction to the then envisaged European Civil Code, which took place in parallel to the foundation of the constitution.50 In ‘Legal Rights and Social Democracy: Essays in Legal and Political Philosophy’51 we encounter MacCormick as an advocate of a middle way between liberalism and Marxism, which allows civil rights and property rights to be brought together with a state-induced 46

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What exactly ‘authority’ implies here would be the natural question. Demogue himself is not very helpful in shedding light on what social authority means and implies. Demogue, ‘La notion de sujet de droit’, at 649. On his impact for European constitutional theory see N. Walker, ‘The idea of constitutional pluralism’ (2002) 65(3) Modern Law Review 317–59; M. Maduro, We the Court: The European Court of Justice and the European Economic Constitution (Oxford: Hart, 1998); K. Tuori and S. Sankari (eds.), The Many Constitutions of Europe (Farnham: Ashgate, 2010); M. Avbelj and J. Koma´rek (eds.), Constitutional Pluralism in the European Union and Beyond (Oxford: Hart, 2012) ; I. Pernice, ‘Die Dritte Gewalt im europa¨ischen Verfassungsverbund’ (Inaugural lecture Frankfurt) (1996) Europarecht 27–43. L. Niglia (ed.), Pluralism and European Private Law (Oxford: Hart, 2013); L. Niglia, The Struggle for European Private Law (Oxford: Hart, 2015). H.-W. Micklitz, ‘Failure or ideological preconceptions? Thoughts on two grand projects: the European Constitution and the European Civil Code’, in Tuori and Sankari, The Many Constitutions, pp. 109–42. N. MacCormick, Legal Right and Social Democracy: Essays in Legal and Political Philosophy (Oxford: Clarendon Press, 1984).

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legislative reorganization in favour of the weak and the vulnerable. He claims that the state can and should create social justice.52 While Demogue represents the attempts to adapt the existing civil code to the changing economic and social realities of the twentieth century by integrating solidarity and collective interests into the notion of the legal subject,53 MacCormick grants politico-moral legitimacy and legitimation to statutory interventions, in order to protect collective interests. The contribution anticipates the discussion on what was later called constitutionalization of private law (Chapter 8). To this day, the question how rights for an undetermined number of persons (Demogue) can be designed remains unresolved. MacCormick considers, first and foremost, the state to be obliged to create a social balance. This would be the only way to justify civil freedoms. Social democracy is a term that was slow to take shape in the English-speaking world not least thanks to Margaret Thatcher who stigmatized social democracy in the UK. However, there is no tradition of mainstream parties that call themselves, explicitly, social democrats in the Englishspeaking world. In 1959, the Social Democratic Party of Germany rejected socialism, dismissed the idea of a state-directed planned economy and thus sparked a development which enabled it in 1972 to form, together with the Liberal Democratic Party, the first social-liberal government after World War II. During the ten years of its existence, this government implemented many political claims of the working class and of the trade unions from the Weimar period by means of law. Even more important for the context of the theory of private law is the adoption of a programme on consumer policy in 1971, through which the government intervened deeply into private law in order to protect the consumer as the weaker party from the market failures and the social deficits of consumer society and from the abuse of private power.54 In the United Kingdom, Tony Blair founded the New Labour strategy in 1994 and became prime minister in 1997. It is only in the light of these events that MacCormick’s contribution and his plea for an English social democracy become understandable. Social democracy is said to be fully compatible with the respect for ‘legal rights and the rule of law’.55 David Hume and Friedrich von Hayek argue that only the granting of civil and property rights (legal rights) would guarantee freedom and that social justice as substantive equality leads to authoritarianism (Chapter 2). Legal rights – freedom and property – unlike natural rights, are assigned to a person through the legal system. MacCormick focuses on the relation between equality, civil liberties and property rights. 52

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MacCormick does not make any effort to explain what he means by social justice. He can do this, since his understanding of social justice is normative and not analytical, a fact that he expresses explicitly. For the German context see P. Ha¨berle, ‘Grundrechte im Leistungsstaat’ (1972) 30 Vero¨ffentlichungen der Vereinigung der Deutschen Staatsrechtslehrer 43–141; W. Abendroth, ‘Zum Begriff des demokratischen und sozialen Rechtsstaates im Grundgesetz der Bundesrepublik Deutschland’, in E. Forsthoff (ed.), Rechtsstaatlichkeit und Sozialstaatlichkeit (Darmstadt: Wissenschaftliche Buchgesellschaft, 1968), pp. 114–44. For a historical account of the rise and the background of consumer law in the then nine member states see N. Reich and H.-W. Micklitz, Consumer Legislation in the EC Countries: A Comparative Analysis (New York: Van Nostrand Reinhold, 1980). P. Lindseth’s reconstruction – in Power and Legitimacy (Oxford: Oxford University Press, 2010) – of the transition from the classical rule of law to the twentieth-century executive-dominated government and how this meant an adaptation of the rule of law would lead to a different conclusion. Also, there is no room to discuss whether Hayek is a liberal, a classical liberal or a neoliberal. Liberalism today encompasses commitments to substantive equality, or at least equality of opportunity.

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In classical liberalism or in a liberal social and economic order, the formal equality of all legal subjects is of foundational importance. Socialism and Marxism put emphasis on the realization of substantive equality, to be guaranteed by the state. Positive freedom has a place in modern liberalism also, although how, and to what extent is a matter of controversy (Chapter 2).56 Hume, to whom MacCormick refers, identifies three arguments, which speak against state-guaranteed equality: the objective would be impracticable, inefficient and pernicious (see Chapter 2).57 Not without a sense of malice, MacCormick refers to the parallels between the critiques of von Hayek, a declared liberal, and Evgeny Pashukanis, an advocate of Marxist law. Civil and property rights are, so MacCormick holds, characteristic for a capitalist economic order, based on the idea that individuals are granted identical rights and that it depends solely on them how they use these rights. This capitalist economic order, as reflected in national private law orders, guarantees civil freedoms and property rights. However, von Hayek and Pashukanis differ in their conclusions. Von Hayek intends to prevent the state from interfering with the economy and the society; Pashukanis advocates for the state to establish material equality in a state-run economy. MacCormick uses liberalism and Marxism as antinomies. He aspires to find reasons for social democracy by examining the inner contradictions between the two poles. He takes advantage of the fact that both positions – liberalism – the Whig Thesis58 and Marxism – his antithesis – contain a modicum of truth. MacCormick holds liberalism responsible for unilateral exploitation of liberty and property rights.59 Material freedom and material equality instead should be the most important political objective. Freedom cannot be both negative and relative. Civil freedom is and remains negative freedom, the possibility of freeing oneself as an individual or group from each form of domination, educational deficits and poverty. The individual’s equality is and remains abstract, fully realized material equality must lead to absurd results – we need only to think of gender, age and height. The materialization of equality,60 rigorously advanced by the European Union through the non-discrimination principle, demonstrates the difficulties in anchoring equality as a statutory objective as it restricts freedom of action 56

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See especially J. Raz, The Morality of Freedom (Oxford: Oxford University Press, 1988), pp. 370–400, where he claims that personal autonomy requires both independence from coercion and manipulation and an adequate range of valuable options to choose from. The controversy is partly caused by the disagreement on what counts as a valuable option and what range of valuable options should be considered as adequate. See D. Hume, Enquiries Concerning Human Understanding and Concerning the Principles of Morals, 3rd ed., eds. L. A. Selby-Bigge and P. H. Nidditch (Oxford: Oxford University Press, 1975), §§ 154–63. Also A. Baier, The Cautious Jealous Virtue: Hume on Justice (Cambridge, MA: Harvard University Press, 2010); D. Garrett, ‘The first motive to justice: Hume’s circle argument squared’ (2007) 33(2) Hume Studies 257–88; J. Taylor, ‘Justice and the foundations of social morality in Hume’s Treatise’ (1998) 24(1) Hume Studies 5–30. Historical allusion to the Whig Party, which in the nineteenth century represented the opponents of the conservative Tories. Today one would speak of ‘socialists’. MacCormick, Legal Right, p. 8 (p. 9 of the online version). R. Mu¨nch, Die Konstruktion der Europa¨ischen Gesellschaft: Zur Dialektik von transnationaler Integration und nationaler Desintegration (Frankfurt: Campus, 2008), pp. 93–7, 114–17, 129–34; shortened English version: R. Mu¨nch, ‘Constructing a European society by jurisdiction’ (2008) 14 European Law Journal 519–41.

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and yields difficulties in how the different forms of illegitimate discrimination can be ranked.61 MacCormick does not deal with the consequences of state-produced equality, although the United Kingdom had adopted a series of equal treatment laws prior to Tony Blair coming to power.62 As baseline civil freedom can only be defended as a maxim if it can be ‘instrumentally good’ (his words), what can be assumed for equality laws?63 The search for the instrumentally good pushes him back to the three objections of Hume – state-directed interventions are impracticable, inefficient and pernicious. MacCormick recognizes the difficulties but finds moral justification for statutory intervention in ‘the Kantian reasons for they [civil liberties] are indeed essential conditions for respect for persons’.64 MacCormick comes close to John Rawls’ principle of difference (Chapter 6).65 Social justice is proceduralized, but he rejects Jean Jacques Rousseau’s romanticizing idea according to which ‘the best prospects for the least privileged’ can be found from a democratic perspective in the general will (volonte´ ge´ne´rale). He concludes that majority voting in democracies does not necessarily guarantee socially fair results. IV Norbert Reich’s contribution ‘Zivilrechtstheorie, Sozialwissenschaft und Verbraucherschutz’ marks a turning point in civil law theory. In the political debate on the pros and cons of product liability in the 1960s, the fractures between traditional civil law theory and the emerging consumer law became apparent. At that time the judiciary was left alone in handling the legal construct of the consumer. The formal rhetoric of equality even in consumer protection could not manifest itself better than through John F. Kennedy’s saying that ‘consumers by definition include us all’. Seen this way, the consumer is a legal subject as any other, but with a particular need for protection, individually and collectively, situationally and structurally. By the 1970s, the legitimation and legitimacy of state interventions in Western democracies were beyond any doubt in Germany and elsewhere. Fritz Scharpf later spoke of the social democratization of Europe.66 Labour law and consumer law are linked to the status of the employee and the status of the consumer and both legal fields put great emphasis on state interventions. However, both legal fields also require autonomous action. The decisive 61

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From a philosophical point of view, A. Somek, Engineering Equality: An Essay on European AntiDiscrimination Law (Oxford: Oxford University Press, 2011); on intersectionality, R. Xenidis, ‘Transforming EU equality law? On disruptive narratives and false dichotomies’ (2019) Yearbook of European Law. Equal Pay Act 1970, Sex Discrimination Act 1975 and the Race Relations Act 1976 were adopted during the period of Harold Wilson’s Labour government. MacCormick, Legal Right, p. 11 (p. 10 of the online version). MacCormick, Legal Right, p. 15 (p. 13 of the online version). J. Rawls, A Theory of Justice (Harvard, MA: Harvard University Press, 1999), p.72: ‘Social and economic inequalities are to be arranged so that they are both (a) to the greatest expected benefit of the least advantaged and (b) attached to offices and positions open to all under conditions of fair equality of opportunity.’ F. Scharpf, Sozialdemokratische Krisenpolitik in Europa (Frankfurt: Campus, 1987); English translation F. Scharpf, Crisis and Choice in European Social Democracy (Ithaca, London: Cornell University Press, 1991).

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question in legal theory and legal policy turned out to be whether the consumer67 and consumer protection could and should be integrated in the private law system through interpretation (Ge´ny) and legislative reforms, or whether a structural reorganization of the private law system based on the different status of the market participants is needed. Demogue makes the first move towards understanding the consumer as legal subject, MacCormick provides the political-philosophical foundation for a reorganization of the legal system in terms of material equality and social justice. Now the discussion focuses on the consumercitizen as introduced by the European Commission.68 Reich intervenes at the interface between the consumer as a legal subject (Demogue) and consumer protection as a political task (MacCormick). He pleads for a structural and status-based reorganization of civil law – he does not speak of private law.69 He writes: Following the considerations in the socialist theory of civil law,70 I would like to distinguish between three areas: a) the legal transactions between companies (in the field of production capital), commercial law (today b2b), b) the goods exchange between companies and end consumers (with regard to the relation between ownership of production means – ownership of consumer goods), consumer law (in the narrow sense71 – nowadays b2c), c) the field of private legal transactions between citizens (assignment and exchange of ownership of consumption means), civil law (today c2c).

The distinction between commercial law, consumer law and civil law helps him determine the significance of private autonomy which in commercial law and civil law remains the guiding principle. In consumer law a structural reorganization is claimed to be necessary, a reversal of rule and exception, a rediscovery of the political in civil law. He quotes Ferdinand Lasalle:72 ‘Where the legal element in the shape of private law starts to detach from the political element, it becomes even more political as the political element itself, since it is the social element.’ Consequently, Reich makes the case for the constitutionalization of private law, the reversal of default and mandatory law, and the opening of legal doctrine towards social sciences. 67

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H.-W. Micklitz, E. Hondius, T. von Mierlo and T. Roethe (eds.), The Mothers and Fathers of Consumer Law and Policy in Europe: The Foundational Years 1950–1980, http://hdl.handle.net/1814/63766; from the point of view of legal sociology, T. Roethe, Der Verbraucher: Rechtssoziologische Betrachtungen (Baden-Baden: Nomos, 2014), a collection of papers in English and German. J. Davies, The European Consumer Citizen in Law and Policy (Basingstoke: Palgrave Macmillan, 2011); challenging G. Comande´, ‘The fifth European Union freedom: Aggregating citizenship . . . around Private Law’, in H.-W. Micklitz (ed.), Constitutionalization of European Private Law (Oxford: Oxford University Press, 2014), pp. 61–101. Critical M. Everson ‘The legacy of the market citizen’, in J. Shaw and G. More (eds.), New Legal Dynamics of European Union (Oxford: Clarendon Press, 1995), pp.73–90; more positive N. N. Shuibhne, ‘The resilience of EU market citizenship’ (2010) 47 Common Market Law Review 1597–628. His latest book is called General Principles of EU Civil Law (Cambridge: Intersentia, 2013). N. Reich had written his habilitation about Soviet civil law and then translated Stucka, the second renowned Marxist legal theorist beside Paschukanis; see P. Stucka, Die revolutiona¨re Rolle von Recht und Staat, introduction by N. Reich (Frankfurt: Suhrkamp, 1969). N. Reich, ‘Zivilrechtstheorie, Sozialwissenschaft und Verbraucherschutz’ (1974) 7(8) Zeitschrift fu¨r Rechtspolitik 187–94, at 188 – in the broader sense consumer law includes administrative, penal and procedural law. F. Lasalle, Das System der erworbenen Rechte, in N. Reich (ed.), Marxistische und Sozialistische Rechtstheorie (Munich: C. H. Beck, 1972), p. 25.

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Reich’s call for a fundamental reorientation of civil law received harsh criticism from traditional German civil law jurisprudence. The deeper motivations must be traced back to the theoretical and political battle standing behind the foundation of the German BGB. Anton Menger, Hermann Kantorowicz and Otto von Gierke inter alia had attacked the exclusion of the social question in the making the BGB.73 Besides polemics against a ‘socialist theory of civil law’ or the audacity to quote Marx in a law journal, which was a no-go in the heated political climate of the 1970s,74 the critique focuses on the legitimacy of a special private law for consumers (Sonderprivatrecht). Over decades (and with a fierceness hard to understand for non-Germans), an ideological debate split German jurisprudence between proponents (a minority) and opponents (strong majority) of consumer law as special private law.75 The then social-liberal government had commissioned a report on consumer protection in the context of the intended reform of the law of obligations in 1980.76 However, unlike in Belgium, France, Italy and the Netherlands an open political debate on a consumer law code did not take place. The academic debate evaporated. In 2002 the ‘red-green’ government integrated the notion of the consumer into the BGB without further ado. Reich’s claim is more than forty years old. What was at the time a rather revolutionary trisection of a status-based private law has become to a large extent reality.77 The driver behind this development is the European Union. The Single European Act delegated competence to the European Union and introduced majority voting. The result is a dense network of EU secondary law, the rise of mandatory contract law and the constitutionalization of private law.78 However, in taking over consumer law from the member states, the European Union transformed it. The EU did not follow the social democratization of 73

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A. Menger, Das bu¨rgerliche Recht und die besitzlosen Volksklassen (Tu¨bingen: Laupp, 1890); A. Menger, Das Recht Auf Den Vollen Arbeitsertrag in Geschichtlicher Darstellung (Stuttgart: Verlag der J. G. Cotta’schen Buchhandlung, 1886) (English version: A. Menger, The Right to the Whole Produce of Labour: The Origin and Development of the Theory of Labour’s Claim to the Whole Product of Industry (Sydney: Wentworth Press, 2019)); von Gierke, Die soziale Aufgabe des Privatrechts (The social role of private law); H. Kantorowicz (as G. Flavius), Der Kampf um die Rechtswissenschaft (Heidelberg: C. Winter, 1906) (English version: G. Flavius, ‘The battle for legal science’ (2011) 12(11) German Law Journal). K. Adomeit, ‘Verbraucherschutz: ein letzter Triumph von Karl Marx’ (2002) 43 Neue Juristische Wochenschrift, editorial. C. Joerges, Verbraucherschutz als Rechtsproblem (Heidelberg: Verlagsgesellschaft Recht und Wirtschaft, 1981), ‘against’ B. Dauner-Lieb, Verbraucherschutz durch Ausbildung eines Sonderprivatrechts fu¨r Verbraucher: systemkonforme Weiterentwicklung oder Schrittmacher der Systemvera¨nderung? (Berlin: Duncker and Humblot, 1983). H.-P. Westermann, Empfiehlt sich bei der Aufnahme bisher entwickelter Verbraucherschutzvorschriften (z. B. Abzahlungsgesetz, AGB-Gesetz, Fernunterrichtsschutzgesetz) in das Bu¨rgerliche Gesetzbuch eine einheitliche Abgrenzung ihrer Anwendung? Welche Normen, die jetzt die Rechtsstellung bestimmter Personen betreffen, enthalten allgemein gu¨ltige Regeln, die verallgemeinert werden ko¨nnen? Ko¨nnen Regelungen in der Europa¨ischen Gemeinschaft oder in Nachbarstaaten als Vorbild dienen?, in Bundesminister der Justiz (ed.), Gutachten und Vorschla¨ge zur U¨berarbeitung des Schuldrechts (Cologne: Bundesanzeigerverlag, 1983), vol. III, pp. 1–122. N. Reich, H.-W. Micklitz, P. Rott and K. Tonner, European Consumer Law (Cambridge: Intersentia, 2014). C. Mak, Fundamental Rights in European Contract Law: A Comparison of the Impact of Fundamental Rights on Contractual Relationships in Germany, the Netherlands, Italy and England (Alphen aan den Rijn: Kluwer Law International, 2008); S. Grundmann (ed.), Constitutional Values and European Contract Law (Alphen aan den Rijn: Kluwer Law International, 2008); G. Bru¨ggemeier, A. Columbi Ciacchi and G. Comande´ (eds.), Fundamental Rights and Private Law in the European Union, vol. I (Cambridge: Cambridge

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society as diagnosed by Scharpf. Whilst European consumer law defines social standards to the benefit of the consumer as a legal subject, it is criticized as depriving consumer law of its protective outlook by giving priority to the market rationale.79 European consumer law is a hybrid; it serves to create a competitive internal market bound to at least some form of social protection.80 As it stands, consumer law is not in line with MacCormick’s plea for equality, but mirrors the difficulties that Demogue had already demonstrated 100 years ago. The opening of jurisprudence towards legal sociology and sound empirical social research did not lead to the integration of social science into legal dogmatics. To this day the concretization of the consumer as a legal subject faces conceptual and theoretical difficulties. Reich’s proposal to use sociological role models got caught in failed attempts to draw a parallel between employees and consumers.81 In legal practice the consumer has to be demarcated ‘upwards’ to small and medium-sized enterprises and ‘downwards’ to the so-called vulnerable consumer in contrast to the ‘responsible’ or ‘confident’ consumer.82 This is where Gruber comes in; as the case teeters between the qualification as a consumer or a small business. If dual use consumers were to enjoy status-related protection, the overall concept of the consumer starts to lose its contours. The objectives of consumer law have only slightly changed. Reich advocated for control of the supplier’s bargaining power and the supplier’s behaviour, the need for building countervailing powers through consumer organizations and through public interest litigation as well as individual legal protection. Each objective deserves its own treatise. The European Union has conferred a variety of individual rights on the consumer as a legal subject. Law as enjoyment and law as disposition (Demogue) merge in the language of consumer law. Reich does not put much emphasis on the collective dimension of law enforcement. Up to now the introduction of collective rights for consumers remains one of the major battlefields in the European Union. The preliminary reference procedure compensates for the non-existing collective action, at least with regard to giving voice to

79

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82

University Press, 2010); O. Cherednychenko, Fundamental Rights, Contract Law and the Protection of the Weaker Party (Munich: Sellier, 2007); H.-W. Micklitz (ed.), Constitutionalisation of European Private Law (Oxford: Oxford University Press, 2014) with contributions by H. Collins, G. Commande´, A. Colombi Ciacchi, M. Bell, O. Cherednychenko, C. Godt and C. Mak. H.-W. Micklitz, ‘The expulsion of the concept of protection from the consumer law and the return of social elements in the civil law: a bittersweet polemic’ (2012) 35 Journal of Consumer Policy 283–96; G. Howells, C. Twigg-Flesner, T. Wilhelmsson, Rethinking EU Consumer Law (London: Routledge, 2017), pp.324–44; M. Bartl, ‘Internal market rationality, private law and the direction of the Union: resuscitating the market as the object of the political’ (2015) 21(5) European Law 572–98. Micklitz, The Politics of Justice, pp. 222–45. E. Roppo, ‘Verbraucherschutz und Klassentheorie’ (1976) Demokratie und Recht 109–20, and the response by K. Tonner, ‘Verbraucherschutz und Klassentheorie: Erwiderung auf Enzo Roppo’ (1976) Demokratie und Recht 241–8. J. Stuyck, ‘Do we need consumer protection for small businesses at the EU level?’, in K. Purnhagen and P. Rott (eds.), Varieties of European Economic Law and Regulation: Liber Amicorum for Hans Micklitz (New York: Springer International, 2014), pp. 359–70; more references in M. de la Cuesta, ‘SMEs in the (food) global value chain: a European private law perspective’, EUI Florence 2020, https://cadmus.eui.eu/ handle/1814/65894.

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collective consumer concerns.83 To this day, to quote Demogue once again, it remains unresolved who should be ‘mandataire’ of the collective interest and how collective enjoyment (jouissance) and disposition/perception of the collective right (disposition) could remain compatible with each other. By means of the preliminary ruling procedure, the European Union has paved the way for legal subjects to enforce individual rights in the collective interest. This is exactly what happens in Gruber; Mr Gruber defends his own rights, but the decision of the ECJ affects all dual-use consumers. In that sense Mr. Gruber is a mandataire, while Demogue provides the intellectual basis for the analysis of these processes. V The Gruber case condenses the range of questions around the extension of the legal subject beyond formal equality. Demogue helps to understand that Mr Gruber is not defending only his own rights; his claim stands for all those who combine work and life under one single roof. Mr Gruber could therefore best be understood as a kind of representative for an entire group of people who share a collective interest. Thinking along these lines, the preliminary reference procedure needs to be reconsidered. It is not a mechanism where individuals seek the correct interpretation of EU law. Instead the ECJ discusses and decides on collective rights; in Gruber on dual use consumers. MacCormick points to the responsibility and the legitimacy of states in the protection of workers and consumers. The European Union is not a state; at the very best a quasi-state. The idea of constitutional pluralism clashes with a European legal order that claims the ultimate and the superior authority to decide for the European Union as a whole on the concept of a consumer. Constitutional pluralism supports the idea of diversity; this means there could well be differences in the interpretation of what dual use means. MacCormick could be understood as advocating a European consumer law that defines a common platform but that leaves room for national variations. Reich’s tripartite order struggles with the Gruber case. Mr Gruber is not the typical weak party Reich has in mind, one who should be the addressee of statutory protection. Mr Gruber is supposed to enjoy protection with regard to the part of the house he uses privately, but he might not need protection in his role as a farmer. The more the concept of consumer is broadened towards small business,84 the more consumer law loses definition and may collapse in the end. The ECJ struggles with the twofold mandate, on the one hand ensuring a high level of consumer protection in the European Union, on the other hand to build the internal market. Depriving Mr. Gruber of his status as consumer might work as a deterrent for dual-use consumers to engage in transborder sales transactions. 83

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B. Kas, ‘Hybrid’ Collective Remedies in the EU Social Legal Order, PhD thesis, European University Institute (2017); H.-W. Micklitz, The Politics of Judicial Co-operation in the EU: Sunday Trading, Equal Treatment, and Good Faith (Cambridge: Cambridge University Press, 2005), but now Directive (EU) 2020/1828, OJ 2020 L 409/1. M. W. Hesselink, ‘SMEs in European Contract Law’, in K. Boele-Woelki and R. W. Grosheide (eds.), The Future of European Contract Law (The Hague: Kluwer Law International 2007), pp. 349–72, comprehensively A. Sto¨hr, Kleine Unternehmen Schutz und Interessenausgleich im Machtgefu¨ge zwischen Arbeitnehmern, Verbrauchern und Großunternehmen (Tu¨bingen: Mohr Siebeck, 2019).

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Granting him protection opens the floodgates to integrate small companies into the notion of consumer. Status-based rights are under pressure from various sides, from law and economics due to the efficiency paradigm, from behavioural economics due to the clash between ‘good intentions’ and ‘unintended counterproductive effects’.85 This US-driven discussion is gradually reaching Europe.86 The overall rationale of status-based rules such as those to the benefit of workers or consumers is that they should align with individual, cognitive abilities. However, status-based rights are also questioned via the digital economy and the digital society. In the sharing economy consumers may turn into producers, constantly change their role, or may make use of both roles. Last but not least, status-based rights are to be confronted with globalization, with the private law beyond the nation state. The question of how the legal subject at the third stage of globalization (Kennedy) will look brings back status versus contract. Kennedy would claim, under reference to Demogue, that status is substituted by identity-based rights. What remains unresolved is how and under what conditions collective interests can be protected. In this chapter I have focused on the search for the legal subject behind the collective interests of workers and consumers. Demogue’s understanding of the legal subject as a mandataire for collective interests is still intriguing. If openly addressed in court litigation, it might help to highlight the economic, social and political consequences of a judgment like the one in Gruber.

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O. Bar-Gill, Seduction by Contract: Law, Economics, and Psychology in Consumer Markets (Oxford: Oxford University Press, 2012), as discussed by H. Collins in his book review (2014) 77(6) Modern Law Review 1030–6; O. Ben-Shahar and C. E. Schneider, More Than You Wanted to Know: The Failure of Mandated Disclosure (Princeton, NJ: Princeton University Press, 2014). From the academic perspective: A. Alemanno and A.-L. Sibony, Nudge and the Law (Oxford: Hart, 2015); to a rather political survey L. A. Reisch and J. Sandrini, Nudging in der Verbraucherpolitik: Ansa¨tze verhaltensbasierter Regulierung (Baden-Baden: Nomos, 2015).

19 Theory of the Corporation Moritz Renner

a topic and materials I This chapter deals with the role of corporations in private law. Private law relations have never been built on bilateral contracts alone. Collective actors in the form of corporations have always played an equally important role. Thus, private law relations mirror the distinction between markets and organizations that is commonplace in economic theory (see Chapters 3 and 17). At the same time, the social role of corporations has always been subject to political and theoretical debate. Whereas, historically, early corporations have been granted legal personality by the political sovereign, the concept of legal personhood is nowadays founded on the principle of party autonomy. Yet the concept and the legal nature of corporate actors remain disputed. As the ideas of ‘corporate citizenship’ and ‘corporate social responsibility’ are widely discussed (see Chapter 22), the theoretical debate has gained new relevance. Different theoretical concepts of the corporation are directly relevant to the doctrine and practice of private law, as is evidenced by the case example in Box 19.1. In the example case, the question of which duties the majority shareholders owe to the minority hinges on the concept of the corporation that explicitly or implicitly informs every discussion of corporate law. II The two reference texts in this chapter stand for starkly different approaches to the theory of the corporation (Box 19.2). The first text dates from the late nineteenth century and was written by the German legal historian Otto von Gierke. It is thus hardly a new text, but one that needs to be rediscovered as it anticipates central arguments of contemporary critical discussions of corporate law. The second, published fifty years later, has already been rediscovered, several decades after its publication, by the law and economics movement. In this text, the US economist Ronald Coase seeks to develop a theory of the firm that is deeply grounded in institutional economics and transaction cost theory (see Chapter 3). 360

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BOX 19.1 CASE STUDY

European Court of Justice Audiolux, ECJ C-101/08 The claimant Audiolux was a minority shareholder in RTL, a company listed on the stock exchanges of Luxembourg, Brussels and London. Bertelsmann, a German corporation, originally held 37 per cent in the shares of RTL. It subsequently acquired the shares of GBL and Pearson, two other major shareholders holding 30 per cent and 22 per cent of the RTL shares, respectively. As a dominant majority shareholder, Bertelsmann then delisted RTL from the London stock exchange. As a consequence, the value of Audiolux’s shares in RTL was considerably reduced. Audiolux claims that, under the general principle of shareholder equality, Bertelsmann was obliged to make an offer to acquire Audiolux’s shares under the same conditions it had previously acquired the shares from other major shareholders.

BOX 19.2

Otto von Gierke, Die Genossenschaftstheorie und die deutsche Rechtsprechung (Hildesheim: Olms, 1887), pp. 603–672 (English translation available on the book website) Ronald H. Coase, ‘The Nature of the Firm’, 4 Economica, 386–405(1937) The Coasean approach to the theory of the corporation has strongly influenced other economic thinkers and through them the law and economics movement. The famous articles by Jensen and Meckling show that the Coasean approach has largely been used for analysing the corporation as a mere product of the relations of corporate actors (see Chapter 20). This line of thinking still stands in stark contrast to approaches that, much in line with von Gierke’s ideas, emphasise that corporations are more than the sum of their parts, that the specific potentials and perils of corporations are a result of their recognition as legal actors as such. These approaches are visible in the classic texts of Continental European thinkers such as Saleilles (see Chapter 18). Further reading is listed in Box 19.3.

b theories, context and discussion I Since the nineteenth century, the role of corporations in society has been a politically charged issue. In recent decades, the rise of transnational corporations, surpassing in size the economies of many states, has triggered a far-reaching debate on the powers and responsibilities of such organizations.1 While neoclassical economists still argue that the only corporate social 1

See already Samuel P. Huntington, ‘Transnational Organizations in World Politics’, 25 World Politics 333–68 (1973).

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BOX 19.3

Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York: Macmillan, 1947 (1932)) Sanford D. Grossman and Oliver D. Hart, ‘The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration’, 94 Journal of Political Economy 691–719 (1986) Michael Jensen and William Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, 3 Journal of Financial Economics 305–60 (1976) Raymond Saleilles, De la personnalite´ juridique (Paris: Rousseau, 1910) responsibility is to make profits,2 there is a growing debate on the question whether or not ‘corporate citizens’ have broader responsibilities towards their workers, their communities and the environment (see Chapter 22). Ultimately, this debate leads back to the question of how to conceptualize the corporation as a legal entity, established by private actors and through the means of private law. In this context, contemporary research mainly follows two different paths. On the one hand, there is an important strand in legal and economic literature that focuses on the internal relations of the corporation. This strand of literature, starting from Berle’s and Means’ analysis of the agency conflict between shareholders and management and continuing with Jensen’s and Meckling’s analysis of corporate actors, tends to dissolve the corporation into the single actors that form it (see Chapter 20). Partially building on these insights, other authors search for ways of empowering the actors within the corporation to effectively influence or participate in corporate decision-making (see Chapter 21). On the other hand, there is a line of research that analyses the external relations of the corporation, especially with regard to the state regulatory framework into which even transnational corporations are embedded. Here, it is disputed whether and to what extent globally active corporations force nation states into a regulatory competition and – potentially – a regulatory ‘race to the bottom’ (see Chapter 23). This chapter tries to trace the relevant discussions back to their roots by asking the more general question: what is a corporation and what is its purpose? The two texts on the theory of the organization discussed in this chapter could hardly be more different – and the same holds true for their authors. Yet both authors and both texts have a number of commonalities. Otto von Gierke was one of the most important legal historians in nineteenth-century Germany. At the same time, he can be considered one of the founders of the theory of corporate law in Germany. In the English-speaking world, he is better known for his writings in history and political theory.3 This is not by chance, as all of his writings deal with the close linkages between legal evolution and the history of political thought. British2

3

Milton Friedman, ‘The Social Responsibility of Business is to Increase its Profits’, New York Times Magazine September 13 (1970). Two partial translations of Otto von Gierke’s ‘Das deutsche Genossenschaftsrecht’ have been published as Political Theories of the Middle Ages, trans. with an introduction by Frederic William Maitland (Cambridge:

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born economist Ronald Coase, too, can be considered the founder of a discipline, that of law and economics originating from Chicago in the 1960s and 1970s. Both reference texts for this chapter have been groundbreaking in their respective disciplines – and both have earned general recognition only decades after their publication. Von Gierke’s theory of the corporation as an autonomous legal organism was met with much scepticism by courts and legislature when Die Genossenschaftstheorie und die deutsche Rechtsprechung was first published in 1887. It was only hesitantly that some of his central ideas were taken up by legal doctrine. For example, it was as late as 2001 that the German Federal Supreme Court, very much along the lines of von Gierke’s theory of corporate law, recognized the legal personality of civil law associations.4 Similarly, Coase was awarded the Nobel Prize in Economics in 1991 for his visionary writings in the field of new institutional economics – more than fifty years after the publication of his 1937 article on the ‘Nature of the Firm’. As to their content, however, von Gierke’s and Coase’s texts stand for diametrically opposed positions. Von Gierke seeks to develop a concept of the corporation and other forms of social organization which is deeply rooted in the idea of society as a social organism made up of group structures ranging from the family to the state. Coase, in contrast, analyses the firm as an efficient means of economic organization, thus laying the groundwork for both institutional economics approaches to the law (see Chapter 3) and actor-based models of the corporation (see Chapter 21). II Von Gierke’s Genossenschaftstheorie is a legal theoretical treatise as well as a contribution to legal doctrine. In the tradition of the German Historical School of Law (Historische Rechtsschule), von Gierke recounts the evolution of a specific legal concept, that of the corporation, in order to develop his own doctrinal position. Large parts of the book analyse in detail the nature of specific legal institutions, such as the marital community of property and collective ownership. Descriptive and normative arguments are often closely linked and sometimes indistinguishable. In the reference text for this chapter, von Gierke makes his position on the nature of the corporation very explicit. For him, the corporation is not merely a legal fiction but a ‘real collective person’ with its own will and capacity to act.5 He thus rejects the idea, stemming from Roman law, that the corporation is established by law and can only form its will and act through its legal representatives. Instead, he sides with the German law tradition which, in his eyes, has always conceived of the corporation as an entity not made but merely ‘found’ by the law. For von Gierke, the corporation – just like the individual – must be recognized by law, because it has its own will.6 The will of the corporation is a collective

4 5

6

Cambridge University Press, 1900) and Natural Law and the Theory of Society, E. Barker (ed.) (Cambridge: Cambridge University Press, 1934). Bundesgerichtshof, BGHZ 146, 341, expressly referring to von Gierke. Otto von Gierke, Die Genossenschaftstheorie und die deutsche Rechtsprechung, (Hildesheim: Olms 1887) (English translation), p.603. Ibid. (English translation), at pp. 608–9.

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will, but it is no less real than the will of the individual, deriving from the ‘soul of the corporate person’.7 For today’s readers, von Gierke’s vocabulary in this context seems rather strange. The idea of a corporate organism8 with its own will and soul appears even esoteric. Yet we have no trouble speaking of a ‘body corporate’ or the ‘organs’ of a legal person. Von Gierke’s approach goes to the literal core of these metaphors that have always challenged the distinction between an individualized ‘state of nature’ and the ‘second nature’ of societal organization.9 In fact, his history of political thought can be read as a reconstruction of the collective nature of human existence that has often been neglected by liberal political philosophy. In this respect, contemporary theories of communitarianism come very close to von Gierke’s approach to the theory of social organizations.10 The upshot of von Gierke’s approach on the legal doctrinal level is a concept of the corporation which is clearly distinguished from the sum of its individual members. For von Gierke, a corporation does not simply consist of its individual members, rather it seems to be just the other way round: even the general assembly of the members or shareholders of a corporation is just ‘the organ of an invisible personality’, that is, that of the corporation.11 The organs, however, are not mere representatives of the organization, they form ‘part of the corporate organism’, and they are ‘legally ordered mediators of a unitary communal life’.12 Thus, through its organs, a corporation can act in good or bad faith, it can be mistaken and can even swear an oath.13 The role of the law, then, is not to grant legal personality to the corporation. Rather, the law provides a framework for the actions of the corporation – just like it does for the actions of natural persons. This concept has far-reaching consequences for von Gierke’s reconstruction of the relationship between the corporation and the state. In von Gierke’s organicist vision of the state, the state itself is a corporate body consisting of other groups and formations such as families, corporations and associations.14 Therefore, the state assumes a superior position as compared to the status of the corporation, but at the same time there is a close interdependency between both forms of ‘communal life’.15 Only in rare cases the state must assert its supervisory authority over corporations, but for von Gierke the actual purpose of any state under the rule of law is to enable the activities of corporations and organizations as necessary expressions of social life.16 7 8 9

10

11

12 13 14 15 16

Ibid. (English translation), at p. 611. Ibid. (English translation), at p. 615. On society as the ‘second nature’ of mankind see Georg Friedrich Wilhelm Hegel, Elements of the Philosophy of Right (Cambridge: Cambridge University Press 1991), § 151. Michael Walzer, Spheres of Justice: A Defense of Pluralism and Equality (New York: Basic Books, 1983); Charles Taylor, The Ethics of Authenticity (Cambridge: Harvard University Press, 1992); Amitai Etzioni, The Spirit of Community: Rights, Responsibilities, and the Communitarian Agenda (New York: Crown Publishers, 1993). Otto von Gierke, Die Genossenschaftstheorie und die deutsche Rechtsprechung, (Hildesheim: Olms 1887), at p. 617. Ibid. (English translation), at pp. 620–4. Ibid. (English translation), at p. 627–9. Ibid. (English translation), at pp. 641–2. Ibid. (English translation), at p. 643. Ibid. (English translation), at pp. 649–62.

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Apparently, von Gierke’s political vision is that of a corporatist state – not that different from Germany in the second half of the nineteenth century – in which the boundaries between different forms of social organization are blurred. This vision, then, decidedly differs from contemporary communitarian theories. It does not so much advocate a selforganization of individuals detached from state institutions but rather an institutionalization of group interests under state supervision. I has certain similarities with Hegel’s political philosophy, which starts from the family as the ‘germ cell’ of social life and develops a holistic model of the social organism epitomized by the state.17 However, at the same time, von Gierke’s model emphasizes the autonomy of associations and corporations as social organisms in their own right. In this respect, it is certainly open to theories of organizational democracy transcending the public/private divide (see also Chapter 8).18 III When Coase asks about the ‘Nature of the Firm’ in his 1937 article, his starting point is entirely different from the one taken by von Gierke. Coase writes not as a lawyer or legal historian but as an economist. He seeks to make a specific contribution to economic discourse by developing a definition of the firm.19 Strangely enough, this definition had not yet been fully developed at the time of his writing, even though economic theory is written from the actors’ perspective of firms and individuals. However, firms and individuals were treated alike and the specific properties of the firm as a collective actor were hardly reflected. Coase clearly attributes this failure to neoclassical economics, which starts from the assumption of a ‘normal economic system’ co-ordinated solely through the price mechanism.20 In this ideal-typical model of market exchange there is simply no need for a concept of the firm: through the price mechanism, any market will reach an equilibrium state of efficient resource allocation without centralized planning. Yet, as Coase observes, planning does play a role even in market economies – within the internal structures of the firm. Firms replace the self-adjusting organism of the price mechanism with planning and organization.21 Against the background of von Gierke’s theory of the corporation, the use of these words is telling: while von Gierke sees organizations as genuine embodiments of the social organism and makes little difference between ‘organizations’ and ‘organism’, Coase juxtaposes both concepts by conceiving ‘organizations’ as undesirable but necessary remedies for distresses of the market ‘organism’. Coase’s question, mainly directed at neoclassical economic theory, is the following: why, if the price mechanism provides for efficient resource allocation, is there any need for 17

18

19 20 21

Georg Friedrich Wilhelm Hegel, Elements of the Philosophy of Right, (Cambridge: Cambridge University Press, 1991), § 142 et seq. David Sciulli, Theory of Societal Constitutionalism. Foundations of a Non-Marxist Critical Theory (Cambridge: Cambridge University Press, 1992); Gunther Teubner, Constitutional Fragments. Societal Constitutionalism in Globalization (Oxford: Oxford University Press, 2012). Ronald H. Coase, ‘The Nature of the Firm’, 4 Economica 386–405 (1937), 386. Ibid., at 387. Ibid., at 387–8.

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firms at all?22 Why should the price mechanism be superseded by other forms of coordination, specifically by the direction of an entrepreneur?23 His answer is seemingly easy and formulated in clear economic terms: there is a cost of using the price mechanism.24 This is the central argument in Coase’s text, and at the same time it marks the invention of the concept of transaction costs (see Chapter 3). Coase defines these as the costs for gathering information on the market, the costs for contracting and the costs for adapting contracts to changed circumstances.25 Transaction costs can be avoided, Coase argues, by integrating transactions into the structures of a firm, by co-ordinating them through central planning instead of the price mechanism. This, not tax considerations, not monopoly incentives, not marketing costs, not the division of labour or the problem of uncertainty, is the reason why there are firms.26 The most interesting of concurring explanations for the existence of firms, Coase finds in Knight’s theory of uncertainty.27 Coase largely dismisses Knight’s theory that firms mainly exist for the reason that they allow the entrepreneur to avoid the uncertainty he would incur in market settings. Coase counters with the argument that uncertainty can be well managed in market settings, for example through buying external advice and knowledge.28 However, Knight’s argument cannot be that easily dismissed – and it even ties in with Coase’s own line of argument: in imperfect markets, uncertainty is one of the main sources of transaction costs, and these costs can often be avoided through vertical integration in the firm. Williamson’s elaboration of transaction cost theory has later made this point quite explicit (see Chapter 3). According to the rudimentary theory of transaction costs already contained in Coase’s article, the firm as a mechanism to co-ordinate economic transactions will replace the market mechanism whenever the costs of firm organization are lower than the transaction costs incurred on the market. This simple calculus, which has later been refined by Williamson (see Chapter 3) and Jensen and Meckling (see Chapter 20), also determines the size of firms.29 If the possibility of product diversification is also taken into account, then, according to these considerations, there is no necessary limit to firm growth.30 Coase’s approach thus implicitly suggests more lenient government policies in antitrust matters – a consideration later made explicit by Williamson (see Chapter 3). Coase concludes his article with a reality check for his theory by explaining that his concept of the firm as a co-ordinating mechanism is well reflected in the law on employeremployee relationships.31 As an empirical validation of his theory, this last part of the article seems rather weak as it refers to a doctrinal treatise rather than to the law in action 22 23 24 25 26 27 28 29 30 31

Ibid., at 388–90. Ibid., at 389. Ibid., at 390. Ibid., at 390–1. Ibid., at 391–4, 398–401. Ibid., at 398. Ibid., at 400–1. Ibid., at 396. Ibid., at 401–3. Ibid., at 403–5.

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and makes no effort to compare employment contracts to other types of contracts with similar powers of direction or mechanisms of adaptation. More importantly, however, this part of the article already hints at the consequences of Coase’s functionalist concept of the firm: the firm is conceived as one possible form of contracting among many (see Chapter 3 and 17) and, at the same time, it is dissolved into the contractual relationships between individual actors (see Chapter 20). IV The consequences of the two different approaches presented in this chapter to the theory of the corporation cannot be overestimated. These consequences are plainly visible in corporate law. Here, von Gierke’s approach focusing on the autonomy of the corporate entity has a rich explanatory potential when it comes to concepts such as fiduciary duties owed to the corporation or the interest of the company. Coase, in contrast, has laid the groundwork for analysing contractual and principal-agent relationships within the firm, and for explaining hybrid forms of co-ordination between market and organization. At the same time, he has paved the way for the later ‘nexus of contracts’ approach, which sets out from the assumption that corporations are ‘simply legal fictions which serve as a nexus for a set of contracting relationships among individuals’ (see Chapter 20).32 From this perspective, many problems of corporate law can be dealt with in contractual terms, as problems of agency between individual actors. As guiding theories for the doctrine of corporate law, von Gierke’s corporatist theory on the one hand and Coase’s contractualist approach on the other often suggest different outcomes for contentious cases. An illustrative example is provided by the Audiolux case (Box 19.1). It is highly disputed whether a dominant shareholder, when acquiring or exercising control of a company, must offer to buy the minority shareholders’ shares under the same conditions as those agreed with other shareholders whose shares have been acquired. A Coasean contractualist approach focusing on the individual contracts between the players would suggest that there is no such duty as takeovers are inherently efficient: a buyer will only take over the majority of a corporation’s shares if he can more efficiently control the corporation’s management than other shareholders, that is, if he incurs lower agency costs. This view has most prominently been formulated by Manne (see Chapter 21). However, a more Gierkean approach would suggest that this is not the end of the story: the buyer might also take over a majority of the shares in order to use their dominant position for exploiting the remaining minority shareholders. This approach, focusing on the corporation as an organism representing all interest involved, would rather favour a mandatory offer to all shareholders.33 The European Court of Justice ruled in the 32

33

Michael Jensen / William Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, 3 Journal of Financial Economics 305–60 (1976), 310; similarly already Armen A. Alchian / Harold Demsetz, ‘Production, Information Costs, and Economic Organization’, 62 American Economic Review 777–95 (1972). For an overview of the debate and especially the mandatory-bid approach that has long been favoured by English law (but, ironically, rejected by large parts of German legal scholarship) see Stefan Grundmann,

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Audiolux case that there was no principle of shareholder equality in European law that would have demanded such a mandatory offer. However, only a few years after the Audiolux dispute arose, the EU legislator enacted the 2004 Takeover Directive.34 Article 5 of the directive now establishes a mandatory offer with equal conditions for all shareholders. The consequences of both approaches reach far beyond the field of corporate law. Both are based on a more or less explicit theory of social ordering. Here, von Gierke’s organicist vision of a corporatist state stands in stark contrast to Coase’s – supposedly descriptive – contractualist model of society. Von Gierke’s historical-evolutionist perspective suggests a quasi-natural development of social groupings and organizations, leaving not much room for the freedom of individual choice. In contrast, Coase’s methodological individualism posits transaction-cost efficiency as the sole determinant of institutional choices in society, largely neglecting the social context in which these institutions exist and operate. Neither approach, however, deals with the problem of a concentration of private power (see Chapter 14) that may also follow from the formation and growth of corporate organizations.

34

European Company Law: Organization, Finance and Capital Markets (Cambridge: Intersentia, 2012), pp. 726–7. Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on Takeover Bids (OJ 2004 L 142, p. 12).

20 Actors in Organizations Stefan Grundmann

a topic and materials I The chapter discusses the division of ownership and control, probably the most striking feature of large-scale economic organization in our time. This refers to the fact that the large company/corporation is owned by the totality of the shareholders, but the structure and assets ‘owned’ are managed and decided on primarily by the board of directors. Thus, ownership and decision power on the property are systematically in different hands – in law, but often also de facto. This fully applies at least to corporations with dispersed ownership, especially those listed on exchanges or alternative trading venues. Corporations of course do not only affect shareholders and managers, but at least two other groups. These are stakeholders in the more concrete sense, that is, parties that have a relatively concrete interest, typically supported by legal norms, namely contractual rights, in the corporation – labour and creditors. Moreover, there are other persons affected by the operation of the corporation, even if they may not have concrete rights, such a neighbours in the case in Box 20.1 chosen as an illustration. The public at large should be named here as well – depending on how norms are shaped, parts of the public can be seen as stakeholders in the more concrete sense or only as persons (also) affected. All these other constituencies can even be seen to play an ever more crucial role in the company world – with the Declaration of the Business Roundtable of August 2019 forming the most recent and highly visible ‘exclamation mark’ (fn. 26). The split of roles in company law is complex enough to devote three chapters to it – Chapter 20 on the split between ownership and control (shareholders and management), then followed by Chapter 21 on empowerment of shareholders (ownership) and chapter 22 devoted to other actors and the pursuit of more dispersed public interests more generally. For a full picture, these chapters need to be seen in conjunction – they are split only for the sake of analytical clarity and reduction of complexity. The split between ownership and control is, moreover, the germ of a splitting-up of the concept of property and ownership into a bundle of property rights that the second half of the twentieth century has experienced with the so-called property rights theory (fn. 32) and that powerfully continues into the twenty-first century particularly in the digital arena. While in law (namely legal scholarship) and economic theory, this phenomenon in the company 369

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BOX 20.1 CASE STUDY

Shlensky v. Wrigley, 237 NE 2d 776 [Ill. App. 1968] The claimant in this case was minority shareholder of Chicago National League Ball Club (Inc.) who owned the National League Baseball team Chicago Cubs. The defendants were Chicago National League Ball Club (Inc.) and its CEO Philip Wrigley whose father, William Wrigley Jr, had bought a minority interest in the company in 1916, extended to a majority interest in 1921 – then held in the Wrigley family until 1981. The team had won the World Series in 1907 and 1908, then (already under Philip’s guidance) in 1945 (at least) the National League Baseball pennant, but never since then (and this would last until 2016). The club formed one of the first examples of corporate sponsorship – in this case to promote the image of Wrigley chewing gum produced by the family enterprise. The case was about Philip Wrigley’s decision – taken in the less successful 1960s – not to install field lights for night games. Wrigley motivated the decision mainly by the fear he had that night games would lead to deterioration in the neighbourhood, while the claimant held that, with high probability, the corporation would yield better returns – given that night games during week days were better visited on average in comparable clubs and that all other clubs in the league had installed them. It remained open whether Wrigley acted mainly for philanthropic reasons (more precisely: for neighbours as more remote stakeholders), for reasons of the club’s image or perhaps also for reasons of the image of his chewing gum business. The court dismissed the claim, as it held that the best business environment was at least in principle the one where the board – outside cases of illegality, fraud or conflicts of interest (not found in this case) – acted with a high amount of discretion. It was of no importance for the case as such that the corporation was listed (for the sale to Chicago Tribune in 1981, it therefore had to get the permission of the Securities and Exchange Commission). Outside the case, however, this circumstance adds considerably to the fact pattern and its discussion.

setting is conceptualized as an agency relationship (or contract) with the shareholders as ‘principals’ – control/management having to serve the interest of ownership/shareholders (or potentially also stakeholders and public) – in real life, the perception is completely different. Outside legal scholarship and economic theory, virtually nobody would have seen the small minority shareholder owning a few shares as the principal of the company or of the board or the CEO in a corporation like Google or Deutsche Bank, that is, Sundar Pichai or Josef Ackermann, acting as agents of a small Google or Deutsche Bank shareholder. Better known, of course, are CEOs that themselves are/were also large or even majority shareholders of ‘their’ corporation, such as Steve Jobs, Bill Gates, Elon Musk, Jeff Bezos or Mark Zuckerberg, and thus are represented on both sides. Irrespective of whether the economic theory reconstruction or the legal characterization is more appropriate or whether the public perception and sociology is more telling, one thing is certain: for large companies to have

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their financial basis, there is a need to regulate the relationship in a way that allows for minority shareholders (and for bondholders) to invest, that is, in a way that takes their interests into account. This obvious tension between board and shareholders (investors), dispersed or minority shareholders, potentially also other stakeholders and bondholders can be exemplified by a case that has considerably shaped US corporate law in questions of powers of the board and that involved an important industrial dynasty in Illinois (Box 20.1). This decision thus marks an interesting compromise between economic theory and legal conception on the one hand (principal-agent relationship), and public perception and sociology on the other. It recognizes de facto that the corporation and its business should be run independently by the board and that a court should not overturn a business decision absent proof of illegality, fraud or conflict of interest. This is stated in a still more explicit way by section 76 of the German Stock Corporation Act.1 It may be that in this case the court indeed overlooked a conflict of interest (Wrigley acting mainly in favour of another business, that of his chewing gum business, and not of Chicago Cubs). More important, however, is the point on which the court did decide. It left it to the board to decide between competing interests, and it would seem as if this also included interests other than those of shareholders (not the image of Chicago Cubs, but potentially also taking into consideration a possible deterioration of the neighbourhood). The court held that the president was not liable for failing to maximize returns to shareholders, in other words that business decisions should not be disturbed just because the plaintiff could make a reasonable case that the policy chosen by the company may not have been the wisest policy available or the one that furthered returns most. The case is hailed as one of the lead cases from which the idea of corporate social responsibility started off (on corporate social responsibility as a concept, see more detail in Chapter 22, and for the transnational setting in which this concept has to take effect, see Chapter 25). More generally, however, it also constitutes a statement regarding the question of who can best assess the facts of given situations and who should therefore be given discretion – and profit from a benefit of doubt that they wanted to act in the best interest of the firm overall (including its context). Finally, however, the long-term success of Wrigley’s engagement in Chicago Cubs was not as glorious as the victory in court. After massive losses, William Wrigley Jr Grandson (son of Philip who had died in 1977) felt urged to sell the majority interest to the Chicago Tribune (Inc.) for USD 20.5 million2 – with the long-term outcome that thirty-five years later, the Chicago Cubs won the World Series again. 1

2

Section 76 – Management of the stock corporation: (1) The management board is to manage the affairs of the company on its own responsibility. Available at www.gesetze-im-internet.de/englisch_aktg/englisch_aktg.html #p0379. On this provision, see J. J. du Plessis / I. Saenger, ‘The General Meeting and the Management Board as Company Organs’, in J. J. du Plessis et al. (eds), German Corporate Governance in International and European Context (Berlin: Springer, 2017), pp. 63–104; for further references and in particular comparative perspectives M. Kort, in H. Hirte / P. O. Mu¨lbert/ M. Roth (eds.), Aktiengesetz: Großkommentar (5th ed, Berlin: de Gruyter, 2015), paras. 73–111; on economic foundations H. Fleischer, ‘Grundfragen der o¨konomischen Theorie im Gesellschafts- und Kapitalmarktrecht’, 30 Zeitschrift fu¨r Unternehmens- und Gesellschaftsrecht 1–32 (2001). On the other hand, sec. 93 para. 1(2) of the code integrates the so-called business judgement rule developed in US corporate law into German law – with the consequence that the pillars of the decision-making architecture seem strikingly similar between both jurisdictions. For more detail on this sale see the New York Times, 17 June 1981.

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BOX 20.2

Adolf Berle / Gardiner Means, The Modern Corporation and Private Property (New York / Chicago / Washington: Commerce Clearing House Publishing, 1932) ( book II, chapter 8, and book III, chapter 1) Michael Jensen / William Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, 3 Journal of Financial Economics 305–60 (1976) II The chapter discusses two texts of reference that can be considered as those that first formulated the tension as such – as a split of ownership and control – and at the same time conceptualized the relationship as one between principal and agent (Box 20.2). These would still seem to constitute the core parameters of how the interplay between the actors of large companies (corporations), those listed on capital markets, is theorized today. This conceptualization – with its two pillars – has been refined and supplemented by a number of additional core findings (in part also contemporaneously). Within the corporation, principal-agent theory would seem to build on a concept that no longer sees the firm as a ‘black box’, a unit that acts only towards the outside world, but rather as an organism with a lot of inside relationships and antagonistic interests. This idea constitutes a powerful trend more generally in the late 1960s and 1970s, with an important first germ in Coase’s article of 1937 on the ‘Theory of the Firm’. Probably the most radical – most structure-oriented – approaches are those of the firm’s interior structure as a network of contracts, a market in which interests of many stakeholders meet, but as well the conceptualization of property as a bundle of nuanced rights. The network idea can be further extended to capital markets outside the firm, blurring the boundaries between inside and outside the firm (see also Chapters 17 and 19). In this case, what is core is the question of whether and how capital markets are efficient enough to support the

BOX 20.3

Armen Alchian / Harold Demsetz, ‘Production, Information Costs, and Economic Organization’, 62 The American Economic Review 777–95 (1972) Harold Demsetz, ‘Toward a Theory of Property Rights’, 57 The American Economic Review 347–59 (1967) Eugene Fama, ‘Efficient Capital Markets: A Review of Theory and Empirical Work’, 25 Journal of Finance 383–417 (1970) Eugene Fama, ‘Agency Problems and the Theory of the Firm’, 88 Journal of Political Economy 288–307 (1980) Peter Walgenbach, ‘Neoinstitutionalistische Ansa¨tze in der Organisationstheorie’, in A. Kieser / M. Ebers (eds.), Organisationstheorien (8th ed., Stuttgart: Kohlhammer, 2019), pp.300–50

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best possible financing of the firm – financial theory being key also in Jensen and Meckling’s text and Fama’s contemporaneous answer being that they reflect all public information (Efficient Capital Market Hypothesis). With these three further developments, the field of organizational research opened up more generally and has dominated the decades since then. The ramifications of the debate can be traced in the supplementary readings in Box 20.3.

b theories, context and discussion I This chapter primarily discusses two seminal papers on the division of ownership and control. The first text deals with the existence of this division and its impact on the very concept of ownership. Indeed, the authors’ suggestion that the division is so severe that it may radically endanger, or even completely erode the concept of ownership, was so successful that corporations/companies with dispersed ownership are today often simply referred to as ‘Berle-Means corporations’. The fascinating feature of this text is that it starts from a very traditional concept of full and unrestricted property, and by comparing it to ownership in a corporation, comes to realize for the first time just how much different forms of ownership matter (dispersed ownership, block-holding, majority shareholders). On the basis of this analysis, the text makes its second revolutionary finding, that this structural feature of such corporations triggers particular kinds of vulnerabilities on the side of ‘owners’, and particular ‘opportunities’ on the side of management to behave contrary to the interests of owners, that is, to act opportunistically. This is where the second text comes in. It is one of the most influential texts to have dealt with the relationship between the two core actors in a corporation, the owner-principal and the manager-agent. It conceives the manager in control of a Berle/Means corporation as an agent, so that Jack Welch (who oversaw a twenty-year rise in the company value of General Electric of 4,000 per cent), for example, would be understood as an agent for the masses of GE’s shareholders. This image of the manager as agent, though many sociologists, for example, would be quick to emphasize its deep incompatibilities with the reality of the shareholder–manager relationship,3 has nonetheless been central to subsequent economic theory about the shareholder–manager (principal–agent) relationship. The concept provides a single model – and for the time being, the mainstream model – to analyse the distribution of duties and rights in the relationship between management and shareholders, between fiduciaries who generally exercise control and principals (owners), namely those who should have the ultimate control. The concept is thus much more normative than the description set out by Berle and Means. The texts are also different in ‘mood’. The first one, written in the fallout of the worldwide economic crisis after 1929, adopts a defeatist tone. The other one, originally written during the economic prosperity or what might even be called the boom of the early 1970s (though not published until the 3

See, for instance, W. D. Huber, Corporate Law and the Theory of the Firm (Abingdon: Routledge, 2020), namely chapter 7 (‘The social construction of the social reality of directors, owners of shares, and investors in shares’).

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height of the oil crisis), offers a more technical, prescriptive and detailed analysis – that in turn makes it much easier to translate into legal concepts and normative conclusions. II The first text discussed is one of the earliest collaborations between a legal scholar and lawyer (Adolf Berle) and an economist (Gardiner Means), and a markedly fruitful collaboration at that time, given how long it would be before transaction cost economics once again brought the two disciplines closer together. Their book was divided into three parts (‘books’), each nominally about property rights: (i) Property in Flux; (ii) Regrouping of Property Rights; and (iii) Property in the Stock Market, with this third ‘book’ thus bridging the gap between shareholders’ rights and collective goods such as markets. How they bridged this gap is showcased particularly well in the two chapters discussed here primarily: the last chapter of book II (chapter 8) and the first chapter of book III. In these two chapters, Berle and Means demonstrate in a rather striking way how property can be analysed both as an individual legal right and as an economic market expectation – with quite divergent outcomes. The text thereby anticipated the core idea of ‘property rights theory’ which – based on earlier writings4 – would be powerfully developed in the new institutional economics movement four decades later, a theory which strongly deviates from what in law is typically seen as property. Indeed, the other paper discussed here relies heavily on that theory (see Section III). The key insight of this approach is that there is no single, monolithic property concept or right. Rather, legal and market relationships are split up into manifold, nuanced and often individually arranged, tailor-made composite bundles of single rights – and this is equally or perhaps especially so in organizational or contractual relationships – which can be stronger and weaker and which can be combined in an infinite number of ways. Thus, property is never just property. In corporations, this implies that the right to sell the share as property and the right to a proportionate share of a firm’s revenues may be attributed differently, that is, to the shareholders, than the right to decide on the use of the assets owned by the corporation, most often given to management. Put differently, property rights may be split, and the allocations of those rights may be broken down into increasingly refined divisions, both on the side of monetary claims and on the side of information and decision rights. The nature of the relationship between the two players considered here – the two placed at opposite poles in all mainstream considerations5 – becomes evident in a phrase that immediately precedes the two chapters discussed here. Chapter 7 ends in this way:

4 5

See fn. 32 – also more generally for references on property rights theory. On the problems posed by the existence of actors other than shareholders and managers, see most recently for example, B. Choudhury / M. Petrin, Corporate Duties to the Public (Oxford: Oxford University Press, 2019); furthermore P. Zumbansen, ‘The Parallel Worlds of Corporate Governance and Labor Law’, 13 Indiana Journal of Global Legal Studies 261–312 (2006); E. Freeman, Strategic Management: A Stakeholder Approach (Boston / MA: Pitman, 1984); J. Coffee, ‘Unstable Coalitions: Corporate Governance As a Multi-Player Game’, 78 Georgetown Law Journal 1495–549 (1989–1990); C. Hill / T. Jones, ‘Stakeholder-Agency Theory’, 29 Journal of Management Studies 131–54 (1992); T. Donaldson / L. Preston, ‘The Stakeholder Theory of the

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the common law has at its command tools adequate to meet the situation [i.e., the relationship between shareholders and management] in sufficiently competent hands. The indefiniteness of its application and the extreme expense of litigation, still leave the stockholder virtually helpless . . . a stockholder’s right lies in the expectation of fair dealing rather than in the ability to enforce a series of supposed legal claims.

This foreshadows a whole host of ideas that would only be fully developed later on: that the common law is efficient,6 that market mechanisms are among the most powerful monitors for rights7 and that it may be rational for shareholders to remain apathetic (if it is too expensive to sue, it is more rational to rely on other mechanisms).8 The core idea is that, to properly capture the relationship between shareholders (‘owners’) and management (‘control’ or also ‘agents’), rights and expectations – law and markets – should be understood in concert, as mutually influencing one another in their function(s). At the same time, there is the idea implied that shareholders are in the hands of management, perhaps even should be and should trust (‘in sufficiently competent hands’). And all this is rather elegantly demonstrated in the two chapters discussed here. The first deals with individual rights that Berle and Means point out, all cynicism aside, still exist (and even serve as ‘[adequate] tools . . . in sufficiently competent hands’), while the second addresses the tools that increase the likelihood of expectations actually being met. The latter, market expectations, which is the paramount concern when trying to vindicate individual rights, is apparently seen as being the more rational strategy to further investors’ rights. This is also how the first selected chapter starts out: the shareholder has given up rights in return for expectations; this is indeed the core feature of the concept of the separation of ownership and control. Berle and Means argue not only that this is a more accurate

6

7

8

Corporation: Concepts, Evidence, and Implications’, 20 Academy of Management Review 65–91 (1995); from the German context see C. Windbichler, ‘Der Gemeinsinn der juristischen Person: Großunternehmen zwischen Shareholder Value, Mitbestimmung und Gemeinwohl’, in H. Mu¨nkler / K. Fischer (eds.), Gemeinwohl und Gemeinsinn im Recht (Akademie Verlag: Berlin, 2003), pp.165–78. For this idea, see R. Posner, The Economic Analysis of Law (9th ed., New York: Aspen Publishing, 2014), pp. 32 et seqq., pp. 323 et seqq. but more generally an underlying thesis; P. Rubin, ‘Why is the Common Law Efficient?’, 6 Journal of Legal Studies 51–63 (1977); G. Priest, ‘The Common Law Process and the Selection of Efficient Rules’, 6 Journal of Legal Studies 65–82 (1977); for an overview of the idea and respective literature see T. J. Zywicki / P. Stringham, ‘Common Law and Economic Efficiency’, in B. Bouckaert and G. de Gheest (eds.), The Encyclopedia of Law and Economics (2nd ed., Cheltenham: Edward Elgar, 2011), 107–31. H. Manne, ‘Mergers and the Market for Corporate Control’, 73 The Journal of Political Economy, 110–20 (1965); see also the essay by B. Manning, ‘The Shareholder’s Appraisal Remedy: An Essay for Frank Coker’, 72 Yale Law Journal 223–65 (1962), at 226 et seq. Manning argues for the case of publicly traded companies that dissenting shareholders could receive fair value for their publicly traded shares more efficiently through open market sale than through an appraisal right. On the basis of such argument, many US states adopted the socalled stock market exception that denies appraisal rights to dissenting shareholders for publicly traded companies. More recently see D. Fischel, ‘Market Evidence in Corporate Law’, 69 University of Chicago Law Review 941–61 (2002); J. Macey, Corporate Governance: Promises Kept, Promises Broken (Princeton / NJ: Princeton University Press, 2008). T. Baums, ‘Germany’, in T. Baums / E. Wymeersch (eds.), Shareholder Voting Rights and Practices in Europe and the United States (The Hague/London/Cambridge, MA: Kluwer Law International, 1999), pp. 109–30, at pp. 111 et seq.; F. Easterbrook / D. Fischel, The Economic Structure of Corporate Law (2nd ed., Cambridge/ MA: Harvard University Press, 2005), pp. 66 et seqq.; S. Grundmann, European Company Law: Organization, Finance and Capital Markets (2nd ed., Antwerp/Oxford: Intersentia, 2012), § 3 para. 29 et seqq.

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description of the factual situation, but that this surrender includes all important rights in strictly legal terms. Their argument can, however, be faulted for a lack of precision and, at times, a certain amount of exaggeration. For instance, in the span of a few phrases, Berle and Means say that the individual right of the minority shareholder is subordinated to the interests of the shareholders as a whole, that is, of the overall company, to the interests of the majority of shareholders and to the interests of management.9 Yet each of these forms of subordination corresponds to a different (primarily normative) approach: the first using the interests of the company as a whole (including of minority shareholder) as the guideline, the second emphasizing conflicts of interest between majority and minority shareholders and the last is concerned with managing conflicts between managers and shareholders per se. The differences between these three approaches have huge implications for law and, in particular, go a long way toward explaining the barrels of ink that have been spilled debating the nature of fiduciary duties in firms both large and small.10 Berle and Means are also provocative in extremis when they place the holy grail of capitalism, the stock corporation with dispersed ownership, on virtually equal footing with communist decision-making.11 Their core contention, however, is that the concept of property/ownership has radically changed: ‘The shift of powers from the individual to the controlling management combined with the shift from the interests of the individual to those of the group have so changed the position of the stockholder that the current convention with regard to him must be radically revised.’12 It is control/influence in particular which has shifted from the owner (qua stockholder), even while the capital interest remains in their hands. On this basis, Berle and Means set out the operation of control in corporations between shareholders and management for corporations traded on capital markets and with dispersed ownership. In a nutshell, they not only give a concise elucidation of the mechanisms of governance for such corporations, but offer an innovative framework that has since become dominant, if not universal (at least in Western market economies), for most issues of corporate oversight. The two most important steps would seem to be, first, putting two (formerly neatly distinguishable) legal categories on more or less equal footing, 9 10

11

12

Berle / Means, The Modern Corporation and Private Property, p. 277. For decisions dealing with the fiduciary relationship between management and shareholders, even prior to 1932, see Dodge v. Ford Motor Co., 204. Mich. 459, 170 N.W. 668 (1919); dealing with the fiduciary relationship between minority and majority shareholders, see Southern Pacific Co. v. Bogert, 250 U.S. 483, 491 et seq. (1919); Pepper v. Litton, 308 U.S. 295, 295 and 306 (1939) (fiduciary duty of the creditor); Zahn v. Transamerica Co. 162 F.2d 36, 42 (3rd Cir. 1947); Perlmann v. Feldmann, 219 F.2d 173, 175 (2nd Cir. 1955); on the early development of fiduciary duties, see E. Merrick Dodd, Jr, ‘For Whom Are Corporate Managers Trustees?’, 45 Harvard Law Review 1145–63 (1932). This article is also particularly significant for the debate on corporate accountability between Berle and Dodd; more generally see T. Frankel, Fiduciary Law (New York: Oxford University Press, 2017). See Berle / Means, The Modern Corporation and Private Property, p. 278. This runs somewhat counter to the idea that minority rights are ‘constitutional’ rights which make it easier for minorities (in organizations/ hierarchies, and particularly in firms) to accept majority voting – just as under the rule of law, fundamental rights give a basic guarantee to all citizens faced with majority voting in states. For this concept of minority rights, see O. Hart / J. Moore, ‘Property Rights and the Nature of the Firm’, 89 Journal of Political Economy, 1119–58 (1990). Berle / Means, The Modern Corporation and Private Property, p. 278, for the ideas in the rest of the paragraph, see pp. 279–81.

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and second, introducing another aspect as much more important and indeed paramount. While debt capital and share capital had previously been seen (and are often still seen) as quite distinct in legal form, with one representing a loan and the other a sharing of ownership, Berle and Means emphasize that, in terms of economic outcome and even in terms of the actual rights conferred, the two are often rather similar. In both cases, individual rights are completely displaced by collective enforcement mechanisms (probably an exaggeration in legal terms, though less also one in practical terms). And in both cases, the economic success of the company is seen as more important than differences in how returns are calculated. Yet the even more revolutionary step, and the one with an enormous long-term impact, resulted from the core distinction Berle and Means drew between securities tradeable on capital markets, and those that are not – irrespective of whether the securities themselves had the legal form of debt or equity. This distinction provided the seed for one of the most important analytical developments in corporate law during the last twenty years. No longer is the only salient distinction between the public company (limited by shares) and the private company, but public companies without recourse to stock markets are also increasingly distinguished from ‘publicly traded companies’, and subjected to different legal regimes, not only with respect to capital market law (of course) but with respect to organizational rules as well.13 Capital market orientation, it turns out, makes a much greater difference than the distinction between debt and share capital – even for the holders of such rights. With respect to the operation of capital markets, two ideas are of particular relevance.14 On the one hand, Berle and Means contend that capital markets matter (and that managers are forced to behave in the interests of shareholders) primarily because new capital would otherwise be difficult to raise, that is, not because of any influence from already-existing shareholdings. On the other hand, they were the first to so prominently stress the monitoring function of capital markets and the corresponding importance of capital market law (which in 1932 was just about to be enacted in the United States).15 The first of these ideas is no longer mainstream – the monitoring function is now seen to involve existing shareholdings as well, since stock prices are now so decisive to management decision-making, both directly through bonuses, and, indirectly, by influencing the possibility of a hostile takeover that would seize control away from incumbent management.16 Thus, the claim that capital markets cannot protect shareholders in 13

14 15

16

See summary of the development (namely in Europe) in Grundmann, European Company Law, § 3 para. 6, 26, § 37 para. 43; and broad discussion of the concept of a specific body of company law for listed companies (in German terminology, Bo¨rsengesellschaftsrecht) on two Lawyers’ Associations annual conferences in Germany and Austria: W. Bayer, ‘Empfehlen sich besondere Regeln fu¨r bo¨rsennotierte und fu¨r geschlossene Gesellschaften?‘, Gutachten (report) E, 67th Deutscher Juristentag 2008, E5, at E81-E87 and E96-E98; ¨ sterreichischen Kapitalgesellschaftsrechts’, 16th O¨JT vol. II/1 M. Schauer / S. Kalss, ‘Die Reform des O 2006, especially 51–65. On these ideas, see Berle / Means, The Modern Corporation and Private Property, pp. 280 et seq. Securities Act of 1933, Pub. L. 73–22, 48 Stat. 74 (1933) (codified as amended at 15 U.S.C. § 77a et seqq.); Securities Exchange Act of 1934, Pub.L. 73–291, 48 Stat. 881 (1934) (codified as amended at 15 U.S.C. § 78a et seqq.). For a summarized account of these mechanisms, see: Grundmann, European Company Law, § 30 para. 4 et seqq., 40 et seqq.

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general, but only shareholders in companies whose need to fund external growth will require them to seek additional capital,17 would no longer be endorsed. On the other hand, monitoring as such is still paramount for the development of capital market law, as a core aspect of company law and for the understanding of corporate governance of today. The possibility of exit via capital markets is seen as one of the most powerful monitoring devices available to shareholders and their advisors, a device that is potentially as powerful, or even more powerful, than the exercise of shareholder voice (on this divide, more extensively Chapter 21).18 Indeed, the right balance between exit (from the company) and voice (within it), and the fostering of these functions via institutional arrangements is the core theme of corporate governance. The rest of chapter 8 is mainly devoted to two themes. First, why capital markets came into being at all – namely, because they convert capital given to a company in perpetuity (share capital is paid in without time limit) into capital which can nevertheless be individually liquidated at any time (via sale of the shares to new/other shareholders).19 Second, how capital market mechanisms and capital market law support this function – namely by assuring large trading volumes (liquidity) and the orderly establishment of a market price. Moreover, it addresses how the capital market mechanism, which initially arose to facilitate the resale of shares, has since developed into a powerful tool of information about such publicly traded companies at large – again an absolutely fundamental idea. Property is divided up in yet another way. Berle and Means point to the fact that, on the one hand, the right to dispose of a company’s assets cannot remain in the hands of the shareholders, but must be allocated to those in control of the firm as a whole while at the same time, however, they also make clear that even taken as a whole, the physical assets and the rights to control them do not exhaust the whole of the company, since other aspects, such as the capacity of the management, are also essential to a company’s success.20 All this brings Berle and Means to the conclusion of this first chapter (and of 17 18

19

20

The potential for exit is today stressed much more often, see Chapter 21. Stressed negatively by A. Hirschman, Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge / MA: Harvard University Press, 1970), p. 30, discussed in Chapter 21. But taken up again more recently by, for example, A. Admati / P. Pfleiderer, ‘“The Wall Street Walk” and Shareholder Activism: Exit as a Form of Voice’, 22 Review of Financial Studies 2645–85 (2009) and A. Edmans, ‘Blockholder Trading, Market Efficiency, and Managerial Myopia’, 64 The Journal of Finance 2481–513 (2009), both considering blockholders; see also survey in Grundmann, European Company Law, § 14 paras. 35–45. Berle and Means particularly emphasize the importance of securitization – the creation of fungible rights – in this process. The concept of fungible rights is still fundamental today, see, for instance, T. Frankel, ‘The New Financial Assets: Separating Ownership from Control’, 33 Seattle University Law Review 931–64 (2010). Berle and Means forcefully stress that, while this mechanism allows participations to be split, control itself cannot be, and that the two can therefore no longer run in parallel (The Modern Corporation and Private Property, p. 283). On the other hand, they point out that only separation from control gives freedom to the owners who would otherwise be tied to their property (much as landowners have to stay with their land in order to extract revenues from it). Thus full ownership (with control) is seen to also immobilize its owner, and the larger the share of ownership grows, the less fungible it becomes. ‘The separation of ownership from management and control in the corporate system has performed this essential step in securing liquidity. It is the management and “control” which is now wedded to the physical property’ (The Modern Corporation and Private Property, p. 285). Berle / Means, The Modern Corporation and Private Property, p. 286; all quotes in the rest of the paragraph at p. 287.

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‘book’/part II of their book), which also offers a highly convincing transition to ‘book’/part III (which is about markets). They conclude This idea [of a completely watered-down property concept] does not accord either with the popular or the legal concept of a shareholder [i.e., their ownership/property position]. Economically, however, it seems inescapable. . . . The various incidental rights – voting, pre-emptive rights in new stock issues, and the like [the bundle of property rights] . . . all affect and enter into this open market appraisal . . . [but are] merely uncertain expectations in the hands of the individual. Aggregated, interpreted by a public market, and appraised in a security exchange, they do have a concrete and measurable value.

What exactly constitutes this ‘aggregated security system’ requires more substantial explanation. That system is in fact the subject matter of part III of their book, compellingly introduced in the first chapter. The core question is this: what are the main institutions which allow capital markets to function and which in particular render shareholder expectations more or less reliable? Berle and Means ground their ideas heavily in what they said in the preceding chapters, but focus on further developing two alternative mechanisms to help to make the best of the potential of capital markets. The first is the spectrum of capital market segments, from highly private ones to highly public ones – at the one end pure internalization, that is, a matching of all offers and all demands within a single bank, but also OTC (over the counter) markets, and official stock exchanges at the other end. Berle and Means explain rather elegantly that variation in these market segments is not simply a matter of size, that is, of market depth (the number of offers and of demand), but is also a question of quality. Stock exchanges have developed more systematic and therefore more reliable sets of rules, for instance about the systematic disclosure of relevant information, and that makes transactions on exchanges more informed and more reliable than OTC or unilateral transactions. The other factor that differentiates the segments is quantities and also qualities of information. Different market segments need, and are provided with, varying amounts of information. In this context, the authors develop two very promising ideas that even today remain less than fully realized. The first is a plea for just as much information as needed – no less, and no more. While the first of these propositions is clearly a key goal of current capital market law, the second – combating information overload – is just as demanding, and has only recently begun to be treated by legislators and regulators as a goal of similar importance.21 The other idea is that the information function of capital markets is in fact derivative of the primary function, to facilitate the liquidity of the investment: ‘Out of this mechanism primarily designed to secure liquidity . . . the security markets have evolved a totally different function. They serve as a yardstick by which security values are measured . . . [supported by] a tremendous 21

For Berle and Means’ rather optimistic view, see The Modern Corporation and Private Property, p. 294: Naturally much of what is disclosed is not necessarily true; and much of what is true never reaches the market; the ideal situation – that of constant running disclosure of all [and only all] information bearing on value being of course necessarily unattainable. It can, however be approximated. . . . mechanisms of dissemination are so well developed that any facts bearing on values can become common market property almost instantaneously.

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mechanism for collection and dissemination of facts.’22 Already then, but even more so today, this is worth stressing, given that disclosure – that is, the information function – is typically seen as the primary aim of capital market law (and rightly so).23 A third – recurring – feature is the relationship between information and real value, between financial markets and the real economy. Berle and Means seem to subscribe to today’s majority view that price transparency on capital markets and transparency on relevant facts, while not proportionately and immediately influencing prices and the value of real economy, are nevertheless helpful in this respect. Therefore, while financial industries and markets are understood to be somewhat dissociated from the real economy (and with the wave of financial innovations a bit more so), supporting capital market mechanisms nevertheless is seen – and also after the financial crisis – to contribute to the proper functioning and assessment of real economy.24 Berle and Means conclude by summarizing three functions: bringing sellers and purchasers together, providing the procedure of sound price setting (measuring value) and providing investors with an instrument to keep their investment liquid – without even mentioning information again. The Wrigley case introduced above illustrates core findings of the text and adds considerable refinement. While the capital market listing that is so prominent a feature for Berle and Means did not play a role, at least not explicitly, in the court’s holding, its findings seem nevertheless particularly tailored to corporations with dispersed ownership, that is, those corporations that are normally listed at capital markets, at least in the United States (socalled Berle-Means corporations). In this type of corporation, the typical shareholder interest is small and shareholder apathy is more likely to impact strongly. In this setting, it seems particularly convincing to allocate ultimate control in current business operations with the board with high exclusivity – and restrict reaction of shareholders primarily to (re) 22 23

24

Berle / Means, The Modern Corporation and Private Property, pp. 297, 294. ‘Sunlight is said to be the best of disinfectants’, see Justice Brandeis, ‘What Publicity Can Do’, Harper’s Weekly 10–13 (20 December 1913). Virtually uncontested today, see, for instance, N. Moloney, EU Securities and Financial Markets Regulation (3rd ed., Oxford: Oxford University Press, 2014), pp. 54–9, 96 et seq; R. Kraakman, ‘Disclosure and Corporate Governance: An Overview Essay’, in G. Ferrarini / K. Hopt / E. Wymeersch (eds.), Reforming Company and Takeover Law in Europe (Oxford: Oxford University Press, 2004), pp. 95–113; and for a comprehensive discussion see A. Ferrell, ‘The Case for Mandatory Disclosure in Securities Regulation around the World’, 2 Brooklyn Journal of Corporate, Financial & Commercial Law 81–132 (2007); and, more recently, L. Enriques / S. Gilotta, ‘Disclosure and Financial Market Regulation’, in N. Moloney / E. Ferran / J. Payne (eds.), The Oxford Handbook of Financial Regulation (Oxford: Oxford University Press, 2015), pp. 511–36. See Berle / Means, The Modern Corporation and Private Property, pp. 294 and 297, for the summary in the following p. 299. On this relationship, that is, so-called allocative efficiency as a core aim of capital market law, see now (and post-financial crisis in particular): R. Levine, ‘Regulating Finance and Regulators to Promote Growth’, in 2011 Jackson Hole Economic Policy Symposium: Achieving Maximum Long-Run Growth, Federal Reserve Bank of Kansas City, 271–311 (2012). For the dispute and the competing theories about how efficiently capital markets reflect real values, see groundbreaking E. Fama’s contributions, See box 203, and, for instance, R. Gilson / R. Kraakman, ‘The Mechanisms of Market Efficiency’, 70 Virginia Law Review 549–644 (1984); B. Malkiel, ‘The Efficient Market Hypothesis and its Critics’, 17 Journal of Economic Perspectives 59–82 (2003); B. Malkiel, ‘Finance and Growth: Theory and Evidence’, in P. Aghion / S. N. Durlauf (eds.), Handbook on Economic Growth (Amsterdam: Elsevier, 2005), pp. 865–934; R. Levine, ‘Financial Development and Economic Growth: Views and Agenda’, 35 Journal of Economic Literature, 688–726 (1997).

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nomination (and potentially removal). This is the core of the finding. While the judgment is known for furthering others than shareholders’ interests (early case on CSR, see Chapter 22), the core line of ideas on which the court rests its holding is equally important. Installing a business judgement rule – allowing the board full discretion even when other decisions might be wiser (better maximize return) – outside well-defined exceptional settings is paramount. It allows boards to be more active, without general fear of interventionist courts. Those exceptional settings are restricted to situations where the behaviour is illegal and where this moreover is decently foreseeable – illegality and fraud – and situations in which the presumption of an acting in the interest of the corporation no longer seems wellfounded. The latter is the case when there are concretely conflicting interests. The reasoning sounds very similar to that given for party autonomy by Ludwig Raiser.25 It is seen as preferable for a dynamic economy as a whole to have such leeway for active boards. In addition, the case does indeed stand for a trend that boards should be allowed to act as arbiters between different interests – also between shareholders and stakeholders outside the company. The case is not clear on the question to what extent such other interests may be taken into consideration – again a wise business judgement may be seen as the benchmark. This latter trend – on stakeholder interests – is what developed not only since 1932 (BerleMeans), but more powerfully and more consistently since 1968 (Wrigley case) and did so worldwide. Capital market law developed features to allow for a more precise and more convincingly binding description of what the corporation promises as its conduct with respect to stakeholders’ interests and public good, similarly to certification as an instrument. In recent years, moreover, even company law itself started to open up to the possibility of creating legal forms that are particularly designed for companies aimed at honouring more decidedly third party and stakeholder interests or the public interest more generally, and (more broadly conceived) stakeholder welfare would seem to be advancing as an aim.26 Overall, if the text still sounds modern even today, that is because it was the first to put the functioning of capital markets and the property rights of shareholders (including shareholder voice) into a functional relationship from which the interplay between owner and manager decision-making can be derived. With respect to capital market regulation, the undertone is interventionist to a certain extent or at least ordo-liberal in philosophy, and decidedly less liberal than many of economic theory papers that it inspired.27 This is one feature that places the text squarely in the era of the New Deal 25 26

27

See Chapter 11. A very recent example can be found in France with the last company law reform where a ‘special purpose‘ public limited company can now be formed, with the particular purpose enshrined in the charter, the socalled socie´te´ a` mission (see new sections 1833–5 of the French Code Civil and Act/Loi L219-10). Still more discussed internationally is the recent ‘Statement on the Purpose of a Corporation’ made on 19 August 2019 by the Business Roundtable of 19 August 2019 (uniting 187 CEOs of the most important US corporations), available at https://opportunity.businessroundtable.org/ourcommitment/. The statement lists five core purposes: ‘delivering value to customers’, ‘investing into our employees’, ‘dealing fairly and ethically with our suppliers’, ‘supporting the communities’ and – only fifth, and targeted to long-termism as well – ‘generating long-term value for shareholders’. This has often been seen as revolutionary in the US context. See particularly Berle / Means, The Modern Corporation and Private Property, pp. 296 et seq., on the one hand, and, for instance, on the other hand, H. Manne with respect to insider dealing or control premiums, Chapter 21. See also Chapter 12.

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(as do some of the examples used in the second half of chapter 1 of book III). The text nonetheless sounds modern (though a bit exaggerated in parts, and lacking some core institutions) in its assessment of shareholder power, at once stressing shareholder apathy in a way that had never been done before, while possibly underestimating and giving little attention to mechanisms that might restore some actual decision-making power to owners themselves.28 III While Berle and Means describe one – albeit economically the most important – type of company (the listed company with dispersed ownership) and clarify the paramount importance of capital markets for this type of institution, Jensen and Meckling establish the framework for a much more detailed analysis of possible arrangements within it, and for all companies. The tension between management and owners in the listed company with dispersed ownership is now analysed in a much more nuanced way. In fact, the authors open by quoting Adam Smith’s famous passage characterizing firms run by anyone other than the owners as inevitably more poorly governed. This claim is answered here by suggesting that while they may have disadvantages, they offer considerable advantages as well.29 Their paper is likely the most influential contribution that organizational theory, and particularly its institutional economics branch, has made to legal scholarship.30 Contrary to the approach of Berle and Means, which treats this dominant type of firm as a kind of black box, Jensen and Meckling inquire into the different modes of influence that shareholders or bondholders can exercise, how these mechanisms shape the behaviour of managers and how this influence may change across different industries. Thus, the issue addressed is no longer just the existence (and a rather extreme image) of the division of ownership and control, but how control rights and ownership claims can be best arranged, given nuanced consideration of the needs of a particular firm or industry. The framework thus developed has been the almost universal basis for subsequent discussions of the relationship between shareholders and managers. To that end, the authors draw on a wide variety of theories they specify right at the start, which allows them to make the best of a certain eclecticism. These theories – property rights theory, principal-agent theory and the theory of finance – are quite convincingly characterized as complementary rather

28

29 30

See, for instance, S. Grundmann, ‘The Renaissance of Organized Shareholder Representation in Europe’, in M. Tison et al. (eds.), Perspectives in Company Law and Financial Regulation (Festschrift for Wymeersch) (Cambridge: Cambridge University Press, 2009), pp. 183–99. See Jensen / Meckling, ‘Theory of the Firm’ at 306 sub (1) and (2). On organizational theory in general, see the references in Chapter 17, fn. 33. Further central approaches include the so called property rights theory, namely H. Demsetz (see fn. 32 in this chapter), which analyses the property rights of each individual, looking for the most efficient functioning of an organization, and sociologically orientated organizational theories, whether they take an institutional stance (see again Chapter 17, fn. 33 and P. Walgenbach, ‘Neoinstitutionalistische Ansa¨tze in der Organisationstheorie’, in A. Kieser / M. Ebers (eds.), Organisationstheorien (8th ed., Stuttgart: Kohlhammer, 2019), pp. 300–50) or not (for instance, the much discussed postmodern-symbolic models based on ideas made popular by H. Blumer, Symbolic interactionism: Perspective and Method (Englewood Cliffs / NJ: Prentice Hall, 1986)).

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than mutually exclusive.31 The departure from the Berle-Means approach becomes particularly evident in one detail that is highly relevant for Jensen and Meckling. While Berle and Means put quite a deal of emphasis on the equivalence, economically speaking, of debt and equity, Jensen and Meckling focus on the governance mechanisms put in place when debt capital is at stake, when share capital is at stake or when a firm is financed by some combination of the two. Indeed, they even make the differences in these mechanisms their core question. Overall, this is a foundational piece in comparative studies on arrangements to optimize the relationship between shareholders (owners – principals) and managers (control – agents). Indeed, it is probably the most influential contribution to principal-agent theory as well as a very important contribution to the theory of finance. The paper is divided into three core parts (in addition to the introduction and conclusion): one on the agency relationship and the incentives in play when share capital is at stake (section II), one on the incentives in the agency relationship when debt capital is at stake (section IV), and one that deals with the combination of both (section V) – section III on the corporate form is no more than a rather unimportant intermezzo in this flow. This structure reflects their core concern with comparing various arrangements (and their combinations) with respect to their impact on governance, that is, on managerial behaviour and on the agency costs spelled out in the title. Because their interest is more in this relationship between control rights and managerial incentives, and less in issues connected to the form of financial liabilities, the more common term ‘capital structure’ is replaced by that of ‘ownership structure’. Two smaller sections on corporate form and limitations of the analysis round off the article. The introduction is very rich. Straight away it is obvious that the most important contribution is made to agency questions, though with its changed perspective the paper was equally influential for the theory of finance. The consideration of property rights theory seems by contrast to be rather auxiliary to the authors’ analysis. What they make most use of is the idea that there is not one single, clearly delineated right that can be called a property right, but that property instead should be disaggregated into a bundle of single rights. Thus, each part of the bundle can be stronger and weaker and can be combined in an infinite number of ways (allowing property relationships to be shaped in a highly tailored manner).32 This approach to property is closely related to two other aspects of their framework. First of all, the firm is not seen as a black box, that is, as 31 32

See Jensen / Meckling, ‘Theory of the Firm’, at 305 and 308. The switch from the concept of ownership of a thing to viewing property as a bundle of relations can be traced back to 1888, when John Lewis wrote about it in his book A Treatise on the Law of Eminent Domain. The concept, though not the wording of the metaphor, is generally supposed to have been conceived by W. N. Hohfeld, ‘Some Fundamental Legal Conceptions as Applied in Judicial Reasoning’, 23 Yale Law Journal 16–59 (1913). Today, the concept is mostly taken for granted, as in, for example, E. Furubotn / R. Richter, Institutions and Economic Theory (2nd ed., Ann Arbor: The University of Michigan Press, 2005), p. 82 or R. Cooter / T. Ulen, Law & Economics (6th ed., Boston / MA: Pearson Education, 2012), pp. 73 et seqq. Groundbreaking R. Coase, ‘The Problem of Social Cost’, 3 Journal of Law and Economics 1–44 (1960); A. Alchian, ‘Some Economics of Property Rights’, 30 Il Politico 816–29 (1965); H. Demsetz, ‘Toward a Theory of Property Rights’, 57 The American Economic Review 347–59 (1967); E. Furubotn / S. Pejovich, ‘Property Rights and Economic Theory: A Survey of Recent Literature’, 10 Journal of Economic Literature 1137–62

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a unitary actor with respect to the outside world, but instead is analysed as a network of contracts and relationships between many individuals, with the ‘firm’s action’ understood only as emerging from the interplay of those relationships.33 As a consequence, instead of the firm being seen as a single unit with clear limits, the inside and the outside of the firm are seen to be a continuum that blurs the border between the two (‘no sense to . . . distinguish’). In this sense, the paper forms part of a quasi-‘antiauthoritarian’ trend in the economics of the 1970s which aimed to largely define ‘hierarchy’ away (and thus hid its problems) and to understand firms primarily or exclusively within a rubric of consensual relationships.34 The keystone in this network of contracts – as articulated in the paper’s decisive next step – is a formalization of the various duties and a delimitation of the actions in which the parties can engage, the specification of the arrangement by which the parties minimize their transaction costs within this particular relationship.35 This is the core of principal-agent theory. If both parties to the relationship are utility maximizers there is good reason to believe that the agent will not always act in the best interests of the principal. The principal can limit divergences from his interests by establishing appropriate incentives for the agent and by incurring monitoring costs . . . [and may] pay the agent to expend resources (bonding costs) to guarantee that he will not take certain actions which would harm the principal.

On this basis, they define agency costs, the costs of establishing an agency relationship (rather than a market relationship or assuming the position oneself), as the sum of: ‘(1) the monitoring expenditures by the principal, (2) the bonding expenditures by the agent, [and] (3) the residual loss’.36 The amount so expended, however, should not be considered a dead loss, but should be evaluated on the basis of savings compared to the costs of putting in place alternative arrangements. The aim of the paper is to delineate the agency costs for various sets of arrangements, particularly with varying levels of dependence on share and debt capital, in different industries: ‘The development of theories to explain the form

33

34

35

36

(1972); Y. Barzel, Economic Analysis of Property Rights (Cambridge / New York: Cambridge University Press, 1989). See Jensen / Meckling, ‘Theory of the Firm’, 310 et seq. (also for the quote in the next sentence). From a network of contracts approach, such a black box approach even seems ridiculous: ‘We seldom fall into the trap of characterizing the wheat or stock market as an individual, but we often make this error [with respect to] . . . organizations . . . ’ (311); on this concept, see more extensively, Chapter 19. See A. Alchian / H. Demsetz, ‘Production, Information Costs, and Business Organization’, 72 The American Economic Review 777–95 (1972). Jensen and Meckling opt for self-regulation rather than regulation (‘Theory of the Firm’, 306) and for consensus rather than order (308: all ‘specified in the contracts’). While Coase had mainly noted the existence of transaction costs, and done so primarily with respect to market transactions (see Chapter 3), Jensen and Meckling – and agency theory more generally – now turned to the calculation of these costs. Moreover, they do such comparison also with respect to hierarchies and to sets of arrangements of different kinds ranging ideally from pure market transactions to pure hierarchies (in the case of Jensen and Meckling ranging between hierarchies with a high equity/capital ratio to hierarchies with a high debt ratio-and this for different industries)). See Jensen / Meckling, ‘Theory of the Firm’, 308 (and 309 for the next quote), but also 323–6. For agency costs – also as compared to market transaction costs – see also E. Fama / M. Jensen, ‘Separation of Ownership and Control’, 26 Journal of Law and Economics, 301–25 (1983); O. Williamson, ‘Corporate Finance and Corporate Governance’, 43 The Journal of Finance 567–91 (1988); O. Hart, ‘Corporate Governance: Some Theory and Implications’, 105 The Economic Journal 678–89 (1995).

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which agency costs take in each of these situations . . . will lead to a rich theory of organizations . . . generated by the contractual arrangements between the owners and top management of the corporation.’ The first substantive comparison deals with agency costs for arrangements with share capital alone (section II) and starts out from the choice between share and debt capital. This is certainly one issue that, at its core, should not be defined by regulatory intervention – at least outside regulated industries such as credit institutions.37 This part is not yet concerned with the comparison against the agency of debt capital (on this, see the next paragraph), but rather with why and when an agency problem arises with share capital at all, that is, when a company is totally financed by a combination of own funds (internal funding) and external share capital. Thus, the situations compared are (i) when management wholly owns the company and (ii) when shares are divided between management and outsiders. The latter is the case, for instance, when the management sells stock to exploit profitable opportunities for which it possesses insufficient funds. In these cases, a risk of moral hazard arises on the part of management, there is a risk that management will act differently at some future point from what the parties would have agreed to had they known about that situation in advance. The relationship to certain types of industries – size, maturity of the relevant market – already becomes apparent.38 The overall scheme is easy to grasp as well: management now has the incentive to overinvest in the consumption of a firm’s perquisites, as it enjoys 100 per cent of the benefits from such expenses yet is no longer fully liable for their costs. Moreover, management may no longer invest as much effort in searching for profitable opportunities, as it no longer gains the whole of the profit from discovering them (indeed, Jensen and Meckling see this is as the most serious risk). Nevertheless, the additional gains can be worth the loss in two situations: either when the gains are high enough to exceed the premium investors can be expected to charge in anticipation of inefficient consumption of perquisites by the managers; or because the risk of such inefficiencies can be reduced. This second case is the moment in which the core of agency theory intervenes: by putting in place arrangements that reduce the likelihood that the principal will indulge in inefficient consumption of perquisites, agents and principals 37

38

Conversely, regulated industries are regulated precisely because of their core function in a market economy, and the particular shape of the risks existing in the industry. This can be seen particularly with respect to executive pay, and especially as it relates to efforts to arrange pay in a way that is oriented to the long term, and avoids excessive risk taking. In principle, international developments can be summarized as running in two directions. For company law more generally and in all industries, executive pay has been subject of some measures to increase transparency and give competences back to owners in a rather general way. See as a particularly significant example Arts. 9a and 9b of Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, EU.OJ 2017 L 132/1. Conversely, public interventions into the arrangement as such – fixing ratios between fixed pay and bonuses etc. – have been limited to regulated industries, and the financial sector in particular. Most important in this respect: Arts. 75, 92–6 of Directive (EU) 2013/36 of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, EU.OJ 2013 L 176/36 (‘CRD IV’), then supplemented by Directive (EU) 2019/878, EU of 2019 L 150/253 (‘CRD V’). See also Jensen / Meckling, ‘Theory of the Firm’, 330, 355 et seq., et passim; for quotes and ideas in the rest of the paragraph, see mainly 313, 321, 324 et seq., 327 et seq.

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can reduce the risk premium charged. Whenever the sum of these agency costs (monitoring and bonding costs, along with the residual risk) is lower than the risk premium that would otherwise be charged by outside shareholders, they should be incurred. These are the two situations that really need to be compared whenever a profitable opportunity arises which requires external financing to be exploited (which is the basic scheme of any investment). What needs to be explicitly stressed is that there is no possibility of doing away entirely with the risk premium charged or agency costs incurred. The reduced value of the firm caused by the manager’s consumption of perquisites outlined above is ‘non-optimal’ or inefficient only in comparison to a world in which we could obtain compliance of the agent to the principal’s wishes at zero cost . . . But these costs . . . are an unavoidable result of the agency relationship . . . [the alternative is] the ‘Nirvana’ form of analysis.

In line with their overall approach and their focus on the decision-makers’ incentives, Jensen and Meckling research how management – as the primary decision-maker – would arrange for monitoring and bonding, and at what cost. It is management who ultimately bear the cost of choosing a less efficient solution. In fact, they explicitly abstract away from (and thus ignore) uncertainty about how managers will actually behave, that is, how much they will engage in inefficient consumption of perquisites of the firm, based on an argument that capital markets allow such risk to be diversified away and, implicitly, that a large enough number of investors have enough information about such behaviour to react to it sufficiently.39 The second part of the comparison considers agency costs in arrangements limited to debt capital financing (section IV). In this respect, Jensen and Meckling identify three types of agency costs in such relationships, which have henceforth been at the core of the discussion. More important still, the difference from the agency costs in the case of share capital becomes immediately evident. The three aspects discussed are:40 (i) where there is high level of debt financing (compared to the level of share capital retained by management), an incentive is created for management to take on excessively risky investments. The reasoning is that in such investments, management has little to lose (the capital ratio is such that it carries a disproportionally low share of the risks), but nonetheless privatizes the entirety of the gains (save for the interest paid). Hence, interest charged by creditors in 39

40

See Jensen / Meckling, ‘Theory of the Firm’, 318. An entire line of discussion about how efficient capital markets really are had already been initiated, but certainly superseded this assumption. Today the prevalent (but still disputed) view would be that capital markets are efficient only insofar as they tend to reflect only publicly available information (semi-strong efficiency). See the short summary in S. Grundmann European Company Law, § 20 paras. 6–11; groundbreaking for this view: contributions by E. Fama, box 20, 3 and in legal scholarship R. Gilson / R. Kraakman, ‘The Mechanisms of Market Efficiency’, 70 Virginia Law Review 549–644 (1984); later, for instance, B. Malkiel, ‘The Efficient Market Hypothesis and its Critics’, 17 Journal of Economic Perspectives 59–82 (2003); for post-financial crises views, see R. Gilson / R. Kraakman, ‘Market Efficiency After the Financial Crisis: It’s Still a Matter of Information Costs’, 100 Virginia Law Review 313–75 (2014); also J. Coffee Jr, ‘The Political Economy of Dodd-Franck: Why Financial Reform Tends to be Frustrated and Systemic Risk Perpetuated’, in E. Ferran / N. Moloney / J. Hill / J. Coffee (eds.), The Regulatory Aftermath of the Global Financial Crisis (2nd ed., Cambridge: Cambridge University Press, 2013), pp. 301–70. See list in Jensen / Meckling, ‘Theory of the Firm’, 334; for quotes and ideas in the rest of the paragraph, see mainly 340–3.

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transparent markets should be excessively high in markets where excessively high risks are taken41 and this should lead to a situation where the issuance of additional share capital is the only option. (ii) Such risk taking can of course be limited by explicit covenants between the firm and its creditors. However, such monitoring or bonding devices, while reducing the risk of residual loss to the creditors, may be difficult and costly to draft in ways that cover all the relevant possibilities; the severe problems in drafting such limits in the laws on prudential supervision of credit institutions go a long way toward confirming Jensen and Meckling’s doubts in this regard. Compared with the issuance of share capital, there is a fundamentally different structure of risks, given that outside share capital not only proportionally shares in the risks, but also in the gains – meaning a quite different structure of moral hazard (excessive taking of corporate assets for own purposes). This passage also makes Jensen and Meckling’s preference for self-regulation with respect to disclosure particularly evident.42 (iii) Given management’s relatively greater inclination to take excessive risks and insofar as that inclination cannot be effectively curbed, yet another premium must be added to the high interest which should be charged anyhow. This is the premium for the risk of bankruptcy – even before it actually occurs – because this risk tends to lower the value of the enterprise, because as bankruptcy approaches, the firm’s assets disproportionately fall in value. This dynamic is illustrated by Jensen and Meckling with the example of the continuing difficulty of selling long-term, high-value products (which require post-sale services for a certain period of time). The ‘result of this is the generally observed phenomenon of the simultaneous use of both debt and outside equity’. Even if management would prefer to rely on debt capital, such reliance has its limits. Where, however, public regulation shapes and very carefully supervises covenants in favour of creditors, higher debt capital ratios can be observed – a phenomenon which, with the 2008 financial crisis, once again became a focus of banking supervision, in Europe with the socalled Capital Requirements Directive IV and V.43 The core question which also comes up in the section comparing the two situations is why debt capital is used at all given the costs associated with it. The fundamental line of reasoning given by Jensen and Meckling is that the reliance on debt capital is not best explained by rather fortuitous factors such as its more favourable tax treatment but, more generally, because of the divergences in agency cost structures that arise with different financing arrangements. This is 41

42

43

For this mechanism, and its centrality to the 2008 financial crisis and its discussion, see, for instance, A. Admati / P. Demarzo / M. Hellwig / P. Pfleiderer, ‘Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive’, in C. Goodhart et al. (eds.), Central Banking at a Crossroads: Europe and Beyond (London: Anthem Press, 2014), pp.33–50; M. Becht / P. Bolton / A. Ro¨ell, ‘Why Bank Governance is Different’, 27 Oxford Review of Economic Policy 437–63 (2011), at 445 and more generally on this idea see R. Posner, The Economic Analysis of Law (9th ed., New York: Aspen Publishing, 2014), pp. 539 et seq. Jensen / Meckling, ‘Theory of the Firm’, 338. See a short summary on the alternative of mandatory disclosure or self-regulation in Grundmann European Company Law, § 20 paras. 8–11. Groundbreaking in this respect: J. Coffee Jr, ‘Market Failure and the Economic Case for a Mandatory Disclosure System’, 70 Virginia Law Review 717–53 (1984); J. Seligman, ‘The Historical Need for a Mandatory Disclosure System’, 9 Journal of Corporation Law 1–62 (1983); today Moloney, EU Securities and Financial Markets Regulation, pp. 82 et seq. See also Chapters 12 and 26. See Jensen / Meckling, ‘Theory of the Firm’, 306 and 355 et seq.; Directive 2013/36/EU, see fn. 37.

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a fundamental structure that sets out an analytical framework for any financing arrangements. The essence is that debt capital is chosen (typically preferred by management) as long as the agency costs of debt capital are lower than the profits which can be drawn from an investment and also lower than the agency costs of share capital. This is also the core statement for the discussion of comparative advantages,44 some of which has already been mentioned in the above discussions of share and debt capital alone. In this third core part, Jensen and Meckling stress once again their changed perspective: ‘We use the term “ownership structure” rather than “capital structure” to highlight the fact that the crucial variables to be determined are not just the relative amounts of debt and equity but also the fraction of the equity held by the manager’ (or, what is equivalent, the fraction of equity held by outsiders). This combines with the above statement that the first is only liability related, the other governance related. Jensen and Meckling make clear, moreover, that the above formula, where the alternative chosen corresponds to the lowest agency costs, really depends on the two assumptions already introduced and explained above: efficient capital markets and management being the ultimate bearers of the agency costs. Jensen and Meckling admit that their formulation is the starting point and by no means the conclusion of a discussion of the comparative advantages of alternative arrangements and ownership structures.45 And finally, they bring in yet another key aspect, one which changes the picture considerably, which is that risk-averse managers tend not to put all their investment into one business, even though – from the perspective of reducing overall agency costs for both share and debt capital – this might well be the ideal arrangement. Many other qualifications (or limitations) of the simple formula named above are possible – and Jensen and Meckling discuss quite a few of them, such as agency costs changing over time, and the need for a dynamic perspective, etc. The conclusions are short and in fact only stress the importance of law – whether emanating in the public sphere or tailor-made by the parties themselves – to reduce the agency costs identified, particularly where the residual loss resulting from the natural conflict of interests between the parties could, if not reduced, prevent the exchange altogether. Thus, the expectation of what law could achieve remains rather generalized and moreover not particularly high – reduce transaction costs overall and thereby enable transactions, not, for instance, contribute to innovation, play an enabling role or steer parties. The authors’ outlook is positive: ‘the corporation [and in Jensen and Meckling’s views, this applies to other prevailing arrangements, such as long-term contractual networks] has thus far survived the market test against potential alternatives’.46

44

45

46

For quotes and ideas in this paragraph, see Jensen / Meckling, ‘Theory of the Firm’, 343–50, on qualifications (such as change in time), see 350 et seqq. See Jensen / Meckling, ‘Theory of the Firm’, p. 346. Indeed, see for today’s state of the art in theory of finance: F. Allen / R. A. Brealey / S. Myers, Principles of Corporate Finance (13th ed., New York: McGraw-Hill/Irwin, 2019); J. Tirole, The Theory of Corporate Finance (Princeton / NJ: Princeton University Press, 2005); L. Perridon / M. Steiner / A. Rathgeber, Finanzwirtschaft der Unternehmung (17th ed., Munich: Vahlen, 2016). See Jensen / Meckling, ‘Theory of the Firm’, 357.

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If the Wrigley case presented in the introduction is known primarily for giving the power to boards to consider the interests not only of shareholders but also of stakeholders when making decisions, then principal-agent theory as developed by Jensen and Meckling seems particularly pertinent. This theory is about the differences of monitoring costs for shareholders on the one hand and stakeholders on the other – however, a type of stakeholder, creditors, different from those addressed in the Wrigley case. It would imply a substantial extension of the authors’ considerations when stakeholders that are not investors in the narrow sense are included as well. On the other hand, neighbours do also make investments (for instance into their houses situated in streets that are calm in the evening) that could be analysed in similar ways to creditor interests in a more inclusive model. One can also, however, analyse the case for what its holding implies for shareholders’ monitoring costs (monitoring expenditures by the principal, bonding expenditures by the agent and residual loss). Excluding conflicts of interests from the realm of discretion that boards enjoy implies bonding expenditure by the agent that promises (by law) to act with discretion only in those situations where no structural and high risk of non-alignment of their interests with those of shareholders exists. In situations of no conflict of interests, however, monitoring costs are lowered by a business judgement rule (no courts coming in), and only clear cases being monitored (illegality and fraud). Moreover, in the area thus delimited, typically the residual loss is minimal. The risk of residual loss is mainly that of mistakes here (no risk of self-interest) – a risk even lower with those actors/agents highly professional in the business area than with any other possible decision taker. IV These two texts state the basic structure of the problems that arise in the division of ownership and control in publicly traded corporations with dispersed ownership, and indeed in all arrangements where there is a considerable division of ownership and control, for example, many professional agency relationships such as portfolio management etc. The three following insights may be detected in the texts. First, the concept of ownership has been radically transformed from the traditional property concept. This change releases owners from both the rights and the responsibilities of control, thereby providing them with liquidity and thus allowing a specialization of tasks in a co-operation. From this ensues the picture of ‘property rights’ as a nuanced bundle of competences and claims, rather than one monolithic concept. Second, this division of tasks gives rise to the problem of moral hazard (the risk of opportunism by the party in control) and thence to a need either to account for this risk in the prices paid to this party or to reduce the risk via monitoring and bonding devices. Third, the task of the law and of consensual arrangements is to combine arrangements – for instance share capital and debt capital – in a way that best reduces agency costs, composed of monitoring costs, bonding cost and residual loss. Residual loss results from the failure of the former two. The party arranging the exchange, typically the decision maker, for instance management, has every interest to look for such reduction, since this party, in a competitive and transparent market, can profit from this expenditure by increasing their gains (or lowering prices below those of

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competitors). This is a powerful analytical framework for the comparative assessment of arrangements (by law or contract) and the respective agency costs (including residual loss). Moreover, it also constitutes a powerful analytical framework for a theory of (ideal) finance that looks not only at the liability side (from the perspective of creditors), but at decisionmaking as well, that is, at the governance side. This is the picture that both texts paint.

21 The Principal’s Decision Exit, Voice and Loyalty Stefan Grundmann

a topic and materials This chapter is the third of a series on the concept and conceptualization of the corporation and the role that core actors play in it. It discusses the power and the limitations that can be observed in the player that, in mainstream doctrinal and economic conceptualization, is seen as the ultimate risk and decision taker. It deals with the power and the limitations that apply to the shareholder in their various decisions, most notably in the decision to invest or disinvest and decisions in the general meetings. While the texts discussed both refer directly to corporations as organizations, one of them decidedly takes a more general view and equally includes and refers to other types of organizations, also of the political sphere – types to which the second text could at least be related. In particular, the ‘voting with their feet’ so famously described in Manne’s text (for listed companies also called the Wall Street rule) has its parallels also in the political arena as Hirschman’s texts explicitly shows. The main choices possible shall be exemplified by one of the lead cases of the takeover wave that the United States experienced in the late 1970s, 1980s and 1990s. Takeovers are characterized by a particularly nuanced range of alternative options for decision-making by shareholders, but also by a huge variety of measures that might frustrate them, as seen in Box 21.1. This case, the second of two lead cases decided by Delaware Supreme Court that shaped US takeover law, illustrates the main question – and the tension – of how power should be distributed between the two core players. On the one hand, the shareholders of a corporation should have the ultimate decision power, on the other hand, management still has, and needs, many options in current business operation. Management, for instance via repurchase (a measure totally usual and legitimate in current business), in a takeover situation, can render it less likely and even illusory that the conditions of a takeover bid will be met. The Unitrin case supplements the Unocal case – decided ten years earlier1 – in that now not only is the proportionality test applied, but a ban on 1

Supreme Court of Delaware 10 June 1985, Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). Delaware law is so important in this area because corporate law is state law in the United States and most large corporations are registered in Delaware whose law therefore applies. Delaware has been so successful in attracting registrations namely because it has a very expert, specialized chancery division dealing only with

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BOX 21.1 CASE STUDY

Unitrin, Inc. v. American General Corp. 651 A.2d 1361 [Del. 1995] The two groups of plaintiffs in this case, a corporation (American General) that had made a hostile takeover bid (offer) and a group of shareholders of the target company (Unitrin) in a class action, filed suit against the target company and its directors in the judiciary of Delaware where the target company was registered. They sued for injunction, inter alia, to enjoin Unitrin from continuing to repurchase its own shares, because this was seen as a disproportionate move for the threat stemming from the bid and indeed would render the success of the takeover bid less likely (and in this case frustrate all individual sales to the bidder, at least at the price offered). The defendants claimed, inter alia, that there was still enough possibility left for the insurgent shareholders to form coalitions in proxy fights and that moreover they were not severely harmed if not given the possibility to sell within a takeover bid (at a higher price), but only via normal capital markets. The Delaware Supreme Court, on the basis of Delaware law, held that the decision of the Unitrin board was not in line with its fiduciary duties owed to the shareholders if either the measure taken was ‘draconian, by being either preclusive or coercive’ or ‘[outside] a range of reasonable responses to the threat American General’s Offer posed’. ‘draconian’ measures is also pronounced. This latter ban can be characterized as an outright ban on those measures that de facto would render the success of the bid illusory (no mere proportionality test). Such a ban can be found more clearly and in a more extended form in the UK City Code on Takeovers and in Article 10 et seq. of the EU Takeover Directive of 2004 that has been modelled along the lines of the code.2 While in the Unitrin case, it must be shown that a high enough number of shareholders is interested in accepting the bid, in UK and European law, the ban applies from the moment the bid is made and, moreover, a breakthrough rule is added that allows to do away with obstacles for the future.3 The Unitrin case is rich in legal reasoning and illustrative of these options, but the case also has its limitations, most importantly that it addresses only the relationship between management and shareholders – not between other stakeholders and the

2

3

corporate law. It remains so successful as Delaware law is now known throughout the United States and has proven to be a pragmatic and solid basis (network effects combined with reputational effects). On its success with respect to influencing stock prices, see the seminal article by R. Romano, ‘Law as a Product: Some Pieces of the Incorporation Puzzle’, 1 Journal of Law, Economics, and Organizations 225–83 (1985). On Delaware takeover law, see also the survey in R. W. Wong, ‘Through the Antitrust Looking Glass: A New Vision of Delaware’s Takeover-Defense Jurisprudence’, 99 Virginia Law Review 169–206 (2013). See Directive 2004/25/EC of the European Parliament and the Council of 21.4.2004 on takeover bids, EC OJ 2004 L 142/12 – and for more detail, Section B.III. The EC/EU regime is, however, optional for member states and has not been adopted in full by all member states. On the breakthrough rule applying in the first general meeting after the success of the bid, see P. O. Mu¨lbert, ‘Make It or Break It: The Break-Through Rule as a Break-Through for the European Takeover Directive?’, in G. Ferrarini / K.J. Hopt / J. Winter / E. Wymeersch (eds.), Reforming Company and Takeover Law in Europe (Oxford: Oxford University Press, 2004), pp. 711–37.

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(interests of the) public at large. These latter are fiercely debated again after the financial crisis and in the age of corporate social responsibility.4 II The chapter discusses two texts of reference, which can be considered the founding texts on the question of how to empower shareholders, how to make reality of what theoretically is seen as their role and power by most authors. Both texts indeed see shareholders – but as well the voting constituencies of other organizations – as the real principals and discuss the strategic choices and options they have (Box 21.2). The potential of both texts is enormous. Two lines of thought that they have triggered seem particularly interesting. The one line would be to enquire still more deeply into the mechanisms of the interplay between management and shareholders, particularly in takeover situations, but also in other situations of power struggle between them and how much of a contractual background and expectation can be detected in them. The other line would focus more on the political sciences- and sociology-related questions of exit and voice, as they

BOX 21.2

Albert Hirschman, Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge, MA / London: Harvard University Press, 1970) Henry Manne, ‘Mergers and the Market for Corporate Control’, 73 Journal of Political Economy 110–20 (1965)

BOX 21.3

Armen Alchian / Harold Demsetz, ‘Production, Information Costs, and Economic Organization’, 62 The American Economic Review 777–95 (1972) Masahiko Aoki, Toward a Comparative Institutional Analysis (Cambridge MA / London: MIT Press, 2001) (especially chapter 11) Sanford Grossman / Oliver Hart, ‘One Share/One Vote and the Market for Corporate Control’, 20 Journal of Financial Economics 175–202 (1988) Joseph H. H. Weiler, ‘The Transformation of Europe’, 8 Yale Law Journal 2403–83 (1991) 4

See Chapter 22 and, for example, M. Amstutz, ‘Globalising Speenhamland: On the Transnational Metamorphosis of Corporate Social Responsibility’, in C. Joerges / J. Falke (eds.), Karl Polanyi: Globalization and the Potential of Law in Transnational Markets (Oxford: Hart, 2001), pp. 359–93; H. Fleischer / S. Kalss / H.-U. Vogt (eds.), Corporate Social Responsibility (Tu¨bingen: Mohr Siebeck, 2018); see also Chapter 19.

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have also been discussed with very concrete examples (such as Europe or Japan) whose success at particular moments has aroused great interest. These ramifications of the debate can be traced in the supplementary readings in Box 21.3.

b theories, context and discussion I As mentioned, this chapter is closely linked to Chapters 19 and 20. Where Chapter 19 describes different modes of how to conceptualize the legal person and the relationships constituting it, and Chapter 20 puts the focus on the interplay between the two core actors, a company or firm’s management (‘control’) on the one hand and shareholders (‘ownership’) on the other, this chapter focuses on only one of these actors. It considers the empowerment of owners more generally – of principals as ultimate decision makers. Both texts discussed here were written during a time of protest in Europe and the United States. In Germany, such protest took a particularly violent form, with domestic terrorism (Rote Armee Fraktion) strongly linked to a society which had yet to come sufficiently to terms with its National Socialist past, but also played out in strong intellectual and philosophical currents, particularly in the form of the critical Frankfurt School.5 In France, the key protest movement was perhaps more integrated into the political discourse, with leading figures such as Cohn-Bendit in key political positions. In the United States, the central developments in this respect were the Civil Rights Movement and protest against the Vietnam War – with the breadth of concerns in some sense mirroring the diversity of US society. Nobody has more impressively summarized the implications of this era for the European Community and Union – with the messianic feeling of early integration, then protest, criticism of the allegedly much too market instrumental approach and (more hesitant) reshaping of the political agenda – than Joseph Weiler.6 All of these late 1960s and early 1970s political and intellectual currents come together in the first text discussed here and written by Albert Hirschman – a democratic reformer rather than a radical. Both texts considered here are also efforts to navigate the waters between competing disciplines, with Hirschman’s situated more broadly between economics, politics and sociology (not to mention the history of thought), and Henry Manne’s sitting more clearly at the intersection of law and economics. The selection by Hirschman, though published five years later, conceptualizes the core issue more broadly, while managing to formulate the alternatives rather explicitly in terms of ‘exit and voice’ (and potentially extending it to a triad of alternatives by also including loyalty). Henry Manne’s text applies these alternatives to the sphere where the choice between the two probably matters most in the business world, or at least where that choice features most prominently, the relationship between companies and capital markets. Manne does so by inventing, or rather discovering, a new market segment, a new ’commodity’ on which 5 6

See Chapter 1. J. H. H. Weiler, ‘The Transformation of Europe’, 8 Yale Law Journal 2403–83 (1991); for this development and theme in more detail, see Chapter 24.

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competition can operate: control. It is not made entirely clear what this control might consist of. It can be management services supplied by managers and demanded by shareholders, directors competing in management inputs, but as well shareholders potentially competing about positions which give them the power to decide on these inputs (power to nominate). The text assumes sometimes one, sometimes the other. In fact, as of the 1970s – and with increasing prominence through the 1980s, 1990s and 2000s – exit and voice became the basis of the most important interdisciplinary and international research approach in the sphere of companies and capital markets: corporate governance research,7 the most visible sphere of governance research in private law.8 While Hirschman applied the dichotomy – or in some cases, the trichotomy – to organizations in general, taken from all walks of life, Manne applied it more narrowly but, consequently, with more focus as well. In other words, while in Hirschman’s contribution economics and political sociology – corresponding to market options and competing firms on the one hand and states and state entities on the other – are equally dominant, even as modes of thinking, Manne’s entire interest is in the listed company or enterprise with a large number of shareholders. That said, Manne’s contribution here (along with some others) established him as one of the founders of a comprehensive ‘school’ – and a highly dynamic and prolific one at that! – the law and economics of corporate and capital 7

8

Exit and voice are seen as the basic modes of acting – these two modes also separating external from internal corporate governance. See (with good comparative law indications) K. Hopt, ‘Common Principles of Corporate Governance in Europe’, in B. Markesinis (ed.), The Clifford Chance Millennium Lectures: The Coming Together of the Common Law and the Civil Law (Oxford: Hart, 2000), pp. 105–32, at 106 et seq.; J. E. Parkinson, Corporate Power and Responsibility (Oxford: Clarendon, 1995), pp. 178–99;. C Teichmann, ‘Corporate Governance in Europe’, 30 Zeitschrift fu¨r Unternehmens- und Gesellschaftsrecht 645–79 (2001), at 646 et seq. Some institutions, such as statutory audits or takeovers (regulation) – discussed in Section III – have strong links both to external and internal governance: see K. Hopt, ‘Comparative Corporate Governance: The State of the Art and International Regulation’, 59 American Journal of Comparative Law 1–73 (2011), at 8; distinguishing member states that stress external mechanisms (including, apart from the Anglo-American world, recent trends in France) from those which definitely put more weight on internal mechanisms (all others, especially Germany): E. Wymeersch, ‘Unternehmensfu¨hrung in Westeuropa: ein Beitrag zur Corporate Governance-Diskussion’, 40 Aktiengesellschaft 299–316 (1995), at 309–15 (more particularly on Germany and, in an intermediate position, France and Belgium); more recent comparative law survey also by E. Wymeersch, ‘Corporate Governance Codes and Their Implementation’, Festschrift for Horn (Berlin: De Gruyter, 2006) pp. 619–31. More recently contract (or market) governance has attracted more attention as well. For contract governance, see F. Mo¨slein and K. Riesenhuber, ‘Contract Governance: A Draft Research Agenda’, 5 European Review of Contract Law 248–89 (2009); and a previous similar approach in: R. Brownsword, Contract Law: Themes for the 21st Century (2nd ed., Oxford: Clarendon, 2006); H. Collins, Regulating Contracts (Oxford: Oxford University Press, 1999); broad interdisciplinary survey and research agenda in S. Grundmann / F. Mo¨slein / K. Riesenhuber (eds.), Contract Governance: Dimensions in Law and Interdisciplinary Research (Oxford: Oxford University Press, 2015). The rather moderate development in this sphere is intriguing, given its importance and that governance research started with long-term contracts in Williamson’s writings, see Chapter 17. For public governance that is particularly influential and owed a lot to the crisis of globalization and the post–Cold War period both leading to an increase in comparison between countries, see K. Dingwerth / P. Pattberg, ‘Global Governance as a Perspective on World Politics’, 12 Global Governance 185–203 (2006); U. Brand, ‘Order and Regulation: Global Governance as a Hegemonic Discourse of International Politics?’, 12 Review of International Political Economy 155–76 (2005); groundbreaking: J. Rosenau / E.-O. Czempiel (eds.), Governance without Government: Order and Change in World Politics (Cambridge / MA: Harvard University Press, 1992).

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market law. In the text discussed here, Manne develops his most important finding, that actors in the corporate field compete for control on the so-called market for corporate control, an insight that still goes a long way toward explaining a core mechanism in company law. In not taking into account other values than interests of shareholders and management, it was focused enough to dominate one phase. On the other hand, it remained limited in vision and could not forecast such movements as the increased importance of corporate social responsibility. In virtually all this, Hirschman’s approach is completely the opposite to Manne’s, but they complement each other beautifully. II Hirschman’s text discussed here is his most famous and though strictly speaking it is not a founding text of any particular school of thought, he and his text stand for an approach which could be called pan-social theory – this in a time which was highly meaningful for the development of social theory and law more generally. Given that his life was so idiosyncratic, and given that the work is situated precisely at the crossroads of historic change, and at the intersection of virtually every social science discipline, it is worth (rather exceptionally for this book) providing a summarized biography of the author. Hirschman was trained as an economist but as that training was in France and more broadly in ‘old Europe’, it yielded a strong interest in political developments and institutions9 and in the history of thought.10 While Hirschman taught and conducted research at the top American academic institutions – from Berkeley via Yale, Columbia and Harvard to the Institute of Advanced Study in Princeton – he always remained the e´migre´ from Berlin and from Europe. His interest in political theory was nourished by his life, by left-wing proclivities (he had been a member of the socialist labour youth organization) and most prominently by a strong belief in democracy and the dignity of man. Thus, overall Hirschman was a sociologically informed and politically engaged economist, but also and to an equal extent, a socio-political theorist trained in economics. In 1932, he graduated from the Lyce´e Franco-Allemand in Berlin. Of Jewish origins, he emigrated in April 1933 perhaps less because of these origins than because of his political and ideological opposition to the Nazi regime. He studied in Paris (E´cole des hautes etudes commerciales), then on graduating went briefly to the London School of Economics, fought for the Republican side in the Spanish civil war (for three months in 1936), then in the anti-fascist underground in Trieste, Italy. From there, he moved again to Lisbon and southern France, fighting the invasion by German troops in 1940 and helping to organize the exodus that followed after the collapse of the free French army (with Varian Fry in the Emergency Rescue Committee). After World War II (in which he also volunteered for the US Army), he 9

10

Outstanding in this respect: A. Hirschman, Shifting Involvements: Private Interest and Public Action (Princeton / NJ: Princeton University Press, 1982), analysing how waves of political involvement alternate, after disappointment in the political sphere, with waves of retirement into the private sphere and into consumption, (which leads again to disappointment in this sphere and the reverse movement). Outstanding in this respect: A. Hirschman, The Passions and the Interests: Political Arguments for Capitalism before Its Triumph (Princeton / NJ: Princeton University Press, 1977) where, over many decades, Hirschman investigates the political background of economic theory while intellectually dismantling communism and its economic system.

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took part in the Nuremberg tribunals as an interpreter, studied again, this time at Berkeley, and spent from 1953 to 1956 in Bogota, Colombia, working for various development institutions.11 As already explained, the time in which Exit, Voice and Loyalty was written was an extremely dynamic moment for the development of social theory and of law more generally, and few texts so effectively bridge the gap between the standout approaches and traditions that marked these developments. That said, economic theory and legal analysis developed in powerful ways after Coase’s founding text on transaction costs was published in 1960. Important contributions to organization theory and governance research were still to come when Exit, Voice and Loyalty was published, among them Williamson’s governance paradigm, and Jensen and Meckling’s use of the principal-agent model to link property rights ideas, theories of the firm and finance theory.12 Hirschman’s text may seem not only broad in scope but rather vague in execution when compared to these much more focused texts (which also offer more formalized economic model building). Indeed, Hirschman was not only neglected in these key texts, but seldom quoted or relied upon in other subsequent milestones of organizational theory in institutional economics.13 It is possible that Hirschman’s text was too broad in coverage and written in too flowery a style for the tastes of specialists, though Hirschman deliberately chose to write the book this way, and the text owes much of its enduring persuasiveness and freshness to that choice. Beyond the breadth of approaches it brings together, one can discern another influence in the text, one which constitutes an equally powerful paradigm shift for the development of social theory as it relates to law: critical theory, often politically/sociologically inspired, in its various manifestations, linked to the 1968 protest movements both in Europe and in the United States. Law’s role as a political instrument, its relationship to the society around it, and particularly the proper influence of social theory and the appropriate response to social dynamism in law and adjudication – these were hotly debated issues in the years that Exit, Voice and Loyalty was being written, with one important example already discussed in Chapter 1.14 And indeed, the relative efficiency of organizations and markets on the one hand, and discontent with the state and political processes on the other, form the background for the text. The approach of linking economic organization to the political system was a marked feature of German legal theory in the 1960s, as much for the ordo-liberals15 as for the Frankfurt School. Exponents of the latter, however, criticized approaches like Hirschman’s, which aimed only at the reform of institutions, and even those like that put forward by a young Habermas to export 11

12 13

14

15

On Hirschman’s life: J. Adelman, Worldly Philosopher: The Odyssey of Albert O. Hirschman (Princeton / NJ: Princeton University Press, 2013). See Chapters 3, 17 and 20 respectively. Notably, this neglect continues even today: J. Fox, Harvard Business Review: ‘But I’ve never seen the discussion framed in terms of exit and voice (well, I have now after Googling it . . .)’, available at: http://blogs .hbr.org/fox/2012/12/exit-voice-and-albert-o-hirsch.html. It does now get at least brief mention, for example in E. Furubotn / R.Richter, Institutions and Economic Theory (2nd ed., Ann Arbor: The University of Michigan Press, 2005), pp. 298, 495. See Chapters 1 and 27 respectively. Indeed, Hirschman’s text is virtually contemporary to Esser’s concept of Vorversta¨ndnis (preconception). See Chapter 6.

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democratic procedures into all areas of society including the economy,16 for not being radical enough. The text begins with three initial chapters (i) setting out the overall framework of the theory; then discussing (ii) exit and (iii) voice (the focus of discussion here).17 These are then followed by three chapters devoted to prominent examples from politics and economics, and finally by chapter 7 with an exploration of a third rather difficult-to-grasp element, loyalty (again discussed to some extent here). The main question raised by this third element – discussed later in this section – is whether it only reinforces and channels the interplay between the two others, or is self-standing. The last group of chapters are again devoted to examples, modulations and a conclusion (or more of a summary really). The core problem is announced right at the beginning. Hirschman sees that any organization – whether in economics or in politics – carries the seeds of its own decline, however good it may be for the time being. Therefore, according to Hirschman, while some margin of dysfunction is tolerable, even unavoidable, ‘lest the misbehaviour feed on itself and lead to general decay, society must be able to marshal from within itself forces . . . required for its proper functioning’. One of the text’s most fascinating aspects is its strongly optimistic tone, the sense it communicates that reform is always possible, even in the darkest of moments. The text inspires confidence that this is in fact Hirschman’s personal experience. He blames economics for not having given sufficient attention to such marshalling forces – though had he waited one more decade, he might have instead quoted Akerlof and Williamson (and others) for having, however incipiently, taken up the cause. Corporate social responsibility, fuelled as well by a global financial crisis, is now pushing even further. When Hirschman seeks to explain why economics gives so little thought to such mechanisms, he points first of all to the paradigm of rational behaviour (which necessarily ousts defects from the scientific agenda)18 and then to the very core of what he sees as the dominant economic model. He blames economists for stressing exit too exclusively – putting too much emphasis on deserting and thus punishing those players who do not function properly, in product markets, in capital markets etc. In his view, economists stress this option to such a great extent, and see exit as such a prominent solution, that they are blinded to the alternatives. Hirschman sees obvious reasons for deploring this neglect of alternative tools, at least in two particular instances. One is the 16

17

18

M. Horkheimer / T. Adorno, Dialektik der Aufkla¨rung (Frankfurt:Fischer, 1969); J. Habermas / C. Oehler / L. von Friedeburg / F. Weltz, Student und Politik: eine soziologische Untersuchung zum politischen Bewußtsein Frankfurter Studenten (Neuwied: Luchterhand, 1961), introduction; and also J. Habermas, Legitimationsprobleme im Spa¨tkapitalismus (Frankfurt: Suhrkamp, 1973); the core text written by a legal scholar in this respect, closer to Habermas and again tying together both areas, is: G. Teubner, Organisationsdemokratie und Verbandsverfassung: Rechtsmodelle fu¨r politisch relevante Verba¨nde (Tu¨bingen: Mohr Siebeck, 1978). For quotes in the following (unless specified differently), see Hirschman, Exit, Voice and Loyalty, pp. 1–5 and (on loyalty) pp. 76–83. This axiom had already been the object of powerful criticism well before Hirschman, but this criticism was admittedly little noticed in the 1960s and became very ‘present’ only in the 1990s and 2000s. See Chapter 3 on bounded rationality as one of the three core developments of post-neoclassical economic theory, that is, one of the three fundamental turns in economic theory in the last half a century. See also Hirschman, Exit, Voice and Loyalty, pp. 11 et seq. in which he refers to the early literature on bounded rationality.

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existence, even prevalence, of monopoly situations in which exit is not an option. The other instance is that exit may be very expensive (as in the case of a business bankruptcy) and in particular, much more expensive than the alternatives. Only at this point does Hirschman begin to fully develop his partition of the alternatives. He asks whether the alternatives, which are unavoidably alternatives in certain specific situations, should not be seen as alternatives in all cases. That whether voice – the direct formulation of discontent – may not be more generally worth considering in each and every situation; whether, for instance, managers or politicians may not be just as responsive to voice as to exit or vice versa. The economists’ idealized Garden of Eden is then discussed at some length, the idea in the eighteenth and nineteenth centuries that choice, or as Hirschman calls it, exit, not only increases overall welfare, but perfectly disciplines market players – an Eden or Nirvana insofar as it resembles the theory of perfect competition. It is in other words a situation which is depicted in neoclassical economics, without any of the fundamental changes introduced since the beginnings of the 1960s (institutional economics). The most important last element of the overall theory in chapter 1 is then to attribute these modes of reaction – exit and voice – to the two dominant social theories, that is to economics and to political theory, respectively. Each mode is cast as the paradigm of the respective line of thinking; both are thus shown to be somewhat one-sided, with the former expressing criticism less directly and thus being harder to interpret, but at the same time typically costing less (and therefore being often, if not systematically, preferred). Hirschman then proposes ‘to observe [more carefully] how a typical market mechanism [exit] and a typical nonmarket mechanism [voice] work side by side, possibly in harmony and mutual support, possibly also in such a fashion that one gets into the other’s way and undercuts its effectiveness’.19 Anyhow, analysing both in conjunction is telling and necessary. Hirschman not only sets out what he sees as the necessary task: ‘I hope to demonstrate to political scientists the usefulness of economic concepts and . . . ’ vice versa – a description that accords well with our book’s overall thrust for private law theory – but undertakes that task himself. Overall, his book constitutes one of the most impressive arguments against the monolithic application of a single theoretical approach when the regulation of complex societies and life is at stake – the highly convincing core argument being that a completely rational, instantaneously taken decision to exit would eliminate any chance of correction. Loyalty is the element which slows down exit as advocated by economics – and thus triggers adaptation processes. The subsequent two chapters are devoted to a more detailed analysis of the two alternatives, with one focusing on exit and the next on voice. Hirschman’s concern is that ‘the exit option is widely held to be uniquely powerful’ – almost like a ‘biological [law or] process’.20 Hirschman then describes and questions the assumed mechanism: deterioration leads to exit from a firm (or from a firm’s product line), this reduces returns, which in turn makes managers react (a disciplining effect). He questions this account first in recognition that the last step in the chain of causation has never been thoroughly 19 20

Hirschman, Exit, Voice and Loyalty, p. 18, following quote at p. 19. Hirschman, Exit, Voice and Loyalty, p. 21 (emphasis added). For the rest of the paragraph, see pp. 23 and 26 et seqq.

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investigated, but also more fundamentally with numerous additional considerations such as the following. For one, it would already seem obvious that the first steps depend on the price/quality elasticity of the consumers, on whether they react strongly (or not) to changes in quality. Here, for the first time – and this was a strikingly new insight – Hirschman points out that both extremes are particularly dangerous: high inelasticity (no reaction) because no disciplining effect would be triggered, and absolute elasticity because the disciplining effect would be triggered instantaneously and universally in all consumers, leaving managers with no chance to react because of immediate full breakdown. Such 100 per cent alert consumers would potentially even destroy the whole mechanism – an important insight into market mechanism21 underlining the fact that a good mix is required. Equally illuminating is Hirschman’s description of how markets and competition can hide drops in quality. Though this aspect is developed less extensively and less incisively than in Akerlof’s article published the same year,22 he offers an equally intriguing argument, namely for non-transparent markets (in which all firms basically produce the same deficient products or conditions). In such markets, for instance, when all firms offer the same unfair contractual terms, the exit option diverts clients from protesting, because they instead embark on the futile search for alternative offers. Astonishingly, Hirschman – quite distinct from Akerlof – never really approaches an alternative capable of channelling exit, voice, and loyalty: namely, a socially preferable solution that can also be mandated or at least be fostered by law and regulation (for instance in the framework of corporate governance or of remedies in contract law, as will be shown in the rest of this section). This neglect of law also explains a certain sympathy Hirschman seems to have for monopolies. Exit also continues to be an issue in the chapter on voice,23 as both a comparator and as a possible complement to this alternative strategy. The chapter starts with the claim that while ‘the exit option has not been [properly] investigated in detail by economists . . . [it nevertheless dominates] judgments and attitudes towards economic institutions’. And this is true even ‘in this age of protest’. Hirschman wrote in a time of unrest, and identifies the alternative attitude of voice with ‘any attempt at all to change, rather than to escape from, an objectionable state of affairs’. In the introduction, he had already defined voice as a direct formulation of discontent, opposable to indirect, difficult to interpret information made available via exit. In actuality, the dichotomy between voice and exit might also be interpreted as different ways of transferring information, with exit being the mere signal via markets and thus serving as a ‘discovery procedure’ or device (in the Hayekian sense) and voice transferring the information in a way that is more explicit but typically also more burdensome for the actor transmitting the information. The emphasis Hirschman places on voice is thus also a strong (and seemingly optimistic) plea for democratic participation 21

22 23

An insight later developed in many areas. See for instance on customer complaint behaviour C. Fornell / B. Wernerfelt, ‘Defensive Marketing Strategy by Customer Complaint Management: A Theoretical Analysis’, 24 Journal of Marketing Research 337–46 (1987); in the field of political science see S. Rokkan, ‘Dimensions of State Formation and Nation-Building: A Possible Paradigm for Research on Variations within Europe’, in C. Tilly (ed.), The Formation of National States in Western Europe (Princeton / NJ: Princeton University Press, 1974), pp. 562–600. See Chapter 12 on this founding piece of information economics and theory. For quotes in this paragraph, see Hirschman, Exit, Voice and Loyalty, pp. 30–9.

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and involvement in matters of markets and economic processes. This chapter is primarily linked back to the one on exit by the argument already made: too much price/quality elasticity erodes any proactive attempt to change, and – curiously enough – this speaks in favour of a certain margin of apathy on the side of clients, shareholders etc. What economic theory conceptualizes as a problem of efficient allocation of resources and of autonomous choice is interpreted by Hirschman as a catalyst for more tailor-made correction and change. Hirschman distinguishes between two scenarios, one in which voice serves as a complement (or residual) to exit and the other where it serves as a true alternative (that is, as a substitute). Where voice works only as a complement to exit, it can step in where exit would have no effect (monopolies etc.) or where it would not have enough – even here voice being determined by ‘the degree of discontent of the non-exiting customer’. Therefore, in Hirschman’s view, ‘in a preliminary appraisal of the combined effect of exit and voice, the possibility of voice having a destructive rather than constructive effect may . . . be excluded’. Hirschman still adds some precision on the potential of the mix: ‘Considering that beyond a certain point, exit has a destructive rather than salutary effect, the optimal pattern from the point of view of maximizing the combined effectiveness of exit and voice over the whole process of deterioration may be an elastic response of demand to the first stages of deterioration [to send a clear signal!] and an inelastic one for the later stages [to leave time for reaction].’ Here, loyalty comes into play for the first time, and it is stressed that exit also has the disadvantage, from the shareholder’s/client’s side, of being irreversible, insofar as those who exit are excluded from future influence and developments. The readiness to take the voice option can be reduced to the formula that it ‘will be in proportion to the advantage to be gained from a favourable outcome multiplied by the probability of influencing the decision’. Hirschman sees such readiness as stronger within organizations than with respect to products traded on markets (questionable for public companies/stock corporations), and that long-term contracts or contractual relationships may differ in this respect from simple exchange contracts.24 Hirschman does not give practical guidance to the solution of cases and problems. He makes this gap quite explicit when he states that his approach ‘does not come out with a firm prescription for some optimal mix of exit or voice, nor does it wish to accredit the notion that each institution requires its own mix that could be gradually approached by trial and error’.25 It would, however, seem fair to summarize that Hirschman sees organizations (in both the economic and political spheres) as stronger the more they foster both exit and voice in parallel. In this, he may well have been the first to formulate a view that at once seems very majoritarian and is fundamental to current corporate governance research.26 In essence, however, this formulation would seem to be an archetype of societal order, one of the earliest examples being Plato’s trial of Socrates in which the latter, 24

25

26

See Chapter 17 for the parallel (contemporaneous or slightly later) detailed considerations on this phenomenon (by I. McNeil and particularly by O. Williamson). Hirschman, Exit, Voice and Loyalty, p. 124; see also p. 83 where he strongly pleads for a combination of both alternatives. See: Parkinson, Corporate Power, pp. 178–99; W. F. Ebke, ‘Unternehmenskontrolle durch Gesellschafter und Markt’, in O. Sandrock / W. Jaeger (eds.), Internationale Unternehmenskontrolle und Unternehmenskultur (Tu¨bingen: Mohr Siebeck, 1994), pp. 7–35, at 27; P. Mu¨lbert / M.Birke, ‘Das u¨bernahmerechtliche

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sentenced to death, refuses to flee. It is the reason given that is striking. Socrates opines that he has accepted all the benefits Athens had to give and therefore wants to stay loyal to his hometown and even asks as his last will to have a cock offered to Asclepius in his name, signalling deep consent. Hirschman discusses yet another aspect beyond exit and voice, in a later chapter.27 This aspect does not, however, really do away with the clear choice between exit and voice as the prime alternatives. Rather, the ‘coexistence of exit and voice [which would typically otherwise drive each other out] is gained by introducing the concept of loyalty’. Loyalty works so as to counteract the inclination to engage in the cheaper, ‘simpler’ exit route, and is described as ‘the extent to which the customer-members are willing to trade off the certainty of exit against the uncertainties’ of voice and its corrective effect by which ‘it holds exit at bay and activates voice’. Thus, while the book’s title implies three kinds of response, the structure and content of the text presuppose that exit and voice are the primary ‘couple’. Indeed, while these two can be seen as choices or modes of action, loyalty instead describes a state of mind and would thus properly be opposed, for instance, to ‘self-interestedness’; it is ontologically different from the first two. In extreme cases, loyalty could even pair with exit as well, as for instance when Luther exits the Catholic Church in an act of ultimate loyalty to it. Yet Hirschman seems to attribute to loyalty the function (in all normal cases) of helping to engender the public good that results from an engagement in the route of voice – a public good, inasmuch as it is often less costly from an overall social cost perspective, despite being more costly for the individual actors. While he gives no specific prescription, the idea that both exit and voice have their advantages, and that an optimized outcome therefore demands a mix between the two, is revolutionary and very fundamental. As a matter of general guidelines for institutional design, we are unlikely to see the emergence of a more important principle, a lesson that becomes especially clear after the recent decade of financial and account auditing crises.28 By analogy to the theory of evolution, the lesson is equivalent to pointing out that adaptation, and not only selection (as Darwin put it), is important to the survival of a species. Hirschman’s analytical framework would still be more complete had he also stressed that there are situations in which loyalty and voice can also be less costly.

27 28

Behinderungsverbot: die angemessene Rolle der Verwaltung einer Zielgesellschaft in einer feindlichen ¨ bernahme’, 55 Wertpapier-Mitteilungen 705–18 (2001), at 709; a more recent study on the interplay: U A. Hellgardt, ‘Europa¨isches Kapitalmarktrecht und Corporate Governance: Unternehmensu¨berwachung als Ziel der Europa¨ischen Kapitalmarktregulierung’, Festschrift fu¨r Hopt (Berlin: de Gruyter, 2010), pp. 397–422. Today, it is along this line of thinking that specific laws on the internal organization of listed companies is developed (stock exchange company law, ‘Bo¨rsengesellschaftsrecht’): see a short survey in S. Grundmann, European Company Law: Organization, Finance and Capital Markets (2nd ed., Antwerp/Oxford: Intersentia, 2012), para. 617; and see also fn. 28. For quotes in this paragraph see Hirschman, Exit, Voice and Loyalty, pp. 76–8. For a much greater emphasis on voice mechanisms in the EU legislative agenda over the last decade, see Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies, O.J. EC 2007 L 184/17; Green Paper of 5 April 2011 on Corporate Governance, COM (2011) 164 final; Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, O.J. EU 2017 L 132/1.

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These costs are at the core of Williamson’s research on long-term relationships,29 and can be quite extreme in cases of emigration – given the costs of changing culture, language and potentially profession, which makes it understandable that voice is given more attention in political science research as well as in cases of exiting family or marriage. The case reported in the introduction – and more generally the Delaware case line on takeovers – would seem to be inspired by a similar, and rather pragmatic, mix of fostering exit and loyalty (voice) at the same time. It would allow management (of the target company) not only to run the company, but also to give some guidance in existential cases such as takeovers. While it may not frustrate a bid when a large number of shareholders would seem inclined to accept it, taking at least some measures to advocate continued independence from the bidder would seem acceptable. If one considers that bidder companies and their management may also have adverse motives (such as empire building or even the intention of looting the target company) and if one also considers that approximately 50 per cent of takeovers are undone after three years,30 these might indeed be arguments that speak in favour of a good mix of loyalty and exit. This may be even more the case whenever an outside judge of particularly high expertise is called upon to have a look at the reasonableness of the bid. Exit, Voice and Loyalty has proved to be highly influential in a wide number of fields, from comparative politics31 and urban studies32 to social psychology,33 political economy and labour economics34 to mention only a few.35 While it was praised when it was 29 30

31

32

33

34

35

See Chapter 17. See, for example, A. Dringoli, Mergers and Acquisition Strategies: How to Create Value (Cheltenham: Edward Elgar, 2016), at pp. 14, 163–4. See, for example, G. O’Donnell, ‘On the Fruitful Convergence of Hirschman’s Exit, Voice and Loyalty and Shifting Involvements: Reflections From the Recent Argentine Experience’, in A. Foxley / M. McPherson / G. O’Donnell (eds.), Development, Democracy and the Art of Trespassing: Essays in Honor of Albert Hirschman (Notre Dame / IN: Notre Dame Press, 1986), pp. 249–68; M. H. Ross, ‘Political Organization and Political Participation: Exit, Voice and Loyalty in Preindustrial Societies’, 21 Comparative Politics 73–89 (1988); W. L. Eubank / A. Gangopadahay / L. B. Weinberg, ‘Italian Communism in Crisis: A Study in Exit, Voice and Loyalty’, 2 Party Politics 55–75 (1996); J. Kato, ‘When The Party Breaks Up: Exit and Voice Among Japanese Legislators’, 92 American Political Science Review 857–70 (1998); see also a similar dichotomy in more general works such as E. Fromm, To Have or to Be (New York: Harper & Row, 1976). D. Young, ‘Exit and Voice in the Organization of Public Services’, 13 Social Science Information 49–65 (1974); K. Dowding / P. John, ‘The Three Exit, Three Voice, and Loyalty Framework: A Test with Survey Data on Local Services’, 56 Political Studies 288–311 (2008). C. Rusbult / I.Zembrodt / L. Gunn, ‘Exit, Voice, Loyalty and Neglect: Responses to Dissatisfaction in Romantic Involvements’, 43 Journal of Personality and Social Psychology 1230–42 (1982); D. Farell, ‘Exit, Voice, Loyalty, and Neglect as Responses to Job Satisfaction: A Multidimensional Scaling Study’, 26 Academy of Management Journal 596–607 (1983). R. Freeman, ‘Political Economy: Some Uses of the Exit-Voice Approach, Individual Mobility and Union Voice in the Labour Market’, 66 The American Economic Review. Papers and Proceedings 643–74 (1976); R. Freeman, ‘Individual Mobility and Union Voice in the Labour Market’, 66 American Economic Review 361–8 (1976); R. Freeman / J. Medoff, What Do Unions Do? (New York: Basic Books, 1984); P. KurrildKlitgaard, ‘Opting Out: The Constitutional Economics of Exit’, 61 American Journal of Economics and Sociology 123–58 (2002). For further sources of studies, see K. Downing / P. John / T. Mergoupis / M. van Vugt, ‘Exit, Voice and Loyalty: Analytic and Empirical Developments’, 37 European Journal of Political Research 469–95 (2000); U. Arnswald, Hirschman’s Theory of Exit, Voice, and Loyalty Reconsidered (Heidelberg: European Institute

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published for its originality and its elegant synthesis of sociological, political and economic thought, it also received considerable criticism. Is Hirschman’s terminology not too ambiguous? Is the concept of loyalty not rather unclear, even illogical and inconsistent? Can a model so simple based on only two options really be an adequate description of reality? Each of these criticisms was levelled against the book.36 At any rate, while its merits may remain disputed, Exit, Voice and Loyalty was a direct inspiration for a large number of essays and studies, especially in the 1970s and 1980s. It continues to have relevance in the twenty-first century, not least of all for being one of the most successful examples of interdisciplinary research in the social sciences.37 As for law, while few important papers refer to Hirschman’s work directly,38 the key distinction in the broad corporate governance debate between external and internal governance, along with their interplay and the right mix between the two,39 is nothing more than Hirschman’s analytical toolkit applied to a key area of society and law. If promoting loyalty by means of law and regulation is an approach more common to Continental Europe than to the United States (and other regions), the probably largest pan-European reform in contract law quickly comes to mind. It has been the basis of the largest reform of the German Civil Code and more recently also of the French Code Civil in contract law. This reform introduced the right of the seller in the case of poor performance to have a ‘second chance’ or ‘second try’. This solution – with all of its economic advantages, with the effect of slowing down exit – is very much about loyalty. This is indeed the solution taken in the EC Consumer Sales Directive of 1999 (now EU Sales Directive of 2019), more clearly still than in the prior model provided by the UN Sales Convention of 1980. Many other institutions could very fruitfully be analysed using this toolkit, ranging from the different regulatory strategies possible with respect to corporate social responsibility (CSR)40 to the actions taken by hedge funds. III After undergraduate studies in economics, Manne received his postgraduate education in law and, indeed, his initiation into academia at Chicago and at Yale. After tenure in several universities, in 1986 he became dean of the law school at George Mason University, and thereafter transformed it into one of the first genuine law and economics faculties. Manne famously opposed the ban on insider trading in the 1960s, characterizing it as

36 37

38

39 40

for International Affairs, 1997); R. Brubaker, ‘Frontier Theses: Exit, Voice, and Loyalty in East Germany’, 18 Migration World 12–17 (1990). Arnswald, Hirschman’s Theory of Exit . . . (last fn.). C. Offe, ‘Exit, Voice, and Loyalty’, in D. Kaesler / L. Vogt (eds.), Hauptwerke der Soziologie (2nd ed., Stuttgart: Alfred Kro¨ner, 2007), pp. 197–200, at 200; K. Downing / P. John / T. Mergoupis / M. van Vugt, ‘Exit, Voice and Loyalty: Analytic and Empirical Developments’, 37 European Journal of Political Research 469–95 (2000). J. Coffee, ‘Class Action Accountability: Reconciling Exit, Voice, and Loyalty in Representative Litigation’, 100 (2) Columbia Law Review 370–439 (2000); as well as B. Baysinger / H. Butler, ‘Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition’, 1 Journal of Law, Economics, & Organization 101–24 (1985); and, in European law, see Weiler, ‘Transformation of Europe’. See especially Grundmann, European Company Law, § 14. See Chapter 22.

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a ‘victimless crime’.41 He thereby became one of the most prominent voices on this core issue, probably the most hotly disputed in early capital market law. That said, his arguments neither convinced the US legislature nor prevented the much later passage of the ban on insider dealing in the EU42 – and for good reason.43 More importantly, however, and very much contemporaneously, he became one of the key protagonists in two worldwide trends which were to shape the following five decades. The first has to do with areas of the law. While, as a scholar hailing from Chicago and Yale, he was of course aware of the seminal law and economics papers which had their focus on torts and nuisance cases (written by Coase and Calabresi),44 and while he remained faithful to the transaction cost approach, he made a fundamentally new step in another respect. He became, at this very early stage, one of the few protagonists of a law and economics approach outside of tort and nuisance and, more precisely, within a core area of business law.45 Second, he was among the very first to formulate the functional link between capital market (securities) law and company (corporate) law that has since become so dominant (first in the United States, over the last three or four decades also in all other market economies, namely in the European Union in particular). While his treatment of insider dealing remains part of the former alone, takeover law – the subject of the article analysed here – straddles the fence between the two fields and constitutes the very archetype of a functional link between the two areas of law.46 41

42

43

44 45

46

This characterization in: H. Manne, ‘Insider Trading and Property Rights in New Information’, 4 Cato Journal 933–57, at 937 (1984); the basic criticism made earlier in: H. Manne, Insider Trading and the Stock Market (New York: The Free Press, 1966), pp. 76–91, 111–58 et passim. For similar positions among other Chicago scholars or scholars with strong Chicago influence: D. Carlton / D. Fischel, ‘The Regulation of Insider Trading’, 35 Stanford Law Review 857–95 (1983), at 866–72. In the US: 40 SEC 907 (1961); several years later supported by 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). In the European Union first: Council Directive 89/592/EEC of 13 November 1989 coordinating Regulations on Insider Dealing, EC OJ 1989 L 334/30, then: Directive 2003/6/EC of the European Parliament and of the Council of 28 Jan. 2003 on Insider Dealing and Market Manipulation (Market Abuse), EC OJ 2003 L 96/16; today: Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing . . ., EU.OJ 2014 L 173/1; Directive 2014/ 57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive) EU.OJ 2014 L 173/179. The core problem with insider dealing is that the counterparts – professional traders – systematically lose out and therefore charge a risk premium, which accordingly and systematically increases the cost of raising capital. Gains are thus privatized, losses socialized: see P. Fenn / A. McGuire / D. Prentice, ‘Information Imbalances and the Securities Markets’, in K. Hopt / E. Wymeersch (eds.), European Insider Dealing: Law and Practice (London: Butterworths, 1991), pp. 3–19, at 8; H. Schmidt, ‘Insider Regulation and Economic Theory’, ibidem, pp. 21–37, at 24 et seq. and 26 et seq. See Chapters 3 and 15. In company and capital market law the most influential overall treatises are probably F. Easterbrook / D. Fischel, The Economic Structure of Corporate Law (Cambridge / MA: Harvard University Press, 1991, reprint 1996); R. Posner / K. Scott, Economics of Corporation Law and Securities Regulation (Boston: Little, Brown, 1980); and more recent M. Ruffner, Die o¨konomischen Grundlagen eines Rechts der Publikumsgesellschaft: ein Beitrag zur Theorie der Corporate Governance (Zurich: Schulthess, 2000); also O. Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985). Embedded in a more broadly theory-based, partially comparative analysis: R. Kraakman et al., The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd ed. Oxford: Oxford University Press, 2017). The areas of tension between company law and capital market law are the subject of the two large monographs by S. Kalss, Anlegerinteressen: der Anleger im Handlungsdreieck von Vertrag, Verband, und

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This short, very dense article is nonetheless rather easy to read for lawyers, and – in a typically American way – starts out with a complete heresy. While the whole article develops the concept of a market for corporate control and while it does so by distinguishing and discussing in turn the three main mechanisms used to change the allocation of control in the United States (proxy fights, direct share purchases and mergers),47 the ‘scandalon’ comes right at the beginning. It is about antitrust law. This field of regulation, the paradigm of market regulation (and in the United States of the 1960s still somewhat of a ‘sacred cow’), is portrayed by Manne not only as in retreat, but also as being grossly dysfunctional at its core. Manne characterizes horizontal mergers between competing companies as, at once, the phenomenon most rigorously limited by antitrust law (per se interdiction), and as particularly important for welfare increase. Moreover, he argues, this is the case not only where one firm is likely to go bankrupt in the near future, but in general. Mergers are no longer depicted primarily as a danger for balanced market structures, but as having the potential for significant saving of social costs. More precisely, he formulates the task as a matter of inquiring into which of the two possibilities is more likely to apply to the facts of the situation under assessment. This focus on the comparative assessment is very similar to the starting point which Williamson would take up soon thereafter when developing his concept of (contract) governance48 and can – as in Williamson – be seen as one of the first, most significant steps towards a more economic approach to antitrust law.49 Manne even goes so far as to forecast that in economically strong market segments, allowing mergers between competing firms would do away with costly bankruptcies altogether. Hereby, mergers are portrayed as having a single important aim: ‘shifting assets from failing to rising firms’.50 The rest of the article is devoted to mergers and similar instruments. Manne’s genius lies in uniting these three instruments – in principle – under the single rubric of a market for corporate control, before discussing the three instruments used in detail: ‘The basic proposition advanced . . . is that the control of corporations may constitute a valuable

47

48 49

50

Markt (Vienna: Springer, 2001); P. O. Mu¨lbert, Aktiengesellschaft, Unternehmensgruppe und Kapitalmarkt: die Aktiona¨rsrechte bei Bildung und Umbildung einer Unternehmensgruppe zwischen Verbands- und Anlegerschutzrecht (2nd ed., Munich: Beck, 1995, 1996). For more recent surveys on this issue, see K. Heiser, ‘Can Capital Market Law Approaches be Harmonised with Essential Principles of Company Law?’, 11 European Business Law Review 60–82 (2000); J. Garrido Garcı´a, ‘Company Law and Capital Markets Law’, 69 RabelsZ 761–86 (2005). On these three mechanisms, see, in turn, Manne, ‘Mergers and the Market for Corporate Control’, 114 et seq., 115 et seqq., 117 et seqq. See Chapters 3 and 17. Groundbreaking also O. Williamson, ‘Economies as an Antitrust Defense: The Welfare Tradeoffs’, 58 American Economic Review 18–36 (1968). For the more economic approach, see more generally: W. Kip Viscusi / J. Harrington / J. Vernon, Economics of Regulation and Antitrust (4th ed., Cambridge /MA: MIT Press, 2005); S. Bishop / M. Walker, The Economics of EU Competition Law: Concepts. Application and Measurement (4th ed., London: Sweet & Maxwell / Thomson Reuters, 2019); D. Schmittchen / M. Albert / S. Voigt (eds.), The More Economic Approach to European Competition Law (Tu¨bingen: Mohr Siebeck, 2007); J. Farrell / C. Shapiro, ‘Horizontal Mergers: An Equilibrium Analysis’, 80 American Economic Review 107–26 (1990). Manne, ‘Mergers and the Market for Corporate Control’, pp. 111 et seq. (also for the quote in the next paragraph) and see also p. 119.

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asset . . . ’ – valuable not only for the managers who compete for the position of control, but for the shareholders competing for the position which allows them to nominate their management (Manne, however, is not very explicit about this distinction). In the general section on ‘corporate-control market[s]’, Manne continues his pretence of being concerned with the antitrust implications of mergers. He places, however, the bulk of the focus on the ultimately more original (and ultimately more influential) second branch of his argument, concerning the governance of the firm, that is, on genuine company law questions. With a view to the importance of this mechanism, the ‘most important [starting point is] . . . the alleged separation of ownership and control in large corporations [shareholders’ apathy in the Berle-Means corporation]. . . . But . . . the market for corporate control gives to these [allegedly powerless] shareholders both power and protection’.51 This is a complete reversal of the mainstream vision extant at the time. From the prior image of allegedly powerless shareholders in companies with dispersed ownership, he restores an image of shareholders as a potent group of actors. That reversal perhaps best explains why one ‘magic’ instrument which helped to implement this shift beginning in the 1980s dominated US corporate law debates and, later on, EU company law development as well, for more than a decade. Indeed, Manne characterizes takeovers/ mergers as the instrument of collective action which restores lost power back to shareholders. Manne depicts a three-step mechanism in action, which elegantly illustrates how the interplay between exit and voice described by Hirschman plays out in one particular type of organization, shareholder-owned corporations with dispersed ownership. Poor management performance leads to exit (in product markets, by customers); this affects returns and thereby reduces stock prices; finally, this reduction increases the potential for takeover/merger, which would oust the poorly performing management (exit in the control question, namely by shareholders).52 This in turn has an effect for shareholders (empowering them to a very fundamental action, that is, change of corporate control). It is true that later developments may have belied Manne’s analysis in many respects (e.g., genuine takeovers turned out to be too costly in most cases, making mergers preferable; shareholders of the target company who sold early would typically lose because they could not benefit from potential future price increases). And the view that fiduciary duties, along with all the efforts exerted by the Securities Exchange Commission (SEC), that is, imposition of capital market law regulation, were almost meaningless besides takeovers grossly overstates the role of the latter. The basic mechanism, however, has indeed proven to be among the most powerful and meaningful instruments of corporate governance: ‘But 51

52

Manne, ‘Mergers and the Market for Corporate Control’, p. 112, all other quotes in this paragraph on pp. 112 et seq.; on Berle-Means, see Chapter 20. In an alternative form of arrangement of the transaction (quite common in practice), shareholders of the target company receive in exchange for their shares in the target company shares in the bidder company. In this case, their voice in the target company is replaced by their voice in the bidder company (and indirect voice also for the target company which is now a subsidiary of the bidder company). The concept described by Manne has been applied to private control transactions mainly by F. Easterbrook / D. Fischel, ‘Corporate Control Transactions’, 91 Yale Law Journal 698–737 (1981/1982), especially 714–21; for a concise account of how the mechanism is seen today (with criticism and regulatory approaches): Grundmann, European Company Law, § 30 paras. 4 et seqq., 40 et seqq.; M. Naniwadekar, ‘The Law of Agency as Applied in Company Transactions’, 5 European Company and Financial Law Review 280–304 (2008).

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the greatest benefits of the takeover scheme probably inure to those least conscious of it. Apart from the stock market, we have no objective standard of managerial efficiency.’ Thus, those who benefit the most are shareholders who do not act despite having the opportunity to do so, via their receipt of valuable information. In short, the market for corporate control acts as a powerful monitoring device on their behalf – a huge advantage that works ‘independent of . . . economies of scale’. It is difficult to imagine a closer link between potential exit and the direct influence on the organization typically associated with voice. At the same time, these explanations show already that there are not many articles which so often state single facts and developments in a questionable way, but which at the same time, with respect to overall model building, are so innovative, influential and illuminating. At the same time, one offhand statement gives reason for alarm: takeovers are, according to Manne, ‘one of the most important “get-rich quickly” opportunities in our economy’. This statement alone raises the question of whether regulation is needed, and if so, what kind. Manne distinguishes and discusses in turn three instruments which facilitate the reallocation of corporate control: proxy fights, direct share purchases and mergers. In the tradition of Coase (and others), Manne subjects them to a comparative cost analysis. The first is proxy fights, in which competing players (current management and an opposing group) each solicit proxies from shareholders with the intent of winning a vote at a general meeting, a tool traditionally much more used in the United States, which could be classified as using the voice option. Manne sees this instrument as being flawed by one basic and very relevant practical issue: ‘While the incumbents finance the bulk of their proxy solicitation expenses from corporate funds, the outsider will have this advantage only if he wins.’53 This is an instance that shows the difference that can be made by regulation (which is in fact imposed, for example, in the UK in this respect).54 The second instrument is direct purchase of shares, an option which Manne portrays as costly and not very relevant in practice (a highly questionable proposition when he was writing, which has only become more so). Such purchases can take three forms: accumulation through market purchase of dispersed stock, direct purchase from large block owners and publicly, proactively making a tender offer to a large number of shareholders. The third and last of these variations on share purchases is the most complex. Here the key is that the decisions are made solely between the management of the bidding company and the shareholders of the target company – with the former formulating the bid (offer) price to be paid, and the latter deciding whether or not to sell (individually, and on condition that the threshold fixed by the bidder is reached). Shareholders of the company making the offer, on the other hand, typically have no right to vote on the issue, and the management of the target company is likewise restricted in its response to the bid, to the point, as in Europe, of 53

54

Manne, ‘Mergers and the Market for Corporate Control’, p. 115, all other quotes and ideas in this paragraph on pp. 115 et seqq.; on Berle-Means, see Chapter 20. On the rules see P. Davies / S. Worthington, Gower & Davies: Principles of Modern Company Law (10th ed., London: Sweet & Maxwell, 2016), pp. 481–5; Grundmann, European Company Law, § 13 paras. 12–20; and more broadly S. Grundmann, ‘The Renaissance of Organized Shareholder Representation in Europe’, in Perspectives in Company Law and Financial Regulation: Essays in Honour of Eddy Wymeersch (Cambridge: Cambridge University Press, 2009), pp. 183–99; See also arts, 3a and 3b of Directive (EU) 2017/828, EU of 2017 L 132/1.

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a complete ban on defensive measures (‘duty of neutrality’). Delaware case law – as in the Unitrin case – is more permissive. In this context, Manne then discusses control premia (higher prices offered to those offering large packages or to those tendering first, until a certain threshold is reached) and expresses strong opposition to any regulation of such premia – such as a rule of equal treatment, or the mandatory bid rule introduced in Europe in 2004.55 The core issue is whether the effect of such regulation is limited to increasing the cost of using an instrument and thereby reducing its beneficial effects (‘results of such a rule could be most unfortunate’ according to Manne). Conversely, such regulation might, however, also work to filter out the good tender offers (i.e., those aimed at increasing productive synergies and management efficiencies, and whose authors are therefore ready to pay for all shares of the target company). Less desirable ones that would ultimately be financed by looting of remaining minorities would be rendered less likely to happen (some sympathy for this latter view can be found in Manne’s text as well).56 The main issue addressed only later on, and not broached in Manne’s article, is probably the extent to which general company law rules hinder or enhance the takeover mechanism (and thereby also its disciplining effect, as might, for instance, a rule forbidding (or limiting) disproportionate voting power.57 Moreover it is worth noting that these questions probably figured quite prominently when it came to the discussion about competition for the best regime for incorporation (‘law as a product’).58 When compared with Manne’s proposals, the Unitrin case shows two main lines of argument. It is clear, albeit only implicitly, that the court sees the issue as one of general company law – only slightly tightening it by adding the proportionality test as an additional 55

56

57

58

Manne casts the dominant rule in the United States to be one that places no regulations on the control premium – but he seems to reveal a bit of bias in failing to mention the most important case in Californian state case law, which points in the opposite direction: Jones v. Ahmanson (1969) 1 C3d 93. Conversely, Art. 3 of the EU Takeover Directive (fn. 2) imposes a mandatory offer to all remaining shareholders once a bidder passes the threshold of 30 per cent of voting stock. See for a concise description: Grundmann, European Company, § 30 paras. 18–38 (for a comparative survey of the law on defensive measures and other actions taken by the management of the target company, see also paras. 39–54). Manne, ‘Mergers and the Market for Corporate Control’, p. 120. In more detail, see J. Reul, Die Pflicht zur Gleichbehandlung der Aktiona¨re bei privaten Kontrolltransaktionen: eine juristische und o¨konomische Analyse (Tu¨bingen: Mohr Siebeck, 1991), pp. 188 et seqq., especially 238–50; P. Davies, ‘The Notion of Equality in European Takeover Regulation’, in J. Payne (ed.), Takeovers in English and German Law (Oxford: Hart, 2002), pp. 9–32, at 23 et seq.; K. Hopt, ‘Modern Company and Capital Market Problems: Improving European Corporate Governance after Enron’, 3 Journal of Corporate Law Studies 221–68 (2003), at 259; E. Wymeersch, ‘The Mandatory Bid: A Critical View’, in K. Hopt / E. Wymeersch (eds.), European Takeovers: Law and Practice (London: Butterworths, 1992), pp. 351–68, at 356–9; today the mandatory bid is also seen positively by most authors in law and economics: see S. A. Ravid / M. Spiegel, ‘Toehold Strategies, Takeover Laws and Rival Bidders’, 23 Journal of Banking & Finance 1219–42 (1999), at 1237 et passim; H. Rau¨ konomische Analyse obligatorischer U ¨ bernahmeangebote’, 59 Die Betriebswirtschaft 763–77 Bredow, ‘O (1999); also L. Bebchuk, ‘Efficient and Inefficient Sales of Corporate Control’, 109 Quarterly Journal of Economics 957–93 (1994). Groundbreaking: S. Grossman / O. Hart, ‘One Share/One Vote and the Market for Corporate Control’, 20 Journal of Financial Economics 175–202 (1988); and very prominent the so-called Golden Shares case law decided by the ECJ, see S. Grundmann / F. Mo¨slein, ‘The Golden Share – State Control in Privatised Companies: Comparative Law, European Law and Policy Aspects’, 4 Euredia 623–76 (2004); and Grundmann, European Company, § 25 para. 30 and § 30 paras. 39–54 (on other takeover impediments). See Chapter 23.

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measure of scrutiny. This view, in the United States, led to negating a general duty to make a general bid to all shareholders (‘mandatory bid’), but rather to a proportionality test in this respect (scrutiny of abnormal control premia).59 With respect to defensive measures taken by the management, the focus of the case, the court would seem to see regulation to be mandated and this well beyond the general company law standard, that is, a mere business judgement rule (with scrutiny of good procedure, but without more intense scrutiny of substance). While Manne’s plea is against regulation in this case, some regulation would, on the other hand, further the point that Manne is making. It would forbid to frustrate the mechanism that Manne calls the ‘market for corporate control’. As has been said when discussing Hirschman’s text, the Delaware Court can be seen to be situated half way between no regulation (as advocated by Manne) and an absolute ban on defensive measures (as in the EC Takeover Directive, albeit on an optional basis for member states). The fact that this issue is not broached is of great interest. Such takeovers take place on capital markets and are subject to typical capital markets duties, namely standardized information rules, but they also have effects on the organization of the company, in the form of a change of directors (and, in the EU directive, through changes in the company charter with respect to voting power as well).60 In the entire article, but in this and the next subsection in particular, Manne clearly adheres to a trend which no longer treats the firm as a black box. In a black box vision of the company, the latter’s relevance is limited to its role as an actor in the market (see Chapters 17 and 19). Manne instead understands the firm as its own kind of a market, in which individual players act according to their own incentives, and the firm’s action emerges as a composite from the interplay among individual decisions.61 The final subsection is on mergers in the narrower sense, in which two companies are combined into a single entity, thus typically ousting the management of the company which is merged into the other. Admittedly, AngloAmerican terminology often includes takeovers in this category, and even Manne is not always clear about the distinction, particularly when he claims that direct share purchases are rare. Manne, however, does not focus on the most telling example for fights about corporate control, because he focuses on mergers in the narrow sense and these are not effected through a purchase at the share level, between shareholders, but through a fundamental change in the company, requiring in virtually all jurisdictions the consent of both boards and of a qualified majority of shareholders at a general meeting of each 59

60 61

For Delaware law in particular, see Rabkin v. Philip Hunt Chemical Corp., 498 A.2d 1099, 1106 s. (Del. 1985); for an analysis see R. J. Gilson / R. Kraakman, ‘Delaware’s Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?’, 44 The Business Lawyer 247–74 (1989); and among the Federal Courts, applying state law, also the very influential 2d Circuit, Perlman v. Feldmann, 219 F.2d 173, 178 (2d Cir. 1955). An exception with its general mandatory bid is California, especially the decision in Jones v. Ahmanson & Co., 460 P.2d 464 (Cal. 1969). See Arts. 10, 11 of the Takeover Directive (fn. 2). For more detail on the two concepts and their consequences see Chapter 19. Groundbreaking: R. Coase, ‘The Nature of the Firm’, 4 Economica 386–405 (1937); then A. Alchian / H. Demsetz, ‘Production, Information Costs, and Economic Organization’, 72 The American Economic Review 777–95 (1972); S. Cheung, ’The Contractual Nature of the Firm’, 26 Journal of Law and Economics 1–21 (1983); for more detail on this network theory of the firm, see Chapter 19.

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company. What is inconsistent here, however, is the following. The monitoring effects of mergers and acquisitions stem from the potential for inefficient management to be forced to resign, that is to say they are intrinsic solely in the case of genuine hostile takeover, which thus fundamentally distinguishes this mechanism from mergers with the consent of both boards. In Manne’s explanations, this remains rather vague. And, of course, in practice, hostile bids can end up as mergers or as friendly takeovers, when the target company’s incumbent management succumbs to the pressures of the bid. Manne even contradicts his basic monitoring scheme by pleading in favour of mergers in the technical sense. He does so by pointing to the fact that the incumbent management in the target company has valuable information which can be saved for the company only if they retain some position in the larger unit created. He thus lends his support to mechanisms such as golden handshakes etc. – very fiercely disputed today from both an efficiency and a fairness perspective.62 The conclusion contains one new point: the question arises who will typically win the benefits from the acquisition (the shareholders of the bidding company and/or of the target company), and under what circumstances.63 This is indeed a core question, and Manne is right in concluding that in his time ‘the study of economics of the market for corporate control [was] still in its infancy’.64 In fact, it was Manne himself who had given birth to this study by setting out the analytical framework for the first time. IV The position of the shareholder(s) – or any other group of persons in organizations who should have the final say, but to a certain extent are afflicted by the problem of collective action and apathy – is of prime importance for any organization and for society as a whole. This position has indeed been subject of both a large literature and intensive debate over many decades. Since Manne’s text was published, his analytical framework has been the benchmark for a core mechanism to address this problem in business organizations, while the core alternatives have been set out more broadly – and here for the political sphere, that is, the functioning of states as well – by Hirschman. Governance studies of the business enterprise and of the state are unthinkable without these two contributions. In 62

63

64

See, for example, D. Yermack, ‘Golden Handshakes: Separation Pay for Retired and Dismissed CEOs’, 41 Journal of Accounting and Economics 237–56 (2006); L. Bebchuk / J. Fried, Pay without Performance: The Unfulfilled Promise of Executive Compensation (Cambridge / MA: Harvard University Press, 2004), pp. 87–112. And for golden parachutes: R. Lambert / D. Larcker, ‘Golden Parachutes, Executive Decision-making, and Shareholder Wealth’, 7 Journal of Accounting and Economics 179–203 (1985); C. Lefanowicz / J. Robinson / R. Smith, ‘Golden Parachutes and Managerial Incentives in Corporate Acquisitions: Evidence from the 1980s and 1990s’, 6 Journal of Corporate Finance 215–39 (2000); J. Hartzell / E. Ofek / D. Yermack, ‘What’s in It for Me? CEOs Whose Firms Are Squired’, 17 The Review of Financial Studies 37–61 (2004). Typically, there is a considerable increase in stock price on the target company’s side, and quite a drop in prices on the bidder company’s side: F. Easterbrook / D. Fischel, The Economic Structure, pp. 199 et seq.; H. Eidenmu¨ller, ‘Kapitalgesellschaften im Spiegel der o¨konomischen Theorie’, 56 Juristenzeitung 1041–51 (2001), at 1047. Manne, ‘Mergers and the Market for Corporate Control’, p. 120 (emphasis added).

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all this, they are at the same time divergent and complementary. Both texts reach well beyond the defeatist position of Berle and Means that shareholders are bound to apathy and inefficacy. Both seek to identify counteracting measures. Indeed, one of the major trends of the century preceding both texts is that the voice of shareholders and, it might be said, those situated on the demand side of markets more generally had been massively eroded (as described by Berle and Means, see Chapter 20). Conversely, it might be said of the decades since that, from a legal policy point of view, few issues were as high on the agenda worldwide as re-empowering principals, namely shareholders and consumers. While, however, Manne concentrates on a law and economics approach and is in principle rather opposed to regulation, trusting instead in the benevolent force of markets for corporate control, Hirschman’s approach is methodologically broader and sees the interplay between exit and voice as key. It is therefore astonishing that he does not point to regulation and law as well, especially given that so many legal instruments can be better assessed within Hirschman’s analytical framework. Astonishingly the Delaware approach on takeovers as reflected in the Unitrin case – typically considered to be rather lax and responsive to managers’ interests – would seem to reflect this stance most closely. Manne on the other hand seems to stand almost exclusively on the side of exit, though he also stresses that those who remain invested in the company, perhaps more than any other group, stand to benefit from the takeover mechanism that he analyses. In the final analysis, however, the two texts complement each other in a rather ideal way. While Hirschman observes that loyalty typically improves the prospects for the effective use of the voice option, Manne shows that the threat of exit, by working so powerfully to discipline managers, operates so as to influence management and acts as a form of voice. In all of this, both Hirschman’s and Manne’s arguments remain very much at the instrumental level: neither of them argues from a moral philosophy point of view, and Hirschman, even more than Manne, seems even ambivalent (or at least enigmatic) about the normative stakes at play. The texts complement each other, furthermore, not only insofar as Manne’s concept offers such a striking – and so practically relevant – example of the interplay between voice and exit that is the bread and butter of Hirschman’s analysis, nor solely because together they surely warrant greater methodological richness. There is an additional core reason: both authors build their analysis using examples drawn from the two most important groups of principals, in Manne’s case the shareholders/investors, and in Hirschman’s consumers and clients (although focusing on reform of organizations, he could very well have used shareholders as well). Hirschman’s book can be understood as a strong plea for consumer sovereignty, for treating consumer welfare as the ultimate goal of market regulation, instead of total welfare used by standard economic theory as the ultimate benchmark.65 It is astonishing that in the area of company and capital market law 65

Groundbreaking on consumer welfare: W. Hutt, ‘The Concept of Consumers’ Sovereignty’, 50 The Economic Journal 66–77 (1940); today F. Esposito, Uniting Law and Economics in Diversity: Allocative Efficiency, EU Antitrust and Consumer Law (Cheltenham: Edward Elgar, in press); for total welfare, predominantly used as the ultimate benchmark in economic theory, see reference in chapter 6 fn. 64; for a comparison and parallel treatment of consumer welfare as the ultimate benchmark on the one hand and of the shareholder welfare approach/principal-agent theory on the other, see S. Grundmann / F. Esposito,

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shareholder sovereignty can be seen as the mainstream view (in legal theory and in economic theory, in the United States and in Europe alike), while this is not the case in the area of consumers and the demand side of the market. Reaching beyond the dichotomy of these two groups of persons, then, is a promising path for future research. It is possible, of course, to analyse the disciplining effect of consumers (product markets) and shareholders (capital markets) together, both equipped with voice and exit options, as was done for instance by Alchian and Demsetz in one of the earliest pieces that also referred to the market of corporate control.66 And one can also extend the network of considerations to take into account the multiplicity of available voice and exit options, a very common approach in today’s corporate governance debate and one that was already particularly prominent in the 1980s and early 1990s, especially in discussions of Japan (which was enjoying particular economic success at the time).67

66

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Investor-Consumer or Overall Welfare: Searching for the Paradigm of Recent Reforms in Financial Services Contracts, EUI Working Papers Law 2017/05; survey in A. Lerner, ‘The Economics and Politics of Consumer Sovereignty’, 62 American Economic Review 258–66 (1972); see also H. Albert, O¨konomische Theorie als politische Ideologie (Tu¨bingen: Mohr Siebeck, 2009; 1st ed. published 1959 as O¨konomische Ideologie und politische Theorie). A. Alchian / H. Demsetz, ‘Production, Information Costs, and Economic Organization’, 62 The American Economic Review 777–95 (1972). M. Aoki, Toward a Comparative Institutional Analysis (Cambridge / MA / London: MIT Press, 2001).

22 Organizations and Public Goods Hans-W. Micklitz

a topic and materials I This chapter investigates the triangular relationship between public goods,1 varieties of capitalism (VoC)2 and corporate social responsibility (CSR). It brings two strands of discourse together which usually do not interact and certainly not in relation to their economic implications. Varieties of capitalism do not seem to say much about public goods, at least not in terms of economics. In a legal perspective though, the VoC discourse focuses on the institutional and organizational conditions of market economies, which determine who is in charge of public goods: the businesses, the state, or both. This suggests that the type of market economy provides insights on whether the prime responsibility is supposed to lie with the state or with private companies. The story then goes that EU member states are more ready to accept responsibility for the public good than US states. There are many faces to CSR. In a strong market-liberal version it focuses on economic efficiency and shareholder return. It is open to promoting all kinds of public goods: sustainability, human rights, non-discrimination, health and safety at work or product safety; and the addressees of CSR are companies and private parties. In a market-liberal perspective, business will accept CSR as a means to increase the revenues of the company through the promotion and integration of public goods. However, CSR is not limited to market efficiency and increase of revenues. Companies may accept the promotion of public goods even if it carries no economic benefits. The question then is whether there is a link between the type of economy and the type of CSR; and whether and to what extent the role and function of the state in the economy affects the behaviour and the commitment of private parties. 1

2

For the sake of the argument public goods are equated with health and safety at work, employment conditions, environmental and consumer protection; see 23(3) European Journal of International Law (2012), ‘Symposium: global public goods and the plurality of legal orders’, including contributions by F. Cafaggi and D. Caron, D. Bodansky, G. Shaffer, F. Cafaggi, F. Francioni, P. Mavroidis, E. Morgera, A. Nollkaemper. P. A. Hall and D. Soskice, ‘An introduction to varieties of capitalism’, in P. A. Hall and D. Soskice (eds.), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford: Oxford University Press, 2001), pp. 1–20.

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BOX 22.1 CASE STUDY

Kiobel v. Royal Dutch Petroleum Co., 569 US 108 (2013) The Shell Petroleum Development Company of Nigeria, Ltd, one of the respondents, operated oil production facilities in the Ogoniland region of Nigeria. Esther Kiobel and the other petitioners were Nigerian nationals who alleged that some of them were killed, tortured, unlawfully detained, deprived of property and forced into exile by the Nigerian government. The petitioners maintained that the respondents, including the Shell Petroleum Development Company, had been complicit in the human rights violations of the Nigerian government. The US Supreme Court had to deal with two questions: 1. Under the Alien Tort Statute, are corporations immune from tort liability for violations of the law of nations, such as torture, extrajudicial executions, or genocide? 2. Upon re-argument, does the Alien Tort Statute allow courts to recognize a cause of action for violations of the law of nations occurring within the territory of a sovereign state other than the United States? Both scenarios start from the implicit premise that states may regulate the behaviour of companies within their jurisdiction, in line with their preferred market model. In the globalized economy companies are operating worldwide. There are practical and legal limits to what a state can do to control the behaviour of companies outside its own jurisdiction. Here there might even be a genuine task for CSR. The responsibility of states vis-a-vis companies for the health and safety of the people as well as for the environment was addressed in Kiobel (Box 22.1).3 The Alien Tort Statute (ATS) is a US federal law first adopted in 1789 that gives the federal courts jurisdiction to hear lawsuits filed by non-US citizens for torts committed in violation of international law. What can VoC and CSR contribute to a case which hinges upon the extraterritorial applicability of US law to the behaviour of a non-American transnational company in Africa? The VoC literature might suggest that the outcome of the case is linked to the way the market economy is shaped, as a liberal market economy or as a co-ordinated market economy, advocating that liberal market economies are more inclined to reject extraterritorial responsibilities than co-ordinated market economies. However, liability is a rather traditional instrument that easily fits into both types of economies. The differences are thus not a matter of principle but a matter of degree. The idea of extraterritorial liability carries a strong moral momentum though, which seems to be more in line with co-ordinated market thinking that aligned with the need for social and environmental regulation. CSR literature might raise the question of whether liability is a useful tool at all, or whether a code of conduct to promote and respect the environment even outside of US territory might offer 3

Kiobel v.Royal Dutch Petroleum Co., 569 US 108 (2013).

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BOX 22.2

P. A. Hall and D. Soskice, ‘An introduction to varieties of capitalism’, in P. A. Hall and D. Soskice (eds.), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford: Oxford University Press, 2001), pp. 1–20 D. Vogel, ‘Is there a market for virtue? The business case for corporate social responsibility’ (2005) 47(4) California Management Review 19–45 much better incentives. This kind of reasoning puts the focus on whether the Shell Petroleum Development Company of Nigeria or perhaps its parent company Royal Dutch had set up or should set up a code of conduct, what the institutional safeguards are or should be to monitor compliance with the code and what kind of legal effects such a code might produce in different market economies. II The two articles chosen here are considered as classics (Box 22.2). Peter Hall and David Soskice have given rise to a whole wave of scholarship and spawned an intense discussion about the possibilities – and the limits – of the identification of different forms of capitalism. To this day, the discussion has not faded, particularly through the broadening towards comparative institutional analysis.4 In his highly compressed analysis, David Vogel5 combines history, concepts and empiricism and thereby offers a deep insight into CSR as a business strategy, with a strong focus on the US understanding that stresses voluntariness. Although not related, the two articles supplement each other perfectly. Both deal with the question of societal embedding of entrepreneurial behaviour; VoC puts emphasis on the overall organization of an economic framework order, CSR focuses on the role and function of the main actors to develop and realize profitable but nevertheless philanthropic business strategies. The interplay between both approaches reveals the potential for private law theory, which is searching for an appropriate legal solution to the Kiobel type of dispute. Varieties of capitalism emerged as a research programme after the collapse of state socialism, where comparative political economy turned towards differences among capitalist economies and states.6 The approach is inspired by the then more established discipline of institutional economics (Chapter 3). In essence, it is an attempt to transfer the findings of new institutional economics (NIE) from the micro (company) to the macro (national economies) 4

5

6

For an overview with regard to the EU; although the distinction between the different waves seems to still be valid today, A. No¨lke, ‘Economic causes of the Eurozone crisis: the analytical contribution of comparative capitalism’ (2016) 14(1) Socio-Economic Review 141–61. D. Vogel, ‘Is there a market for virtue? The business case for corporate social responsibility’ (2005) 47(4) California Management Review 19–45. D. Bohle and B. Greskovits, ‘Varieties of capitalism and capitalism “tout court”’ (2009) 50(3) European Journal of Sociology 355–86, at 357, where they provide an account of the history of VoC and try to give an explanation for its success.

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level7 and to analyse the interrelationship between the two. Hall and Soskice identify two main forms among advanced capitalist economies: liberal market economies (LMEs) and coordinated market economies (CMEs). Subsequent research refined the concept in two directions, the cautious promotion of a third type within advanced market economies, the Mediterranean model and the extension of VoC to Eastern European countries. Dorothee Bohle and Be´la Greskovits revised the approach and made it applicable to the Eastern European countries at large. Andreas No¨lke and Arjan Vliegenthart8 instead concentrated on the Visegrad countries making them a fourth category and labelling them as ‘dependent market economies’. Today it seems that VoC has lost some of its appeal as the current literature on comparative political economy goes beyond VoC.9 However, even if this is true, the methodological attempt to classify market economies remains of major importance for legal scholarship (see Chapter 5 on LOT, which precedes VoC). The rise of CSR is strongly linked to the increased transnationalization of production in global value chains. There is an abundant literature from the fields of business management, political science and law on the potential impact of CSR on business behaviour, on the reasons behind the rise, the role and function of CSR in different market economies, on the institutional setting in which CSR is embedded as well as on the enforceability of CSR commitments (Box 22.3).

b theories, context and discussion I In a broader theoretical context VoC can be linked to the new orientation of comparative law, be it in the form of LOT (legal origin theory, Chapter 5) or in the theoretical efforts to break down the thinking in legal families (Chapter 23). If you were to follow Hall and Soskice as the thought leaders on varieties of capitalism, only two forms in comparative law would be relevant; that is the LME and the CME. Were you to opt for the more sophisticated approach, a third form, the dependent market economy (DPM), would have to be added. Seemingly, such a reduction of complexity would have amounted to an academic cleansing of comparative law.10 Instead the opposite happened. Varieties of capitalism together with LOT boosted the development of new approaches to comparative law, theoretically by putting emphasis on difference and conceptually by rethinking the concept of legal families and the functional method (Chapters 5 and 23). Varieties of capitalism shifted the focus from substantive law to organizations and institutions which influence the firms’ behaviour in the market (NIE is discussed in Chapters 3 and 17). Seen this way, VoC complements LOT and allows lawyers to 7

8

9

10

The distinction between the various levels, in particular whether it is necessary to introduce an intermediary – meso – level, is of no relevance. A. No¨lke and A. Vliegenthart, ‘Enlarging the varieties of capitalism: the emergence of dependent market economies in East Central Europe’ (2009) 61(4) World Politics 670–702. For an overview on comparative capitalism research see A. No¨lke, ‘Economic causes of the Eurozone crisis: the analytical contribution of comparative capitalism’ (2016) 14(1) Socio-Economic Review 141–61, which deals with the Eurocrisis; nevertheless, the three waves he describes are still valid today. Bohle and Greskovits, ‘Varieties of capitalism’, at 362 refer to Occam’s razor.

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BOX 22.3

D. Bohle and B. Greskovits, ‘Varieties of capitalism and capitalism “tout court”’ (2009) 50(3) European Journal of Sociology 355–86 S. Brammer, G. Jackson and D. Matten, ‘Corporate social responsibility and institutional theory: new perspectives on private governance’ (2012) 10(1) Socio-Economic Review 3–28 A. B. Caroll and K. M. Shabana, ‘The business case for corporate social responsibility: a review of concepts, research and practice’ (2010) 12(1) International Journal of Management Reviews 85–105 J.-P. Gond, N. Kang, and J. Moon, ‘The government of self-regulation: on the comparative dynamics of corporate social responsibility’ (2011) 40(4) Economy and Society 640–71 D. Kinderman, ‘Corporate social responsibility in the EU, 1993–2013: institutional ambiguity, economic crises, business legitimacy and bureaucratic politics’ (2013) 51(4) Journal of Common Market Studies 701–20 A. No¨lke, ’Economic causes of the Eurozone crisis: the analytical contribution of comparative capitalism’ (2016) 14(1) Socio-Economic Review 141–61

engage deeper with the interaction between substantive law and institutions, which is what Beth Ahlering and Simon Deakin termed ‘institutional complementarity’.11 The crude breakdown of capitalist economies into two ideal-types has provoked strong criticism to which Hall and Soskice responded in 2007.12 They do not subscribe to Ken’ichi Ohmae’s view that under global pressure the two systems would converge into the direction of LMEs,13 but in line with their claim not to take sides they insist that LMEs and CMEs continue to exist side by side. One of the harshest attacks against VoC has been voiced by Wolfgang Streeck.14 He argues that institutional change would require to take the two driving forces of capitalism into consideration – ‘fear’ (the employee) and ‘greed’ (the entrepreneur), a dimension which VoC does not include.15 Such a critique finds much support among all those who associate the current economic and political 11

12

13

14

15

B. Ahlering and S. Deakin, ‘Labor regulation, corporate governance, and legal origin: a case of institutional complementarity’ (2007) 41(4) Law and Society Review 865–908. P. A. Hall, ‘The evolution of varieties of capitalism in Europe’, in B. Hancke´, M. Rhodes and M. Thatcher (eds.), Beyond Varieties of Capitalism: Conflict, Contradictions, and Complementarities in the European Economy (Oxford: Oxford University Press, 2007), pp. 39–88; critical, Bohle and Greskovits, ‘Varieties of capitalism’, at 374; with a critical view on the potential biases H. Rosling, O. Rosling and A. Rosling, Factfulness (London: Hodder & Stoughton, 2018). K. Ohmae, The Borderless World: Power and Strategy in the Global Marketplace (London: Harper Collins, 1994), pp. 172–92. W. Streeck, Re-forming Capitalism: Institutional Change in the German Political Economy (Oxford: Oxford University Press, 2009), p. 251. With regard to behavioural institutionalism see I. Fioretos, Creative Reconstructions: Multilateralism and European Varieties of Capitalism after 1950 (Ithaca, NY: Cornell University Press, 2011).

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development with neoliberalism. This is just the opposite of what Ohmae had hoped for in the early 1990s, when it looked as if CMEs could gain ground in economics and politics. However, in today’s private law, beyond the nation state LMEs seems to prevail over CMEs, not least due to the lack of a legal authority that could embed global capitalism. Hall and Soskice do not pay much attention to the role of the state and they do not engage with the impact of globalization on their models. Here lies certainly one of the weaknesses of VoC, as each and every market economy is socially embedded into a regulatory environment. The role of the state might differ, but that role is crucial in whatever form, not least in the way national market economies react to globalization. Corporate social responsibility also has a long history, one which dates back to industrialization and the emergence of the labour movement in the nineteenth century. The advantage of going such a long way back is that CSR can be placed in context: historically, politically and economically. The disadvantage is the difficulty of defining what CSR is; that is why even after nearly forty years of discussion, there is no consensus on a definition, at least not from an interdisciplinary perspective. In 2001, the European Union defined CSR as ‘a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis’.16 Much of the debate revolves around voluntariness and what exactly that means. Today, the voluntary aspect is no longer part of the definition. In EU publications, CSR refers to companies taking responsibility for their impact on the society. This does not mean that voluntariness has entirely vanished from what CSR stands for. Taking a historical perspective on comparative institutional analysis highlights the role of the state, the importance of trade unions and of religious beliefs.17 There are places like Germany and the Scandinavian countries where industrialization goes hand in hand with political pressure on ethical business behaviour.18 The price to pay for economic freedoms is then to ‘do good’ to the public. This is mandated voluntariness rather than free will of the companies. Therefore, the philanthropic flavour documented through public institutions that bear the name of their industrial donors does not tell the full story. Countries with strong labour movements saw trade unions putting pressure on ethical behaviour of companies and engagement in collective agreements not only on salaries but also on health and safety at work. In countries without a successful labour movement like the United States, business behaviour has been under constant public scrutiny by civil society, right from the beginning of industrialization. One might therefore wonder whether doing good to the public can be called philanthropic at all. The modern development of CSR differs from its early incarnation. It could be understood as a reaction to market liberalism in the UK during the Thatcher era, in the United States under Nixon and in the European Union in the aftermath of the Lisbon 16

17

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Green Paper: Promoting a European framework for corporate social responsibility, COM (2001) 366 final, 18 July 2001, p. 1. S. Brammer, G. Jackson and D. Matten, ‘Corporate Social Responsibility and institutional theory: new perspectives on private governance’ (2012) 10(1) Socio-Economic Review 3–28 provide for an overview and introduction into the special issue which is entirely devoted to comparative institutional analysis. J. Hoffmann, Arbeitsbeziehungen im Rheinischen Kapitalismus: zwischen Modernisierung und Globalisierung (Mu¨nster: Westfa¨lisches Dampfboot, 2008).

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Summit of 2000. The change in institutional settings, the political emphasis on market freedoms and the pushback of trade unions all shifted the perspective. Not only the ‘business case’ but also business ethics were brought into the limelight. Nongovernmental organizations turned into important societal actors, advocating business responsibility through CSR. The most concise standpoint against CSR is that of Milton Friedman: ‘there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud’.19 The battle between shareholders and stakeholders became centre stage in the design of the CSR. Shlensky v. Wrigley stands out as an early example prior to market liberalism where the court affirmed the refusal by the Chicago Cubs president to install field lights for night games at Wrigley Field. The court thereby restricted the managers’ freedom to reduce the shareholder value through donations to the public.20 The judgment could be understood as ‘incunable’ as CSR ‘avant la lettre’. The controversy about the duties of managers towards their undertaking does not only go to the core of company law21 (Chapters 20–21), it has to be placed in the wider political economic context of the kind of responsibilities companies have towards the public if the states change the level playing field. Empirical research demonstrates that it is far too simplistic to draw a dividing line between liberal market economies and co-ordinated market economies, the first opting for voluntariness of business social responsibility, the latter advocating at least some sort of legal framework in which CSR should be embedded. Jean-Pascal Gond, Nahee Kang and Jeremy Moon distinguish between CSR as self-government (voluntariness in the US), CSR as facilitated by government (partly UK), CSR as a partnership with government (targeting local and national initiatives), CSR as mandated by government (France, China, but also the EU) and CSR as a form of government (functional substitute for state action).22 Notwithstanding the categorization being debatable due to potential overlap between the categories, as well as the classification of countries, the research sheds light on the need for a much more sophisticated view on the conditions under which CSR might go beyond a pure market-liberal understanding, in particular in connection with institutional comparative analysis that would involve all other ‘institutions’.23 19

20

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M. Friedman, ‘The social responsibility of business is to increase its profits’, New York Times, 13 September 1970, http://umich.edu/~thecore/doc/Friedman.pdf. Shlensky v. Wrigley, 237 NE 2d 776 (Ill. App. 1968); R. Mares, The Dynamics of Corporate Social Responsibilities (Leiden: Martinus Nijhoff, 2008), p. 40. J.-H. Binder, ‘Vorstandshandeln zwischen o¨ffentlichem und Verbandsinteresse: Pflichten- und Kompetenzkollisionen im Spannungsfeld von Bankaufsichts- und Gesellschaftsrecht’ (2013) Zeitschrift fu¨r Unternehmens- und Gesellschaftsrecht 760–801. As to the role of CSR in competition: R. M. Hilty and F. Henning-Bodewig (eds.), Corporate Social Responsibility: Verbindliche Standards des Wettbewerbsrechts (Berlin, Heidelberg: Springer, 2014). J.-P. Gond, N. Kang and J. Moon, ‘The government of self-regulation: on the comparative dynamics of corporate social responsibility’ (2011) 40(4) Economy and Society 640–71. Institutional comparative analysis defines institutions as: ‘The rules of the game: the humanly devised constraints that structure human interaction. They are made up of formal constraints (such as rules, laws, constitutions), informal constraints (such as norms of behaviour, conventions, self-imposed codes of conduct), and their enforcement characteristics’; www.coase.org/nieglossary.htm.

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The most recent step enshrined in the formula of CSR as a form of government is connected to globalization, the ever more important role of multinational companies and the reorganization of international trade along the lines of global value chains24 (Chapter 25). Intensified globalization created new business opportunities facilitated by private law and private regulation beyond the nation state, but with them arrived new business responsibilities. Companies, non-governmental organizations (NGOs) and international organizations used the opening space to promote CSR in good faith, though in very different ways. Kiobel has become synonymic with irresponsible behaviour, but it seems overtly simplistic to conclude that companies are necessarily misusing the new freedoms as there is evidence of companies engaging in CSR in good faith, as well as business organizations such as the ISO (International Organization for Standardization).25 The OECD and the UN discovered CSR as a prominent field of political action through development of guidelines, the UN Global Compact and ‘more ambitiously’ through the seventeen UN Sustainable Development Goals. The European Union followed its own agenda. Daniel Kinderman distinguishes between three waves, the social-liberal under J. Delors, the move towards neoliberalism after the Lisbon Summit in 2000 and the revitalization of the ‘S’ in CSR after the fall of Lehman Brothers and the euro crisis.26 The rise of CSR in the transnational economic and political environment added a new layer to the debate around CSR27 and triggered empirical research by lawyers and nonlawyers, mainly in the form of case studies.28 The legal and legal-theoretical discussion concentrates on the regulatory nature of CSR: can they be considered as social or legal norms? Is it possible to enforce the standards of CSR and, if so, under which conditions?29 Less spectacular, but no less important, are the efforts of companies that try to enforce CSR standards using contract law in supply chains.30 Here CSR and contract governance31 combine an increasingly important field of private law theory (see Chapter 17).

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R. Baldwin, The Great Convergence: Information Technology and the New Globalization (Cambridge, MA: Harvard University Press, 2016). Gond, Kang and Moon, ‘The government of self-regulation’, at 651. D. Kinderman, ‘Corporate social responsibility in the EU, 1993–2013: institutional ambiguity, economic crises, business legitimacy and bureaucratic politics’ (2013) 51(4) Journal of Common Market Studies 701–20. M. E. Porter and R. Kramer, ‘Strategy and society: the link between competitive advantage and corporate social responsibility’ (2006) 84 Harvard Business Review 78–92. Good overview A. B. Caroll and K. M. Shabana, ‘The business case for corporate social responsibility: a review of concepts, research and practice’ (2010) 12(1) International Journal of Management Reviews 85–105. Groundbreaking M. Herberg, Globalisierung und private Selbstregulierung: Umweltschutz in multinationalen Unternehmen (Frankfurt: Campus, 2007); M. Herberg, ‘Global legal pluralism and interlegality: environmental self-regulation in multinational enterprises as global law-making’, in O. Dilling, M. Herberg and G. Winter (eds.), Responsible Business: Self-Governance and Law in Transnational Economic Transactions (Oxford: Hart, 2008), pp. 17–40. T. C. Halliday and G. Shaffer (eds.), Transnational Legal Orders (Cambridge: Cambridge University Press, 2015) are trying to systemize and to structure the wealth of case studies. A. Beckers, Enforcing Corporate Codes: On Global Self-Regulation and National Private Law (Oxford: Hart, 2015). F. Cafaggi, ‘The regulatory functions of transnational commercial contracts: new architectures’ (2013) 36(6) Fordham International Law Journal (2013) 1557–618. S. Grundmann, F. Mo¨slein and S. Riesenhuber (eds.), Contract Governance: Dimensions in Law and Interdisciplinary Research (Oxford: Oxford University Press, 2015).

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But what links VoC and CSR? Where are the reference points? One might argue that the looser institutional structure within LMEs leaves more room for CSR initiatives, promoted by business, by NGOs together or alone, with or without support of governments and international organizations. With their firm institutional settings, CMEs might be more path-dependent, more reliant on the state and on international organizations, but also more reluctant to consider bottom-up initiatives from business and society. Comparative research on varieties of capitalism could tell us ideally which of the two or three forms of capitalism is better suited to develop and promote CSR, in particular in the transnational arena, due to the urgent need for responsible behaviour. Comparative research on the political economy beyond and after Hall and Soskice could contribute to an understanding of the conditions which have to be met and in what particular historical and cultural environment. However, there is a considerable tension between internationally orientated CSR and comparative research on varieties of capitalism which focuses on national economies. A business strategy does not need to be linked to a specific national economic context, even if it were possible to define characteristics which are unique to a national economy. Each company can align its business to the objectives of CSR as framed through the degree of statutory action, to the fusion of profit seeking and social commitment. Comparative research on varieties of capitalism argues that the development of business strategies is embedded in national-historical and cultural structures. These national structures influence the development of CSR strategies, hence their realisation depends on national structures.32 This is in line with research on MNCs claiming a home country effect.33 It was only through globalization that the way was cleared for a changed role for nation states and thus for international CSR, which can free itself from national structures, traditions and cultures. To this extent, CSR reaches beyond VoC.34 II Hall and Soskice’s varieties of capitalism belong to the classics of political economy which, since the days of Max Weber, have been interested in the differences and similarities between economic and political institutions. The aim here is not to determine the importance of the contribution to comparative research on the political economy. Others have successfully dealt with this task and highlighted the most important conflicts.35 The Kiobel case cannot be directly linked to the discourse that Hall and Soskice initiate. Their endeavour is to define and understand the differences between market economies, without there being any direct link to law. Lawyers have their own understanding of institutions; liability could be understood as a legal institution depending on how one defines institution. 32

33

34 35

Same direction, J. Hoffmann, ‘Co-ordinated continental European market economies under pressure from globalisation: Germany’s Rhineland capitalism’ (2004) 5(8) German Law Journal 985–100, at 999 (fn. 54). M. B. Rana and G. Morgan, ‘Twenty-five years of business systems research and lessons for international business studies’ (2019) 28(3) International Business Review 513–32. Bohle and Greskovits, ‘Varieties of capitalism’, at 374. Helpful Bohle and Greskovits, ‘Varieties of capitalism’, at 363, who distinguish between four strains of discussion: (1) empirical and methodological questions, (2) social statics, (3) social dynamics and (4) valid theory on capitalism.

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Hall and Soskice instead rely on a definition which is widely agreed upon in political science yet not common for lawyers and therefore requires clarification:36 ‘Following North [. . .] we define institutions as a set of rules, formal or informal, that actors generally follow, whether for normative, cognitive, or material reasons, and organizations as durable entities with formally recognized members, whose rules also contribute to the institutions of the political economy.’ As regards the context, it is of essential importance that markets are classified as institutions and companies as organizations. The starting point is the co-ordination problems that firms need to solve in order to produce competitively in market economies governed by democratic states. Hall and Soskice distinguish between three different theoretical perspectives on understanding institutional differences in advanced capitalist societies:37 (1) the approach to modernization in the post-war period, in which the state had a key function in order to catapult the economy from the production methods of the pre-war period to the consumer society of the post-war era. Prominent examples of the approach to modernization can be seen in France, Japan and Italy.38 Wars stimulate modernization in terms of progress through technology, a fact that is reflected in the history of technical standardization used in the production of weapons.39 The question then becomes how to convert an economy which is specialized in the production of arms into one which produces capital and consumer goods; (2) the debate on corporatism, as a reaction to the economic crisis of the 1970s with its oil price shock and inflation. Corporatist institutions, in which producer groups (trade unions and business organizations) and the state co-ordinate their economic strategies have helped to weather the crisis. These institutions are characteristic of the Scandinavian countries, the small Continental European states and Germany;40 (3) the debate about new production regimes of the 1980s and 1990s. Firms and their conduct are brought to the fore – from a sociological point of view – in how they cope with the change from mass production to a new production regime on a regional or national level. BadenWurttemberg and the Third Italy are considered success stories. However, their success was very much bound to single regions and the commitment of individual entrepreneurs.41 It did not prove to be particularly sustainable, not least because it was based to a significant extent on 36 37 38

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Hall and Soskice, ‘An introduction to varieties of capitalism’, p. 9, but also the definition provided in fn. 22. Hall and Soskice, ‘An introduction to varieties of capitalism’, p. 2. J. Osterhammel, The Transformation of the World: A Global History of the Nineteenth Century, trans. P. Camiller (Princeton, NJ: Princeton University Press, 2014); on Italy in particular H. Woller, Geschichte Italiens im 20. Jahrhundert (Munich: C. H. Beck, 2010). R. W. Hamilton, ‘Role of nongovernmental standards in the development of mandatory federal standards affecting safety or health’ (1977) 56(8) Texas Law Review 1329–484; H. Schepel, The Constitution of Private Governance: Product Standards in the Regulation of Integrating Markets (Oxford: Hart, 2006); P. Marburger, Die Regeln der Technik im Recht (Tu¨bingen: Mohr Siebeck, 1979). G. Bru¨ggemeier, Entwicklung des Rechts im Organisierten Kapitalismus, Vol. 1 and 2 (Frankfurt: Syndikat Verlag, 1977/1979). C. Crouch, M. Schro¨der and H. Voelzkow, ‘Regional and sectoral varieties of capitalism’ (2009) 38(4) Economy and Society 654–78; C. Lane and G. Wood, ‘Capitalist diversity and diversity within capitalism’ (2009) 38(4) Economy and Society 531–51; W. Streeck and K. Thelen (eds.), Beyond Continuity: Institutional Change in Advanced Political Economies (Oxford: Oxford University Press, 2005).

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its small or medium-sized structure – the narrow supply chains, the limited educational training, partly lacking innovation and export orientation, combined with far-reaching selfexploitation of the owners and their families (extremely long working hours, no holidays, etc). From the three consecutive approaches, Hall and Soskice draw the conclusion that comparative capitalism has to focus on the organization of the private sector and its embedding in national economies. There is one strong assumption and one shortcoming. The emphasis on national economies and national regulatory regimes, ‘that are the preserve of the nation state’, is striking. It not only suggests a high degree of path dependency as shown by Sven Steinmo¨,42 but also a static element that limits the economic, political and cultural influence between national economies. Second, Hall and Soskice do not discuss the role and function of the EU, which over a period of more than sixty years established a regulatory framework for a common economic order that complements, if not replaces, national legal orders at least partially. If the statement is taken literally, the national implementation rules determine the firms’ conduct, not the European requirements. From my point of view, both forms exist side-by-side; the nationally embedded economy and the cross-border European one which transcends national boundaries. Hall and Soskice emphasize instead:43 ‘Where we break most fundamentally from these approaches [referring to the three approaches mentioned above], however, is our conception of how behaviour is affected by the institutions of the political economy.’ They consider previous research with its references to institutions as socializing agencies, to power,44 or to sanctions and incentives as being too narrow, leaving one feeling tempted to add those that neglect the importance of strategic interactions between economic actors (state, business associations, trade unions, companies). Despite potential shortcomings, their approach enables the critical reader to identity links between comparative capitalism and CSR, a topic which is at the core of the confrontation between Hall and Soskice and Vogel. Hall and Soskice try to forge links with economists, political scientists and business management, but they do not refer to law, legal institutions (such as liability) and legal expertise.45 The second part of the contribution is dedicated to the outlining of the crucial elements of their own actor-related approach. At its core, the contribution deals with the interaction of state and companies, companies as individual actors. With regard to the role of economic associations and trade unions they build on the literature on corporatism, and in CMEs trade unions and business organizations assume a major co-ordination function. The supply chain does not play a role, nor do consumers or clients be they industrial or end consumers. They appear on the margins, if at all, but a systematic analysis does not take place. Hall and Soskice distinguish, subsequently, between six crucial elements which should indicate whether and how the embedding of companies in specific production regimes affects the entrepreneurial support

42 43 44

45

S. Steinmo¨, The Evolution of the Modern States (Cambridge: Cambridge University Press, 2010). Hall and Soskice, ‘An introduction to varieties of capitalism’, p. 4. As to the underestimation of power in VoC see P. Culpepper, ‘Capitalism, institutions, and power in the study of business’, in O. Fioretos, T. G. Falleti and A. Sheingate (eds.), Oxford Handbook of Historical Institutionalism (Oxford: Oxford University Press, 2016), pp. 453–66. Hall and Soskice, ‘An introduction to varieties of capitalism’, p. 6.

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of public goods. Here there seems to be a common denominator between Hall and Soskice on the one side and Vogel on the other: (1) the relational perspective, which consists of the correlation between profitability and the ability to co-ordinate efficiently with a variety of actors in five areas:46 industrial relations, vocational training and education, corporate governance, relationships between firms and co-ordination with employees within the organization.47 This, in fact, is the core of the argument: firm strategies are embedded in these five wider institutional spheres, which, in turn, determine firm strategies and national competitiveness; (2) the distinction between LMEs and CMEs. Liberal market economies feature organizations which co-ordinate their activities through competitive markets or hierarchies (see also Chapter 17), while CMEs require more effort. Their economic success depends on the co-ordination of activities which are organized outside market mechanisms. This rough differentiation was attacked on a massive scale.48 At the same time, the rather crude distinction reflects the strength and explanatory power of VoC; (3) the role of institutions and organizations, which differs considerably. In CMEs, firms or their associations co-operate with trade unions in order to reduce uncertainty and to coin common strategies. The same applies to financing. Stable relations with banks rule out the need to raise money on the capital market. This can only be achieved by means of discourse between actors that are structurally embedded; (4) the role of culture, informal rules and history. Hall and Soskice set a decisive and serious course, partly even in contrast to their own preliminary work.49 ‘Because we believe such outcomes [in economic performance] are the products of efforts to coordinate in contexts of strategic interaction, we reject the contention that they follow the presence of a particular set of institutions alone, at least if the latter are defined entirely in terms of formal rules or organizations.’ They highlight the central function of informal rules, of history and culture. In this vein, Hall and Soskice always refer to the national regulatory framework, the national informal rules and the national history as well as the national culture; they do not examine conditions under which institutions transform.50 Seen through the lenses of legal theory, Hall and Soskice adopt a position similar to Pierre Legrand’s ‘European legal systems are not converging’.51 The rather static approach might explain why they exclude sixty years of European integration that has built its own history 46 47

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Hall and Soskice, ‘An introduction to varieties of capitalism’, p. 7. See R. Schmidt, ‘Public-private cooperation in transnational regulation’, PhD thesis, European University Institute, Florence (2015), pointing to the collaboration between ISO and ILO in ISO 26000, pp. 107–53. J. R. Gingrich, Making Markets in the Welfare State: The Politics of Varying Market Reforms (Cambridge: Cambridge University Press, 2011); in this context see also T. Wilhelmsson, ‘Varieties of welfarism in European contract law’ (2004) 10 European Law Journal 712–33, analysed in Chapter 9. Hall and Soskice, ‘An introduction to varieties of capitalism’, p. 12. Streeck, Re-Forming Capitalism; Bohle and Greskovits, ‘Varieties of capitalism’, at 368 on ‘the need for a theory of gradual institutional change’. P. Legrand, ‘European legal systems are not converging’ (1996) 45(1) International and Comparative Law Quarterly 52–81.

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and, at least partly, its own legal culture.52 I do not claim that Europe can be equated with a particular economic model. However, it might be possible to formulate the hypothesis that Europe has provided historical and cultural minimum standards which enable the production of common public goods; (5) the institutional infrastructure and the business strategy. The rather inconspicuous heading hides a qualitative leap. Hall and Soskice transfer the new economics of organizations from the micro-level, being that of firms, to the macro-level: the economy. Is such a transfer possible and methodologically convincing? The answer has to be given by others. To me as a lawyer, and in light of the European integration experience, it seems problematic that corporate law has remained by and large a national concern, setting aside the achieved convergence in capital market law and accounting,53 while the national economies are increasingly superseded by European and international regulations. They address these concerns by introducing two essential restrictions: first of all, the differentiation between market and hierarchy is not sufficient and has to be complemented by non-market, nonhierarchical perspectives; second, it is not the institutional structures that follow the firms’ strategies, but the other way around: the firms’ strategies are aligned to existing structures which are deeply anchored in formal and informal rules.54 Although this statement cannot be understood as absolute, the culture and history of mature institutions almost seem to place firms in a Procrustean bed from which there is no easy escape. The consequences for business strategies in a globalized world would be far-reaching. New business strategies would require a change of national institutions. This is a rather rigid argument as it does not take into consideration the development of transnational institutions.55 Lastly, (6) institutional complementarities. Again, Hall and Soskice transfer findings in microeconomics, the so-called complementary goods, to macroeconomics. Not only products, but also institutions complement each other, which is particularly demanding if the institutions stem from different spheres of the political economy; for instance, if permanent employment is linked with financing through banks. National economies tend to transfer success stories between spheres – for example, from the sphere of production to the sphere of services. This parallelization within a national economy renders comparative capitalism possible and profitable. Bohle and Greskovits56 might add a word of caution, since Hall and Soskice suggest a quasi-automatic context for which there is hardly any evidence so far.

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G. Helleringer and K. Purnhagen (eds.), Towards a European Legal Culture (Oxford: Hart, 2014), in particular H.-W. Micklitz, ‘The (un)-systematics of (private) law as an element of European legal culture’, pp. 81–115. S. Grundmann, European Company Law: Organization, Finance and Capital Markets, 2nd ed. (Cambridge: Intersentia, 2012), pp. 443–573. Hall and Soskice, ‘An introduction to varieties of capitalism’, p. 15; the reference by P. A. Hall, ‘The evolution of varieties of capitalism in Europe’ to the European Union creates problems as it questions the consistency of the overall approach – see Bohle and Greskovits, ‘Varieties of capitalism’, at 371. European Journal of International Law (2012), ‘Symposium: global public goods and the plurality of legal orders’. Bohle and Greskovits, ‘Varieties of capitalism’, at 365, referring to C. Crouch, Capitalist Diversity and Change: Recombinant Governance and Institutional Entrepreneurs (Oxford: Oxford University Press, 2005).

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The analytical concept concludes with the cautious allusion to a third type of economy which they call Mediterranean and which features a strong agrarian sector and considerable state invention (France, Italy, Spain, Portugal, Greece and Turkey). However, this potential third model is not really given shape. In a manner consistent with VoC, Bohle and Greskovits57 examined eleven Eastern European countries. By reverting to historical institutionalism, they distinguish between the neoliberal model in the Baltic States, Bulgaria, Romania and Croatia, the embedded neoliberal model in Slovakia, Czech Republic, Hungary and Poland and the neo-corporatist model in Slovenia. The added value of their analysis does not only amount to their focus on the usually neglected Eastern European states, but also consists in a review of an extensive academic discussion and advocacy in favour of bringing in institutional change and transnationalization. Hall and Soskice’s comparative capitalism is not linked to a value judgement: ‘Although each type of capitalism has its partisans, we are not arguing here that one is superior to another.’58 Indeed, there is a direct path which leads from comparative capitalism to LOT and to the Report of the World Bank (Chapter 5),59 in which the superiority not only of the Anglo-American economic model, but also of common law over the Continental European legal system, is proclaimed. The reader is left, perhaps, with the misleading impression that CMEs are establishing a political frame in which companies are encouraged to produce public goods, as their institutional safeguards are more developed than in the case of LMEs. In theory, CSR could fill the gap that is left by LMEs following the defeat of more institutionalized forms of social solidarity in liberal market economies.60 Corporate social responsibility appears as a tool that could help identify appropriate solutions for the Kiobel types of conflict. III David Vogel’s book The Market for Virtue deals in an empirically comprehensive way with the potential of the market to create socially responsible companies, in the sense of entities which are responsible towards the environment, their own employees and society as a whole. The question then would be whether and under what conditions Royal Dutch or its subsidiaries feel encouraged to respect international law obligations that reflect the public good. Vogel offers a nuanced outline of the history of CSR mainly in the United States, underpinned with dense empirical analyses. His review appears rather sceptical with regard to the pros and cons of CSR and the lack of empirical evidence. Nevertheless, he considers a ‘market for virtue’ to be possible, for the production of public goods without statutory intervention via the interaction of ‘market’ and ‘hierarchy’ (see Chapter 17). Vogel does not determine the requirements to be met for the functioning of such a market. Vogel is regarded as one of those who speak in favour of a business case for CSR beyond Friedman. The evaluation of CSR as a means of promoting the public good is highly relevant with regard to the 57

58 59 60

See Crouch, Capitalist Diversity, and enthusiastic book review by S. Cimpoca in 36 Western European Politics (2013) 892–3, and S. Svallfors in 11 Comparative Politics (2013) 662–4. Hall and Soskice, ‘An introduction to varieties of capitalism’, p. 21. The World Bank Doing Business, www.doingbusiness.org. Brammer, Jackson and Matten, ‘Corporate social responsibility’.

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question of whether compliance of companies with CSR objectives has to be understood as purely economic or rather as a political or moral action.61 It makes a difference whether Royal Dutch chooses to respect international law because it makes money from their policy decision or whether the parent company accepts moral responsibility for how its subsidiaries are doing business in the Global South. The CSR movement gained momentum in the 1970s and 1980s, exactly at the time when the social welfare state started to decline and was greeted with widespread scepticism. Are companies ready to commit to a better world on a voluntary basis or is an intervention by the state necessary, and what would it look like? What is the role of NGOs, in particular in fields which were traditionally reserved for trade unions? The highly politicized discussion has given rise to a myriad of publications.62 The idea of a ‘business case’, the imposition of CSR standards on the market to optimize profit seeking, seems to recede further into the background.63 The most recent international regulations – the UN Global Compact,64 the UN Guiding Principles,65 the OECD Guidelines,66 the European Commission67 and the Resolutions of Norway, South Africa and Ecuador adopted in June 2014 – highlight the regulatory character of CSR as an instrument to enforce minimum human rights standards.68 In addition, CSR and contract governance evolve into forms of private regulation, the latter using contracts as an instrument to enforce CSR with the degree of legal constraint depending on the formulation of the contract. Contract governance has to be kept separate from the question as to whether social rules (like CSR) can be transformed into legal rules (Chapter 25). Vogel’s article stands out from the crowd. After a short historical outline entitled ‘Being a Better Corporate Citizen is a Source of Competitive Advantage’, Vogel contrasts the old style ‘Doing Good to do Good’ (for example Standard Oil of New Jersey, which finances 61

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D. L. Levy and R. Kaplan, ‘Corporate social responsibility and theories of global governance: strategic contestations in global issue arenas’, in A. Crane, D. Matten, A. McWilliams, J. Moon and D. S. Siegel (eds.), The Oxford Handbook of Corporate Social Responsibility (Oxford: Oxford University Press, 2008), pp. 432–51; S. Hiß, ‘Warum u¨bernehmen Unternehmen gesellschaftliche Verantwortung?’, PhD thesis, University of Bamberg (2005). J. Wouters and A. Chanet, ‘Corporate human rights responsibilities: a European perspective’ (2008) 6(2) Northwestern Journal of International Human Rights 262–303; O. De Schutter, ‘Corporate social responsibility European style’ (2008) 14(2) European Law Journal 203–36, who does not cite Vogel. In 2001 the European Commission (COM (2001) 366 final, 18.07.2001) proclaimed that CSR should be left to the companies; in 2011 (COM (2011) 681 final, 25.10.2011) the Commission considers the need for regulation. In the meantime the Commission issued two more communications concerning CSR – COM (2002) 347 final, 2.07.2002; and COM (2006) 136 final, 22.03.2006. www.unglobalcompact.org/what-is-gc. The United Nations Guiding Principles on Business and Human Rights, A/HRC/17/31, 21.03.2011, chapter 2: ‘The corporate responsibility to respect human rights’. OECD Guidelines for Multinational Enterprises (OECD Publishing, 2011), pp. 31–34; www.oecd.org/daf/ inv/mne/48004323.pdf. References in fn. 63. Under UN Guiding Principles states are required to take regulatory measures to implement CSR and companies to accept responsibilities under CSR. More recent proposals from Norway, Ecuador and South Africa want to bind companies to protect human rights. The OECD Guidelines resemble the UN Guiding Principles (soft law), but include a dispute settlement mechanism; see L. C. Backer, ‘Rights and accountability in Development (Raid) v. Das Air and Global Witness v. Afrimex: small steps toward an autonomous transnational legal system for the regulation of multinational corporations’ (2009) 10 Melbourne Journal of International Law 258–307.

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an engineering school in Princeton, as well as David Rockefeller’s commitment as chairman of the Chase Manhattan Bank, which was motivated by enlightened selfinterest) with the new style ‘Doing Good to Do Well’ (doing good things and increasing one’s profits). Thereby Vogel gives Friedman’s provocation in the New York Times, ‘The Social Responsibility of Business is to Increase Profits’, a different twist.69 From this moment forward, sparked by a plea of sustainability, the idea of a market for virtue insinuates that social responsibility-taking is profitable. This reorganization had an impact on the role and function of NGOs. In the 1980s they had fiercely attacked the politics of ‘double standards’ – remember Bhopal (1984), where an American company had produced chemicals in India under substandard Indian labour and environmental protection rules. Nowadays, instead of campaigning against businesses on grounds of such conduct, NGOs co-operate with them on CSR with and without the participation of international organizations. It is a matter of fact that Royal Dutch has a CSR code and that NGOs have been instrumental in its inception and implementation. Detractors say that today every multinational organization has a pet NGO, whereas Vogel emphasizes the possibility to achieve common goals, to develop common standards and common enforcement strategies. Such a development was said to be made possible by the combination of two factors: the changing structures of companies and the ‘new embrace of money and morals’. In the late nineteenth and early twentieth century, developed industrial societies separated ownership and control of the company which promoted the development of ‘managerial capitalism’. This in turn enabled managers to realize a whole string of other company goals, which also included philanthropic objectives. There are many such examples from the United States and Europe, such as the so-called Krupp colonies in Essen,70 where Krupp employees were given subsidized housing, which reflected social commitment without excluding self-interest. This was a way to tie the employees permanently to Krupp, completely in line with the characteristics of CMEs predicted by Hall and Soskice. The strong social structures enhanced the employees’ loyalty towards their firm. David Vogel’s analysis is entirely built on the ideology of voluntariness and does not engage with the institutional framework of CSR that sheds a much more sophisticated light on these activities. Implicitly, proponents of CSR like David Vogel accepted the criticism of Milton Friedman by going to great lengths to prove that CSR is economically profitable. Such a new phase of social development requires a different kind of business education. The generation of managers that entered the market after graduating from US elite universities was influenced by the zeitgeist of the 1960s and 1970s, especially the criticism of capitalistic excesses. In contrast to the 1960s and 1970s, it was no longer frowned upon or taboo to earn and possess money, but desirable as long as it was possible to prove that the money served a good purpose; i.e. that money and morals could be linked to each other.71 In the 69

70 71

M. Friedman, ‘The social responsibility of business is to increase its profits’, New York Times, 13 September 1970, http://umich.edu/~thecore/doc/Friedman.pdf; cited in Vogel, ‘Is there a market for virtue?’, at 21 (fn. 4). H. James, Familienunternehmen in Europa, Haniel, Wendel und Falck (Munich: C. H. Beck, 2005). On the idea of effective altruism: www.effectivealtruism.org.

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words of Vogel:72 ‘the increasing influence of the business case for CSR reflects changes in the nature of business competition, the transnationalization of global value chains and changes in beliefs about the potential social role of business’. It is here that the discussion about companies’ responsibility with regard to human rights finds its starting point. Can companies be considered holders and addressees of fundamental and human rights? In the Kiobel judgment, the US Supreme Court rejected the claimants’ request,73 while the European Court of Justice has not yet had an opportunity to rule on companies as holders of social rights.74 David Vogel’s analysis lacks consideration of the Internet’s role and function as a new possible means of social monitoring of entrepreneurial activity, which has gained more and more importance during the last few years. The supporters of such a CSR model faced the question of whether they could keep their grandiose promise that ‘CSR is profitable’. This requires proof that there is a relationship between a company’s social responsibility and its profitability. The second part of the essay – a far more comprehensive overview can be found in Vogel’s book The Market for Virtue75 – is dedicated to a review of the existing empirical research. Should evidence be provided, and his question implies that this might happen, all companies might feel incentivized to adopt CSR. Non-governmental organization activists might even count on permanently improving social and environmental standards, establishing a type of competition which does not focus on making the highest profit but rather on who, at their highest level of profitability, shows the highest degree of responsibility towards employees, environment and society.76 The implications for research on comparative capitalism would be enormous. An adaption or fusion of business strategies beyond the limits of LMEs and CMEs would be unavoidable. Business strategies would lead to new structures, and the central elements of Hall and Soskice’s theory would prove untenable. The strategies would influence the structures, not the other way around. National cultures and traditions would lose importance, while international rules would make national rules fade into the background. But another scenario is possible too: a persistent divergence with some companies in some sectors/countries being competitive on the basis of CSR, and others on the basis of costs only would speak to Hall and Soskice’s comparative institutional advantages, only that it would not be generated by the ‘institutions’. The empirical results of ‘Putting the Business Case to the Test’ are summarized by Vogel as follows:77 ‘An extensive body of academic research examines the relationship between corporate responsibility and profitability. Its central conclusion can easily be summarized: at best it is inconclusive.’ One of the main difficulties is of a methodological nature; to a large extent, CSR is based on self-disclosure. This self-disclosure is the basis for 72 73 74

75

76 77

Vogel, ‘Is there a market for virtue?’, at 29. Kiobel v.Royal Dutch Petroleum Co., 569 US 108 (2013). L. Azoulai, ‘The Court of Justice and the social market economy’ (2008) 45(5) Common Market Law Review 1335–55, at 1347–8. D. Vogel, The Market for Virtue: The Potential and Limits of Corporate Social Responsibility (Washington, DC: Brookings Institution Press, 2005). A. Fung, D. O’Rourke and C. Sabel, Can We Put an End to Sweatshops? (Boston: Beacon Press, 2001). Vogel, ‘Is there a market for virtue?’, at 29.

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a ranking by means of criteria which are not consistent and only partly reviewable. Vogel harshly criticizes the premises of the research and even its usefulness:78 ‘the effort to demonstrate through statistical analyses that corporate responsibility may be not only fruitless but also pointless and unnecessary because such studies support to hold corporate responsibility to a standard to which no other business strategy is subject.’ And a few lines later, ‘why should we expect investments in CSR to consistently create shareholder value when virtually no other business investments or strategies do so?’ One is instantly reminded of the famous statement by Henry Ford, who allegedly said that he knew at least half of his advertising budget worked, he just didn’t know which half. However, Vogel does not discuss Wrigley Field.79 Vogel’s assessment of the significance of empirical research is refreshing. It makes abundantly clear that each social commitment, not only in the form of state inventions, but also in the shape of entrepreneurial activity, is exposed to a general suspicion: liberty is restricted by equality, profitability decreases due to social commitments. The burden of proof is imposed on the institution which is socially committed. Vogel relativizes the importance of CSR as a business strategy. It is but one business strategy among many others but clear lines between profitability and social responsibility cannot be drawn; he is unable to explain why companies have not given up philanthropic behaviour despite the rather thin evidence for the profitability of CSR strategies. It might be that there are other more valuable ethical and moral reasons for companies and for business organizations to invest into public goods. Companies might simply be watchful of trends; this would mean that CSR is about faith that the market is moving in that direction. One might wonder whether and to what extent evidence affects CSR strategies. Comparative institutional analysis provides for much more sophisticated explanations as it includes not only the state but also other institutions, formal and informal ones. Through this lens, the market for virtue looks like a rather narrow concept, meant to save CSR against Friedman’s dictum. IV Vogel concludes:80 ‘it is rather to suggest that any such claim [for CSR] must be more nuanced. CSR does make sense for some firms in specific circumstances.’ But what does this mean in our case? Does Royal Dutch’s activity in Nigeria belong to ‘some’ firms and are the ‘specific circumstances’ met? Here Hall’s and Soskice’s distinction between different types of market economies tie in. Perhaps a more nuanced categorization of market economies would allow the building of deeper and better links to comparative institutional analysis on CSR. In an increasingly differentiated society and economy, CSR can only prevail on a sectoral level and under specific circumstances, for example, where a company suffers from a particularly bad reputation which it wants to improve by means of CSR, provided the institutional infrastructure suffices to incentivize the company and 78 79 80

Vogel, ‘Is there a market for virtue?’, at 33. Shlensky v.Wrigley, 237 NE 2d 776 (Ill. App. 1968), see above in the text. Vogel, ‘Is there a market for virtue?’, at 42.

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to supervise and monitor its behaviour. The plea of J. Rogers Hollingsworth, Philippe Schmitter and Wolfgang Streeck81 goes along with such a finding: ‘capitalism can no longer be studied as a whole but must be broken down into its parts’.82 System theorists may feel vindicated. The differentiation between society and economy requires a refined analysis, be it in regimes or sectors.83 Such a perspective makes it difficult to find a common explanation for why CSR has gained importance in both types of economies. Returning to Kiobel: states and courts are reluctant to extend national standards of social and societal protection beyond their territory. Marc Galanter even argued with regard to Bhopal that the first addressee for such claims must be the national court – in our case in Nigeria – as such a litigation offers the opportunity to build up the necessary judicial infrastructure.84 However, I am not aware of any judgment of the Global North which is ready to accept extraterritorrial liability of a transnational company for the infringement of international law whether it has its business seat in the country or not. There are cautious tendencies to promote liability outside the nation state, but not in the Kiobel type of conflicts.85 The extraterritorialization of social standards and potential legal consequences have been discussed widely in the 1980s under the slogan of ‘double standards’.86 Companies from the Global North did not apply the same standards of conduct worldwide, being happy to adjust to the lower standards of the given country of the Gobal South, if apply them at all. In that sense Kiobel is a case of de´ja` vu. The international community or the countries of the Global North could not even agree on a non-binding transnational framework to respect and to enforce internationally agreed rules on human rights, health and safety, worker protection and the environment. What remains are transnational attempts to promote CSR, most strongly in and through the EU. Dionysia Katelouzou and Siems have demonstrated empirically that there might be room and also acceptability for the promotion of European Stewardship Codes.87 Whether or not transnational companies are subscribing to CSR, whether they are monitoring their CSR policy is a matter of fact. This would also apply to Royal Dutch post-Kiobel. It looks as if transnational companies were beginning to rethink their responsibilities under pressure from the public, under the pressure of blaming strategies in social media and with the support of those employees who support an active engagement of the company for the public good. 81

82 83

84

85

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J. Rogers Hollingsworth, P. C. Schmitter and W. Streeck (eds.), Governing Capitalist Economies: Performance and Control of Economic Sectors (Oxford: Oxford University Press, 1994). Bohle and Greskovits, ‘Varieties of capitalism’, at 382. H.-W. Micklitz and Y. Svetiev (eds.), ‘A self-sufficient European private law: a viable concept?’, EUI Working Paper 2012/31. M. Galanter has built up a repository on Bhopal, https://repository.law.wisc.edu/s/uwlaw/page/bhopalcollection. UK Supreme Court Vedanta Resources PLC and another (Appellants) v. Lungowe and others (Respondents) before Lady Hale, President Lord Wilson, Lord Hodge, Lady Black, Lord Briggs (2019), available at: www.supremecourt.uk/cases/docs/uksc-2017–0185-judgment.pdf. D. Augenstein, Global Business and the Law and Politics of Human Rights (Cambridge: Cambridge University Press, in press). ‘The global diffusion of stewardship codes’, to be published in D. Katelouzou and D. Puchniak (eds.), Handbook on Shareholder Stewardship (Cambridge: Cambridge University Press, 2020 forthcoming).

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This does not help Kiobel as victim of human rights infringement, but CSR might contribute to prevent such forms of infringements in the future. In Chapters 25–27 we are discussing the theoretical implications of transnational law, of private ordering and of bargaining in the shadow of the law. Corporate social responsibility forms an integral part of the debate. One might wonder, though, whether it would take a judgment of the ECJ or of one of the supreme courts of the member states to clarify the legal status and the legal quality of CSR.

part v

Private Law (Rule-Setting) beyond the State

23 Law as a Product Hans-W. Micklitz

a topic and materials I On 9 March 1999, the Court of Justice of the European Union shattered the wellestablished doctrine in Continental private international law that the company statute is the current seat of the company, that the company’s domestic law cannot be validly chosen merely by registration in a given jurisdiction and that companies established abroad must participate in domestic legal transactions (Box 23.1).1 Centros triggered a fierce European debate on the relationship between the freedom of establishment and international private law for companies. The Rome I Regulation exempts company law from its scope of application; therefore, national international private law rules come into play. This means a divided world between those member states that adhere to the seat theory like Germany and Denmark and those that follow the incorporation theory, i.e. the common law countries.2 In Centros and the follow-up decisions, the ECJ measures national approaches to the transfer of seat against the freedom of establishment. The result has been a lowering of national standards of establishment and an overall turn towards the incorporation theory or an amalgam of seat and incorporation theory.3 II The texts to be presented differ in their approaches, the means and the depth of their presentation, as well as the method used and the period in which they were written. They 1 2

3

Case C-212/97, Centros Ltd [1999] ECR I-01459. For a comprehensive debate of the case law before and after Centros until 2010 S. Grundmann, Europa¨isches Gesellschaftsrecht, 2nd ed. (Heidelberg: C. F. Mu¨ller, 2011), pp. 768–91; English version: S. Grundmann, European Company Law: Organization, Finance and Capital Markets, 2nd ed. (Cambridge: Intersentia, 2012); more recently C. Gerner-Beuerle, F. M. Mucciarelli, E. Schuster and M. Siems ‘Cross-border reincorporations in the European Union: the case for comprehensive harmonisation’ (2018) 18(1) Journal of Corporate Law Studies 1–42. H. Eidenmu¨ller, L. Enriques, G. Helleringer, K. van Zwieten, ‘Centros at 20: regulatory arbitrage and beyond – an introduction’ (2019) 20 European Business Organisation Law Review 399–405.

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BOX 23.1 CASE STUDY

Case C-212/97, Centros Ltd [1999] ECR I-01459 Centros had been registered as a private limited company on 18 May 1992 in England and Wales. Since UK law imposes no requirement on limited liability companies as regarding the provision for and the paying-up of a minimum share capital, Centros’ share capital, amounting to GBP 100, had been neither paid up nor made available to the company. The Danish Department of Trade refused registration on the grounds, inter alia, that Centros, which did not trade in the United Kingdom, was seeking to establish a principal establishment in Denmark, thus circumventing the requirement to pay up a minimum capital fixed at DKK 200,000 (c. EUR 27,000). The CJEU held that the refusal was contrary to Articles 52 and 58 (the freedom of establishment). However, the member state may adopt any appropriate measure for preventing or penalizing fraud.

BOX 23.2

R. Romano, ‘Law as a product: some pieces of the incorporation puzzle’ (1985) 1(2) Journal of Law, Economics, and Organizations 225–83 K. Zweigert and H. Ko¨tz, An Introduction to Comparative Law, 3rd ed. (Oxford: Oxford University Press, 1998), (English translation available on the book website)

all, nonetheless, give rise to a comprehensive concept and grant a profound insight into the handling of law as means for designing the economy and society (Box 23.2). Konrad Zweigert and Hein Ko¨tz belong to the founders of the functional method in private law, one that is widely used in practice by policy makers and legal practitioners, despite the criticism voiced against its instrumental use of law (Chapter 5). Here the emphasis is put on the more implicit rather than explicit treatment of law as a product which can be transferred from one country to the next, subject to a set of requirements. Romano has revolutionized the way we think about company law and the decisions that guide companies to transfer their seat of residence to Delaware. This has not remained without effect on European company law. Far beyond company law, the so-called ‘Delaware effect’ is all too often treated as a synonym for regulatory competition manifested as a race to the bottom. The last thirty years have left us with deep insights on regulatory competition in company law, on the opportunities for states to attract business to favourable environments and on the network effects of a highly specialized community of companies, shareholders, lawyers and courts. However, it is necessary to look beyond company law and embed the idea of regulatory competition in a much broader and

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BOX 23.3

H. Eidenmu¨ller, L. Enriques, G. Helleringer and K. van Zwieten, ‘Centros at 20: regulatory arbitrage and beyond – an introduction’ (2019) 20 European Business Organisation Law Review 399–405 R. Michaels, ‘Make or buy: a public market for legal transplants?’, in H. Eidenmu¨ller (ed.), Regulatory Competition in Contract Law and Dispute Resolution (Oxford: Hart, 2013), pp. 27–42 J. Stark, Law for Sale (Oxford: Oxford University Press, 2019)

more general context of the political economy and the philosophy of regulatory competition (Box 23.3).

b theories, context and discussion I In the history of commercial transactions, the transfer of legal rules and concepts followed the exchange of goods and services. This transfer, which sometimes amounted to straightforward imposition, was particularly striking in the period of European colonialism.4 Over decades, if not over centuries, the imported rules would then merge with the domestic legal provisions of the importing country.5 Research on what this merger look like, how the foreign law could be integrated into existing law of the colonies and how the potential backflow from the colonies to the colonizer has gained ground, in Europe through the critique on Western-centered comparative law and the shift in focus to research on European legal history global perspectives6 (Chapter 5). With the creation of nation states in the wake of the Peace of Westphalia, private law gradually became nationalized. The codification of private law began in Continental Europe with the adoption of the French Code Civil in 1804 (with a small forerunner, the Austrian Code (AGBG) as enacted in the then Austrian province of Galicia). This process would continue after World War II in the newly independent colonies and after the 4

5

6

M. Koskenniemi, The Gentle Civilizer of Nations: The Rise and Fall of International Law 1870–1960 (Cambridge: Cambridge University Press, 2004), pp. 98–178; see. also J. Osterhammel, The Transformation of the World: A Global History of the Nineteenth Century, trans. P. Camiller (Princeton, NJ: Princeton University Press, 2014), in particular pp. 637–709. For an overview see M. Graziadei, ‘Comparative law as the study of transplants and receptions’, in M. Reimann and R. Zimmermann, The Oxford Handbook of Comparative Law (Oxford: Oxford University Press, 2006), pp. 441–75. T. Duve, ‘Von der Europa¨ischen Rechtsgeschichte zu einer Rechtsgeschichte Europas in globalhistorischer Perspektive’ (2012) Rechtsgeschichte 18–71; shortened English version: T. Duve, ‘European legal history – global perspectives’, Max Planck Institute for European Legal History research paper series no. 2013–06; V. Corcodel, Modern Law and Otherness: The Dynamics of Inclusion and Exclusion in Comparative Legal Thought (Cheltenham: Edward Elgar 2019).

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collapse of communism in Central and Southeastern Europe, insofar as the old national codifications were cleaned from rules of communist regimes.7 National private law orders of the nineteenth, twentieth and twenty-first centuries were based on a variety of legal sources reflecting the perennial exportation and re-importation of legal rules, their origins in the ius commune, in canon law and in commercial customs.8 From a historical point of view, no legal order has ever been developed from a clean slate. Lawmakers have always been engaged in ‘borrowing’ from earlier legal orders. To this day, the discussion on legal transfer involves questions as to whether law can be transplanted and, if so, to what extent;9 whether such legal transplants cause ‘irritation’,10 remain ‘extrinsic’,11 or create new forms of ‘inter-legality’.12 The legal-theoretical debate focuses on questions of the identity of the legal system.13 These questions are pressing in the European law context. Walter Hallstein14 formulated the famous triad of the European Union as being a creator of law, a source of law and a legal order. All three parts of the triad can be associated with transfers of law. The European Union is considered to be an outstanding experiment in the use of law to create peace and to establish a common market to the benefit of all citizens,15 summarized in the memorable ‘integration through law’ paradigm.16 Economic, social and political integration between the states and the people of the European Union was planned and realized up to a point by means of law. The European integration project requires trust in common legal traditions and 7

8

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10

11

12

13

14

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16

The Hungarian Civil Code might serve as an example. During communist times contracts had to be concluded and performed so as to meet the communist ideology; see L. Ve´ka´s, ‘Rekodifikation des Privatrechts in Zentral- und Osteuropa zwischen Reformbedarf und Tradition’, in R. Welser (ed.), Die Rekodifikation des Privatrechts in Zentral- und Osteuropa zwischen Reformbedarf und Tradition (Vienna: Manz, 2014), pp.115–24. R. Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition (Oxford: Clarendon Press, 1990); particularly obvious in M. Schmoeckel, J. Ru¨ckert and R. Zimmermann (eds.), Historischkritischer Kommentar zum BGB, vol. 1 (Tu¨bingen:Mohr Siebeck, 2003), §§ 1–240; M. Bussani, ‘Strangers in the law: lawyer’s law and the other legal dimensions’ (2019) 40 Cardozo Law Review 3125–84, stressing the need to include non-law. A. Watson, Legal Transplants: An Approach to Comparative Law, 2nd ed. (Athens: University of Georgia Press, 1993); for the impact of Watson on comparative law, see Graziadei, ‘Comparative law’, p. 442. G. Teubner, ‘Legal irritants: good faith in British law or how unifying law ends up in new divergences’ (1998) 61 Modern Law Review 11–32. H. Lindahl, Fault Lines of Globalization: Legal Order and the Politics of A-Legality (Oxford: Oxford University Press, 2013). M. Amstutz, ‘Interlegality in European private law: a question of method?’, in C. Joerges and T. Ralli (eds.), European Constitutionalism without Private Law: Private Law without Democracy (Oslo: ARENA Report No 3/11, 2011), pp. 55–67; J. Klabbers and G. Palombella (eds.), The Challenge of Inter-Legality (Cambridge: Cambridge University Press, 2019). For example, the question of the identity of the legal system: J. Finnis, ‘Revolutions and continuity of law’, in J. Finnis, Philosophy of Law: Collected Essays Volume 4, pp. 407–35; J. Raz, The Concept of a Legal System, 2nd ed. (Oxford: Oxford University Press, 1980), pp. 188–9. W. Hallstein, Der unvollendete Bundesstaat: europa¨ische Erfahrungen und Erkenntnisse (Du¨sseldorf; Vienna: ECON, 1969), p. 33. I. Greilsammer and J. H. H. Weiler discuss the efficiency of a European model in the solution of the IsraeliPalestinian conflict in I. Greilsammer and J. H. H. Weiler, Europe’s Middle East Dilemma: The Quest for a Unified Stance (Boulder, CO: Westview Press, 1987). M. Cappelletti, M. Seccombe and J. H. H. Weiler (eds.), Integration Through Law: Europe and the American Federal Experience (Berlin: de Gruyter, 1985–1986).

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a common legal culture (see Chapter 5).17 The construction of the common market, later the internal market, took place without a discussion on how the European market should be socially and democratically embedded.18 The functional method in comparative law, forcefully promoted by Zweigert and Ko¨tz,19 provided the appropriate legal techniques for building a European private law which complements the market freedoms.20 The Lando Group (owing its name to Ole Lando) used the functional method to develop the ‘Principles of European Contract Law’;21 so did the Study Group (guided by Christian von Bar) and the Acquis Group in the joint elaboration of the Academic Draft of a Common Frame of Reference.22 When the European Union started to harmonize contract law, the European Commission heavily relied on the functional method to distil the best from the national private law orders in the search for a European solution.23 The implementation of EU legal rules into national private legal orders, the risk of state liability in case of non- or incorrect transposition has sometimes led to radical changes in national private law orders. Secondary EU regulations and directives insinuate the feasibility of homogeneous private law rules for culturally, socially and economically heterogeneous statehood.24 The interaction between European private law and Europeanized/non-Europeanized national private law orders is legal transfer in action.25 Company law does not really fit into such a scenario due to the limited set of harmonized European rules. The development of European company law follows a certain dialectic between liberalization through the market freedoms with the ECJ in the driver’s seat and a subsequent re-regulation, not necessarily by the European Union but also in the member states. The legal transfer is thus not managed via the European Union but by the member states themselves. In Centros, the ECJ liberalized the company law, thereby triggering a process of approximation towards the incorporation theory. 17

18

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20

21

22

23

24

25

T. Duve, ‘From a European legal history towards a legal history of Europe in a global historical perspective’, Max Planck Institute for European Legal History Research Paper Series no. 2012–01. This is the essence of all the writings of C. Joerges, whose arguments rest on Polanyi and Wietho¨lter; see Chapter 24. K. Zweigert and H. Ko¨tz, An Introduction to Comparative Law, 3rd ed. (Oxford: Oxford University Press, 1998), pp.13–32. H.-W. Micklitz, The Politics of Justice in European Private Law (Cambridge: Cambridge University Press, 2018), pp. 257–75. O. Lando, H. Beale, A. Pru¨m, E. Clive and R. Zimmermann (eds.), The Principles of European Contract Law, Parts I–III, Student Edition (The Hague: Kluwer Law International, 2019). C. von Bar, E. Clive, H. Schulte-No¨lke, H. Beale, J.Herre, J. Huet, M.Storme, S.Swann, P. Varul, A. Veneziano and F. Zoll (eds.), Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR), prepared by the Study Group on a European Civil Code and the Research Group on EC Private Law (Acquis Group), based in part on a revised version of the Principles of European Contract Law (Munich:Sellier European Law Publishers, 2009). Analysis and criticism by R. von Gestel and H.-W. Micklitz, ‘Comparative law and EU legislation: inspiration, evaluation or justification?’, in M. Adams and D.Heirbaut (eds.), The Method and Culture of Comparative Law: Essays in Honour of Marc van Hoecke (Oxford: Hart, 2014), pp. 301–19. L. Niglia (ed.), Pluralism and European Private Law (Oxford: Hart, 2013); N. Jansen, The Making of Legal Authority: Non-Legislative Codifications in Historical and Comparative Perspective (Oxford: Oxford University Press, 2010). Contributions in L. de Almeida, M. Cantero Gamito, M. Durovic and K. P. Purnhagen (eds.), The Transformation of Economic Law: Essays in Honour of Hans-W. Micklitz (Chicago: Hart, 2019).

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Since the turn of the millennium, integration through law has come under pressure; first through the rise of governance referred to as integration through governance or even integration without law,26 then, more recently, through Euroscepticism, nationalism and populism. Economic pressure derives from the rise of economic efficiency – which has made its way via the Lisbon Summit into integration beyond law.27 The politicization of law through the White Paper on European Governance28 has generated a variety of new forms of legal transfer, in which formal transposition or formal ‘imposition’ is complemented through co-ordination, cooperation and deliberation. The effects on functional comparative law as the pathway to European integration are more serious. Even in domains where law is still used as an instrument of European integration, the European Commission no longer relies on comparative legal research, instead advocating solutions which are first and foremost economically efficient.29 Is Richard Posner right in his claim that economic efficiency makes sense if we cannot agree on anything else?30 The cultural and legal diversity of Europe takes a back seat. The so called neo-liberal move is said to be one of the major reasons behind Euroscepticism.31 The focus on economic efficiency facilitates comparisons between the rules that govern EU and US markets.32 The original integration through law project, however, put the focus on the comparability of the federal structure. Centros combines two issues: the federal structure and economic efficiency. The judgment could be understood as a plea for judicial promotion of competition between the legal orders of member states.33 Economic efficiency builds a bridge between old-style legal instrumentalism, law as a tool and module of European integration and ‘law as a product’. The US discussion 26

27 28

29

30

31

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C. Joerges, ‘Integration through de-legalisation?’ (2008) 33 European Law Review 291–312; C. Joerges, ‘Europe’s economic constitution in crisis and the emergence of a new constitutional constellation’, in A. Mene´ndez and J. E. Fossum (eds.), The European Union in Crises or the European Union as Crises? (Oslo: ARENA Report 2/14, 2014), pp. 279–333. www.europarl.europa.eu/summits/lis1_en.htm. COM (2001) 428 final, 25.7.2001; S. Smismans, ‘From harmonization to co-ordination? EU law in the Lisbon governance architecture’ (2011) 18 Journal of European Public Policy 504–24; H.-W. Micklitz, ‘The targeted full harmonisation approach: looking behind the curtain’, in G. Howells and R. Schulze (eds.), Modernising and Harmonising Consumer Contract Law (Munich: Sellier European Law Publishers, 2009), pp. 47–86. The so-called Refit programme of the European Union serves as a striking example, see H.-W. Micklitz and A. Villanueva, ‘Refit or Rethink – the politics of EU research – a grand misunderstanding?’, in E. von Schagen and S. Weatherill (eds.), Better Regulation in EU Contract Law: The Fitness Check and the New Deal for Consumers (Oxford: Hart, 2019), pp. 37–60. R. Posner, Economic Analysis of Law, 9th ed. (New York: Wolters Kluwer Law and Business, 2014), pp. 635–62. See also R. Posner, ‘Wealth maximization revisited’ (1985) 2(1) Notre Dame Journal of Law, Ethics and Public Policy, at 104, where he writes: ‘Wealth maximization [. . .] comes closer to being a consensus political philosophy [. . .] in our contentiously pluralistic society than any other overarching political principle.’ Strongly W. Streeck, How will Capitalism End? (London: Verso, 2016); on many variations of neoliberalism, D. Cahill, M. Cooper, M. Konings and D. Primrose, The Sage Handbook on Neo-Liberalism (London: Sage, 2018). See J. Whitman, ‘Consumerism versus producerism: a study in comparative law’ (2007) 117(3) Yale Law Journal 340–407; but also D. Kelemen, Eurolegalism: The Transformation of Law and Regulation in the European Union (Cambridge, MA: Harvard University Press, 2011). N. Reich, ‘Competition between legal orders: a new paradigm of EC law?’ (1992) 29(5) Common Market Law Review 861–96; more general J. Smits, ‘A radical view of legal pluralism’, in: Niglia, Pluralism and European Private Law, pp. 161–72

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started with Coase’s famous article on the nature of the firm. Chapter 3 and Chapter 17 deal with corporate law and the links to theories of private law. The current chapter focuses on the Delaware effect; the idea and expectation that companies transfer their head office to wherever they find the most favourable legal rules. Roberta Romano34 dedicated her research to the competition of US federal states in corporate law; a competition that Delaware is claimed to have won. Nowadays, corporate law still ranks high on the political agenda.35 From this perspective, the Centros judgment could be understood as the European reply. Favourable English law conditions enticed small and medium companies (SMEs) to establish their head office in the UK and to provide services to the European Union from the UK territory.36 In reaction to case law of the ECJ member states reduced both administrative and financial burdens for SMEs. Nevertheless, one should be wary of comparing the Delaware effect with the Luxemburg effect. The similarities between the legal orders of individual US federal states are greater than those between EU member states. In spite of all harmonization efforts, European company law remains overwhelmingly national. Common rules, traditions and cultures especially with regard to corporate law (with the exception of the capital market and investment law) exist to a rather limited extent.37 The confrontation between Zweigert and Ko¨tz’s functional method and Romano’s law as a product enables us to improve our understanding of the problematic of transfers of law irrespective of the chosen method or technique. II The introduction by Zweigert and Ko¨tz is counted among the classics in comparative law.38 Zweigert and Ko¨tz belong to the post-war generation, which derived its intellectual and philosophical foundations from a belief in a unified Europe as a path towards peace and prosperity (see Chapter 5). The common European legal culture carries the idea of European ‘integration through law’. Law is a ‘product’, a ‘means’, but also an ‘instrument’ that can be used for an overall well-recognized good purpose: European integration. Zweigert and Ko¨tz’s functional method creates the basis for comparison and, hence, for competition between legal orders which should be overcome in the search for the best and most universally beneficial solution. The main idea is that, although Europe has common legal roots, the legal systems of individual states have grown apart to a considerable degree. 34

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R. Romano, ‘Law as a product: some pieces of the incorporation puzzle’ (1985) 1(2) Journal of Law, Economics, and Organizations 225–83, at 226. For the most pervasive example see E. O’Hara and L. E. Ribstein, The Law Market (Oxford: Oxford University Press, 2009), p. 10. G. Ferrarini, K. J. Hopt and E. Wymeersch (eds.), Capital Markets in the Age of the Euro: Cross-border Transactions, Listed Companies and Regulation (The Hague: Kluwer Law International, 2002); M. Gelter and L. Enriques, ‘Regulatory competition in European company law and creditor protection’ (2006) 7(1) European Business Organization Law Review 417–53; printed in H. Eidenmu¨ller and W. Scho¨n (eds.), The Law and Economics of Creditor Protection: A Transatlantic Perspective (The Hague: T. M. C. Asser Press, 2008), pp. 421–57. Grundmann, European Company Law; Gerner-Beuerle, Mucciarelli, Schuster and Siems, ‘Cross-border reincorporations’. For example, R. David, English Law and French Law: A Comparison in Substance (London: Stevens, 1980).

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The volume consists of 700 pages, half of which are dedicated to the main legal families, while the other half deal with a detailed analysis of contract law, criminal law and the law of unjust enrichment: ‘[T]he primary aim of comparative law, as of all sciences, is knowledge . . . which extends and enriches the “supply of solutions” and offers the scholar of critical capacity the opportunity of finding the ‘better solution’ for his time and place.’39 Law is understood as a system of rules that can be applied notwithstanding the moral or historical context. Their starting position leans more towards analytical positivism than the notion of law as a moral ideal in the Dworkinian sense. Zweigert and Ko¨tz analyse the usage of comparative law for the needs of the legislator, for interpretation, for legal education, for projects of international unification and for the building of European private law. The legislator should take the experience and the solutions of different legal families into consideration in the search for the best fit, while avoiding their reduction to a parameter for economic development (see Chapter 5 on LOT). Zweigert and Ko¨tz barely refer to the dispute between Kahn-Freund and Watson about ‘legal transplants’, on the conditions and the limits of the transferability of law. Yet, they are aware of the need to take the institutional environment into consideration. The message is that the legislator would need to ask two questions: first, whether the rule in question has proved satisfactory in its country of origin and second, whether the rule will work in the country of reception. A fully fledged answer to the first question would require comprehensive socio-legal research which was only undertaken in the early 1980s by the social-empirical research group at the very same Max-Planck Institute.40 What Zweigert and Ko¨tz advocated appears to be in line with what the European Union had been doing in the heyday of private law harmonization in the 1990s. Comparative law contributed to the search for the best solution. The ‘impact assessment’41 advocates a compatibility test that elevates economic efficiency into a prominent position and limits the search for the best solution to the field of economics. Zweigert and Ko¨tz’s second requirement falls by the wayside. Few studies have dealt with conflicts caused in national private law orders through harmonization.42 Zweigert and Ko¨tz promote a political ideal, which is more linked to Franz Wieacker’s belief in the common heritage than actually rooted in the realities of the bumpy European integration process (Chapter 5). In all European states, the interpretation of legal rules is based on the quartet of a literal, a historical, a systematic and a teleological approach.43 According to Zweigert and Ko¨tz, comparative law should be put at the same level as the other four methods of 39 40

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Zweigert and Ko¨tz, An Introduction to Comparative Law, p.15. A. Ho¨land, ‘Die Rechtssoziologie auf dem Weg vom Hamburger MPI zum Bremischen ZERP’, in C. Joerges, T. Pinkel and U. Uetzmann (eds.), Josef Falke zum 65. Geburtstag ZERP (2014/1 Discussion Paper), pp. 25–8. https://bit.ly/2ZAZe2n; R. Munday, ‘In the wake of “good governance”: impact assessments and the politicisation of statutory interpretation’ (2008) 71(3) Modern Law Review 385–412. Teubner, ‘Legal irritants’, has to be mentioned; also C. Joerges, ‘Desintegrative Folgen legislativer Harmonisierung: ein komplexes Problem und ein unscheinbares Exempel’, in H. Schulte-No¨lke and R. Schulze (eds.), Europa¨ische Rechtsangleichung und nationale Privatrechte (Baden-Baden: Nomos, 1999), pp.205–22. The Consumer Law Compendium dates back to 2007: https://bit.ly/2Cbe4UF; it could have turned into a useful tool if it had been regularly updated. The ‘effet utile’ as developed by the ECJ. There is a wealth of literature on methodology in European law, for example, K. Riesenhuber (ed.), European Legal Methodology (Cambridge: Intersentia, 2017).

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interpretation. The authors are well aware of what they are asking for: ‘these questions [the role of comparative law with regard to judicial activities] . . . should receive a bold rather than a timid answer’.44 The late Lord Bingham once said: ‘we [the House of Lords] have no problem in quoting other courts – pause – if they share our opinion’.45 Courts do not communicate with each other if they have differing opinions46 but the dense networks between courts might help promote an exchange.47 The Centre for Judicial Cooperation at the European University Institute in Florence provides for such a forum.48 The centre’s success underpins the judges’ desire to exchange points of view.49 Institutional co-operation brings out the bright side of the judicial exchange, as hoped for by Zweigert and Ko¨tz. The third claim stresses the need for legal education. The authors criticize the rather lamentable situation in member states and claim, referring to Roscoe Pound,50 to integrate comparative law into the teaching of national law.51 There is no university in Europe where comparative law is mandatory, except the University of Maastricht.52 There is, however, the European Law School, which offers an alternative form of postgraduate studies. Students are expected to work and live in three different European states with three different languages.53 The Ius Commune Casebooks for the Common Law of Europe, created by Walter van Gerven, equally served educational purposes.54 They come close to the ideal type of multinational textbooks. Van Gerven spoke out against a codification of civil law ‘from above’. The Ius Commune Casebook Series is based on the conviction that it is possible to create a ‘common law for Europe’ through a bottom-up process, by means of case law of the member states. Through cross border exchange between judges and courts, common European solutions can be developed. Zweigert and Ko¨tz’s own ideas on the feasibility of a common law for Europe are aligned with those of the Lando Group and later the Study Group:55 ‘One must first find what is common in the concerned jurisdictions and incorporate that in the uniform law. Any differences must be reconciled either by adopting the best existing variant or by finding a new solution through cooperative methods which is better and more easily applied than 44 45

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48 49 50 51

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Zweigert and Ko¨tz, An Introduction to Comparative Law, p. 18. At an event at the European University Institute in Florence in 2007, in which the author participated; see M. Gelter and M. Siems, ‘Citations to foreign courts – illegitimate and superfluous, or unavoidable? Evidence from Europe’ (2014) 62(1) American Journal of Comparative Law 35–85. M. Bobek, Comparative Reasoning in European Supreme Courts (Oxford: Oxford University Press, 2013), pp. 40–1. F. Cafaggi and S. Law (eds.), Judicial Cooperation in European Private Law (Cheltenham: Edward Elgar, 2017). www.eui.eu/Projects/CentreForJudicialCooperation/Home.aspx See the impressive list of the previous events, working papers and books at https://bit.ly/3eEHg3x. Zweigert and Ko¨tz, An Introduction to Comparative Law, p. 24. Zweigert and Ko¨tz, An Introduction to Comparative Law, p. 23, with references to R. Schlesinger, ‘The Role of the “Basic Course” in the Teaching of Foreign and Comparative Law’ (1971) 19(4) American Journal of Comparative Law 616–23; and K. H. Neumayer, ‘Rechtsvergleichung als Unterrichtsfach an deutschen Universita¨ten’, in H. Bernstein, U. Drobnig and H. Ko¨tz (eds.), Festschrift fu¨r Konrad Weigert zum 70. Geburtstag (Tu¨bingen:Mohr Siebeck, 1981). https://bit.ly/3jagSBS. www.rewi.hu-berlin.de/en/ip/els/homepage-els?set_language=en. https://bit.ly/2OsOEEe. Zweigert and Ko¨tz, An Introduction to Comparative Law, p.24.

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any of the existing ones.’ Ernst Rabel and Rene´ David advocated the elaboration of model laws and restatements. The Study Group produced the ‘Principles of European Contract Law’ and, jointly with the Acquis Group, developed the ‘Academic Draft Common Frame of Reference’, complemented by six volumes of comparative analysis.56 European politics welcomed neither the European Civil Code nor a Common European Sales Law. The lowest common denominator was a fully harmonized EU consumer sales law, driven by the search for a uniform economically efficient solution. It seems as though the European Union is facing difficulties in doing justice to the two criteria offered by Zweigert and Ko¨tz: the degree of satisfaction with the existing sales law and the potential compatibility of the new rules in the recipient countries. III Roberta Romano’s contribution stems from a different intellectual tradition. Economic analysis of law had pushed its social, political and moral dimensions to the sidelines. Over the course of the 1970s, law and economics gradually gained ground in the US, but was long to remain on the margins in Europe. In her seminal paper published in 1985, Romano searches for the most efficient rules in the competition between the laws of individual US states and with federal law via a choice of the companies’ seat. She looks for an explanation for the success of Delaware in attracting companies from all over the US, establishing longterm relationships and keeping them in the state. Romano’s article bears the suggestive title ‘Law as a Product’. The title and the approach ran around the world and triggered research venturing far beyond company law. More than thirty years later, research and literature abound, although the label changed from ‘law as a product’ to ‘regulatory competition’. In 2009, Erin O’Hara and Larry Ribstein published The Law Market,57 an explicit attempt to use law as a product for a comprehensive analysis not only in regard to corporate law, but also for contract law, family law, consumer law and arbitration. Based on Albert Hirschman, they advocate choice either through ‘voice’ (choice of law) or ‘exit’ (mobility of the customer). In Europe, perhaps the most outspoken research concentrated on insurance contracts.58 However, it took nearly 20 years before Horst Eidenmu¨ller launched his ‘law as a product’ project at the University of Munich. The outcome is a seminal publication which brings together scholars from the United States and the European Union under the title Regulatory Competition in Contract Law and Dispute Resolution.59 Whilst O’Hara and Ripstein focus on US law, the contributors in Eidenmu¨ller broaden the subject matter in a twofold way – the topic is no longer national law, but transnational law, and the law producers are no longer states or international institutions alone but also private parties. 56

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Von Bar, Clive, Schulte-No¨lke, Beale, Herre, Huet, Storme, Swann, Varul, Veneziano and Zoll, Principles, Definitions and Model Rules. O’Hara and Ribstein, The Law Market. M. Dreher, Die Versicherung als Rechtsprodukt: Die Privatversicherung und ihre rechtliche Gestaltung (Tu¨bingen: Mohr Siebeck, 1991). Eidenmu¨ller, Regulatory Competition.

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Overall, they observe a shift in perspective, from statist to a societal one, from territorial to functional.60 Already Romano’s law as a product overlapped with the discourse on the role and function of conflict of laws, respectively international private law in transnational law.61 The opening up of regulatory competition between state and non-state law in the global economic environment triggered a debate on whether contracting parties should be entitled not only to choose between different state laws, but also between state law and nonstate law.62 The economics of regulatory competition dominated the debate on the opt-in model as proposed in the Common European Sales Law.63 If one adds the impact of law as a product on comparative law and the opening towards law and economics,64 law as a product and/or regulatory competition condenses in a nutshell the even deeper philosophical question on the role and function of law in a globalized economy and society.65 The Delaware effect is nearly twenty-five years older than the Luxembourg effect,66 but is still at the heart of the debate about the pros and cons of regulatory competition. Suffice to remember that Panama, Liberia and the Marshall Islands account for about 40 per cent of the world’s registered tonnage.67 Romano’s contribution focuses on American corporate law in a fully developed federal state, whereas Zweigert and Ko¨tz focus on Europe. However, the purpose of this chapter is not to compare two corporate law systems,68 but to highlight how law is used as a product by Zweigert and Ko¨tz to promote European integration and by Romano to provide US enterprises with efficient corporate law and federal states with a reasonable tax revenue. As a consequence, her complex argument should be read as a blueprint for empirical research on how law is used and instrumentalized by the parties to the law market. In her opening remarks, Romano gives a short outline of the domestic debate on state competition literature, which has since lost none of its significance. Nader and Fischer point to a potential race to the bottom, where states would undercut each other with increasingly lower requirements to render their jurisdiction attractive and, in 60

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D. Wielsch, ‘Global law’s toolbox: how standards form contracts’, in Eidenmu¨ller, Regulatory Competition, pp. 72–3, under reference to F. Cafaggi, ‘New foundations of transnational private regulation’ (2011) 38(1) Journal of Law and Society 20–49. H. Muir Watt, ‘Private international law beyond the schism’ (2011) 2(3) Transnational Legal Theory 347–427. G. Ru¨hl, ‘The choice of law framework for efficient regulatory competition in contract law’, in Eidenmu¨ller, Regulatory Competition, pp. 287–304. S. Grundmann and W. Kerber, ‘An optional European contract law code: advantages and disadvantages’, (2005) 21 European Journal of Law and Economics 215–236; Common Market Law Review (2013) Special Issue 50(1/2) gathers contributions to a conference in Chicago on the law and economics approach to European contract law. For example, M. Siems, Comparative Law (Cambridge: Cambridge University Press, 2014); R. Michaels, ‘Comparative law by numbers? Legal Origins thesis, Doing Business reports, and the silence of traditional comparative law’ (2009) 57 American Journal of Comparative Law 765–95. J. Stark, Law For Sale (Oxford: Oxford University Press, 2019) p. 6: ‘Although literature on regulatory competition has become abundant during the last decades, the issue has received surprisingly little attention from the perspectives of legal philosophy, sociology, and political theory’. The major revisions of the corporate code in Delaware result from 1967. Romano, ‘Law as a product’, at 233. United Nations Conference on Trade and Development, Review of Maritime Transport 2017 (United Nations 2017), p. 43, taken from J. Stark, Law for Sale, pp. 1–4. In this context R. M. Buxbaum and K. Hopt, ‘Legal harmonization and the business enterprise: corporate and capital market law harmonization policy in Europe and the U.S.A.’, in Cappelletti, Seccombe and Weiler, Integration Through Law.

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consequence, improve their tax revenue. Easterbrook and Fischel advocate state competition as means to create efficient rules. Critics refer to Viking and Laval69 to demonstrate how the ECJ promoted competition yet undermined labour law.70 The success of Romano’s research results by and large from the fact that she could prove that not only managers but also investors and shareholders are in a position to benefit. However, she does not analyse the potential impact of regulatory competition on the public good. Advocates and opponents alike believe in two assumptions that can be subjected to empirical testing: (1) the states’ goal is to maximise tax revenues; (2) the enterprises’ aim is to locate their headquarters in the state which offers the most favourable legal conditions. Those who rely on the market, trust in shareholders to render companies efficient and accountable through competition between the rules of states, thus getting away with ‘bad rules’. Those who mistrust the market, count on federal rules that eliminate such competition between states and set common standards – ‘good rules’.71 The opposition is overstated as the law market may also produce failures as demonstrated by Hans-Werner Sinn .72 The reader should be aware of the striking differences vis-a-vis the Zweigert and Ko¨tz approach. Traditional comparative law would ideally examine the corporate law of fifty federal states, testing its functional comparability and the potential transferability of the ‘best solution’. Romano instead subjects her theoretical assumptions to a practical test. She differentiates between the supply side, that is, the federal states, and the demand side, represented by businesses. A survey sent to companies that had previously relocated their seat revealed eight ‘provisions of interest, out of which Romano evaluates four: (1) the standard for director and officer indemnification; (2) the exemption from stockholder vote of mergers involving a specific percentage of the corporation’s stocks; (3) the elimination of appraisal rights in corporations whose shares are traded on a national exchange; and (4) anti-takeover statutes.73 European comparative lawyers would probably insist on including employee representation, as employee mobility does not play a role in Romano’s analysis. In Europe, the Societas Europaea is meant to increase companies’ mobility. Enterprises are allowed to choose member states with less developed collective worker rights. Efforts to establish a European model of co-determination had already failed in the 1980s; still, the 69

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Case C-438/05, The International Transport Workers’ Federation and The Finnish Seamen’s Union [2007] ECR I-10779; Case C-341/05, Laval un Partneri [2007] ECR I-11767. In that sense C. Joerges and F. Ro¨dl, ‘Informal politics, formalised law and the “social deficit” of European integration: reflections after the judgments of the CJEU in Viking and Laval’ (2009) 15 European Law Journal 2–20; D. Schiek, The EU Economic and Social Model in the Global Crisis: Interdisciplinary Perspectives (Farnham: Ashgate, 2013); C. Kilpatrick, ‘Laval’s regulatory conundrum: collective standard-setting and the court’s new approach to posted workers’ (2009) 34 European Law Review 844–65; for a rather different perspective see L. Azoulai, ‘The Court of Justice and the social market economy: the emergence of an ideal and the conditions for its realization’ (2008) 45(5) Common Market Law Review 1335–55, at 1347–8; H.-W. Micklitz, ‘Three questions to the opponents of the Viking and Laval judgments’ (2012) OSE (Observatoire Social Europe´en) Opinion Paper No. 8. On good vs. bad O’Hara and Ripstein, The Law Market, p. 20. H.-W. Sinn, ‘The selection principle and market failures in systems competition’ (1997) 66(2) Journal of Public Economics 247–74; discussed by A. Engert, ‘Networks and lemons in the market for contract law’, in Eidenmu¨ller, Regulatory Competition, pp. 304–12. Romano, ‘Law as a product’, at 233.

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competition over social standards in Europe has not automatically led to a race to the bottom. Empirical evidence paints a much more sophisticated picture.74 Romano points out that federal states tend to become victims of their own success. A federal state, relying on tax revenue, has to follow the legal trendsetter in order to avoid losing companies to jurisdictions offering better terms. Delaware took the initiative with regard to three of the four parameters and adopted laws within a very short period. Far more than other federal states, Delaware is under a pressure of permanent innovation, yet it manages to offer a stable legal environment. The state constitution protects the status quo by requiring a two-thirds majority to change corporate law. Ireland and Luxembourg are said to be the European Delaware, as they have attracted companies through low corporate taxes, from the EU and from across the Atlantic.75 More recently, the EU legislature has taken action to reduce tax law competition between member states.76 Romano represents the concerns of the demand side by using questionnaires to ensure that the matrix covers all relevant topics that enticed enterprises to change their locations or that plan to do so. The costs for relocation are high, amounting to USD 3–4 million for a large public company. Companies indicate the following explanations: public offering, expansion through mergers and acquisitions, or avoidance of ‘takeover’. If a company wants to perform one of these three transactions, the applicable law plays an essential role. Delaware is said to have found the right answer for each of the three transactions. Tax savings are not a prominent factor; companies are paying a premium to Delaware in order to be provided with a favourable business environment, characterized by longstanding case law, experienced lawyers and judges who guarantee legal certainty. These benefits are less appealing to older and less dynamic companies. Romano invokes two reasons for how and why Delaware manages to stay in the lead: incentives for the legal profession and institutional support.77 The more corporate lawyers specialize, the more they will advise companies to relocate. The state and 74

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G. Bachmann, ‘Die Societas Europaea und das europa¨ische Privatrecht’ (2008) Zeitschrift fu¨r Europa¨isches Privatrecht 32–58. See, for example, P. S. Ryan, ‘Will there ever be a “Delaware of Europe?”’ (2004/2005) 11(2) Columbia Journal of European Law 187–200; L. Enriques, ‘EC company law and the fears of a European Delaware’ (2004) 15(6) European Business Law Review 1259–74; C. Kirchner, ‘Regulatory competition in EU corporate law after Inspire Art: unbundling Delaware’s product for Europe’ (2005) 2(2) European Financial and Company Law Review 159–206. See for example the references from fn. 79. Article 6 of the Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market, OJ L 193, 19.7.2016, provides that: For the purposes of calculating the corporate tax liability, a Member State shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part 2. For the purposes of paragraph 1, an arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.

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Luxembourg and Ireland tax rulings are now under the state aid rules scrutiny (before the Commission, the General Court and soon, the CJEU). These tax rulings have allegedly treated MNEs more favourably in comparison to stand-alone companies. Romano, ‘Law as a product’, at 273.

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corporate lawyers thus become parties to an alliance, which leads to self-reinforcing network effects (Chapter 2). Contrary to what Romano suggests, more recent research demonstrates that Delaware has a long history in business-friendly rules and the rupture in 1967 might be less dramatic than she suggests.78 Today, it is assumed that Delaware is chosen as a business seat exactly because of the network effects. Moreover, other larger states choose not to compete as they are not as dependent on tax revenues as Delaware. In light of the ever-growing importance of whether and how law should be used for business purposes to increase efficiency, I will now turn to the different strands of criticism that has been voiced against the idea of law as product. They can be divided into the internal and the external. The internal critique focuses on methodological shortcomings and conceptual insufficiencies; it does not question the overall usefulness of treating law as a product or of using law as a means to enhance competition. This sort of critique starts from the premise that an appropriate refinement could improve the use and the usability of law in shaping economic transactions. The contributions in Eidenmu¨ller are a rich source of information in this respect.79 Treating law as a product or invoking regulatory competition requires the existence and the definition of an appropriate market, of the actors in this market, of the parameters of competition that govern this market as well as of potential market failures.80 As is wellknown in competition law, the definition of an appropriate market is key and often determines the outcome. Romano takes it for granted that there is a market for corporate law, but do participation rights belong to the corporate law market? Is the market national, supranational or international, is it one for contract law or is it one for contract law in the respective markets, transport, energy, telecommunication for instance? Initially, the research focused on state law.81 The competitors were different states, but what if states compete with international sales law (the Vienna Convention) or, to complicate things further, if state law competes with non-state law82 or non-state law with non-state law?83 The price of the ‘product’ is still the key parameter. However, in regulatory competition the recipient country is not usually paying, instead the supplier country might subsidize the sale of the respective law.84 Competition lawyers will insist that there can be a price for 78

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B. R. Cheffins, S. A. Bank and H. Wells, ‘Law and history by numbers: use, but with care’ (2014) 5 University of Illinois Law Review 1739–64, at 1743, but see also at 1764. Eidenmu¨ller, Regulatory Competition; although they reiterate to some extent what has been said by L. Bebchuk, ‘A new approach to takeover and regulatory competition’ (2001) 87(1) Virginia Law Review 111–64; and M. Kahan and E. Kamar, ‘The myth of state competition in corporate law’ (2002) 55(3) Stanford Law Review 679–750. G. Ru¨hl, ‘The choice of law framework’, p. 289, under reference to Sinn, ‘The selection principle’. Romano, ‘Law as a product’, at 228–30; in Germany E. M. Kieninger, Wettbewerb der Privatrechtsordnungen im Europa¨ischen Binnenmarkt (Tu¨bingen: Mohr Siebeck, 2002), focusing on ‘legislative products’. D. Wielsch, ‘Global law’s toolbox’, advocating for an extension of Hart’s rule of recognition to non-state law. H. Collins, ‘Regulatory competition in international trade: transnational regulation through standard form contracts’, in Eidenmu¨ller, Regulatory Competition, pp. 121–42, p. 125: ‘regulatory competition has led to the rejection of state law in favour of private transnational law’, p. 134 on ‘irrelevance of choice of law’. Michaels, ‘Make or buy’, p. 28 and the ‘law and development’ literature, for example, D. Kennedy,A World of Struggle: How Power, Law and Expertise Shape Global Political Economy (Princeton, NJ: Princeton University Press, 2016).

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the product even if apparently nobody pays.85 Last but not least, is law to be treated as a product or is law to be regarded as a service?86 States which promote their sales are benefitting from the demand for legal services in the recipient country. Treating law as a service does not rule out the existence of a market, though the market might look very different as per the parameters that determine it. The external critique reaches much further. Understanding law as a commodity broadens the perspective towards the political economy of law as a product and towards regulatory competition. The supplier states as well as the suppliers of transnational law might use the promotion of their laws to recipient countries as means of preparing the ground for foreign investment.87 The recipient countries might even engage in collusion, to the detriment of local companies and local needs. This results in a divided economy and a divided society in the recipient country, as can be observed not only in less developed countries in the Global South but also in many of the new EU member states.88 H. Muir Watt denounces the schism between public and private law in transnational governance. J. Stark89 challenges the thinking in law as a product and regulatory competition over mandatory social rules from the viewpoint of political and moral philosophy. IV An obvious candidate for framing the two texts by Zweigert and Ko¨tz and Romano is Karl Polanyi’s The Great Transformation.90 The reader is encouraged to study Chapter 2 on Polanyi first. Polanyi’s book had fallen into oblivion until left-wing scholars started using him as reference point for critical legal theories in the aftermath of the 1968 revolution/ revolt91 and again forty years later, after Lehman Brothers and the euro crisis.92 The age of financialization is characterized through the decoupling of the financial market from the market for goods and services and from society.93 Polanyi starts from the opposite conclusion. He rejects natural accounts of the market mechanism; therefore, the financial market should be re-embedded in the social system, to stabilize the financial market economically and societally. Polanyi has not conferred a particular role on law. One could even say that 85

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T. Ackermann, ‘Private production of transnational regulation through standard form contracts’ in Eidenmu¨ller, Regulatory Competition, pp. 142–6. F. Mo¨slein, ‘Regulatory competition between public and private rules’, in Eidenmu¨ller, Regulatory Competition, pp. 147–54, p. 148. Michaels, ‘Make or buy’, p. 35. See. D. Kukovec, ‘Law and the periphery’ (2015) 21(3) European Law Journal 406–28. Law for Sale. K. Polanyi, The Great Transformation (Boston, MA: Beacon Press, 1944), chapter 6, ‘The self-regulating market and the fictitious commodities: labor, land, and money’, pp. 68–76. Indeed, it belonged to the basic reading of the single-stage lawyer training at the University of Bremen, or to the social-economic studies of the former School for Economics and Politics in Hamburg, that all teachers and students had to be familiar with. See R. Hank, ‘Der Große Transformator’, Frankfurter Allgemeine Zeitung, 4 July 2009, No. 152 Z1; S. Frerichs, ‘Re-embedding neo-liberal constitutionalism: a Polanyian case for the economic sociology of law’, in C. Joerges and J. Falke (eds.), Karl Polanyi, Globalisation and the Potential of Law in Transnational Markets (Oxford: Hart, 2011), pp.65–84. J. Vogl, The Specter of Capital (Stanford, CA: Stanford University Press, 2015).

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he disregards law. However, his analysis in ‘The Self-Regulating Market and the Fictitious Commodities: Labour, Land, and Money’ is based on a fairly instrumental understanding of law. Law thus becomes a tool, a medium, which accompanies the embedding and reembedding process without controlling it. Such an understanding is not far from functional comparative law or from law as a product. Ralf Michaels argues that ‘law as a product is a misnomer’,94 law is commodified.95 The same is true for comparative law which promotes legal transfer.96 In the concept of law as a product and regulatory competition, two legal cultures are apparently clashing – the United States still dominating the understanding of law as a tool to increase economic efficiency with the prevailing European understanding of law as means not only of increasing economic efficiency, but also for promoting social standards. The heated debate on how best to harmonize corporate law in Europe, either through competition or through regulation, reflects the deep gulf not only in the understanding of law but also in how a society, in which law defines mandatory standards for labour, consumer and the environment, should look. Centros brought the conflict into the limelight, as did the opt-in model in the proposed Common European Sales Law. Over the last twenty years, the ECJ refined the Centros doctrine considerably. S. Grundmann97 comes to the following conclusion: Therefore, after the Cartesio98 decision, the following picture [. . .] has crystallised: Centros, U¨berseering99 and Inspire Art100 had already developed a freedom of incorporation in the sense that the company formed is in fact allowed to freely choose the applicable law [. . .] Conversely, Cartesio is about the freedom to re-incorporate in the sense that a company once funded can later transfer its seat and change the applicable law (cross-border change of company form). The same can be said for the regulators and competition between them. While the first line of cases led to a competition in incorporation regimes [. . .] Cartesio opens a market for the change of company statutes and thus leads to a competition in re-incorporation regimes. As the Member States are still free to decide on the conditions under which they want to confer ‘their’ nationality, they themselves decide the capacity of ‘their’ companies to ‘export’ their legal form, for instance by transferring their real seat to another Member State, while maintaining the law of incorporation or origin. Thus, it is each Member State’s decision whether it wants to allow ‘its’ companies active participation in this type of competition. The Member States can, however, not avoid being subjected to competition of company forms, in particular that a company formed under one law can change this law against the will of the state of origin. 94

95

96

97 98 99 100

R. Michaels, ‘Make or buy: a public market for legal transplants?’, in H. Eidenmu¨ller (ed.), Regulatory Competition in Contract Law and Dispute Resolution (Oxford: Hart Publishing, 2013), pp. 27–42. However, see the attempt of Frerichs, ‘Re-embedding neo-liberal constitutionalism’ to understand law as fourth commodity. For an early discussion of law as a product of comparative law, E. Orucu, ‘Law as transposition’ (2002) 51(2) International and Comparative Law Quarterly 205–23. S. Grundmann, European Company Law, pp. 609–10. Case C-210/06, Cartesio [2008] ECR I-09641. Case C-208/00, U¨berseering [2002] ECR I-09919. Case C-167/01, Inspire Art [2003] ECR I-10155.

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The European Union did not succeed in harmonizing corporate law and this might not change in the near future. However, Centros has changed the legal landscape in Europe. Instead of the EU legislature, the ECJ took the lead and triggered a process of rethinking the role and function of company law in the European Union. Overall, the member states were receptive of the idea that competition exists between legal orders and attempted to make their corporate laws more attractive by shifting the emphasis from the seat theory to the incorporation theory. Authors of both approaches may feel satisfied; Zweigert and Ko¨tz in that the member states engaged in a comparison of legal orders, examined the broader economic and political environment for ‘their’ companies in the internal market and in the end favoured a solution that grants all companies, not only those registered domestically, broader opportunities to choose the legal order under which they operate. Romano would approve of the move towards regulatory competition in the European Union and also insist on the need to evaluate the differences in the business environment, the functionality of the registration and the bureaucracy behind it, the competence of the lawyers and the judges, not least the degree to which language matters as a barrier in itself. This kind of research is left for a legal institutional comparison that might possibly confirm what we know from contract law, where corporations choose either the common law or Swiss law, if they do not vote for the law of New York.101

101

See S. Vogenauer, ‘Regulatory competition through choice of contract law and choice of forum in Europe: theory and evidence’ (2013) 21 European Review of Private Law 13–78. For the empirical comparative analysis of European company law see M. Siems and D. Cabrelli (eds.), Comparative Company Law: A Case-Based Approach (Oxford: Hart, 2013).

24 Multilevel Governance and Economic Constitution Hans-W. Micklitz

a topic and materials I This chapter concerns the significance of the ordo-liberal economic constitution for the construction of the European Economic Community, the European Community and, today, of the European Union. In this context, the concept of multilevel governance and the economic constitution are interlocked. The founders of ordo-liberalism conceived the ordo-liberal model in the context of a national economy – this constitutes the prime theme of Chapter 6 insofar as it discusses Franz Bo¨hm’s concept of a private law society – and not for a multinational community of states or a transnational economic order of any kind. This raises the question as to whether the ordo-liberal economic order can also be applied and legitimized beyond the state, being transferred to the European Union and thereby imposed on other member states. Or does it fail due to the different national ideas about economic, monetary and fiscal policies or because of labour and social policies, or lastly, environmental and consumer policies that became increasingly important over the course of the twentieth century? And if so, what is the effect of the Europeanization of national policies, which the member states only made possible by transferring their competences to the European Union and which they expanded with each amendment of the Treaty of Rome? The Pringle case seems perfect for studying the European economic constitution, the interaction between monetary policy, economic and fiscal policy, the complicated interplay between exclusive competences of the EU, exclusive competences of the member states and joint competences, as well as the governance structure that should co-ordinate the different policies and different actors, the EU, the member states and the European Central Bank (ECB) (Box 24.1). In the Maastricht Treaty, the European Union established the euro, which was officially introduced on 1 January 2002. The treaty transferred the exclusive competence in monetary policy to the European Union and established the ECB. The competence in fiscal policies lies with the member states. The competences in economic policy are shared. The member states’ and the EU’s activities are based on the close co-ordination of member 454

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BOX 24.1 CASE STUDY

C-370/12 Judgment of the Court (Full Court), 27 November 2012 Thomas Pringle v. Government of Ireland and Others ECLI:EU:C:2012:756 At the peak of the euro crisis, the eurozone member states decided to establish the European Stability Mechanism (ESM). Article 3 describes the purpose: The purpose of the ESM shall be to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM Members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its member states. For this purpose, the ESM shall be entitled to raise funds by issuing financial instruments or by entering into financial or other agreements or arrangements with ESM Members, financial institutions or other third parties.

Mr Pringle, an Irish Parliamentarian, claimed that Ireland, by ratifying, approving or accepting the ESM Treaty, would undertake obligations which would be in contravention of provisions of the EU and FEU Treaties concerning economic and monetary policy and would directly encroach on the exclusive competence of the European Union in relation to monetary policy. He claimed that by establishing the ESM the member states whose currency is the euro are creating for themselves an autonomous and permanent international institution with the objective of circumventing the prohibitions and restrictions laid down by the provisions of the FEU Treaty in relation to economic and monetary policy. Further, he claimed that the ESM Treaty confers on the Union’s institutions new competences and tasks which are incompatible with their functions as defined in the EU and FEU Treaties. Lastly, he claimed that the ESM Treaty was incompatible with the general principle of effective judicial protection and with the principle of legal certainty. states’ economic policies, conducted in accordance with the principle of an open market economy with free competition. At the centre of the fiscal policy is the so-called bail-out clause under which neither the European Union nor the member states are to ‘be liable for . . . the commitments’ of another member state or ‘assume [those commitments]’. Pringle goes to the heart of what the economic constitution of the European Union is all about: what are its constitutive elements, the market freedoms, competition and an independent central bank in the meaning ordo-liberalism gives to it? Is it possible to distinguish between monetary, economic and fiscal policy, as the European legal order insinuates? Is the ESM Treaty interfering with monetary policy, which is in the hands of the EU/ECB alone or is it merely co-ordinating the economic policies of the member states? And can this be done outside the EU Treaty via a separate international agreement that unites the eurozone member states only? What about the impact of the ESM Treaty on the bailout clause in the EU Treaty? Does the ESM Treaty relieve member states of the

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BOX 24.2

E. J. Mestma¨cker, ‘Auf dem Wege zu einer Ordnungspolitik fu¨r Europa’, in E. J. Mestma¨cker, H. Mo¨ller and H. P. Schwartz (eds.), Eine Ordnungspolitik fu¨r Europa: Festschrift fu¨r Hans von der Groeben (Baden-Baden: Nomos, 1987), pp.9–49, (English translation available on the book website.) R. M. Buxbaum and K. J. Hopt, Legal Harmonization and the Business Enterprise: Corporate and Capital Market Law Harmonization Policy in Europe and the USA, vol. 4 (Berlin: Walter de Gruyter, 1988), chapter 1 ‘Introduction: models of inquiry’, pp. 1–23 C. Joerges, ‘What is left of the European Economic Constitution? A melancholic eulogy’ (2005) 30(4) European Law Review 461–89

responsibility for setting up a solid national budgetary policy? Does the ESM Treaty introduce a kind of financial solidarity between the stronger and the weaker member states by the backdoor that Europeanizes and politicizes financial policy that would hardly be in line with ordo-liberal thinking? Finally, who has what role to play in the decision-making processes: what roles are there for the EU, the ECB, the now twenty-seven member states of the EU Treaty and, last but not least, for the Board of Governors of the ESM, which unites the eurozone member states with the European Commission and the ECB as observers? Pringle wonderfully demonstrates the interplay with the idea of an economic constitution and the need for an appropriate multilevel governance structure. II The three selected texts are written by the generation which came after the ordo-liberal founders. In some respects they show a close affinity to the founders; in others, they are quite critical; still, ordo-liberal thought forms their backbone and they are of utmost importance for the understanding of the economic constitution of the European Union and its governance structure (Box 24.2). The contribution of Ernst-Joachim Mestma¨cker bears the significant title ‘On the path to a regulatory policy for Europe’.1 Here Mestma¨cker develops the concept of an ordoliberal economic constitution based on competition law and the four fundamental freedoms. The contribution was written after the Single European Act. Mestma¨cker correctly observes the shifts towards a politicization of the economy (and of the economic constitution) through the transfer of competences to the EU, which in the light of the ordo-liberal model he considers to be highly problematic.2 1

2

E. J. Mestma¨cker, ‘Auf dem Wege zu einer Ordnungspolitik fu¨r Europa’, in E. J. Mestma¨cker, H. Mo¨ller and H.P. Schwartz (eds.), Eine Ordnungspolitik fu¨r Europa: Festschrift fu¨r Hans von der Groeben (Baden-Baden: Nomos, 1987), pp. 9–49. In the first footnote in Mestma¨cker, ‘Auf dem Wege’, p. 9, he refers to P. Pescatore, “Die ‘Einheitliche Europa¨ische Akte”: Eine ernste Gefahr fu¨r den Gemeinsamen Markt’ (1986) 21 Europarecht 153–69.

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Richard M. Buxbaum and Klaus J. Hopt wrote their contribution in the context of the transnational project ‘integration through law’ that was supervised by Mauro Cappelletti, Monica Seccombe and Joseph Weiler.3 The second part of the book title bears witness to the aim pursued by the authors, which was to determine the role of law in a system of multilevel governance: ‘Europe and the American Federal Experience’. They search for a theoretical framework far beyond a mere comparative analysis in which they could embed the distribution of competences in company law between, on the one hand, the European member states or, respectively, the fifty US states, and on the other, the European Union or the United States at a federal level. Their contribution remains to this day of considerable theoretical and practical-political significance in the search for orientation in a multilevel system, be it a federal framework or a new model of supranational organization. The third contribution focuses on the social dimension in the economic constitution of the EU. Christian Joerges4 deals with the question of whether the erosion of the ordoliberal economic constitution, first through the Single European Act, later through the Maastricht Treaty, has opened the door for a social Europe and, if so, to what extent. Despite the re-orientation of the European Union towards a concept of ‘new governance’, his summary turns out to be rather sceptical. Joerges proposes a procedural understanding of the European constitutionalization. The recent developments in the debate about the economic constitution and the multigovernance structure of the European Union are moving in various directions. Two of these are prominent: the euro crisis has led to reviving the discussion on the pros and cons of ordo-liberalism and the potential of one theoretical model to guide and structure the European Economic Constitution. The other noteworthy development is influenced by the pros and cons of experimentalist governance as a potential explanation but also as theoretical guidance for the managing of the European Union as a whole (Box 24.3). BOX 24.3

J. Hein and C. Joerges (eds.), Ordoliberalism, Law and the Rule of Economics (Oxford: Hart, 2017) P. Kjaer, G. Teubner and A. Ferrajo (eds.), The Financial Crisis in Constitutional Perspective: The Dark Side of Functional Differentiation (Oxford: Hart, 2011) S. Grundmann, ‘Regulatory competition in European company law: some different genius?’, in G. Ferrarini, K. J. Hopt and E. Wymmeersch (eds.), Capital Markets in the Age of the Euro: Cross-Border Transactions, Listed Companies and Regulation (The Hague: Kluwer Law International, 2002), pp.561–95 C. Sabel and J. Zeitlin, ‘Learning from difference: the new architecture of experimentalist governance in the EU’ (2008) 14(3) European Law Journal 271–327 3

4

M. Cappelletti, M. Seccombe and J. H. H. Weiler (eds.), Integration Through Law: Europe and the American Federal Experience (Berlin: de Gruyter, 1985–1986). C. Joerges, ‘What is left of the European Economic Constitution? A melancholic eulogy’ (2005) 30(4) European Law Review 461–89.

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b theories, context and discussion I The entanglement of multilevel governance and the economic constitution represents a political minefield. This is where the unprotected collision of politics, law and economy in continually new shapes takes place, ultimately putting in question the role and function of law itself. Multilevel governance is not a legal term, but one from political science. In the context of nation states, lawyers would speak of federalism. Beyond the nation state, there are no comparable legal categories from which normative conclusions could be derived (see Chapters 25–27). In 1986, the Single European Act introduced the internal market and with it new competence in sensitive political fields. The new institutional design of the European Union led to a discussion on how to implement the regulatory objectives, how to handle the shift of regulatory competences from the nation states to the European Union and how to conceptualize the new architecture. Political science took the lead and introduced the concept of multilevel governance before the term found its way into legal scholarship.5 The daily practice was characterized by regulatory activism. The European Commission put to use its new competences and succeeded in getting a huge amount of secondary EU law adopted, not only in the field of economic policy but also with regard to private law issues, in particular consumer law. The short period between 1986 and 2001 could be regarded as the heyday of European regulation. In 2001 the European Commission published the White Paper on European Governance.6 This paper marked a break-even point in the development of the European Union as it openly addressed the problematic of a supranational body which has broad competences but lacks the institutional infrastructure to implement and to enforce regulatory policies which became condensed into secondary EU law. The White Paper prompted an avalanche of research on multilevel governance or multilevel system scholarship.7 Its counterpart at the global level is the idea of global governance (see Chapter 25). The second part of the discussion on how to conceptualize the European economic order has its origins in the Weimar Republic’s theory of constitutional law. Hugo Sinzheimer8 was the first to define the economic constitution as a concept. He focused on linking the capitalist economy – today one would speak of market economy – to organization of work in order to obtain a concept which placed the market economy in a constitutional-theoretical framework. Sinzheimer emphasized the entanglement of the constitution of the market and labour 5

6 7

8

See M. Jachtenfuchs and B. Kohler-Koch (eds.), Europa¨ische Integration, 2nd ed. (Wiesbaden: Springer, 2003, 1st ed. 1996); especially the research of Kohler-Koch available at www.mzes.uni-mannheim.de/d7/en/profiles/ beate-kohler-koch. On the transfer to legal scholarship see C. Mo¨llers, Gewaltengliederung (Tu¨bingen: Mohr Siebeck, 2005), § 6, p. 210. COM (2001) 428 final, 25.7.2001. C. Joerges, Y. Mény and J. H. H. Weiler (eds.), ‘Mountain or molehill? A critical appraisal of the Commission White Paper on Governance’ (2001) Jean Monnet Working Paper No. 6/01; G. Marks, L. Hooghe and K. Blank, ‘European integration from the 1980s: state-centric v. multi-level governance’ (1996) 34(3) Journal of Common Market Studies 341–78. H. Sinzheimer, Grundzu¨ge des Arbeitsrechts (Jena: Gustav Fischer, 1927); in this context R. Dukes, The Labour Constitution: The Enduring Idea of Labour Law (Oxford: Oxford University Press, 2014).

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or, more pointedly, reconciling capital and labour (Chapter 8). After the international economic crisis of 1929, the term ‘economic constitution’ was taken up and developed further by Walter Eucken, Alexander Ru¨stow (both 1932) and Franz Bo¨hm (1933). This marked the beginning of the discussion on the ‘ordo-liberal organization of the economy’.9 In contrast to Sinzheimer, the three founders laid the focus on the market economy, the development of which should be guaranteed by a strong though restrained state, whose main function from an economic perspective is to safeguard free and fair competition. The singular orientation towards the market economy, neglecting its social anchoring as strongly promoted by Sinzheimer, provoked opposition by critical constitutionalists who associated ordoliberalism with authoritarian liberalism.10 It was only after World War II and in the course of the reconstruction of the Federal Republic of Germany that the conceptual thoughts of Eucken and Ru¨stow gained ground despite the fears and resistance of their ideological opponents of various echelons in society and the economy (Chapters 6 and 13). There is one obvious objection to the lengthy discussion of ordo-liberalism in this book: why should a non-German lawyer, sociologist, political scientist or economist be concerned with the model of an economic constitution, with ordo-liberalism, with the idea of incorporation of an economic order into the constitution? And if they should be concerned, why at such length and from such various perspectives? Is this not a question of a Sonderweg (preoccupation) that can only be of limited interest beyond Germany? The practical, political answer might be that ordo-liberalism has left its mark on the European constitution (not only on the economic constitution). Joerges formulates a more convincing answer:11 Just a Sonderweg of German constitutional theory? Certainly more than that. The tensions between the law and social justice and its ‘juridification’ are of general importance. And to take the argument a step further into an uncharted sea: this debate is linked to the project of modernity itself: to the tension and conflict between the project of political modernity defined as collective self-determination, and economic modernity defined as the autonomous determination of the ways in which human needs are satisfied.

The most recent developments following the euro crisis bear witness to the significance and also to the un(?)suitability of ordo-liberal thought not only for the European Union as an economic community that needs to unite different politico-economic ideas of other member states, but also and especially for the effects and interactions with the societies of Europe. 9

10

11

W. Eucken, ‘Staatliche Strukturwandlungen und die Krisis des Kapitalismus’ (1932) 36 Weltwirtschaftliches Archiv 297–323, reprinted in (1997) 48 ORDO: Jahrbuch fu¨r die Ordnung von Wirtschaft und Gesellschaft 5–24; A. Ru¨stow, ‘Interessenpolitik und Staatspolitik’ (1932) 7(6) Der Deutsche Volkswirt 169–72; F. Bo¨hm, Wettbewerb und Monopolkampf (Berlin: Carl Heymanns, 1933, new ed. Baden-Baden: Nomos, 2010). With Hermann Heller as leading figure; see H. Heller, ‘Autorita¨rer Liberalismus?’ (1933) 44(1) Die Neue Rundschau 289–98; see with regard to his importance as a founder of political science and a democratic state theory, C. Mu¨ller and I. Staff (eds.), Staatslehre in der Weimarer Republik: Hermann Heller zu ehren (BadenBaden: Nomos, 1984). As if history could repeat itself: following the euro crisis, the term ‘authoritarian liberalism’ became a keyword of European economic and monetary policy, see A. Somek, Cosmopolitan Constitutionalism (Oxford: Oxford University Press, 2014), pp. 22–3; as well as C. Joerges and C. Glinski (eds.) The European Crisis and the Transformation of Transnational Governance: Authoritarian Managerialism versus Democratic Governance (Oxford: Hart, 2017). Joerges, ‘What is left’.

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The three texts to be discussed were drafted during different phases of European integration, shortly after the Single European Act of 1986 and in 2004 (after the Treaties of Maastricht (1991), Amsterdam (1999) and Nice (2001)), thus, appearing during the discussion about the failed attempt of ‘open’ constitutionalization of the EU. One might be tempted to interpret the three texts in the light of the developments that have taken place since the economic crisis/euro crisis. However, their consistent reference to the main topic of multilevel governance and economic constitution seems to indicate a broader outlook. They include the respective fields of law and policy that the authors place at the centre of their analyses, that is, different prioritizations with regard to policy areas: Mestma¨cker – competition law; Buxbaum and Hopt – corporate law and capital markets law; Joerges – social, labour and consumer law. II Mestma¨cker aims at:12 ‘demonstrating which questions were decisive at the beginning of European integration [. . .]. It should [. . .] be attempted to emphasize the options that the European competition policy was facing at the start of European integration, how the relations to the remaining community politics were and how they developed afterwards.’ The contribution is divided into four sections. Section I deals with the foundations of the European market constitution and its origins in competition and the market freedoms; section II analyses the outlines of the common market as determined by the Treaty of Rome in contrast to the political concept of the internal market concluded in the Single European Act; section III focuses on the conflict-prone interplay between competition and industrial policy; section IV provides the reader with details on competition law in ordo-liberalism. The first section bears the title ‘The Treaty of Rome as market-economic order with constitutional character’, thereby revealing the path that Mestma¨cker wants to take. Only the Treaty of Rome, as the relevant foundation for the creation and the functioning of the internal market, and not the regulatory powers newly created by the Single European Act, constitute a conclusive architecture of legitimization. Here, a hierarchy between primary and secondary European Community Law is suggested which does not correspond with the ECJ’s approach.13 For Mestma¨cker, it is essential that the ECJ had set from the very beginning the course towards a market constitution. In the Consten-Grundig case,14 the ECJ determined that the EEC Treaty represents a ‘competition order’; in its Leclerc decision,15 the court stated that ‘Articles 2 and 3 of the Treaty set out to establish a market characterized by the free movement of goods where the terms of competition are not distorted’; in the Walt Wilhelm case,16 it ruled that EU competition law gains precedence over national law. 12 13

14 15 16

Mestma¨cker, ‘Auf dem Wege’, pp. 12–13. Case C-106/77, Simmenthal [1978] ECR 629. An objection that Mestma¨cker, ‘Auf dem Wege’, p. 13, considers as void. An objection might be that counterexamples exist. But the ECJ has not yet approved a general distinction between primary and secondary community law. Joined Cases C-56 and C-58/64, Consten SaRL and Grundig GmbH v. Commission [1966] ECR 299. Case C-229/83, Leclerc [1985] ECR 1. Case C-14/68, Walt Wilhelm [1969] ECR 1.

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Against this background, Mestma¨cker’s position in the debate on the claimed economic-political neutrality of the Treaty of Rome, a debate which was vehemently conducted at the time he wrote his article, is consistent. He particularly turns against Pieter Verloren van Themaat,17 who refuses to speak of a market-economic constitution since, in the Treaty of Rome, competition is said to be on a par with the principles of equality and solidarity. Van Themaat finds backing in the German discussion on the economicpolitical neutrality of the German constitution.18 Moreover, van Themaat invokes the Common Agricultural Policy, which cannot be squared with the ordo-liberal model proclaimed by Mestma¨cker. Indeed, from a historical and an analytical point of view, downplaying and neglecting the agricultural sector as a constitutive part of the Treaty of Rome is one of the weaknesses of ordo-liberalism. The Treaty of Rome is based on an economic-political compromise between Germany and France. France agreed on the opening of its national market to German industry, but in return required the agricultural market to be subjected to European regulation and subsidization.19 Mestma¨cker, however, by referring to Advocate General Capotorti, intends to subject the EU’s institutions to the primacy of the competition order also with regard to agriculture.20 He is aware that the conflict requires a political decision between different economic models. According to Mestma¨cker, it would be advisable to revert to Eucken and Bo¨hm in order to justify an ordo-liberal market constitution for the European Union as a whole.21 The adoption of the Single European Act seems to have put the advocates of an ordo-liberal economic constitution somewhat on the defensive. However, one might wonder whether Bo¨hm would have declared social regulation (consumer law) to be incompatible with ordo-liberalism. Section II bears the title ‘Internal Market’ and can only be understood against the background of Mestma¨cker’s critical position being directed not against the project per se but against achieving it through political and regulatory activism. A possible alternative, albeit not discussed, could have been the mutual recognition of national rules, as promoted in the Cassis de Dijon case (1979)22 and touched upon in the White Paper on the completion of the internal market (1985).23 However, one year later, the Single European Act did not recognize mutual recognition as a constitutive principle. Instead, the Single European Act introduced Article 100 (a) EEC Treaty (today Article 94 TFEU), thereby granting the European Union the competence to complete the internal market through legislative measures. These powers could subsequently be realized through the majority vote.24 17

18

19 20 21 22 23 24

E. J. Mestma¨cker, ‘Die Aufgabenverteilung zwischen dem Gesetzgeber und dem Europa¨ischen Gerichtshof bei der Gestaltung der Wirtschaftsverfassung der Europa¨ischen Gemeinschaften’, in Mestma¨cker, Mo¨ller and Schwartz, Eine Ordnungspolitik fu¨r Europa, pp. 425–43. H.-J. Mertens, C. Kirchner and E. Schanze, Wirtschaftsrecht (Reinbek: Rowohlt, 1978); 2nd ed. Opladen: Westdeutscher, 1982. L. van Middelaar, The Passage to Europe (New Haven, CT: Yale University Press, 2013). Mestma¨cker, ‘Auf dem Wege’, p. 19. Mestma¨cker, ‘Auf dem Wege’, pp. 20–1. Case 120/78, Rewe-Zentral AG v. Bundesmonopolverwaltung fu¨r Branntwein [1979] ECR I-649. COM (1985) 310 final 14.6.1985. S. Grundmann, ‘The Structure of European contract law’ (2001) 9(4) European Review of Private Law 505–28, considers this mechanism to be a competitive element amongst the regulators; more in favour of the

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Mestma¨cker criticizes the foreseeable politicization of the economic constitution, as reflected in the Treaty’s language:25 ‘Relapse of the clear legal language of the constitutional legislator into the jargon of a diplomatic communication at a conference.’ The Treaty of Rome, especially the project of a common market, linked the member states to each other without them knowing whether and how their own interests would be affected in the future. Member states removed this veil of ignorance (John Rawls) with the adoption of the Single European Act.26 Unlike the common market, the internal market could have turned into a project of political policy-making with a high level of design freedom implicitly assumed.27 Mestma¨cker goes as far as to claim that, by means of the qualified majority requirement, member states could undermine the direct applicability of the provisions of the EEC Treaty laid down by the ECJ through legislative action. There has been much social and academic support for the Single European Act and the politicization of the market economy. In such a perspective, the Single European Act offered the opportunity to shift the ‘social question’ from the national towards the European level and to create a social Europe.28 Fritz Scharpf analysed the difficulties of realizing such a project and coined the bold formula of the joint decision trap.29 Mestma¨cker gave a fitting response to this, albeit in a different context:30 ‘[that] under which conditions the Member States are permanently ready to accept that Community law [adopted by a qualified majority and provided with supremacy] limits their sovereignty’. Section III is dedicated to the tension between competition and industrial policy. Economic policy as competition policy requires the primacy of the market, while competition policy as industrial policy requires the primacy of politics. Mestma¨cker focuses on two central areas that, to this day, suffer from the virulence of this conflict: when dealing with stagnant industries, industries hit by a crisis or with regard to research and development funding by the state. Unlike the ECSC Treaty, the EEC Treaty has no instruments to fight structural crises. Mestma¨cker refers to this finding in order to counteract the attempts of the

25 26 27

28

29

30

competition between regulators S. Grundmann, ‘Wettbewerb der Regelgeber im Europa¨ischen Gesellschaftsrecht: jedes Marktsegment hat seine Struktur’ (2001) 30(6) Zeitschrift fu¨r Unternehmens- und Gesellschaftsrecht 783–832; in English, S. Grundmann, ‘Regulatory competition in European company law: some different genius?’, in G. Ferrarini, K. J. Hopt and E. Wymmeersch (eds.), Capital Markets in the Age of the Euro: Cross-Border Transactions, Listed Companies and Regulation (The Hague: Kluwer Law International, 2002), pp. 561–95. Mestma¨cker, ‘Auf dem Wege’, p. 25. Mestma¨cker, ‘Auf dem Wege’, p. 26. On the distinction between the concepts of the internal market and the common market see A. Somek, Individualism: An Essay on the Authority of the European Union (Oxford: Oxford University Press, 2008), p. 121. Somek refers to L. W. Gormley, ‘Competition and free movement: is the internal market the same as a common market?’ (2002) 13(6) European Business Law Review 517–22; K. Mortelmans, ‘The common market, the internal market and the single market, what’s in a market?’ (1998) 35(1) Common Market Law Review 101–36; G. Davies, ‘Can selling arrangements be harmonised?’ (2005) 30 European Law Review 370–85. It is sufficient to refer to the publication series of the Centre for European Legal Policy, www.nomos-shop.de /trefferListe.aspx?action=reihe&reihe=215&rtoc=0. F. Scharpf, ‘The joint-decision trap: lessons from German federalism and European integration’ (1988) 66(2) Public Administration 239–78. Mestma¨cker, ‘Auf dem Wege’, p. 25, fn. 25. He could have found support in J. H. H. Weiler, ‘The transformation of Europe’ (1991) 100(8) Yale Law Journal 2403–83.

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EU Commission to use Article 85 (3) EEC Treaty (today Article 101 (3) TFEU) for the exemption of crisis cartels. However, this has precisely been the case over the last twenty years, not only by means of exemption, but also due to the generous handling of state aid. State aid law has developed into a separate field of law of the highest practical relevance.31 Mestma¨cker put particular emphasis on research funding as an instrument of European industrial policy. Nearly thirty years ago he stated:32 ‘All evidence suggests the gaining of independence of the research and technology policy in Europe.’ His prediction as well as the ‘affinity of technology to power’ as proclaimed by Ernst Forsthoff, to whom Mestma¨cker refers, has since become reality.33 One could draw parallels to the euro crisis and ask what is left of the primacy of the market and competition at times when state aid is generously granted to banks, whether we are experiencing a rebirth of crisis management through an enhanced administrative state and how these concepts are mutually exclusive.34 III Buxbaum and Hopt compare US and European corporate and capital markets law. The ‘principled criteria’,35 on which they base their analysis, are only partly tailored to the topic of a legal comparison. It is for this reason that the text is relevant with regard to the discussion about the economic constitution. In their search for a rational division of powers, they initially refer to quantitative criteria (size of the enterprise), and then to formal characteristics (legal nature of the enterprise). They consider both types of criteria as indeterminate since, due to a lack of theoretical safeguards, they allow for a rational justification of an assignment of a competence to the lower or the higher level. If anything, formal criteria may be considered useful, provided that a correlation between form and regulatory purpose could be established. The completely different points of reference in the member states of the European Union refer more to historically developed legal systems than to rational parameters.36 Those reference points which are derived from the US constitution or the EEC Treaty appear to carry the most weight. Buxbaum and Hopt refer to the commerce clause in the US constitution, which serves ‘to regulate commerce among the several states’ (Article I § 8), or to Article 3 (h) of the Treaty of Rome, which speaks ‘[of] the extent necessary for the functioning of the common market’.37 At least in Europe, social scientists have for a long time dealt with the apparent comparability of these two formulations and the 31

32 33

34 35 36 37

D. Chalmers, G. Davies and G. Monti, European Union Law, 3rd ed. (Cambridge: Cambridge University Press, 2014), dedicate a whole chapter, pp. 1052–86, to state aid law. However, the question is whether – with regard to the content – the industrial policy represents the central impact direction or rather a restriction. Even the banking recovery fund (supplied by bank levy!) is linked to public state aid law. Mestma¨cker, ‘Auf dem Wege’, p. 31. Mestma¨cker, ‘Auf dem Wege’, p. 33 by referring to E. Forsthoff, Der Staat der Industriegesellschaft (Munich: C. H. Beck, 1971), p. 34, and the example of the Federal Republic of Germany. See Joerges and Glinski, The European Crisis. Buxbaum and Hopt, Legal Harmonization, p. 1. Buxbaum and Hopt, Legal Harmonization, p. 3. In the introduction, Buxbaum and Hopt deal only marginally with the Single European Act and the then new Art. 100a EEC Treaty, now Art. 114 TFEU, which says: ‘which have as their objective the establishment and functioning of the internal market’; see in detail Buxbaum and Hopt, Legal Harmonization, chapter 3, pp. 194–5.

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possible consequences.38 Buxbaum and Hopt highlight the many differences: On an institutional level, a developed federation (USA) vs. a European Union that might remain incomplete in the long run; the constitutional design of powers; and historically – given that the United States boasts a 200-year-old constitution as compared to the European one (the treaties) that was only thirty years old at the time. In the United States, the federal courts took on a key function. According to Buxbaum and Hopt, in the European Union the realization of the common market depends on the European legislature, which is true at least for corporate and capital markets law.39 On the other hand, in the aftermath of the crisis the European Union has taken regulatory measures to realize a European capital market more often than not by way of regulations.40 In this context, I would like to add two comments. Following Mestma¨cker, the ECJ’s Centros decision (Chapter 23) could be considered as an attempt to realize the alignment in corporate law by means of the fundamental freedoms, that is, without involving the European legislature. This would be a recourse to the veil of ignorance (Rawls) that enabled the US courts to create a federal state and a market out of an association of politics to build a political unit.41 The contribution of Buxbaum and Hopt might still be slightly tainted by the ‘learning from America’ style. Today, the situation might have become reversed as the European multilevel governance structure allows for studying changes in a nation state’s constitutional architecture.42 In their search for orientation in the division of powers, Buxbaum and Hopt turn to economic considerations or theories. They do not deal with ordo-liberalism. However, from the short reference to a possible correlation between ‘economic organization and the political concept of federalism’, one might conclude that helpful information with regard to a distribution of power can be drawn neither from ordo-liberalism nor from the model of a mixed economic constitution. Mestma¨cker would hardly agree with this interpretation, since he considers the EEC Treaty on the creation of a common market as an politicoeconomic ‘overall decision’ (Grundsatzentscheidung).43 Buxbaum and Hopt refer to the 38

39

40

41

W.-H. Roth, Freier Warenverkehr und staatliche Regelungsgewalt im Gemeinsamen Markt: Europa¨ische Probleme und amerikanische Erfahrungen (Munich: C. H. Beck, 1977). S. Grundmann, European Company Law: Organization, Finance and Capital Markets, 2nd ed. (Cambridge: Intersentia, 2012, pp. 77–81. See, for example, D. Busch, E. Avgouleas and G. Ferrarini (eds.), Capital Markets Union in Europe (Oxford: Oxford University Press, 2018); M. Pepi and M. G. Horga, ‘Building the single European capital market’ (2015) 32 Procedia Economics and Finance 1505–16. Buxbaum and Hopt, Legal Harmonization, pp. 20–1: In the United States the struggle is that of a judiciary, of absolute and plenary authority to define autolimitations on its free use of the negative Commerce Clause – on the use, that is, of the constitutional grant of authority, standing alone and unexercised, to forbid state incursions into this unposted territory. A power not yet completely within the grasp of the strongest European central authority is in the United States left to the politically least involved (if not therefore least powerful) branch of government, to extend or not extend at will.

42

43

H.-W. Micklitz, ‘The European Union Project, Review Article on “Philosophical foundations of European Union law” by Julie Dickson and Pavlos Eleftheriadis (eds)’ (2013) 32 Yearbook of European Law 538–54. To this day the connection between C. Schmitt and ordo-liberalism is intensely discussed by academia, see C. Joerges, ‘Europe a Großraum? Shifting legal conceptualisations of the integration project’, in C. Joerges

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notion of ‘public choice’, according to which the decision should be left to the competition between legal orders. In this context, Roberta Romano highlights the so-called Delaware effect – the effects of regulatory competition (see Chapter 23). In incomplete or developed federations, the legislature should refrain from making decisions; state interventions would only be necessary to allow competition. Buxbaum and Hopt refer to a possible social pressure, which either leads to an intervention by the federal legislature or, provided that the latter does not intervene, to an intervention by the member states. The normative implications of the public choice principle remain politically vulnerable; the descriptive implications for corporate law continue to play a leading role in producing findings. Buxbaum and Hopt utilize the theory of comparative advantage in order to find out whether a unification or approximation of legal rules is reflected in productivity and, if so, in which way. In the classic case of justification of free trade, it is assumed that a comparative advantage results from appropriate specialization in production since the three natural advantages – ‘natural endowments, productivity and transportation costs’ – differ depending on the state. Buxbaum and Hopt refer to Tibor Scitovsky44 who searches for parameters to explain the economic integration of states by means of a comparable level of industrialization. He sees these parameters in the changes of production methods and behaviour as well as of the volume, the nature and the model of investments that could increase productivity in terms of a comparative advantage.45 Ultimately, such a model results in privileging competition as the decisive parameter. This is completely in line with an ordo-liberal economic constitution that would have to secure competition on a federal level by simultaneously reducing local obstacles of competition as well as the competition of regulators. Buxbaum and Hopt built on Peter Bernholz and Malte Faber’s46 considerations on a normative economic theory as their third economic model. Unlike a welfare state, where a unification of rules only makes sense under specific conditions and to a limited degree, in a night-watchman state rules should generally be unified. Accordingly, social regulation should remain a responsibility of the member states, as was originally provided for in the Spaak report. Yet the model would not be very revealing for the division of powers in corporate law, since it contrasts with the realities of common law. From our perspective today, it may be added that the harmonization process in the European Union and the United States is not mainly driven by traditional corporate law. It is rather capital markets law that plays an important role. For over a decade, the initiatives of harmonizing corporate law have been exclusively restricted to the so-called stockbroking company (PLCs with a capital market connection).47

44 45 46

47

and N. S. Ghaleigh (eds.), Darker Legacies of Law in Europe: The Shadow of National Socialism and Fascism over Europe and its Legal Traditions (Oxford: Hart, 2003), pp. 167–92. Buxbaum and Hopt, Legal Harmonization, p. 10. Buxbaum and Hopt, Legal Harmonization, pp. 10–11. ¨ berlegungen zu einer normativen o¨konomischen Theorie der P. Bernholz and M. Faber, ‘U Rechtsvereinheitlichung’ (1986) 50(1/2) Rabels Zeitschrift fu¨r ausla¨ndisches und internationales Privatrecht 35–60. Anticipating Grundmann, ‘Regulatory competition in European company law’; continued in Grundmann, European Company Law, pp. 923–45

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It is in the EU’s and the United States’ political frames of reference that Buxbaum and Hopt search for a final parameter. Their scholarship is based on the idea that the European Union is far more than an economic community, that is, that European integration has its own ethos. This leads to the question of whether it is better to pursue consumer protection, environmental protection or co-determination at a central or decentralized level? In this regard, the authors are careful. A theory-guided ‘search’ would already be problematic:48 ‘It is still unclear whether any existing economic or political theory of integration is yet able to offer a fully developed operation model of how to draw rational dividing lines between federal and state regulation of company and capital market law.’ Thus, the authors restrict themselves to an analysis of the political realities and the functional processes of European integration by relying on four criteria:49 (1) pointing out the essential differences; (2) analysing the targets provided by the Commission and the Council that have been fulfilled; (3) methods and institutions (legislator or courts); and (4) synoptic overview. In the final part, Buxbaum and Hopt revert to these four parameters and enumerate their results.50 Unfortunately, it is barely possible to apply such a framework to the United States. Thus, Buxbaum and Hopt have to return to the constitutional requirements: to the debate on the main differences between the ‘interstate commerce clause’ as a prohibition of governmental trade restrictions and the discussion about the reference to the internal market in the European legal order that positively legitimates the European legislator to intervene. In short, the authors develop an impressive theoretical framework for analysing EU law, but they find this framework to be sui generis and incapable of being applied beyond the confines of the EU. IV 51

Joerges’ thesis is provocative: ‘the erosion of the economic constitution [as presented by Mestma¨cker and discussed in Chapters 6 and 13] has not paved the way to a cure for Europe’s social deficit. Neither the open method for co-ordination nor the commitment to a “social market economy” in the Constitutional Treaty nor the new “social rights” provide for a conceptually sufficient and politically credible basis for this end.’ The article is based on three premises:52 (1) constitutionalism must reach down into the economic system and into the social fabric of society – in this respect he shares the original thesis of ordoliberalism;53 (2) the ordo-liberal economic constitution no longer serves as a model of a private law society (Chapter 6) since the social question is no longer the member states’ 48 49 50 51 52 53

Buxbaum and Hopt, Legal Harmonization, p. 15. Buxbaum and Hopt, Legal Harmonization, pp. 17–18. Buxbaum and Hopt, Legal Harmonization, pp. 272–4 (not reproduced here). Joerges, ‘What is left’, at 461. Joerges, ‘What is left’, at 462–3. It was in particular the inclusion of the Monetary Union in the treaty and not in the ‘mere’ secondary legislation that caused discussions and criticism; see M. van der Sluis, ‘Maastricht revisited: economic constitutionalism, the ECB and the Bundesbank’, in M. Adams, F. Fabbrini and P. Larouche (eds.), The Constitutionalization of European Budgetary Constraints (Oxford: Hart, 2014), pp. 105–23; earlier M. Everson, ‘The constitutional law of the euro? Disciplining European governance’, in P. R. Beaumont and N. Walker (eds.), Legal Framework of the Single European Currency (Oxford: Hart, 1999), pp. 119–40.

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exclusive responsibility; and (3) the provisions in the Lisbon Treaty and in the charter to ensure a social Europe are ambivalent at best. The Open Method of Coordination (henceforth OMC) that received a lot of premature praise undermined the integrity of law. The social question, as made clear by Joerges’ title and the reference to its origins,54 supplements Mestma¨cker’s contribution on the economic constitution and competition, as well as Buxbaum’s and Hopt’s work on the economic constitution and corporate or capital markets law. This is especially the case since the OMC reveals the perspectives and risks of economic constitutionalism while opposing the idea of tackling the social question through legislative activity by means of regulations and directives. The EU’s legislative powers being far too small, the OMC relies on the principle of ‘new governance’.55 With nearly twenty years of practical experience with the policies to complete the Single European Market (established in 1986), Joerges has the necessary insights to give a clearer picture of the apprehensions expressed by Mestma¨cker and Pierre Pescatore.56 Two statements are of significant importance for the subsequent analysis of the OMC: the shift of attention from market failure, which justifies statutory interventions, towards regulatory failure revealing the weaknesses of (maybe even interest-driven) state interventions. It is only against the background of regulatory failure that the importance of the OMC can be understood (Chapters 6 and 12). Yet the answer of the second generation of proponents of ordo-liberalism to the new challenge of an internal market might be even more important. In Joerges’ words, this second generation turns its back on Eucken and subsequently moves towards Friedrich von Hayek. Von Hayek’s manifesto, developed as early as 1945, (see Chapter 12) bore the title ‘Competition as a discovery procedure’.57 The new manifesto defends an apolitical concept of the economic constitution against the EU’s politically framed project of the internal market.58 However, this turn in the ordoliberal body of thought could not capture the rationale of the internal market project which triggered a massive wave of re-regulation, since it underestimated the project’s momentum. The parallel between von Hayek and the OMC is quite obvious, apart from 54 55

56 57

58

Joerges, ‘What is left’, at 461. I do not intend to embark on a discussion of whether or to what extent the European Union is able to deal with the social question, whether the inclusion of the social market economy in the treaty targets or enables a reorganization of the EU’s economic constitution, or whether or to what extent a constitutionalization of social rights offers a solution (in this context C. Joerges, ‘A renaissance of the European Constitution’, in U. Neergaard, R. Nielsen and L. M. Roseberry (eds.), Integrating Welfare Functions into EU Law: From Rome to Lisbon (Copenhagen: DJOF, 2009), pp.29–52), since those issues are already discussed in Chapters 8 and 9. P. Pescatore, The Law of Integration (Leiden: Sijthoff, 1974). F. von Hayek, ‘Competition as a Discovery Procedure’ (2002) 5(3) Quarterly Journal of Austrian Economics 9–23. Joerges consistently succumbed to this paradigm, but changed its direction; C. Joerges, ‘Alles nur ¨ ber Kollisionsrecht und Interlegalita¨t, u¨ber Evolution und das Entdeckungsverfahren der Marleasing? U Praxis im Angesicht der Krisen Europas’, in S. Keller and S. Wipra¨chtiger (eds.), Recht zwischen Dogmatik und Theorie: Marc Amstutz zum 50. Geburtstag (Zurich/St. Gallen: Dike, 2012), pp. 53–73; with regard to the discovery procedure literature: C. Joerges, ‘Zur Legitimita¨t der Europa¨isierung des Privatrechts, ¨ berlegungen zu einem Recht-Fertigungs-Recht fu¨r das Mehrebenensystem der EU’, in C. Joerges and U G. Teubner (eds.), Rechtsverfassungsrecht: Recht-Fertigung zwischen Privatrechtsdogmatik und Gesellschaftstheorie, Internationale Studien zur Privatrechtstheorie (Baden-Baden: Nomos, 2003), pp. 183–212.

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the fact that the discovery procedure in the ‘new governance’ is orientated towards the administrative practice and not towards competition.59 The OMC was, and is still, linked with the political hopes of the European Left. Joerges’ work carries the title60 ‘Are we about to bring the law to trial? Some queries with the open method of co-ordination.’ The OMC is introduced by means of a short outline of its development as a concept that was deeply appreciated by political scholars like Jonathan Zeitlin,61 but was also substantially supported by established legal scholars like David Trubek.62 At the Lisbon Summit in 2000,63 the European Union introduced the OMC, which, as Jonathan Zeitlin argues, promised to be: ‘an attractive model of how a non-coercive form of policy co-ordination emphasizing mutual learning and exchange of good practices could be applied to a politically sensitive field such as social protection which is characterized by wide institutional variations across EU Member States, where harmonization is considered by many to be neither practicable nor desirable’.64 Today, the author of this quote would be less likely to express such an optimistic point of view.65 Joerges would like proponents of the OMC to answer two normative questions concerning the details of the EU’s constitutionalization process. The first question refers to democratic experimentalism as proclaimed by, amongst others, Charles Sabel. The second question deals with a possible connection between the debate on regulatory failure and the discussion about the OMC. Like the concept of democratic experimentalism, the OMC can create new participative forms of democratic action. By referring to Alexander Somek, Mark Amstutz and William E. Scheuermann, Joerges66 rejects democratic experimentalism as a model to strengthen social regulation in the EU, arguing that, in a much too frivolous way, the traditional virtues of the rule of law would thus be sacrificed in favour of a model that appears to be ‘soft’, but has ‘strong’ impacts. Democratic experimentalism would loosen the relations between law and legal enforcement without providing (normative) criteria as to how to organize the discovery procedure, or a benchmarking scale by means of which a best practice could be established. Ten years after the publication of the essay, the proponents of democratic experimentalism 59

60 61

62

63

64 65

66

Joerges, ‘What is left’, at 483: ‘In an ironic sense, democratic experimentalism can be called a methodological heir to first generation ordo-liberalism.’ Joerges, ‘What is left’, at 478. Quoted in Joerges, ‘What is left’, at 479; for a more profound analysis see J. Zeitlin and P. Pochet, The Open Method of Co-ordination in Action, 2nd ed. (Brussels/New York: Peter Lang, 2005). With regard to an appreciation of Trubek’s approach that does not align with the critical evaluation of Joerges at others, see N. Reich, ‘“Reflexive contract governance in the EU”: David Trubek’s contribution to a more focused approach to EU contract legislation’, in G. de Bu´rca, C. Kilpatrick and J. Scott (eds.), Critical Legal Perspectives On Global Governance: Liber amicorum David M. Trubek (Oxford: Hart, 2014), pp. 273–94. www.europarl.europa.eu/summits/lis1_en.htm; with regard to the importance of the reorientation of contract law to economic efficiency see introduction in Chapters 3 and 6. As quoted in Joerges, ‘What is left’, at 482. J. Zeitlin, ‘Towards a stronger OMC in a more social Europe 2020: a new governance architecture for EU policy coordination’, in E. Marlier and D. Natali (eds.), Europe 2020: Towards a More Social EU? (Brussels/ New York: Peter Lang, 2010), pp. 253–73. With regard to the often-discussed relation between ‘governance’ and ‘law’, see the references in fn. 68 and 69. Joerges, ‘What is left’, at 483–4.

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have learned to cope with the ‘failure of the model’. Sabel and Zeitlin bring forward the argument that there is a difference between experimentalist governance and informal governance. They refer to the strict (legal) obligation of disclosure, ‘justification’ (justification of the solutions found) and ‘peer review’.67 In an attempt to constitutionalize the OMC, Joerges’ argument goes even further.68 The initially provocative statement boils down to a rather traditional solution – the introduction of constitutional, legislative, procedural safeguards. Nevertheless, Joerges identifies a positive element in the shift from the ordo-liberal economic constitution towards new governance. From his perspective, Europe’s proclaimed constitutionalization should be perceived as an open process, taking place before our very eyes without us being aware of it (‘l’essential est invisible pour les yeux’, SaintExupe´ry). It is determined by the following three parameters: (1) the development of a European community by means of political networks; (2) the quest to understand law as justification law (which ultimately corresponds to a large extent to the corrections offered by Sabel and Zeitlin)69 through which justice and fairness can be reflected in the process of law production; and (3) the need to strengthen the legitimacy of nation states’ democracies through the inclusion of third parties, that is, persons and groups that do not belong to the community.70 Despite all the legitimate criticism raised against the move towards governance, it seems much more rewarding to understand the European Union as a laboratory for a post–nation state supranational structure rather than to measure the European Union against established criteria of a Western democratic state, be it in the form of a central state or a fully fledged federation.71 V Buxbaum and Hopt have identified a motto under which the discussion in the present chapter could be summarized:72 ‘Scholars who look or hope for rational decision-making criteria are victims of the illusion that principle and motive are synonyms.’ This finding 67

68

69 70

71 72

C. Sabel and J. Zeitlin, ‘Learning from difference: the new architecture of experimentalist governance in the EU’ (2008) 14(3) European Law Journal 271–327; C. Sabel and J. Zeitlin (eds.), Experimentalist Governance in the European Union: Towards a New Architecture (Oxford: Oxford University Press, 2010); see as well C. Sabel and W. H. Simon, ‘Epilogue: accountability without sovereignty’, in G. de Bu´rca and J. Scott (eds.), Law and Governance in the US and the EU (Oxford: Hart, 2006), pp. 395–412; and Y. Svetiev, ‘Settling or learning: commitment decision as a competition enforcement paradigm’ (2014) 33(1) Yearbook of European Law 466–500. In particular M. Dawson, New Governance and the Transformation of European Law: Coordinating EU Social Law and Policy (Cambridge: Cambridge University Press, 2011); E. Korkea-aho, Adjudicating New Governance: Deliberative Democracy in the European Union (Abingdon: Routledge, 2015); M. Dawson, C. Joerges and H. Enderlein (eds.), The Transformation of the European Union: Challenges of Functionality, Design and Legitimacy (Oxford: Oxford University Press, 2015). Contributions in: Joerges and Teubner, Rechtsverfassungsrecht. Critical A. Somek, Cosmopolitan Constitution (Oxford: Oxford University Press, 2014); see also the review by D. Patterson, ‘The Cosmopolitan Constitution by Alexander Somek’ (2015) 30(3) Constitutional Commentary 667–88. H.-W. Micklitz, The European Union Project. Buxbaum and Hopt, Legal Harmonization, p. 1.

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does not spare the legal scholar the search for rational criteria. Yet, they should not lose sight of the political minefield that is the entanglement of multilevel governance and the economic constitution. Pringle condenses all these new shapes in a nutshell. Mestma¨cker would certainly argue that any form of politicization of the monetary policy runs counter to the idea that the European Union should limit its role to secure market freedoms and guarantee fair competition on the one hand, but should not instrumentalize monetary policy for other purposes. In Pringle, the ECJ analyses the objectives of the ESM Treaty and not the effects.73 The court argues that potential indirect effects of the ESM Treaty on monetary policy and thereby on the exclusive competence of the ECB cannot be excluded but do not affect the overall qualification of the ESM Treaty as economic policy. In its case law on market freedoms, the court did just the opposite, stretching the reach of market freedoms by focusing on the potential effects. Notably, relying on the objectives of the ESM and taking the official language for granted is in itself a form of politicization. Therefore, the ECJ politicizes in depoliticizing the conflict. It provides the ECB and the governors of the ESM Treaty with considerable political discretion. Buxbaum’s and Hopt’s analysis is particularly helpful when it comes to orientation in the division of powers between the member states and the EU. They seem to reject the idea that ordo-liberalism or the model of a mixed economy can provide substantive guidance in the shaping of the powers in a federal (US) or an EU multilevel governance model. Whilst they are not discussing the relationship between regulatory competition and ordo-liberalism, they are much more outspoken on the shortcomings of any ‘economic or political theory of integration’ to draw dividing lines between federal and state regulation of a company and capital market law. It is by no means clear whether their findings can be applied to social regulation or as in Pringle to the different intermingling policies. What remains, however, is the well-analysed scepticism towards shaping the EU institutional architecture along the lines of abstract models or abstract theories. Their four criteria – ‘essential differences’, ‘political targets’, ‘methods and institutions’ and ‘synoptic overview’ – might serve instead as sui generis toolkit to analyse the different substantive, procedural and institutional governance dimensions. In this sense, Buxbaum and Hopt are in a way forestalling governance theories. Joerges’ contribution puts the social question into the limelight, more generally the interaction between market integration through the four freedoms and competition vs. social regulation.74 Pringle addresses the social question through fiscal solidarity. The ECJ rejected the argument that the ESM Treaty undermines the bailout clause. There are good arguments that the ESM Treaty might very well have such an effect. What matters for Joerges though is the governance structure; the question of how potential clashes between the bailout and the ESM Treaty could be managed. In the text, he discusses the OMC and 73

74

T. Tridimas ‘The thin red line between the OMT decision and the Banking Union’, in S. Grundmann / H.W. Micklitz (eds.), The European Banking Union and Constitution: Beacon for Advanced Integration or Death-Knell for Democracy? (Oxford: Hart, 2018), p.28. Joerges and Glinski, The European Crisis.

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its potential for managing the differences in labour law and for improving the social face of the internal market. Applying his analysis on the deficits of the OMC to Pringle would imply that the interaction between the EU Treaty and the ESM needs to be proceduralized. This boils down to what Mark Dawson75 has called the constitutionalization of the multilevel governance structure.

75

M. Dawson, New Governance and the Transformation of European Law: Coordinating EU Social Law and Policy (Cambridge: Cambridge University Press, 2011).

25 Transnational Law Moritz Renner

a topic and materials I This chapter deals with the concept of transnational law. Transnational law is of utmost practical relevance, as private law relations have always transcended the borders of national legal systems. There is a broad theoretical discussion of the topic, but the very concept of transnational law remains elusive. Is it a novel legal order made by non-state actors? A mere description of the ways in which different legal orders interact? Or rather a new perspective on the lawmaking process as an interplay of public and private, national and international actors? What the concept might mean in practice is illustrated by a recent decision of the English Court of Appeal (Box 25.1). The case poses the central question: what is transnational in transnational law? It is concerned with a dispute between two Italian parties and has no apparent connection to any other state’s territory. Nevertheless, it has an important crossborder dimension as the transaction between the parties relates to the global derivatives market. Furthermore, the legal relation between the parties is based on a standard contract published by the ISDA as a private standard-setting institution with a global reach. II What can theories of transnational law contribute to the analysis of a case such as Dexia v. Prato (Box 25.1)? Most importantly, they can help us understand what is happening and what is at stake here. Philipp C. Jessup described phenomena of transnational lawmaking as early as the 1950s, in the first reference text for this chapter. His pragmatic, functional approach still provides valuable insights for practitioners and theorists of private law alike. The rapid pace of globalization especially in the last decades of the twentieth century has made the issues raised by transnational phenomena much more pressing. At the same time, contemporary social theories such as systems theory (see Chapter 4) have provided a sophisticated conceptual apparatus for analysing the social changes that globalization

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BOX 25.1 CASE STUDY

Dexia Crediop S.p.A. v. Comune di Prato [2017] EWCA Civ 428) The claimant in this case was an Italian bank, the defendant an Italian municipality.1 The matter in dispute was a claim arising out of a complex interest swap agreement that had been concluded between the parties and that had led to huge losses for the municipality’s budget. The swap agreement was based on standard documentation elaborated by the International Swaps and Derivatives Association (ISDA), the dominant (private) standard-setting institution in the global swaps market. The agreement contained a choice-of-law clause designating English law as applicable to the contract. The defendant, however, argued that the agreement was void under various provisions of Italian financial and consumer-protection laws. It further argued, with reference to Article 3 (3) of the EU Regulation No 593/2008 on the Law Applicable to Contractual Obligations, that mandatory provisions of Italian law remained applicable to the agreement in spite of the choice-of-law clause because the dispute was purely domestic in nature.

BOX 25.2

Philip C. Jessup, Transnational Law (New Haven / CT: Yale University Press, 1956), pp. 1–34 Gunther Teubner, ‘“Global Bukowina”: Legal Pluralism in the World Society’, in Gunther Teubner (ed.), Global Law without a State (Aldershot: Dartmouth, 1997), pp. 3–28

has brought about. These developments are reflected in Gunther Teubner’s famous article on the ‘Global Bukowina’, the second reference text for this chapter (Box 25.2). Many phenomena associated with the concept of transnational law are not new at all. Historical accounts of the development of modern legal systems, such as the writings of Harold J. Berman, show that there have been forms of ‘transnational law’ long before the modern nation state even came into existence. After Teubner, the discussion of transnational law has not ended. There is still much dispute about the very concept of transnational law. Yet pragmatic, functional approaches in the tradition of Jessup have begun to analyse a plethora of legal phenomena from a transnational law perspective. These developments are reflected in the further readings suggested in Box 25.3. 1

For an in-depth discussion of the case and the related matter of Banco Santander Totta S.A. v. Transport Companies [2016] 4 W. L. R. 49 [368] see Jan Bo¨hle, ‘Die Abwahl zwingenden Rechts vor staatlichen Gerichten in Inlandsfa¨llen’, Zeitschrift fu¨r Europa¨isches Privatrecht 72 (2019).

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BOX 25.3

Harold J. Berman, Law and Revolution: The Formation of the Western Legal Tradition (Cambridge: Harvard University Press, 1983) Gralf-Peter Calliess / Peer Zumbansen, Rough Consensus and Running Code: A Theory of Transnational Private Law (Oxford: Hart, 2012) Terence C. Halliday / Gregory Shaffer, ‘Transnational Legal Orders’, in Terence C. Halliday / Gregory Shaffer (eds.), Transnational Legal Orders (New York: Cambridge University Press, 2015), pp. 3–72 Ralf Michaels, ‘The True Lex Mercatoria: Private Law Beyond the State’, 14 Indiana Journal of Global Legal Studies 447–68 (2007) Christian Tietje / Alan Brouder / Karsten Nowrot, Philipp C. Jessup’s Transnational Law Revisited (Halle-Wittenberg: Institute for Economic Law, 2006) Peer Zumbansen, ‘Transnational Law’, in Jan Smits (ed.), Encyclopedia of Comparative Law (Cheltenham: Edward Elgar, 2006), pp. 738–54

b theories, context and discussion I When US lawyer, diplomat and soon-to-be judge at the International Court of Justice Philipp C. Jessup gave his Storrs Lecture on ‘Transnational Law’ at Yale Law School in 1956, the concept of globalization had not even entered the lexicon yet.2 This circumstance only hints at the far-sightedness with which Jessup developed his idea of transnational law as a pluralistic body of rules transcending the boundaries between domestic and international, between private and public law. Today, more than half a century later, the concept of transnational law has made a tremendous career: books, journals, conferences and research projects on the issue of transnational law are proliferating.3 One of the scholars who has contributed most visibly to this career is German legal theorist Gunther Teubner. Greatly indebted to the conceptual framework of systems theory (see Chapter 4), Teubner develops his own account of the emergence of transnational law from a distinctly legal theoretical and legal sociological perspective. In a whole series of books and articles, he takes up a question posed by Niklas Luhmann, who wondered whether the advent of an ever more complex ‘world society’4 would lead to a general demise of law and politics.5 2

3

4 5

Peer Zumbansen, ‘Transnational Law’, in Jan Smits (ed.), Encyclopedia of Comparative Law (Edward Elgar, 2006), pp. 738, 739. For an overview of the most relevant literature see Gralf-Peter Calliess ‘Law, Transnational’, in Helmut Anheier / Mark Juergensmeyer (eds.), The Encyclopedia of Global Studies, Vol. 3 (Los Angeles: Sage, 2012), pp. 1035–9. Niklas Luhmann, ‘Die Weltgesellschaft’, 57 Archiv fu¨r Rechts- und Sozialphilosophie 1–35 (1971). Niklas Luhmann, Law as a Social System (Oxford: Oxford University Press, 2004), p. 490.

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In the five decades that lie between Jessup’s seminal lecture and Teubner’s groundbreaking article on the ‘Global Bukowina’, the debate about law in a globalized world has steadily gained in relevance. The globalization of all areas of life – the economy, technology, culture, sports, religion – has dramatically changed the role of the modern nation state. Not only have all these areas been internationalized, but their global integration has also led to a proliferation of new private actors from global standard-setting bodies to transnational corporations.6 The new actors are becoming both subjects and authors of genuinely transnational norms, such as the ISDA standard contracts in our example case (box 25.1). These transnational norms defy the traditional categories of either private international law, that is, state-made conflict-of-laws rules, or public international law, that is, the law between sovereign nation states. As a consequence, the nexus between nation state and law, long considered a quasi-logical necessity, is becoming questionable.7 Similarly to Jessup,8 Teubner has a rather optimistic view of the role that law has to play in a globalized world – but only if law and jurisprudence adapt to changing social circumstances. ‘[W]hat is needed’, Teubner formulates in his Storrs Lecture at Yale in 2003, ‘is an explicit “structural coupling” of law with reflexive practices in different fields of society’.9 In contemporary discussions about transnational law, this view is far from uncontested.10 It has immediate practical consequences, however. The Dexia v. Prato case, as our example case (Box 25.1), hinges on the question whether the contract between the disputing parties was transnational, or merely domestic, in nature. If the Court of Appeal were to accept the transnational nature of the contract, it might be subject to different rules than a domestic one. II Jessup does not have the conceptual apparatus of systems theory at his disposal when he addresses the phenomenon of transnational law in 1956. He starts his lecture with a very straightforward description of the problem: The ‘complex interrelated world community’ 6

7

8

9

10

On private standard-setting bodies see Tim Bu¨the / Walter Mattli (eds.), The New Global Rulers: The Privatization of Regulation in the World Economy, (Princeton / NJ: Princeton University Press, 2012), on transnational corporations see the Indiana Journal of Global Legal Studies 2011 Special Issue ‘Transnational Corporations’. For a historical relativization of the nexus between nation state and law see Harold J. Berman, Law and Revolution: The Formation of the Western Legal Tradition (Cambridge: Harvard University Press, 1983). For a good comparative overview on the relation between private law and the state see Nils Jansen / Ralf Michaels, ‘Private Law and the State: Comparative Perceptions and Historical Observations’, in Nils Jansen / Ralf Michaels (eds.), Beyond the State? Rethinking Private Law (Tu¨bingen: Mohr Siebeck, 2008), pp. 15–68. Philip C. Jessup, Transnational Law (New Haven / CT: Yale University Press 1956), p. 7 quoting Cardozo: ‘answer to realities’. Gunther Teubner, ‘Coincidentia oppositorum: Hybrid Networks Beyond Contract and Organization’, in Marc Amstutz / Gunther Teubner (eds.), Networks: Legal Issues of Multilateral Co-operation (Oxford: Hart, 2009), pp. 3–30. For a critique see Bruno Simma / Dirk Pulkowski, ‘Of Planets and the Universe: Self-contained Regimes in International Law’, 17 European Journal of International Law 483 (2006); for a concise collection of contemporary positions on transnational law see the 2013 special issue of the Revue internationale de droit e´conomique on ‘Les grandes the´ories du droit transnational’.

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of his time is faced with a host of problems transcending the boundaries of the nation state, but there is no ‘world state’ to solve them.11 Many of these problems, he argues, are resolved by legal means. Yet the law applicable to these problems is not public international law in the sense of an ius inter nations, a law between states. Neither is it private international law in the sense of the conflict-of-laws rules of domestic legal systems. Instead, the law applicable to cross-border situations combines different types of norms from different sources. Jessup therefore develops a functional definition of transnational law, by defining the latter as ‘all law which regulates actions or events that transcend national frontiers. Both public and private international law are included, as are other rules which do not wholly fit into such standard categories’.12 Thus, Jessup departs from classical positivistic notions of law, which define law according to its sources as either domestic, that is, made by a state for its individual citizens, or international, that is, agreed upon between states for their diplomatic affairs. On the basis of such notions ‘our thinking tends to become frozen’, warns Jessup, in highly abstract conceptualizations of the interrelationship between domestic and international norms (‘monism’13 or ‘dualism’14).15 What he offers instead is a comprehensive concept of transnational law which does not focus on legal sources, but on transnational situations, and whose subjects are both individuals and states – as well as all other forms of corporate bodies. The examples of transnational situations are manifold, already in 1956: ‘an American oil company doing business in Venezuela; or the New York lawyer who retains French counsel to advise on the settlement of his client’s estate in France; or the United States Government when negotiating in the Soviet Union regarding the unification of Germany’, ‘the United Nations when shipping milk for UNICEF’ or ‘the International Chamber of Commerce . . . taking part in a conference called by the Economic and Social Council of the United Nations’.16 The Dexia v. Prato case (Box 25.1) would be another example to add to this list. Rules of international law may be applicable to these situations as may rules of domestic law, but they may also be resolved ‘by a process of adjustment – an extralegal or metajuridical means’.17 Here, Jessup turns to a sociological, rather than purely juridical, understanding of transnational rule-making, by referring to rules made by ‘ecclesiastical authorities’, ‘by corporations’, and ‘by international organizations’: ‘ubi societas, ibi ius’.18 ‘Nowadays it is neither novel nor heretical to call all of these rules “law”’, states Jessup.19 But, in reality, this is exactly what it is. Even decades after Jessup’s lecture, ‘wars of faith’ are fought over the legal character of the customary rules of international trade and 11 12 13

14 15 16 17 18 19

Philip C. Jessup, Transnational Law (New Haven / CT: Yale University Press, 1956), p. 1. Ibid., p. 2. Hans Kelsen, ‘Die Einheit von Vo¨lkerrecht und staatlichem Recht’, 19 Zeitschrift fu¨r ausla¨ndisches o¨ffentliches Recht und Vo¨lkerrecht 234 (1958). Heinrich Triepel, Vo¨lkerrecht und Landesrecht (Leipzig: Hirschfeld, 1899). Philip C. Jessup, Transnational Law (New Haven / CT: Yale University Press, 1956), p. 7. Ibid., pp. 3–4. Ibid., p. 6. Ibid., pp. 8–9. Ibid., p. 9.

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the ‘soft law’ nature of corporate codes of conduct.20 Jessup, however, is not interested in wars of faith, he is interested in social realities – such as the Achnacarry Agreement, which in 1928 founded a cartel between private and semi-public oil producers and thus effectively regulated the world market for oil production and distribution, or in concession contracts between governments and foreign private investors.21 Jessup is one of the few to point out that these realities, already in the 1950s, defy any clear-cut separation between domestic and international, private and public law.22 With a view to our case example (Box 25.1), Jessup would have been the first person to acknowledge that the interconnectedness of the contract in question with a complex web of global transactions poses specific, transnational questions of law. His functional perspective on transnational lawmaking clarifies that the case cannot be decided on the basis of domestic law alone. Instead, the Court of Appeal in Dexia v. Prato has to consider that transnational legal situations require transnational legal approaches. Of course, Jessup knows that his functional approach to transnational law breaks with traditional conceptions of the relation between law and the nation state. This is why he stages his argument in three little dramas, each in two scenes, which deal with legal problems ranging from the divorce in a marriage over issues of minority shareholders’ rights to conflicts between the former colonial powers and the countries of the Global South.23 These dramas are discussed by two fictitious personae, Mr Orthodox, embodying the conceptual scepticism of traditional legal scholarship, and Mr Iconoclast, representing the fresh spirit of a functional approach to transnational legal problems. It is quite clear whose side Jessup takes in this discussion, when he lets Mr Iconoclast elaborate on the similarities between corporate democracy and the democratization of international organizations, the growth of administrative bodies on the domestic and on the international level, or the role of redistribution politics both domestically and internationally.24 III Gunther Teubner, too, frames his seminal article on the ‘Global Bukowina’ as a fictitious dialogue. Here, we listen to a dialogue not between Mr Orthodox and Mr Iconoclast, but between Bill Clinton and Eugen Ehrlich.25 At first sight Apparently, the former president of the only remaining superpower in the 1990s and the legal sociologist at the outskirts of the dying Austro-Hungarian Empire in the early twentieth century have little in common. 20

21 22

23 24 25

See also Gralf-Peter Calliess / Moritz Renner, ‘Between Law and Social Norms: The Evolution of Global Governance’, 22 Ratio Juris 260–80 (2009). Philip C. Jessup, Transnational Law (New Haven / CT: Yale University Press, 1956), p. 13. But see also Wolfgang Friedmann, The Changing Structure of International Law (London: Stevens & Sons, 1964), p. 70: ‘To understand such modern phenomena as an investment and concession agreement between a group of private oil companies and the Indian government [. . .] we must reorient our thinking. In particular, we must overcome the traditional distinction between public and private law thinking.’ Philip C. Jessup, Transnational Law (New Haven / CT: Yale University Press, 1956), pp. 16–22. Ibid., pp. 27–34. Gunther Teubner, ‘“Global Bukowina”: Legal Pluralism in the World Society’, in Gunther Teubner (ed.), Global Law without a State (Aldershot: Dartmouth, 1997), pp. 3–28.

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Teubner takes them to stand ideal-typically for two different models of world order: the ‘Pax Americana’ on the one hand, and the ‘Global Bukowina’ on the other. For Teubner, the concept of the Pax Americana, a unified world order under the benevolent hegemony of the United States, has its roots in the Kantian idealization of a world republic under a common public law.26 This vision, Teubner argues, is wrong both empirically and normatively: neither is it plausible that there will ever be a world republic under a globally unified political and legal constitution nor would this even be desirable. Teubner contrasts this vision with his account of ‘a fragmented rather than a uniform globalization’, where ‘politics has lost its leading role’.27 Although Teubner briefly mentions Wallerstein’s theory of the world system,28 it is quite clear that this analysis is indebted, above all, to Luhmannian systems theory, which describes society as being fragmented into conflicting and incommensurable social rationalities (see Chapter 4). Thus, globalization must be described as a process affecting ‘not only the economy, but also science, culture, technology, health systems, social services, the military sector, transport, communication media and tourism’.29 Much in the spirit of Jessup’s proto-sociological turn (ubi societas, ibi ius), Teubner takes this state of affairs as evidence for Ehrlich’s theory of ‘living law’: global law is not made by political institutions, domestic or international, but rather emerges within civil society itself.30 The reference to civil society in this context must not be mistaken for an invocation of the rational universal discourse of a general public (see Chapter 4). Quite to the contrary, it denotes the ‘cold technical processes’ driven by the functional rationalities of fragmented social discourses in the economy, science and technology.31 The ISDA standard contracts dominating the global derivatives markets that are at play in the Dexia v. Prato case would be a prime example in point. Global legal structures emerge within particular social fields and in self-organized, spontaneous processes; the unity of law is forever lost. When Teubner then turns to an analysis of the so-called lex mercatoria debate, he does so in order to test his theory in a ‘paradigmatic case’, which also appears as ‘one of the rare cases in which practical legal decision-making becomes directly dependent upon legal theory’.32 The term lex mercatoria is generally developed from the observation of a historical phenomenon: the ‘body of truly international customary rules governing the cosmopolitan community of international merchants’ which had already developed in 26

27

28

29

30

31

32

See Ottfried Ho¨ffe, ‘Ko¨nigliche Vo¨lker’: Zu Kants kosmopolitischer Rechts- und Friedenstheorie (Frankfurt: Suhrkamp, 2001). Gunther Teubner, ‘“Global Bukowina”: Legal Pluralism in the World Society’, in Gunther Teubner (ed.), Global Law without a State (Aldershot: Dartmouth, 1997), pp. 3–28, 5. Immanuel Wallerstein, The Modern World-System I: Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century (London: Academic Press, 1974). Gunther Teubner, ‘“Global Bukowina”: Legal Pluralism in the World Society’, in Gunther Teubner (ed.), Global Law without a State (Aldershot: Dartmouth, 1997), pp. 3–28, 6. Eugen Ehrlich, Fundamental Principles of the Sociology of Law (Cambridge / MA: Harvard University Press 1936), p. 390. Gunther Teubner, ‘“Global Bukowina”: Legal Pluralism in the World Society’, in Gunther Teubner (ed.), Global Law without a State (Aldershot: Dartmouth, 1997), pp. 3–28, 7. Ibid., pp. 8–9.

Transnational Law

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medieval times.33 After the rise of the nation states, economic historians argue, this body of customary rules has made way for the domestic codifications of commercial law, but it is now being reinvigorated by the forces of globalization.34 Orthodox lawyers have always had difficulties in following this narrative and this was, as Teubner points out, for good reasons. The concept of lex mercatoria breaks a taboo in legal thinking by positing that legal rules can be made by private actors and without recognition by any domestic legal order.35 In this context, commentators like F. A. Mann have argued that even the apparently transnational rules made by international arbitral tribunals come into being only by delegation of state authority and through recognition by state courts.36 However, this position remains itself caught in a petitio principii in that it simply takes the perspective of state actors without acknowledging the factual effectiveness of transnational rules. Yet, for Teubner, the proponents of the lex mercatoria have failed to come up with a satisfying explanation for this normative phenomenon, instead reverting to the ‘conceptual poverty’ of traditional theories of customary law, ‘antiquated’ notions of a societas mercatorum or the highly abstract idea of a ‘contrat sans loi’.37 This critique is, on the one hand, directed at Clive Schmitthoff’s revitalization of medieval customary law for a theory of the ‘new law merchant’.38 Schmitthoff’s theory is not only based on historically questionable assumptions,39 it relies on an idealized conception of ‘merchant law’ which hardly reflects the plethora of different forms that transnational rule-making can take. The latter also holds true for the French school of ‘transnationalists’ around Berthold Goldmann which centres around the idea of a ‘de-nationalized’ contract (‘contrat sans loi e´tatique’).40 33

34

35

36

37

38

39

40

Clive M. Schmitthoff, ‘International Business Law: A New Law Merchant’, 2 Current Law and Social Problems 129 (1961), 131. Paul R. Milgrom et al., ‘The Role of Institutions in the Revival of Trade; The Law Merchant, Private Judges and the Champaign Fairs’, 2 Economics and Politics 1–21 (1990); Avner Greif, Institutions and the Path to Modern Economy: Lessons from Medieval Trade (Cambridge: Cambridge University Press, 2006). Gunther Teubner, ‘“Global Bukowina”: Legal Pluralism in the World Society’, in Gunther Teubner (ed.), Global Law without a State (Aldershot: Dartmouth, 1997), pp. 3–28, 10–11. F. A. Mann, ‘Lex Facit Arbitrum’, in Pieter Sanders (ed.), International Arbitration Liber Amicorum for Martin Domke (The Hague: Martinus Nijhoff, 1976), pp. 157–83. Gunther Teubner, ‘“Global Bukowina”: Legal Pluralism in the World Society’, in Gunther Teubner (ed.), Global Law without a State (Aldershot: Dartmouth, 1997), pp. 3–28, 9. Clive M. Schmitthoff, ‘International Business Law: A New Law Merchant’, 2 Current Law and Social Problems 129 (1961); Clive M. Schmitthoff, ‘The new sources of the law of international trade’, 15 International Social Science Journal 259 (1963); Clive M. Schmitthoff, ‘The Law of International Trade, its Growth, Formulation and Operation’, in Clive M. Schmitthoff (ed.), The Sources of the Law of International Trade (London: International Association of Legal Sciences, 1964), p. 3. Kent Lerch, ‘Vom Kerbholz zur Konzernbilanz? Wege und Holzwege zu einem autonomen Recht der global economy’, Rechtsgeschichte 107 (2004); Albrecht Cordes, ‘Auf der Suche nach der Rechtswirklichkeit der mittelalterlichen Lex mercatoria’, 118 Zeitschrift der Savigny-Stiftung fu¨r Rechtsgeschichte: Germanistische Abteilung 168 (2001). Berthold Goldman, ‘Les conflits de lois dans l’arbitrage international de droit prive´’, 109 Recueil des Cours 347–485 (1963); Berthold Goldman, ‘Frontie`res du droit et “lex mercatoria”’, 9 Archives de philosophie du droit 177–92 (1964); Berthold Goldman, ‘Nouvelles re´fle´xions sur la Lex Mercatoria’, in Christian Dominice´ et al. (eds.), E´tudes de droit international an l’honneur de Pierre Lalive (Basel: Helbing & Lichtenhahn, 1993),

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New Private Law Theory

In order to ground these theories in a reflection of social practice Teubner seeks – and finds – help in the ‘contemporary sociological theory of law’. Relying on Luhmann’s concept of a self-reproducing, autopoietic legal discourse (see Chapter 4), he asks whether and under which conditions the lex mercatoria and similar phenomena of global rulemaking begin to orient themselves along the binary code of legal/illegal. Although disclaiming any allegiance to the concept of the contrat sans loi, Teubner starts this analysis by placing contracting practices at the centre of an emergent transnational law. Yet differently from the contrat sans loi approach, he does not stop here and instead asks, in the spirit of Durkheim’s legal sociology (Chapter 2), for the ‘non-contractual premises of contracting’.41 It is at this point that we can see the merits of a legal sociological analysis of transnational law – although Teubner’s writings rather lay the conceptual groundwork for actual sociological analysis rather than employing empirical research methods. The idea of a selfvalidating contract, which seems highly paradoxical from the perspective of classical legal positivism, loses all its horror when analysed through the lens of sociological theory. With its help, we can identify the concrete strategies that lead to a ‘de-paradoxification’ of the contrat sans loi paradox.42 The moves of de-paradoxification that Teubner goes on to describe, however, are heavily dependent on the dispute-resolution setting of international commercial arbitration. It is only in this context that one can truly speak of transnational law or an emerging lex mercatoria. Here, the rule-making is externalized from the contracting parties to an adjudicating body, which establishes secondary rules of legal interpretation, temporalized through a linkage of binding decisions. In this setting, Teubner rightly points out, transnational law ‘has nothing to do with customary law’: ‘It is positive law.’43 With a view to our Dexia v. Prato example case (Box 25.1), however, it is not quite clear whether Teubner would have seen genuinely transnational law at work here. The genesis of the standard contracts that underlie the conflict are typical for his account of transnational lawmaking: they are issue-specific rules made by private parties that determine the behaviour of actors in a whole social field. Yet these rules are not confirmed through the adjudication of genuinely transnational bodies. Instead, they usually come before national courts such as the English High Court in our case example. Teubner himself is silent as to the question whether the de-paradoxification of transnational contracts might also take place in domestic courts. More recent approaches to transnational lawmaking such as Halliday’s and Shaffer’s theory of ‘transnational legal orders’ answer the question in the affirmative.44 Halliday and Shaffer define transnational legal orders as involving legal norms, produced by

41

42 43 44

pp. 241–55; Henri Batiffol, ‘La loi approprie´e au contrat’, in Henri Batiffol (ed.), Le droit des relations e´conomiques internationales: E´tudes offertes a` Berthold Goldmann (Paris: Litec, 1982), pp. 1–13; Eric Loquin, ‘L’application de re`gles anationales dans l’arbitrage commercial international’, L’apport de la jurisprudence arbitrale 67 (1986). Gunther Teubner, ‘“Global Bukowina”: Legal Pluralism in the World Society’, in Gunther Teubner (ed.), Global Law without a State (Aldershot: Dartmouth 1997), pp. 3–28, 15. Ibid., 15. Ibid., 17. Terence C. Halliday / Gregory Shaffer, ‘Transnational Legal Orders’, in Terence C. Halliday / Gregory Shaffer (eds.), Transnational Legal Orders (New York: Cambridge University Press, 2015), pp. 3–72

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or with legal bodies that transcend the nation states and are engaged with legal bodies within multiple nation states.45 This broader concept, which clearly captures the Dexia v. Prato example, seems to operationalize Teubner’s theoretical approach in a very convincing manner. Teubner acknowledges that there remain stark differences between transnational and domestic law: transnational law is closely dependent upon economic transactions, the system of precedents remains inchoate and the content of its rules rather vague.46 Nevertheless, it is a highly powerful form of law, which affects the behaviour of economic actors on a global scale. As such, it raises concerns of legitimacy that are still unanswered. How they might be answered through an internal politicization of global legal discourse is a question taken up by Teubner in later publications, culminating in his 2012 book on societal constitutionalism.47 IV The debate on transnational law, started by Jessup in 1956, has the potential for fundamentally transforming the discourse of private law. Indeed, the very notion of private law becomes questionable when analysed from the functional sociological perspective taken by both Jessup and Teubner. The private or public law nature of rule-making processes beyond the nation state is often unclear.48 Frequently, it is also uncertain whether they should qualify as law at all.49 This is most evident – and most often discussed – with a view to international commercial arbitration. Here, private adjudicators are empowered by private contracts to decide on legal disputes. But their decisions are binding on the parties, enforceable in domestic legal systems – and often manifestly concern public policy issues.50 Similar phenomena can be observed in investor-state arbitrations in international investment law, but also in fields as diverse as internet regulation,51 standard-setting in corporate financial accounting,52 or in international sports organizations as in the Pechstein case discussed in Chapter 13.

45 46

47

48

49

50

51

52

Ibid., pp. 12–17. Gunther Teubner, ‘“Global Bukowina”: Legal Pluralism in the World Society’, in Gunther Teubner (ed.), Global Law without a State (Aldershot: Dartmouth, 1997), pp. 3–28, 18–19. Gunther Teubner, Constitutional Fragments: Societal Constitutionalism in Globalization (Oxford: Oxford University Press, 2012). Moritz Renner, ‘Private Justice, Public Policy: The Constitutionalisation of International Arbitration’, in Thomas Dietz / Walter Mattli (eds.), International Commercial Arbitration and Global Governance: Contending Theories and Evidence (Oxford: Oxford University Press, 2014), p. 117. Gralf-Peter Calliess / Moritz Renner, ‘Between Law and Social Norms: The Evolution of Global Governance’, 22 Ratio Juris 260–80 (2009). Moritz Renner, ‘Private Justice, Public Policy: The Constitutionalisation of International Arbitration’, in Thomas Dietz / Walter Mattli (eds.), International Commercial Arbitration and Global Governance: Contending Theories and Evidence (Oxford: Oxford University Press, 2014), p. 117. See, for example, Elizabeth G. Thornburg, ‘Fast, Cheap, and Out of Control: Lessons from the ICANN Dispute Resolution Process’, 6 Journal of Small & Emerging Business Law 191 (2002). Moritz Renner, ‘Occupy the System! Societal Constitutionalism and Transnational Corporate Accounting’, 20 Indiana Journal of Global Legal Studies 941–64 (2013).

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The challenge of these developments is taken up by different theoretical approaches such as global constitutionalism, global administrative law and international public law, which specifically address the legitimacy concerns raised by new transnational forms of lawmaking.53 Many of these approaches, however, lack a workable definition of transnational legal phenomena and tend to merely transpose domestic legal categories to the transnational arena. They have much to learn from Jessup’s functional approach as well as from Teubner’s legal theoretical reconstruction of transnational law. For contemporary debates, however, the two texts presented here point to two quite different conceptions of transnational law. Teubner’s approach effectively advocates for a very narrow definition of transnational law, limited to the rules made and enforced by private actors. Jessup’s approach is much more inclusive. It encompasses not only private governance structures (see Chapter 26), but also the intricate interplay between private and public governance structures beyond the nation state. Although this latter approach lacks the analytical rigour of Teubner’s theory, it seems more apt to grasp the different phenomena of rule-making beyond the nation state.54 A similar functional approach to transnational legal situations might have informed the English Court of Appeal’s decision in the matter of Dexia v. Prato, our example case (Box 25.1). The Court of Appeal dismissed the defendant’s arguments for an application of mandatory Italian law and decided in favour of the claimant bank. It reasoned that, with a view to the standard documentation used by the parties and with regard to the transnational ambit of the swaps market, this was – even though a dispute between two Italian parties – not a purely domestic dispute. Therefore, it applied English law on the basis of the contractual choice-of-law clause and held the swap agreement to be valid and enforceable. This decision is likely to have a huge impact on the law of transnational financial markets and beyond. As is evidenced by the use of ISDA documentation between the Italian parties to the dispute, financial products and transactions are highly standardized on a global scale. The rules for such transactions are not made by nation states, but by increasingly powerful private standard setters.55 These standard setters effectively lay the ground for a transnational law of financial markets. However, as the case also evidences, this emerging transnational law is not fully detached from the legal system of the nation state and its institutions. Transnational agreements refer to domestic law, and they are often enforced by nation state courts. Transnational law, then, is – as the case shows and as Jessup suggests – much less a selfsufficient body of non-state rules than a bricolage of private and public ordering: 53

54

55

For a comparison of the two dominant approaches global constitutionalism and global administrative law see Ming-Sung Kuo, ‘Between Fragmentation and Unity: The Uneasy Relationship between Global Administrative Law and Global Constitutionalism’, 10 San Diego International Law Journal 439–67 (2009). For the international public law approach see Armin von Bogdandy et al., ‘From Public International to International Public Law: Translating World Public Opinion into International Public Authority’, 28 European Journal of International Law 115–45 (2017). For a definition of transnational law which extends to phenomena of ‘public-private co-regulation’ see also Gralf-Peter Calliess ‘Law, Transnational’, in Helmut Anheier / Mark Juergensmeyer (eds.), The Encyclopedia of Global Studies, Vol. 3 (Los Angeles: Sage, 2012), pp. 1035–9. For more examples see the contributions to Tim Bu¨the / Walter Mattli (eds.), The New Global Rulers: The Privatization of Regulation in the World Economy (Princeton / NJ: Princeton University Press, 2012).

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transnational private actors make their own rules, but they strategically rely on public institutions to complement and enforce the mechanisms of private governance. English law and English courts are considered to be particularly well suited to adapt to the needs of transnational rule-making.56 This is why the standard contract used in the Prato case (Box 25.1) contained a choice-of-law clause pointing to English law and a choice-of-court clause establishing the jurisdiction of the English courts. Domestic actors such as the Italian municipality of Prato, however, may well get lost in the seeming maze of foreign and transnational rules, and they may question whether their interests are well represented by a rule-making authority such as the ISDA. This raises the much-discussed question whether transnational legal regimes can and should be ‘constitutionalized’ so that they can reflect broader public policy concerns.57 To date, the question remains unanswered. Some transnational standard-setting bodies show an increased awareness of the problem and try to reflect a broader set of stakeholder interests.58 Others, however, move towards an even further disentangling from nation state institutions: the ISDA is increasingly encouraging the use of international arbitration in order to remove disputes from nation state courts. In all likelihood, the constitutionalization of transnational law can only be achieved through the very process that is its defining feature: a communicative process transcending the boundaries between domestic and international, between private and public law.

56

57

58

For the theoretical background and an empirical analysis of this hypothesis see Stefan Voigt, ‘Are International Merchants Stupid? Their Choice of Law Sheds Doubt on the Legal Origin Theory’, 5 Journal of Empirical Legal Studies 1 (2008). Gunther Teubner, ‘Global Private Regimes: Neo-spontaneous Law and Dual Constitution of Autonomous Sectors in World Society’, in Gunther Teubner / Karl-Heinz Ladeur (eds.), Globalization and Public Governance (Aldershot: Ashgate, 2004), p. 71; Gunther Teubner, Constitutional Fragments: Societal Constitutionalism in Globalization (Oxford: Oxford University Press, 2012); for an application of this approach to the case of the International Accounting Standards Board (IASB) see Moritz Renner, ‘Occupy the System! Societal Constitutionalism and Transnational Corporate Accounting’, 20 Indiana Journal of Global Legal Studies 941–64 (2013). For the case of the IASB see Moritz Renner, ‘Occupy the System! Societal Constitutionalism and Transnational Corporate Accounting’, 20 Indiana Journal of Global Legal Studies 941–64 (2013).

26 Private Ordering Moritz Renner

a topic and materials I This chapter deals with the relationship between private ordering and private law. Every theory of private law has to deal with the fact the law is just one means among many that private parties can use to organize their relationships. This fact concerns every area of life, from families to corporations. Even if there are no formal laws regulating a certain area, there are nevertheless norms that determine how people behave, how others will judge their behaviour, and how deviant behaviour is sanctioned. In some instances, these norms can be considered as a form of private ordering. Here, private actors establish a normative order with effects comparable to those of state law (public ordering). The norms of private ordering that this chapter deals with are especially widespread where ‘official’, state-made law has little or no effect. One area in which the reach of official law is particularly limited is the realm of the global economy, and yet this area is not without rules (see also Chapter 25). The importance of private ordering in this area is evidenced by the example case in Box 26.1, which concerns the highly controversial practice of ‘net short debt investing’ on bond markets. II Both reference texts for this chapter come from the field of law and economics, but they both deal with the problem of private ordering in a manner that bears close resemblance to earlier sociological approaches as they are based on empirical studies (Box 26.2). Lisa Bernstein’s seminal article on the diamond industry excellently demonstrates how theoretical insights on the role of law can be generated from a close observation of social practices. Robert Ellickson shows in his book Order Without Law how such insights – in his case derived from a study on cattle ranchers in Shasta County – can be integrated into a broader taxonomy of social ordering. The contributions of Bernstein and Ellickson have been followed up by lawyers, economists and other social scientists. Empirical studies such as Tomas Dietz’s book on private ordering in the global software industry or Brian Bix’s study on private ordering in family law have both expanded our knowledge on different mechanisms of private ordering and our theoretical understanding of the role of law in a globalized world. At the same 484

Private Ordering

485

BOX 26.1 CASE STUDY

U.S. Bank Nat’l Association v. Windstream Services, LLC v. Aurelius Capital Master, Ltd, case 12-CV-7857 (JMF), S.D.N.Y. 15 February 2019 In 2013 Windstream, a telecoms company, issued bonds in order to finance its operations. As is standard market practice, the bond documentation contained a number of so-called covenants. One of the bond covenants prohibited that Windstream transfer any assets to affiliated companies. Windstream violated this prohibition when it transferred a considerable number of its network services to a holding company in 2015, allegedly in order to comply with regulatory requirements. Given this violation of a covenant, the bondholders, with a quorum of 25 per cent, would have been entitled to declare an ‘event of default’ after a sixtyday cure period and demand immediate repayment of the bonds (acceleration). However, the bondholders took no action after Windstream violated the covenant. In 2017, well after the covenant violation, Aurelius, a US hedge fund, bought 25 per cent of the Windstream bonds. It then took swift action by declaring an event of default and demanding immediate repayment of the bond, causing Windstream to fall into bankruptcy. According to market rumours, Aurelius had simultaneously built a net short position on Windstream’s debt by buying credit default swaps (CDS) worth ten times the amount of its bond exposure. Thus, Windstream’s default – which Aurelius had triggered itself (a so-called manufactured default) – allowed Aurelius to cash in on the credit default swaps.

BOX 26.2

Lisa Bernstein, ‘Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry’, 21 Journal of Legal Studies 115–57 (1992) Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge / MA: Harvard University Press, 1991), pp. 123–36 time, private lawyers such as Gregor Bachmann and Dan Wielsch are seeking to integrate these insights into legal doctrine by developing standards for the recognition and application of norms made by private actors. (See Box 26.3.)

b theories, context and discussion I Academia has long been preoccupied with the relationship between private law as provided by the state legal system (be it in form of statutes or court decisions) and private

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New Private Law Theory

BOX 26.3

Gregor Bachmann, Private Ordnung: Grundlagen ziviler Regelsetzung (Tu¨bingen: Mohr Siebeck, 2006) Brian Bix, ‘Private Ordering in Family Law’, in Elizabeth Brake et al. (eds.), Philosophical Foundations of Family and Children (Oxford: Oxford University Press, 2018) Thomas Dietz, Global Order Beyond Law (Oxford: Hart, 2014) Dan Wielsch, ‘Global Law’s Toolbox: Private Regulation by Standards’, 60 American Journal of Comparative Law 1075–104 (2012)

ordering. The founding texts of legal sociology bear eloquent witness to this fact (see Chapter 2) and the debate has been ongoing since then. The phenomenon of private ordering has not only steadily gained in importance throughout the last decades – it proved to shake the very foundations of private law. On the one hand, the gradual transformation of private law through protective regulations for the benefit of structurally disadvantaged parties, the so-called materialization of private law, is constantly progressing (see Chapter 10), causing an ever-deeper permeation of public law provisions into private law. On the other hand, however, private dispute resolution and private rule-making replace the public legal system in many spheres. This is especially obvious with regard to transnational commercial relations (see Chapter 25), but far from being limited to them. This development challenges both private law theory and doctrine. The challenge arises with regard to the legal validity of sector-specific standard agreements1 or the terms and conditions used in franchise networks,2 but it also concerns the status of transnational expert committees3 and the recognition of arbitral awards made on the basis of lex mercatoria.4 As Ralf Michaels rightly points out, any legal system can react to private norms in four different ways: (1) refuse any legal recognition, (2) incorporate the norms into the legal system, (3) exercise deference, meaning the recognition of private norms as given facts, and (4) integrate private ordering into the existing hierarchy of norms.5

1

2

3

4 5

For example, the so-called Master Agreement of the International Swaps and Derivatives Association (ISDA); see Dan Wielsch, ‘Global Law’s Toolbox’, 60 American Journal of Comparative Law 1075–104 (2012). See Mathias Rohe, Netzvertra¨ge. Rechtsprobleme komplexer Vertragsbindungen (Tu¨bingen: Mohr Siebeck, 1998); Gunther Teubner, Netzwerk als Vertragsverbund. Virtuelle Unternehmen, Franchising, Just in Time in sozialwissenschaftlicher und juristischer Sicht (Baden-Baden: Nomos, 2004); Stefan. Grundmann, ‘Die Dogmatik der Vertragsnetze’, 207 AcP 708–67 (2007). For example, the accounting standards of the International Accounting Standards Board; see Andreas Engert, ‘Private Normsetzungsmacht: Die Standardisierung von Regelungen im Markt als Form der Fremdbestimmung’, 300 Rechtswissenschaft 304 ff. (2014),; Moritz Renner, ‘Transnationale Wirtschaftsverfassung’, 78 RabelsZ 750–83 (2014), 777 ff. See Thilo Rensmann, Anationale Schiedsspru¨che (Berlin: Duncker & Humblot, 1997). Ralf Michaels, ‘The Re-Statement of Non-State Law’, 51 Wayne Law Review 1209–59 (2005).

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All four options, however, require that private law doctrine acknowledges the existence of private norms in the first place. Only in recent years and not without a lot of stimulus from the US debate did European legal scholars start to pay attention to this phenomenon,6 whereas sociologists and economists have been analysing private ordering ever since its early beginnings – a fact largely due to their focus on functionality rather than legal validity of societal self-regulation. Throughout the last two decades, impulses to analyse the mechanisms of private ordering came mainly from economists. Legal economist Lisa Bernstein downright pioneered with her work on ‘Opting Out of the Legal System’ in the international diamond industry, which is the first reference text of this chapter. Bernstein’s study stands out for its empirical accuracy. At the same time, her findings on mechanisms of private ordering are easily transferable to other industries. The second reference text proceeds in a similar fashion: lawyer and economist Robert Ellickson examines the non-legal tools used by cattle farmers in Shasta County to settle their conflicts. The text, an excerpt from his groundbreaking work ‘Order Without Law’, is especially interesting in that Ellickson seeks to develop a general taxonomy of private ordering, which makes it an inspiring and rewarding read for legal theorists approaching different phenomena of private dispute settlement. II The title of Bernstein’s study addresses the crux of the matter: can there be an ‘Opting Out of the Legal System’? Can private actors resolve their problems outside the legal system provided by the state, relying solely on their own rules and institutions? Bernstein’s study aims to prove that they can. What she observes is a self-organized ‘system of private governance’ that allows to resolve commercial disputes without recourse to the legal system.7 Bernstein summarizes the essential advantages of such the private governance system: lower transaction costs (see Chapter 3), greater confidentiality and reliable contract enforcement thanks to effective sanctions. As a result, mechanisms of private ordering are – according to Bernstein – more Pareto-efficient than the public legal system. Much of Bernstein’s study is rather descriptive, with a lively depiction of the structures and practices of the international diamond industry. Among the details she provides, two are of specific importance: diamond production, the first stage of diamond trading, is largely controlled by one corporate group (De Beers); the second stage of diamond trading is then organized through a number of exchange markets accessible to registered traders only. A follow-up study that Barack Richman published in 20088 shows that the diamond industry has significantly changed since Bernstein’s study was published, with the De Beers 6

7

8

Etwa Gregor Bachmann, Private Ordnung: Grundlagen ziviler Regelsetzung (Tu¨bingen: Mohr Siebeck, 2006); J. Ko¨ndgen, ‘Privatisierung des Rechts’, 206 Archiv fu¨r die civilistische Praxis 477–525 (2006). Lisa Bernstein, ‘Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry’, 21 Journal of Legal Studies 138 (1992), 115. ‘BarakRichman, Ethnic Networks, Extralegal Certainty, and Globalization: Peering into the Diamond Industry’, in Volkmar Gessner (ed.), Contractual Certainty in International Trade (London: Hart, 2008), p. 31.

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group now directly selling to the end buyers, thus circumventing the second stage of diamond trading. Bernstein’s study, however, focuses on this second stage and the empirical part of her study is thus entirely concerned with the New York Diamond Dealers Club (DDC), a highly important trading place at that time. The club not only serves as a forum for information exchange but also provides its own arbitration system. The trading of raw diamonds usually takes place in non-written form, be it through mere handshakes or a traditional ‘open cachet’ (see below III).9 In the latter case, potential conflicts are often resolved by consultation with a broker.10 The Aurelius example case (Box 26.1) shows that other settings of private ordering, such as the global bond market, are more formalized. The relations between the different actors on financial markets are, to a large extent, based on standardized contracts developed by industry associations such as the International Capital Markets Association. At the same time, however, informal rules of behaviour continue to play a role even there. Common practices and usages often determine the behaviour of market actors far beyond the letter of their written contracts. Most importantly for our example case, it is common market practice that bondholders usually do not trigger an ‘event of default’ for isolated covenant violations. Triggering an event of default and accelerating repayment of the bond is considered the bondholders’ ‘nuclear option’, as it almost invariably leads to the bankruptcy of the bond issuer. Thus, bondholders mostly use covenant violations as bargaining chips for adjusting the financial conditions of the bond and restructuring the company’s debt rather than enforce the clauses by demanding immediate repayment. The fact that Aurelius violated this unwritten norm of bond market practice is one of the reasons why the case eventually went to court. In Bernstein’s example, the diamond trade, disputes between market participants would rarely find their way to the courts as private rule-making is complemented by mechanisms of private adjudication: if conflicts between diamond traders arise, they are dealt with in the club’s private arbitration system.11 Most cases are settled in conciliation proceedings, if not, they are handed over to the Floor Committee, which can impose a fine or expel a party from the DDC if the breach of contract is obvious. Less obvious cases are heard before an arbitration board whose decisions can be appealed to a state court, where they are subject to judicial review with limited scope. In most cases, dispute settlement is based on trade custom and stock exchange usage, selectively amended by Jewish law – as the larger part of club members adheres to New York’s Jewish community – and to an even lesser extent by common law. Arbitrators are only called in as a matter of last resort and because the unpredictable outcome of an arbitration tends to put off dealers. Usually, there is no need for formal enforcement of arbitration awards since the dealers comply in order to avoid reputational damage. Non-compliance with a decision leads to naming and shaming within the DDC and eventually to exclusion from the club. The club makes use of the possibility of exclusion in a very restrained way, usually keeping a back door open, because otherwise it could face liability claims for damages and 9

10 11

Lisa Bernstein, ‘Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry’, 21 Journal of Legal Studies 138 (1992), 122. Ibid., 123. Ibid., 124–8.

Private Ordering

489

the violation of competition law in the public legal system. Bernstein does not elaborate on the point that here market power appears as a central problem of private ordering (see chapter 13). On the one hand, the functionality of the DDC seems due to its extremely powerful position. This positions rests on the fact that an expulsion from the club jeopardizes the economic existence of the expelled market member. On the other hand, the containing effect of potential liability claims raised within the public legal system proves that state institutions remain important. It appears that public control is required where private ordering threatens to restrict market access. Tellingly, Bernstein mentions in a footnote12 that the Federal Trade Commission has thus far initiated at least one investigation to determine if the DDC was in restraint of trade. The last part of Bernstein’s study is dedicated to an economic analysis of her empirical findings. Bernstein assumes that the diamond trade relies on special mechanisms of contract enforcement because there is no spot exchange of goods. Instead, the seller provides the goods in advance, granting the buyer a one- or twomonth term of payment, so that the latter does not need interim financing while the diamonds are being processed. To enforce their agreement, traders can rely on either the public legal system or on mechanisms of private ordering. In Bernstein’s opinion, transaction cost efficiency argues strongly in favour of private ordering (see Chapter 3). While she concedes that the use of written standard contracts would not be costly as such, she points out that every standard contract would have to include extensive references to trade customs, for example with regard to the calculation of damages, and that its enforcement would, once again, rely on informal mechanisms.13 It seems rather self-contradictory, however, when Bernstein ultimately assumes that market participants do not simply assess transaction costs as they are guided by habit and customs. The latter assumption seems to be all but far-fetched, but it is not easily verifiable with the instruments of an economic analysis. Similarly, the informal rules of bond-market practice in our exampe case (Box 26.1) do not appear to be simply a result of efficiency considerations. From an efficiency perspective there is as much to be said in favour of a strict enforcement of the letter of bond covenants as there is to be said against it. Whereas strict enforcement might lead to a higher overall effectiveness of such contractual clauses, the economic damage brought about by the default of the bond issuer can be considerable. Against this background, it is interesting that the argument in Bernstein’s seminal text adds a normative twist to the economic analysis of private ordering. Bernstein addresses the shortcomings of the US legal system that, according to her, require market participants to resort to mechanisms of private ordering. Among the aspects Bernstein criticizes the most is the common law method of damage calculation that often does not award compensation for lost profit and the mere duration of trials. These points of criticism may well be justified, 12 13

Ibid., 139, fn. 50. Ibid., 134–5.

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New Private Law Theory

but Bernstein is not able to empirically prove that they can account for the recourse to private ordering in the diamond industry. Methodologically, she is skating on thin ice when contenting herself with a policy-oriented juxtaposition of the legal system’s characteristics on the one hand and the advantages of private ordering on the other. At this point, her conclusions do not add much to Macaulay’s findings (see Chapter 17) on the importance of informal dispute resolution for matters arising from trade contracts from which she cites in her study. Bernstein’s analysis of the concrete importance of reputation for the execution of contracts is better-founded.14 Here, Bernstein returns to the core of her study in that she illustrates how club members fulfil their mutual obligations without relying on written contracts or enforcement instruments provided by the legal system. Her differentiation between different contexts in which reputation comes into play is of central importance. On the one hand, mechanisms of reputation are especially effective within hermetic, homogenous groups, such as between diamond traders. In a similar vein, Ben-Porath coined the term ‘F-Connections’ (‘families, friends, firm’).15 On the other hand, information technology can create reputation mechanisms or, at least, increase their importance. Bernstein’s study dates back to an era when ‘fax machines’ and ‘computer databases’ described state-of-the-art information technology. Since then, the importance of technology-based reputation mechanisms has exponentially grown and even entered the spheres of consumer markets (Airbnb, eBay16). This leads to a host of new possibilities for private contract enforcement. The analytical potential of studies dedicated to these new areas has been demonstrated in an impressive analysis of transnational software contracts by Thomas Dietz.17 The obvious suspicion that an over-inclusive enforcement of contracts might lead to inefficiencies is disproved by Bernstein: due to the closed market structure, dealers cannot easily switch to other transaction partners – a breach of contract is thus almost never efficient,18 and thus comprehensive contract enforcement is desirable.19 Bernstein therefore comes to a very positive assessment of private ordering in the diamond industry – especially as opposed to a legal system that she perceives as largely inefficient. This conclusion is certainly justified, in particular with regard to an argument that Bernstein addresses only in passing20 but that seems to be fundamental: due to their territorial boundedness, public legal systems are unable to

14 15

16

17 18

19

20

Ibid., 138–44. Yoram Ben-Porath, ‘The F-Connection: Families, Friends, and Firms and the Organization of Exchange’, 6 Population and Development Review 1–30 (1980). David P. Baron, ‘Private Ordering on the Internet: The eBay Community of Traders’, 4 Business and Politics 245–74 (2002). Thomas Dietz, Global Order Beyond Law (Oxford: Hart, 2014). On the theory of ‘efficient breach’ see Charles Goetz / Robert Scott, ‘Liquidated Damages, Penalties, and the Just Compensation Principle: A Theory of Efficient Breach’, 77 Columbia Law Review 554 (1977). Lisa Bernstein, ‘Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry’, 21 Journal of Legal Studies 138 (1992), 145 et seq. Ibid., 151.

Private Ordering

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provide legal certainty for globally organized sectors such as the diamond industry (see Chapter 25).21 In the last part of her study, Bernstein very briefly points to the problems that may arise from the emergence of private ordering. The confidentiality of dispute resolution impedes the development of abstract and generally applicable rules – a problem that can partly be addressed with the publication of guiding principles.22 Furthermore, in specific cases, matters of third parties outside the industry might be concerned by internal dispute resolution (e.g., when a commission agent goes bankrupt).23 III Robert Ellickson’s study Order Without Law was published around the same time as Bernstein’s work but gained somewhat less attention within the academic community. The aims of Ellickson’s study are comparable to Bernstein’s. Again, we are dealing with an empirical study of a certain societal sphere that mostly relies on a form of private ordering instead of the public legal system. Ellickson analyses the informal rules set by cattle farmers in Shasta County. His empirical findings largely correspond to Bernstein’s: Just as she does, Ellickson finds that thanks to custom and habits, self-aid and private dispute settlement recourse to the legal system is often dispensable. He also applies economic tools, using game theory and transaction cost economics (see Chapters 3 and 17). However, Ellickson’s approach reaches beyond the immediate object of his study. In the second chapter of his work, parts of which are the second reference text for this chapter, he seeks to develop elements of a theory of social co-operation. In particular, he develops general categories for a taxonomy of functional equivalents to the private law provided by the state. He explicitly underpins the interdisciplinary potential of his taxonomy.24 This, indeed, is one of his merits: he develops concepts for different types of private ordering that are equally compatible with law, economics and sociology. Ellickson’s initial assumption is simple: not all social norms and institutions are equally suitable when it comes to facilitating co-operation.25 In this context, co-operative behaviour means a behaviour to everyone’s benefit. Co-operative behaviour needs to be facilitated by apposite norms and institutions if defection was otherwise the rational strategy (prisoner’s dilemma, see Chapter 11). Ellickson argues that norms set incentives 21

22

23

24

25

Regarding this argument see the seminal work by Dieter Schmidtchen, ‘Territorialita¨t des Rechts, Internationales Privatrecht und die privatautonome Regelung internationaler Sachverhalte. Grundlagen eines interdisziplina¨ren Forschungsprogramms’, 59 RabelsZ 56–112 (1995). On this problem with a focus on how to achieve legal certainty through the publication of court rules and the emergence of transnational precedents Gralf-Peter Calliess / Moritz Renner, ‘Between Law and Social Norms: The Evolution of Global Governance’, 22 Ratio Juris 260–80 (2009). For an analysis of how transnational law accounts for third-party and common interests see Moritz Renner, Zwingendes transnationales Recht: Zur Struktur der Wirtschaftsverfassung jenseits des Staates (Baden-Baden: Nomos, 2011). Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge / MA: Harvard University Press, 1991), p. 123. Ibid., pp. 124–7.

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New Private Law Theory

for co-operative behaviour. With his understanding of norms he consciously gives up the analytical differentiation between factual and normative standards of behaviour. By way of strong simplification, Ellickson then equates those norms that are set by state institutions with law. The question whether or not other norms can have the status of law is thus avoided.26 Ellickson’s study focuses on the identification of different elements of private ordering.27 Ellickson distinguishes between First-Party Control, that is, personal ethics enforced by self-discipline, Second-Party Control, that is, contractual agreements enforced by selfhelp, and Third-Party Control, that is, social norms enforced by means of proxy self-help, organizational structures – or the legal system. Even though these categories seem abstract at first, their meaning becomes palpable as soon as they are combined with the examples Bernstein provides in her study on the diamond industry.28 This is especially fruitful with regard to those ordering mechanisms, that Ellickson refers to as Second- and Third-Party Control. Buying a diamond by way of ‘open cachet’ as described by Bernstein is a good example of a bilateral control mechanism: after writing their offer on a sealed envelope which contains the diamonds, the buyer is bound to that offer for a certain period of time. Yet most of the mechanisms that Bernstein describes are mechanisms of Third-Party Control. For example, in Ellickson’s terms the trading usages of the DDC are social norms enforced through the reputational mechanisms of the club by means of proxy self-aid. The club’s statutes, then, which can be enforced by the Floor Committee through the expulsion of members, are organizational rules. Beyond that, Ellickson’s categories are easily transferable to other constellations, be it self-aid mechanisms within long-term contracts (Second-Party Control, see Chapter 17) or corporate codes of conduct binding a company and possibly its suppliers (Third-Party Control, see Chapter 22). The bond market example of the Aurelius case (Box 26.1) shows that the types of private ordering identified by Ellickson are complementary rather than exclusive. Standard contracts developed by industry associations might be one element of a functional system of private ordering, informal rules of behaviour might be another. Thus, Ellickson is right when he underlines that different mechanisms of private ordering can be combined with one another in multiple ways – as is the case in both bond markets and the diamond industry. Ellickson gives the telling example of an arbitration clause upon which the parties bilaterally agree, but which ultimately sets the ground for a dispute settlement by a third party.29 In this context, a comment that Ellickson makes rather in passing is highly important: in every part of society there is a need for some 26

27

28

29

On this problem see Gralf-Peter Calliess / Moritz Renner, ‘Between Law and Social Norms: The Evolution of Global Governance’, 22 Ratio Juris 260–80 (2009). Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge / MA: Harvard University Press, 1991), p.131 with table 7.3. For further empirical material see Gralf-Peter Calliess et al., ‘Transformation des Handelsrechts? Neue Formen von Rechtssicherheit in globalen Austauschprozessen’, in Achim Hurrelmann et al. (eds.), Zerfasert der Nationalstaat? (Frankfurt: Campus, 2008), pp. 143–75. Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge / MA: Harvard University Press, 1991), p. 135.

Private Ordering

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kind of meta-rules that co-ordinate the interplay of different public and private mechanisms of ordering. Private law theorists habe coined the term ‘societal conflict-of-laws rules’ to describe such meta-rules.30 At this point, the discussion on private ordering is also relevant for private law doctrine, since it is all about the initial question: how is private law to deal with norms that are privately established and enforced? When should it recognize them as valid, refer to them – or consciously disregard them? When is the legal system to accept a self-help mechanism such as the exclusion from a trade club – and when should the legal system intervene and prevent such expulsions? And should it not incorporate the specific customs of certain sectors, for example with regard to the calculation of damages, in order to provide more efficient (and commonly accessible) mechanisms of contract enforcement for Bernstein’s diamond traders? IV The interdisciplinary opening of private law doctrine has raised awareness for a whole cosmos of private ordering beyond the state legal system. For a number of industries, genesis and functionality of private ordering are well researched, both empirically and systematically. The challenge for private law theorists now is the normative assessment of private ordering and its relationship to the public legal system. If private law theory managed to establish ‘rules of recognition’ through which the validity of an act of private ordering could be assessed, this would be of immediate use for private law doctrine. Therefore, private ordering is a research area where a sociologically and economically informed private law theory can demonstrate its relevance particularly well. This becomes apparent in cases such as the Aurelius example (Box 26.1). Here, legal concepts such as the concept of fiduciary duties might act as a translation device between private ordering and state law. Against the background of the common market practice of not accelerating bonds for isolated covenant violations it seems’ plausible that both Windstream and other bondholders had a justifiable expectation that Aurelius would not accelerate the bond and cause Windstream’s default. This justifiable expectation can be reflected by fiduciary law doctrine in both common and civil law jurisdictions. Conceptually, it can be framed as a good faith duty to act in accordance with the interests of the bond-issuer as well as other bondholders – to the extent that these interests are substantiated in specific expectations of behaviour. However, imposing on Aurelius a fiduciary duty to refrain from accelerating the bond would mean that the informal expectations held by market participants markets would effectively trump the formal rules laid down in standard contracts made by the very same market participants. If the purpose of fiduciary duties in this context is to preserve the functionality of private ordering, then the bar is set high for justifying an ex post imposition of fiduciary duties on individual market participants by state courts. To the extent that formal rules of private ordering, such as standard contracts, are made and adapted in an inclusive and transparent procedure, such as in the ambit of an industry association, it can 30

For an overview of this debate see Andreas Maurer / Moritz Renner, ‘Kollisionsrechtliches Denken in der Rechtstheorie’, 125 Archiv fu¨r Rechts- und Sozialphilosophie, Beiheft 207 (2010).

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New Private Law Theory

be presumed that all relevant concerns are adequately reflected in the rules. At this point, the discussion about private ordering and its legal assessment directly ties in with the debate on ‘constitutionalizing’ transnational law (see Chapter 25). If formal rules of private ordering are silent on the matter, they may be complemented by informal expectations of behaviour. If, in contrast, they clearly aim at conclusively regulating the duties of market participants, there is no room for imposing fiduciary duties. As a consequence, Windstream’s claim against Aurelius would have to be dismissed under both common and civil law rules, as would have to be claims of other bondholders. A close legal analysis of the different rules of private ordering that are in play here reveals that market participants have found a workable solution for potential conflicts of interest. This solution is reflected in the standard contracts used on the transnational bond market, which should accordingly be upheld and enforced by state courts.31

31

For a more thorough discussion of the example case see Moritz Renner, ‘Transnational Fiduciary Law in Bond Markets: A Case Study’, 5 UC Irvine Journal of International, Transnational, and Comparative Law 113 (2020).

27 The Shadow of the Law and Social Embeddedness Stefan Grundmann

a topic and materials I This chapter concludes the section on rule-setting and ‘private law beyond the state’. With this concept, the question is also raised as to whether particular areas de facto constitute or even should constitute a sphere ‘outside the law’. One of the most striking examples in this respect can be found with the Internet and in particular with clashes of opinion in the digital sphere (see also Chapter 16). The most direct conflict might well be that of hate speech (and other insults, threats, etc.) pronounced on the Internet and in particular on platforms (namely social media or channels open for content provided by media, such as newspapers) that are independent from state authority. The leading case in Europe – with respect to freedom of speech and opinion on such platforms – may well be the Delfi AS v. Estonia case, decided by the Grand Chamber of the European Court of Human Rights in June 2015 (Box 27.1). This is one of the most disputed questions in the digital arena worldwide. The core question is whether platforms – not state owned or not acting as agents of state divisions or with state privileges – are subject to freedom of opinion rules at all and what ensues from an answer to this question when it comes to the accountability for hate speech posted by others – often in anonymity. The United States does not have a lead case yet, but it would seem clear that the free speech and opinion rules contained in the First Amendment and pursuant to the ‘state action’ doctrine, according to the US Supreme Court, cannot be invoked against other than state entities1 – without, however, clarity on what this implies for the role of platforms as watchdogs or curators of content in digital public spaces.2 There are 1

2

See as the last lead cases in a long line of US Supreme Court case law: Manhattan Community Access Corp. v. Halleck, No. 17–1702, 587 U.S. ___ (2019), available at https://supreme.justia.com/cases/federal/us/ 587/17–1702 (this case, however, decided by a split vote of 5:4 along ideological lines within the court); Packingham v. North Carolina, No. 15–1194, 582 U.S. ___ (2017), available at 15–1194 PACKINGHAM V: North Carolina (06/19/2017); for an overview see K. Klonick, ‘The New Governors: The People, Rules, and Processes Governing Online Speech’, 131 Harvard Law Review 1598–670 (2018). See on this question, namely T. E. Kadri / K. Klonick, ‘Facebook v. Sullivan: Public Figures and Newsworthiness in Online Speech’, 93 Southern California Law Review 37–98 (2019).

495

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BOX 27.1 CASE STUDY

Delfi AS v. Estonia – ECHR Grand Chamber of 16 June 2015 [application 64569/09] The applicant in this case before the European Court of Human Rights (ECHR) runs an internet platform – Delfi – with up to 330 news stories a day, followed by a section for comments from outside. The platform is one of the biggest in Estonia, and reaches all Baltic states, published in Estonian and Russian. The Delfi platform has best practice rules on comment content, deletes either on its own initiative or in reaction to requests those comments considered to contain threats, insults, hate speech and the like. Moreover, the platform makes clear in a disclaimer that opinions expressed in comments are not shared by the platform. In this case, the shipping line AS Saaremaa Laevakompanii (SLK), was the subject of a rather critical article in the journalistic part of Delfi’s platform in which it was described how SLK conduct hindered the installation of ice roads across certain parts of the Baltic Sea in the winter. Many users reacted in the comment part of the platform with insults, threats, etc., most of them anonymous. Even though this was not hate speech with racist or sexist content in the narrow sense, the case addressed the core issue and would have applied to such content as well – namely what the responsibility of the platform might be. Estonia had a law imposing duties of scrutiny (and also liability for damages) on providers, not a strict liability, but rather extended duties to act as a watchdog. It was not material whether Articles 12–15 of the EC e-Commerce Directive did indeed exclude such accountability and liability of providers (as most authors think), as this rule had not been transposed into Estonian law. Because of the EU law doctrine that EU Directives do not apply directly (‘horizontally’) to disputes between private parties (see Art. 288, para. 3 Treaty for the Functioning of the European Union (TFEU)), Estonian law was indeed called upon to decide the case. The allegation of Delfi AS was that its right of freedom of speech and opinion was violated if Estonian law did impose such far-reaching duties on providers of platforms – despite the fact that the Delfi platform had a scheme disallowing hate speech and had already made some effort to ban it. The Grand Chamber decided that a national – here Estonian – law could impose rather far-reaching duties on platform providers without violating their freedom of speech and opinion.

proposals made by non-governmental bodies in the European Union (see Chapter 16), yet no official proposals to date. One might see a bottom-up convergence in statu nascendi: Germany has a law imposing similar duties on platforms to those Estonian law did, and the French legislature now in principle followed this path.3 Core private players in the field 3

For the so-called Netzwerkdurchsetzungsgesetz (NetzDG) of 1 September 2017 in Germany (Network Enforcement Act, Bundesgesetzblatt – Official Journal 2017 I, p. 3352), see in a perspective of private ordering D. Wielsch, ‘Die Ordnungen der Netzwerke: AGB – Code – Community Standards’, in M. Eifert /

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such as Facebook have indeed reacted over recent years and already installed procedures that try to establish basic procedural rules for being heard and for proper representation of all affected groups on the panel, that is, basic principles of ‘due process’ – both for the commentators and for those affected by comments (for instance, victims of hate speech).4 Finally, it has to be stressed that the judgment as such does not decide on whether platforms should have such duties – nor on the question whether the EC e-Commerce Directive excluded this – but only that a national law stating such duties did not violate the free speech and opinion rules contained in Article 10 of the ECHR.5 Here enters the relevance of considerations in legal sociology or also political philosophy on whether spaces de facto free of legal duties should exist and for which reasons. Similarly, it can be highly illuminating to ask how social embeddedness – as developed in Granovetter’s text (B.III) – can be fostered by or is as well the source of norms of behaviour and in which contexts. II The chapter discusses three texts of reference which all deal with the question of where and how law has its impact, albeit indirectly and subcutaneously even when, at first sight there seems to be no law applying (Box 27.2). The first is by a leading French doctrinal thinker of the second half of the century who at the same time was the leading legal sociologist in French academia. The text asks the question whether law – in the French codification tradition – really reaches all corners of human life and social coexistence, conceptually speaking, while it is obvious that in practice it can of course never completely fill them. The second text is by the founder of new economic sociology who, after half a century of departure from economy as an object of sociological consideration, brought this field back to where it had already been with Max Weber – right into the core of sociology, as one of the most important sub-systems of society.6 Finally, the third text, by a US legal scholar and a US economist, addresses the question of how law as a pervasive ordering regime may influence behaviour even when

4

5

6

T. Gostomzyk (eds.), Netzwerkrecht: Die Zukunft des NetzDG und seine Folgen fu¨r die Netzwerkkommunikation (Baden-Baden: Nomos, 2018), pp. 61–94; L.-M. Neudert, ‘Germany: A Cautionary Tale’, in S. Woolley/ P. Howard (eds.), Computational Propaganda: Political Parties, Politicians, and Political Manipulation on Social Media (Oxford: Oxford University Press, 2018), pp. 153–85. For considerations on a potential parallel law in France, see Proposition de loi visant a` lutter contre les contenus haineux sur internet (so-called loi Avia) which was approved by the Se´nat on 17 December 2019; on the most recent legislative proceedings see A. Piquard, ‘Haine en ligne: la loi Avia face a` ses critiques’, Le Monde (online), 16 December 2019. See ‘Facebook Oversight Board’ – a (duly remunerated, professional) board that decides on removal of comments etc., at https://about.fb.com/news/2020/01/facebooks-oversight-board/ and comment by K. Klonick, ‘Creating Global Governance for Online Speech: The Development of Facebook’s Oversight Board’, 129 Yale Law Journal 2418–99 (2020). See also Magyar Tartalomszolga´ltato´k Egyesu¨lete and Index. HU ZRT v. Hungary – ECHR Fourth Section of 2 February 2016 [application 22947/13]; and on the case law of the ECHR in this respect more broadly J. B. Mir / M. Bassini, ‘Freedom of Expression in the Internet: Main Trends of the Case Law of the European Court of Human Rights’, in: O. Pollicinio / G. Romeo (eds.), The Internet and Constitutional Law (Abingdon: Routledge, 2016), pp. 71–93. On M. Weber and his understanding of the area, see more detail in Chapter 2.

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BOX 27.2

Jean Carbonnier, ‘L’hypothe`se du non-droit’, in Flexible droit: Pour une sociologie du droit sans rigueur (10th ed., Paris : L.G.D.J., 2001, 1st ed. 1969), pp. 25–47 (English translation available on the book website) Mark Granovetter, ‘Economic Action and Social Structure: The Problem of Embeddedness’, 91 American Journal of Sociology, 481–510 (1985) Robert Mnookin / Lewis Kornhauser, ‘Bargaining in the Shadow of Law: The Case of Divorce’, 88 The Yale Law Journal 950–97 (1979)

BOX 27.3

George Akerlof / Rachel Kranton, ‘Economics and Identity’, 114 The Quarterly Journal of Economics 715–53 (2000) Omri Ben-Shahar / John Pottow, ‘On the Stickiness of Default Rules’, 33 Florida State University Law Review 651–82 (2006) Robert Cooter / Stephen Marks / Robert Mnookin, ‘Bargaining in the Shadow of the Law: A Testable Model of Strategic Behavior’, 11 Journal of Legal Studies 225–51 (1982) Marc Galanter, ‘Justice in Many Rooms: Courts, Private Ordering, and Indigenous Law’, 19 Journal of Legal Pluralism 1–47 (1981) Russel Korobkin, ‘The Status Quo Bias and Contract Default Rules’, 83 Cornell Law Review 608–87 (1998) Karl Polanyi, The Great Transformation: The Political and Economic Origins of our Time (New York: Farrar & Rinehart, 1944, reprint Boston: Beacon Press Books, 2001)

its application could be, or indeed has been, excluded – as a shadow still reigning supreme. These three texts all centre around one question: where and how, directly or indirectly, consciously or not, does law have its impact? This implies that the three texts inspired numerous strands of theories and ideas, and one important backdrop for them might well be found in a currently growing area of study. Indeed, identity studies have become a truly dominant feature in the social sciences and neighbouring disciplines over recent decades – even reaching out to disciplines such as economics that deal more with models, measuring and exact calculation and less with multifaceted, indefinite concepts such as ‘identity’. The shift in sociology – considering economy again as an important sub-field – has certainly added a lot to such discussion between the social sciences. While Granovetter is the key player in this turning back to new economic sociology, Polanyi is equally key in

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sociology’s departure from such studies (with his separation theory – or great transformation and alienation theory). Probably the richest arena of discussion in the area considered here is where the relationship between law and internalization of norms or social norms is analysed. In economics, the shadow of law is often discussed as ‘stickiness’ of law – the theory of default rules playing a key role. These ramifications of the debate can be traced in the supplementary readings listed in Box 27.3.

b theories, context and discussion I The three texts discussed here approach our question with a focus on law and economic sociology, in either the foreground or background. All three address the question of how much law is needed – and the extent to which rules really influence behaviour. Of course, these three texts by no means exhaust the topic, but they do illustrate its key aspects. In essence, the question is always to what extent various normative orders – ranging from purely social norms (see Chapter 26) to the fully fledged regulation of a whole industry – do indeed have binding effects. All three texts examine the continuum of possible effects generated by different types of rule. For the case of formal rules, for example, at one end of the spectrum lie merely ancillary rules, such as default rules, which (at least formally) leave all decision-making to the parties concerned. Further on are rules where the decisions of the parties concerned generate effects for third parties, such as inheritance rights. Next, we encounter mandatory rules. Finally, we come to those forms of regulation which completely shape a certain market or industry, such as energy. Of course, in every instance, the texts implicitly engage with Max Weber’s strict dividing line and criterion: whether the state’s apparatus of force can be used (law) or not (non-law). While this criterion still seems to represent mainstream thinking even today,7 the three texts reviewed here offer alternative views. The two texts written by lawyers with a strong law and sociology background (Jean Carbonnier; Robert Mnookin and Lewis Kornhauser) speak more explicitly to legal rules. The text by a – if not the – protagonist of economic sociology (Mark Granovetter) is not explicitly about legal rules, but illustrates how economic actors actually behave by reference to core problems of contract and company law. All three texts are nonetheless united in a common preoccupation with the degree to which the parties feel bound when exercising their freedom of choice in negotiation processes – not just with morals, default rules, embeddedness in social contexts and relationships, but with the power of these standards, institutions or contexts to actually 7

See, for example, R. C. Ellickson, ‘A Critique of Economic and Sociological Theories of Social Control’, 16 Journal of Legal Studies 67–99 (1987); for a critical deconstruction highlighting a trend towards hybrid enforcement in economic law see R. Wai, ‘Enforcement in the Shadows of Transnational Economic Law’, in H.-W. Micklitz / A. Wechsler (eds.), The Transformation of Enforcement: European Economic Law in Global Perspective (Oxford: Hart, 2016), pp. 15–46. See also, in the German literature: T. Raiser, Grundlagen der Rechtssoziologie (6th ed., Tu¨bingen: Mohr Siebeck, 2013), pp. 177 et seq.; R. Zippelius, Grundbegriffe der Rechts- und Staatssoziologie (3rd ed. Tu¨bingen: Mohr Siebeck, 2012), pp. 64 et seqq., 103 et seqq.

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guide behaviour. Their shared enigma, in other words, is the highly persuasive authority of (mere) default rules and (mere) social rules, which turn out to sometimes be even more persuasive than mandatory legal rules, that is, more intensely internalized and practically more successful in terms of compliance. The second and the third texts stress the highly persuasive authority of default rules and the social context in which relations are embedded. The first by contrast – rife, as elaborated below, with typically French characteristics – reflects more explicitly the view that law is not always the guiding force of relationships, that, beside the domain of law, le droit, there is a realm of non-law, le non-droit. The claim is formulated within the old French tradition of legal sociology, rather than only within the theory of relational contracts (see Chapter 17). Taken together, the three texts do exhibit a certain convergence, with the domain of legal rules giving way at various points to the domain of other rules and influences. Given that a full picture of the governance of consensual or hierarchical relationships requires both sides, such a broad consideration of social sciences approaches is helpful. In the broader context of this work, economic sociology and the texts discussed in this chapter help to bridge the gap between the strands of thinking discussed in Chapters 2 and 3, where, respectively, sociology and economics were regarded in conjunction with law. II Jean Carbonnier is considered the outstanding private law scholar with a social science approach in contemporary France and quite possibly as the outstanding protagonist of legal sociology of the last half-century as well. Not only has he compiled a leading textbook on French private law in general, one firmly rooted in a social sciences perspective,8 but he has also drawn on his rich understanding of substantive law to author a number of eminent legal sociology monographs. Among the latter, his most famous is certainly his 1969 Flexible Droit, now in its tenth edition and continuously enriched with new topics over more than three decades.9 Moreover, in family law matters especially, he has advocated his understanding of law in French legislation over a period of nearly forty years.10 All in all, he 8

9

10

J. Carbonnier, Droit civil: Introduction (27th ed., Paris: Presses universitaires de France, 2002); 1st ed. published in 1976, as Traite´ de Droit Civil; see also: J. Carbonnier, Droit civil. Volume I, Introduction. Les personnes. La famille, l’enfant, le couple (Paris: Presses universitaires de France, 2004); J. Carbonnier, Droit civil. Volume II, Les biens. Les obligations, (Paris, Presses universitaires de France, 2004). J. Carbonnier, Flexible droit: Pour une sociologie du droit sans rigueur (10th ed., Paris : L.G.D.J., 2001, 1st ed. 1969) – a collection of articles starting in the 1950s. The first part is dedicated to ‘droit et non-droit’. The third part, dedicated to the three pillars of law, is also famous in France. ‘Les trois pilliers du droit’ are family, property and contract (following the three parts of the Code Civil, arranged according to the so-called system of institutions: the institutiones of the Iustinian Codex Iuris Civilis of 533, being based on the second-century author Gaius). The genuine treatise on legal sociology followed: J. Carbonnier, Sociologie juridique (Paris: Presses universitaires de France, 2004). In particular, Carbonnier gave important guidance for the legislative reforms on incapacities (1964, 1968), on matrimonial property regimes (1968), on parental power (1970), on the highly innovative lowering of the age of majority to the age of 14 in matters of religious belief and, moreover, on the reforms on filiation (1972), divorce (1975) and wills and estates (succession, 2002). See article on J. Carbonnier in P. Arabeyre / J.L. Halpe´rin / J. Krynen (eds.), Dictionnaire historique des juristes franc¸ais, (1st ed., Paris: Presses Universitaires de France, 2007), pp. 161–3.

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can be seen as the protagonist of the broad ‘second’ French legal sociology movement that occurred in the closing decades of the twentieth century.11 The first part of Flexible Droit that will be discussed here is titled ‘Le Droit et le NonDroit’ – Law and Non-Law. In these pages, Carbonnier sets out his core problem. While the law, specifically in a modern codified system (of which France has the oldest), is designed to cover all relationships, legal sociologists and indeed anybody looking at law in a broader context inevitably recognize that its coverage is by no means general and that the intensity varies across the different contexts of life. This is so even though Carbonnier, in the Weberian tradition (Chapter 2), also recognizes an increasing intensification of law’s coverage. The text’s beginning is thus highly interesting, given Carbonnier’s background as both an outstanding doctrinal private law scholar and as a protagonist of legal sociology: ‘Doctrinal jurists think that, even if all is not law, law’s role is to be everywhere, enveloping all, ideally supporting everything and everyone . . . With advanced maturity, today’s legal sociology has a better understanding and has ceased to claim that the law has such a divine ubiquity.’12 This is ‘L’Hypothe`se du Non-Droit.’ The text not only exhibits a typically French elegance, linguistically, putting emphasis on epistemology and logic etc., but is very French in its style and even its composition as well, with inter alia, the archetypical subdivision into two parts. The first part concerns the positive statement that there is ‘non-droit’ and the other contains a more normative evaluation of which domain should be predominant, ‘droit’ or ‘non-droit’ – and each part is subdivided again into two chapters. The first sequence of the first chapter (I.A) is about ‘the absence of (state) law’ as a fact, or – as Carbonnier puts it – a ‘social fact’. Here, Carbonnier’s interest is not in immoral laws, such as those entrenching racism (which he labels ‘anti-droit’), nor rules binding actors in the underground, such as criminal circles (which he calls ‘sous-droit’ – ‘underground law’). Rather, he means the absence of law; the complete retreat of law in space or time,13 which is later defined as a situation where it is foreseeable that the law will not be 11

12

13

On the first and founding movement, see Chapter 2. Other highly renowned texts from the last four or five decades include: A. Supiot, Homo Juridicus: Essai sur la fonction anthropologique du droit (Paris: Editions du Seuil, 2005); G. Gurvitch, Ele´ments de sociologie juridique (Paris: Aubier e´d. Montaigne, 1940); H. Le´vyBruhl, La sociologie du droit (Paris: Presses universitaires de France, 1961); but see as well M. Mauss, ‘Essai sur le don: Forme et raison de l’e´change dans les societies archaiques’, L’Anne´e Sociologique 30–186 (1925). Carbonnier, Flexible Droit, p. 25 (own translation). Between the two quotations, Carbonnier refers to the same feeling of ‘omnipotent law’ reigning in early legal sociology in France, particularly in E´. Durkheim, De la division du travail social (Paris: Presses universitaires de France, 1893); there is, however, yet another link to Durkheim, namely to his concept of the ‘non-contractual’ foundations of any contracting (see, among others, Chapter 2); besides Durkheim, see also M. Weber, Wirtschaft und Gesellschaft (5th ed., Tu¨bingen: Mohr Siebeck, 1972), namely chapter VII, § 8 on p. 511, where he describes how similar economic developments will not necessarily interfere with the specific characteristics of civil and common law jurisdictions in the same manner. Similarly, in his doctrinal treatise: Carbonnier, Droit civil, p. 63: ‘En sociologie, c’est l’observation de phe´nome`nes d’absence ou de retrait du droit dans des situations ou` il devrait eˆtre pre´sent selon sa finalite´ dogmatique – syncopes du droit’ (as examples chosen: friendship, non-marital status, areas where imposition of the law is too expensive, in part the family). See Carbonnier, Flexible Droit, pp. 25–9 in which he deviates considerably from the famous image (in J.-J. Rousseau and, to some degree also in the earlier work of T. Hobbes) that the state of nature is a society without law.

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applied or imposed. There is certainly a striking contrast here with systems theory, which developed roughly contemporaneously and which is also rooted in legal sociology, for which such areas of non-law, exceptions from the claimed overall reach of law, would seem inconceivable (see Chapter 10).14 At this early stage, Carbonnier distinguishes absence from a situation where the shadow of the law, in the sense of the third text discussed in this chapter, continues to influence the behaviour of the parties. Carbonnier regards the judge as the decisive element for bringing law into being and not, as in legal or legislative positivism, the rule-setting procedure or the sanction imposed (see Chapter 1). His line of argument thus boils down to the view that non-droit is the domain in which there is, in fact, no possibility that a judge will step in.15 Later on, Carbonnier further clarifies the criteria that distinguish such contexts. There is ‘non-droit’ only where the law itself (i) ‘has given up on dealing with the situation’ and (ii) this surrender is not just for one instance, but is ‘general in character’. A pertinent example with high practical importance may be seen in the case reported above – at least in those jurisdictions that do not impose a duty to scrutinize content on online platforms run by private actors. In this case, the law has de facto given up – at least the state enforcement apparatus has given up on enforcing norms like the criminal ban to insult or to threaten others because it no longer forces the only actor that has the tools to discard unacceptable content or even take action against the misfeasors themselves. This view is very much in the vein of legal sociology and is particularly attractive thanks to the concept of non-droit. However, for example in Germany, the law does not recede, and even if the law does recede, this may be a conscious choice, for instance in favour of complete freedom on the Internet. Even if the protection of personality is not granted and platforms are not obliged by law to impose such protection on users, this can be seen as the consequence of a positive statement on the superiority of freedom of opinion and of speech. Moreover, at the same time, non-droit as a concept also raises questions of efficacy. When, for example, Carbonnier says that there is no law where there are insurmountable difficulties of proof or prohibitive costs, this is a question of legal policy which may even influence doctrinal thinking, for example, with respect to the level of proof required for awarding damages in capital market law.16 Similarly, Carbonnier says (in a rather unorthodox way) that an overkill of rules (‘an excess of regulatory intervention’) can lead, in fact, to non-droit. Technocratic law or hundreds and hundreds of pages, for instance in the EU 14

15 16

There is dispute on this, however, even among systems theorists. See, on the one hand, G. Teubner, ‘Reflexives Recht: Entwicklungsmodelle des Rechts in vergleichender Perpektive’, 68 Archiv fu¨r Rechtsund Sozialphilosophie 13–59 (1982); G. Teubner,‘Substantive and Reflexive Elements in Modern Law’, 17 Law and Society Review 249–84 (1983); and on the other hand N. Luhmann, ‘Einige Probleme mit “reflexivem Recht”’, Zeitschrift fu¨r Rechtssoziologie 1–18 (1985). Carbonnier, Flexible Droit, p. 27; further quotes in this paragraph at pp. 32, 30 et seq., 31 and 33. For approaches awarding damages in cases where only fraud on the market as a whole can be proven, but no strict causal link to individual damages: US Supreme Court, Basic Inc. v. Levinson, 485 U.S. 224 (1988); D. Fischel, ‘Efficient Capital Markets, the Crash and the Fraud on the Market Theory’, 74 Cornell Law Review 907–22 (1988–1989), pp. 907 et seq.; Note, ‘The Fraud-on-the-Market Theory’, 95 Harvard Law Review 1143–61 (1982); see G. Spindler, ‘Kausalita¨t im Privat- und Wirtschaftsrecht’, 208 Archiv fu¨r die civilistische Praxis 283–343 (2008), at 331 et seqq.

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Banking Union, may come to mind. Potentially even more convincing as an example may be the introduction (virtually worldwide!) of a principle of irretrievable matrimonial breakdown which is no longer aimed at legally assessing how and why a marriage has failed.17 The second chapter of the first part, on why parties often choose the status of nondroit, is much less revolutionary. Carbonnier examines situations where family members renounce the imposition of their legal rights, as well as situations where the parties potentially do not want to form a legally binding contract; for instance, when giving advice among friends (conseil gratuit) or giving a friend a lift (transport be´ne´vole). In the second part, Carbonnier asks a question which, in his view, sociology would not ask: what is the hierarchy between droit and non-droit? Again, the second chapter of the second part is more traditional. It challenges the simplistic view that there is always a trend from less to more law (although this trend does seem to be prevalent). However, the first chapter of the second part is normative in the strict sense, and raises the question of whether droit or non-droit should be preferred. It is obvious that the question cannot be answered definitively, but even asking the question is provocative. Carbonnier sees two lines of argument. He describes, first, the ‘dogmatic’ argument that there is always the shadow of the law and that this is a source of freedom (‘la ple´nitude de droit d’une liberte´ publique’), an argument to which the most recent positivists would probably subscribe.18 The second line of counter-argument is that this does not reflect real life, as can be proven statistically. Although this passage does not, therefore, provide a normative answer to the normative question Carbonnier poses, he does offer one elsewhere in the text. He argues that liberal criminal law developed as one of its cornerstones the principle that what is not forbidden ex ante may not lead to penal sanctions ex post (again, Luhmann and other systems theorists would probably criticize Carbonnier for mistaking legal (allowed) actions for nonlaw). Hence, in Carbonnier’s view, one could make the case for a general presumption of ‘subsidiarity’ entailing that, where there is no regulation by the law, the matter is presumed not to be subject to legal mechanisms. (Again we might ask: in favour of liberty? Or in favour of societal bonds?) Carbonnier’s later writings, influenced by the 1968 riots,19 develop his idea more powerfully and include the two phrases which are most quoted in discussions of his concept of the subsidiarity of law in all areas: ‘Ne le´gife´rez qu’en tremblant!’ and ‘Between two solutions, prefer always the one which requires less law.’

17

18 19

K. Boele-Woelki / B. Braat / I. Sumner (eds.), European Family Law in Action, Vol. 1: Grounds for Divorce (Antwerp/Oxford/New York: Intersentia, 2003). Carbonnier, Flexible Droit, p. 39. For J. Raz as a protagonist in this sense, see Chapter 1. Carbonnier, Flexible Droit, pp. 49 et seqq. (‘Scolies sur le non-droit’). These riots were, however, not seen as a case of non-droit (under the two criteria of the definition given above, Carbonnier, Flexible Droit, p. 32). First, there was a ‘law of war’ in these riots: that nobody on either side should be killed. Second, more radically, to have non-droit, one would have needed ‘une re´flection sur le droit lui-meˆme. Celle-ci fit de´faut’. This negation of the law in action was missing.

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III The second text discussed in this chapter is one of Mark Granovetter’s two best-known works. The overall theme of Granovetter’s work – albeit silent on legal consequences – is that of implicit norms, their source and the degree to which parties feel bound by them. In his doctoral thesis, the essential findings of which were published in the American Journal of Sociology, Granovetter distinguishes between different kinds of network relationships: between strong ties (such as family, partnership or very close friendship) and weaker ties such as mere acquaintance. He reaches the somewhat counterintuitive empirical finding that the latter help much more broadly – and even more efficiently – in the search for jobs.20 What seems counterintuitive may, however, be a response to norms, strongly internalized, such as norms against nepotism. What is more, Granovetter’s distinction between strong and weak ties was methodologically very important, as it facilitated the analysis of network relationships in terms of different kinds of relationships producing different effects. Such relationships, it became clear, combine in multiple mixes and thus became a true object of investigation, with the heterogeneity of the mixes taken as a starting point. This text is methodologically related to Carbonnier’s in that the variety of social relationships is central to the argument. The second text that introduces the concept of ‘embeddedness’ is probably still more important, at least in social scientific terms, given that this concept has been hailed as ‘economic sociology’s most celebrated metaphor’21 and indeed as the foundation stone of new economic sociology.22 Whereas Polanyi had famously argued that the economy had been separated from society (also via consciously political acts), with the result that the economy no longer followed society, but dragged society along behind it forcing social relations to be expressed in economic terms,23 Granovetter regards the economy very differently. He sees it as a very important social sub-system.24 New economic sociology has flourished again since Granovetter25 and 20

21

22

23

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M. Granovetter, ‘The Strength of Weak Ties’, 78 American Journal of Sociology 1360–80 (1973); M. Granovetter, Getting A Job: A Study of Contacts and Careers (Cambridge / MA: Harvard University Press, 1974). M. Guille´n / R. Collins / P. England / M. Meyer, ‘The Revival of Economic Sociology’, in id. (eds.), The New Economic Sociology: Developments in an Emerging Field (New York: Russel Sage Foundation, 2005), pp. 1–32, at 4. R. Swedberg, ‘New Economic Sociology: What Has Been Accomplished, What is Ahead?’, 40 Acta Sociologica 161–82 (1997), at 162; O. Velthuis, ‘The Changing Relationship between Economic Sociology and Institutional Economics: From Talcott Parsons to Mark Granovetter’, 58 American Journal of Economics and Sociology 629–49 (1999). In fact, economics had been pre-eminent in the early days of sociology, and particularly legal sociology, for instance with Weber’s Wirtschaft und Gesellschaft of 1922 (fn. 12, see also Chapter 2). The exchange dramatically decreased in intensity, however, when macroeconomics became more mathematical and model-oriented after Schumpeter and then World War II. On Talcott Parsons’ separation hypothesis, see Velthuis above and Chapter 17, section IV. K. Polanyi, The Great Transformation (New York: Farrar & Rinehart, 1944); this is, of course, based on the distinction that Weber makes between instrumental rationality and value rationality. See more extensively in Chapter 2. Then following this path, for instance: A. T. F. Lang, ‘The Legal Construction of Economic Rationalities?’, 40 Journal of Law and Society 155–71 (2013). Though not an operationally closed one in the sense of systems theory, see Chapter 10. For example: V. Zelizer, ‘Beyond the Polemics of the Market: Establishing a Theoretical and Empirical Agenda’, 3 Sociological Forum 614–34 (1998); H. White, ‘Where do Markets Come from?’, 87 American

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sociology’s intersection with the economy (as well as with economics) is also of prime importance for this book: contracts, markets and firms are the prime institutions of private law on which this book focuses in its two parts on substantive private law institutions (Parts III and IV). In its substantive sections, in turn, Granovetter’s text intensively discusses Oliver Williamson’s founding work on governance research (see Chapters 3 and 17) while analysing typical problems arising in the contract and company law arena. The text is divided into five sections. The first is an intensive introduction on ‘the problem of embeddedness’. In the second, Granovetter advances his core thesis that institutional economics and current sociology rely too strongly on under- and oversocialized conceptions of relationships and behaviour in an economy, and therefore fail to properly explain economic mechanisms. In the third and fourth sections, the thesis is illustrated with two core legal examples: malfeasance, and the choice between market instruments (namely contracts) and hierarchies (namely companies). The governance literature on this latter aspect is the background to Granovetter’s argument.26 A discussion summarizes the core claims and concludes the article. In the introduction, Granovetter introduces the view that neoclassical (but also institutional) economics, with its paradigm of a rational, maximizing man (homo economicus or REMM (resourceful, evaluating, maximizing model/man)), starts from an assumption similar to Hobbes’ ‘state of nature’. This is a state that Granovetter labels as ‘atomistic’ for its tendency to put humankind individually at the centre of the discussion, rather than starting from a concept that emphasizes our relationships with others.27 He summarizes: ‘At the other extreme lies what I call the argument of “embeddedness”’, that is, the view that the context of relationships in which the actor lives varies from one person to the next and, at the same time, is of determinative importance to understanding an individual’s expected behaviour. Yet Granovetter notes – and this is more astonishing – that the argument from embeddedness is not only in striking opposition to the premises of institutional economics (see Chapter 3), but also to dominant sociological approaches to modern economic phenomena immediately preceding Granovetter’s intervention. Namely, while many sociologists had understood the economy as in harmony with (embedded in) society in non-market societies, they saw in modern market societies

26 27

Journal of Sociology 517–47 (1981); N. Fligstein, ‘Markets as Politics: A Political-Cultural Approach to Market Institutions’, 61 American Sociological Review 656–73 (1996); for further references concerning the emergence of new economic sociology see: R. Swedberg, ‘New Economic Sociology: What Has Been Accomplished, What is Ahead?’, Acta Sociologica 161–82 (1997), at 162. This recent strand of research is close in style to earlier economic sociology and as well to research on varieties of capitalism, with its empirical approach and detailed positive assessment of economic processes, see more detail in Chapter 22. First quoted in Granovetter, ‘Economic Action and Social Structure’, 483, see also Chapter 17. At this point, Granovetter could indeed have made reference both to methodological and normative individualism, which institutional economics also accept as the starting point both of their analysis and of the value framework as well; see, on both forms of individualism: H.-B. Scha¨fer / C. Ott, Lehrbuch der o¨konomischen Analyse des Zivilrechts (5th ed., Berlin/Heidelberg/New York: Springer, 2012), pp.3, 57; E. G. Furubotn / R. Richter, Institutions & Economic Theory (2nd ed., Ann Arbor: Michigan University Press, 2005), p. 3; K. J. Arrow, ‘Methodological Individualism and Social Knowledge’, 84(2) The American Economic Review 1–9 (1994), particularly at pp. 1–2. Quote in next phrase Granovetter, ‘Economic Action and Social Structure’, at 481.

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a radical split that had alienated the two from one another.28 Granovetter disagrees on both grounds.29 More important for his argument is that he does not see modern markets as being so alienated from societies either. As will be explained in the following paragraphs, Granovetter’s goal is to promote an economic sociology and an idea of embeddedness that lies between the under-socialization of the economists and the over-socialization of the sociological perspective. The second section concentrates on Granovetter’s core interest: the notion of embeddedness. Granovetter first explains under- and over-socialized conceptions of behaviour, reducing the former to Parsons’ famous 1937 critique of ‘the atomized, under-socialised conception of man in the utilitarian tradition’30 that declares rationally pursued selfinterest as the sole guideline for behaviour. This conception, according to Granovetter, ‘removes the problem of order from the intellectual agenda, at least in the economic sphere’. Granovetter quotes many sources from the 1970s and early 1980s, but also traces the roots back to Adam Smith. Already, here, his partiality becomes evident. While there are indeed such trends of totally eclipsing phenomena, such as hierarchies and order,31 this trend is not universal even in institutional economics. For example, Hirschman, whom he quotes in this respect, not only wrote about free market choice, but in his most famous book stresses that there are alternatives to choice (exit), and finds them in loyalty/voice as organizational schemes and as frameworks for potential behaviour. More importantly, to see order as being marginalized does not do justice even to developments in US law, and certainly neglects ordo-liberal order as the most important foundational theory of modern developments in European law (see Chapters 6 and 24). Further, even in Chicago, Ronald Coase had described legislative order as a ‘superfirm’ or hierarchy only twenty years earlier (see Chapter 3). None of this, however, invalidates Granovetter’s starting claim that the REMM assumption is more atomized than his concept of embeddedness. The highly original second part of Granovetter’s first step is to argue that Parsons’ criticism leads to a similar result at the other extreme; that is, that over-socialization of the conception of behaviour and of the framework for behaviour leads again to an overmechanical assumption which atomizes the true world, albeit in a somewhat different way. As Granovetter writes: ‘in the under-socialized account, atomization results from narrow utilitarian pursuit of self-interest, in the over-socialized one, from the fact that behavioral patterns have been internalized’ and ‘ongoing social relationships thus have

28

29

30 31

This view has been stressed early on by Karl Marx, in fact on the basis of Hegelian philosophy, but also underlies Polanyi’s argument quoted earlier. Granovetter does not explicitly discuss the contradiction that might be seen in Polanyi’s approach, which is that in modern market behaviour, the atomistic perspective prevails, while outside market interactions, a more ‘socialized’ perspective seems more appropriate. For the first ground (‘pre-modern’ societies) on which he does not really elaborate, see: ‘the level of embeddedness of economic behavior . . . has changed less with “modernization” than they believe’ (Granovetter, ‘Economic Action and Social Structure’, 482 – particularly M. Weber as well, fn. 12 in this chapter; and Chapter 2). See Granovetter, ‘Economic Action and Social Structure’, 483, and the following quote at 484. A rather clear example, with their nexus-of-contracts conception of hierarchically arranged organizations, is A. A. Alchian / H. Demsetz, ‘Production, Information Costs, and Business Organization’, 72 The American Economic Review 777–95 (1972), namely at p. 779–83, 794, and see Chapters 19 and 20.

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only peripheral effects on behaviour’.32 Thus, Granovetter’s view that these two extremes meet in this core aspect is the highly original second step of his analysis: ‘Under- and oversocialized resolutions of the problem thus merge (converge!) in their atomization of actors from immediate social context’. Conversely, these ongoing social relationships all diverge from each other as they are highly individual in shape. The influence and role of the immediate social context is Granovetter’s main interest – this is what relations are embedded in – and he progresses to state ‘that such analysis reveals central, not peripheral, features of these processes . . . (and that) is the key to understanding how existing institutions arrived at their present state’.33 It is important to stress – especially since it is not completely spelled out in Granovetter’s text – that both the rational behaviour assumption and the assumption of total internalization of social norms are seen as normative conceptions. Behaviour is justified because it is rational or because it internalizes social norms and therefore complies with them better. In contrast, Granovetter emphasizes that these models are very ‘mechanical’ (behaviour is ‘automatic’ under both conceptions). Granovetter is therefore more optimistic about variety and individuality in the shapes of real life, and more process oriented. In sections three and four, Granovetter illustrates the concept of embeddedness with two examples taken from the sphere of law, malfeasance and the market/hierarchy dichotomy. Embeddedness is once again positioned in opposition to atomization. Drawing on, and criticizing, Williamson’s work on the alternative of markets and hierarchies (Williamson offering the most thorough examination of the issue from the perspective of institutional economics; see Chapters 3 and 17), Granovetter makes two main observations with respect to malfeasance. First, that Williamson explained many contractual arrangements as advancing efficiency, rather than offending market order, and therefore wanted to reduce regulatory restrictions. Second, that Williamson wanted to substitute trust with governance arrangements. It may well be that both criticisms are flawed, given that Williamson discusses antitrust law (cutting back on it) – rather than, as Granovetter implies, malfeasance – and expressly notes the need for the governance arrangements only where trust is already absent; that is, he sees governance and trust as two separate possibilities.34 Granovetter’s own argument is powerful, nevertheless: ‘The embeddedness argument stresses instead the role of concrete personal relations and structures . . . in generating trust and discouraging malfeasance. [. . .] Even better is information from one’s own past dealings with that person.’ This is the familiar argument that governance research and institutional economics are too abstract to explain and forecast a particular behaviour. The idea is so compelling that its repercussions were felt outside economic sociology. Economists such as Akerlof and Kranton later came close to these ideas but from a different starting point, namely the analytical framework of institutional 32 33

34

See Granovetter, ‘Economic Action and Social Structure’, 485, also for following quote. See Granovetter, ‘Economic Action and Social Structure’, 500, and for the rest of quotes in this paragraph, see 486. See Chapter 17, B.I. For Granovetter’s criticism, see ‘Economic Action and Social Structure’, 488 et seq. in his article. Following quote at 490.

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economics.35 However, the idea also has important repercussions for law. Taken to the extreme, Granovetter’s argument could even be seen to speak against legal arrangements altogether (see also on the Delfi case at the end of this section): ‘social relations, rather than institutional arrangements or generalized morality, are mainly responsible for the production of trust in economic life’.36 Williamson would – and did – answer that he is less concerned with the question of how trust arises than with the question of how to react institutionally when trust has not arisen or might be abused. In this light, the two approaches could even be seen as complementing one another. One further step is highly meaningful: Granovetter realizes that trust is not only helpful,37 but may also be a source of vulnerability. The legal answer would therefore be to advance protection in particular trust relationships, such as by inferring duress more easily in family relationships or holding fiduciaries to stricter standards of honesty.38 Similarly, where there is much reliance, particularly in the pre-contractual phase, reliance damages (at least) may be based on ‘trust invested’,39 showing how trust is felt to need potential legal protection. However, such a view is rather opposed to Granovetter’s scepticism of legal institutions (sociology is, of course, particularly elucidating when it comes to the situations where trust is typically built up in fact). Thus, the embeddedness approach provides ‘no sweeping (and thus unlikely) predictions of universal order’, but thereby also renders it difficult to ground general regulatory regimes on it – except perhaps for a more general plea to foster solutions that are more prone to warrant embeddedness. The criticism in the section on markets and hierarchies is similar. It would seem as if Granovetter did not want to acknowledge that the main step Williamson took beyond Coase’s theory of the firm of 1937 was exactly that he discovered the hybrids between 35

36

37

38

39

G. Akerlof / R. Kranton, ‘Economics and Identity’, 114 The Quarterly Journal of Economics 715–53 (2000). The line of argument of identity economics, as sketched in this article, is based on social psychology and other fields outside of economics. It basically says that individuals not only have diverging preferences, but also internalize (and obey) different social norms to a diverging degree, and with diverging ease, as a result of social identities that vary on the basis of diverging environments of socialization. Later, more extensively, in the monograph: G. Akerlof / R. Kranton, Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being (Princeton / NJ: Princeton University Press, 2010). See Granovetter, ‘Economic Action and Social Structure’, 491, and for the rest of the quotes in this paragraph, see also p. 493. See the old idea of trust as a way to reduce complexity, as developed by N. Luhmann, Vertrauen: ein Mechanismus der Reduktion sozialer Komplexita¨t (Stuttgart: Enke, 1968); further reading: M. Hartmann / C. Offe (eds.), Vertrauen: Die Grundlage des sozialen Zusammenhalts (Frankfurt: Campus Verlag, 2001). The famous ‘punctilio of honor’, more exactly: ‘Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior’ (Justice Cardozo in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928), describing fiduciary duties. Prominent in the Anglo-American world: G. Gilmore, Death of Contract (2nd ed., Columbus: Ohio State University Press, 1995; 1st ed. 1974); groundbreaking for Germany: C.-W. Canaris, Die Vertrauenshaftung im deutschen Privatrecht (Munich: Beck, 1971); also J. Ko¨ndgen, Selbstbindung ohne Vertrag: zur Haftung aus gescha¨ftsbezogenem Handeln (Tu¨bingen: Mohr Siebeck, 1981); see also comparative law survey in: H. Beale / B. Fauvarque-Cosson / J. Rutgers / D. Tallon / S. Vogenauer, Cases, Materials and Texts on Contract Law (3rd ed., Oxford: Hart, 2019), part 5. In a similar way, the violation of duties stemming from particular positions of trust is sanctioned more severely in most countries, often also via criminal law: for a comparative law survey ¨ berlegungen zum Tatbestand der Untreue’, 122 Zeitschrift fu¨r die see T. Ro¨nnau, ‘(Rechts-)Vergleichende U gesamte Strafrechtswissenschaft 299–324 (2010).

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market and hierarchy, and stressed the rich range of possible variations between them.40 His interest was indeed the discovery of the area between atomized (or discrete) contracts or transactions in markets and hierarchies. By no means does he advocate the latter as an overall remedy. It is meaningful that both Williamson and Granovetter extensively quote Macaulay’s view that long-standing personal relations are the basis of such hybrids (see Chapter 17). Again, Williamson and Granovetter would seem to complement rather than oppose each other. Williamson’s preference, in principle, for private rather than public ordering stems exactly from the fact that he sees these relations as too varied to find one solution which fits them all.41 Granovetter’s argument that a network of smaller entities built on individualized trust may be ‘superior to pure authority relations’42 would clearly be shared by Williamson as well. The rest of the text is analytically less interesting and nearly apologetic. When summarizing the differences between his approach and Williamson’s, Granovetter seems to overstate all of those differences, save one: Granovetter is more interested in explaining why certain behaviours emerge in certain hybrid relationships, whereas Williamson looks for relationships in which the parties’ behaviour creates problems and asks what type of governance arrangement could provide a solution. The discussion (in fact a conclusion) starts out by summarizing the two strands of atomizing thought which Granovetter intended to challenge through the concept of embeddedness. Furthermore, rather than leaving certain topics outright to economics, Granovetter advocates a return to an economic sociology! The remainder of this section contains one final surprise and a list of the three main ‘challenges’ for economic sociology. The surprise reads as follows: ‘while the assumption of rational action must always be problematic, it is a good working hypothesis that should not easily be abandoned. What looks to the analyst like non-rational behaviour may be quite sensible when situational constraints, especially those of embeddedness, are fully appreciated.’43 Embeddedness as the maid of rational choice?! The three important challenges for economic sociology are as follows. First, that focusing on individualized relationships leads to an approximate approach only, but that only such an analysis of networks of relations can create an ‘adequate link between macro- and micro-level theories . . . [which could not] be established without a much fuller understanding of these relations’. Second, the challenge is to warrant a better understanding of when networks of SMEs may be more apt for a certain task than large enterprises and vice-versa. Third, the challenge is as well to bring about a return of sociology that injects more realism 40

41

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43

O. Williamson, ‘Transaction-Cost Economics: The Governance of Contractual Relations’, 22 Journal of Law & Economics 233–61 (1979), especially at 234 et seq., 247 et seq. Granovetter writes that ‘social relations between firms are more important (and authority within firms less so) in bringing order to economic life’ (‘Economic Action and Social Structure’, p. 501). Substitute the word ‘social’ for the term ‘private party arranged’ and this phrase could be written by Williamson. See for example O. Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985), Chapter 1, pp. 20 et seq. See Granovetter, ‘Economic Action and Social Structure’, p. 498; for the confrontation with Williamson, see pp. 502–4. See Granovetter, ‘Economic Action and Social Structure’, p. 506; all following quotes in this paragraph at p. 507.

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into the model-oriented realm of economics; to show ‘not only that there is a place for sociologists in the study of economic life but that their perspective is urgently required there’. Looking at the Delfi case, anonymous hate speech, threats or defamation on social platforms would seem further away from a state of embeddedness than ever. Atomization seems still higher than in a parallel setting in the analogue world, with increased anonymity and immunity (de facto and often de jure). With respect to the World Wide Web and in Parsons’ way of conceptualizing the modern world, one could even speak of a second dimension of alienation after a first such dimension with industrialization’s advanced standardization of work (and modern economies’ increased abstraction from individual service or need). The platform segregates aggressive actors from the victim, while – because of its network characteristics – rendering them ‘omnipresent’ and ‘very close’ to the victim and its surroundings at the same time. While it would not seem to totally pervert freedom of speech and of opinion if the actor, acting on the web, was not de facto immunized from criminal or other sanctions that they had to fear or face in the market place (of the analouge world), the same does not hold true on the other side. The victim on the web loses any advantage of embeddedness, of trust environments created via embeddedness, if the aggressive actor is thus immunized. Thus, the US solution would seem to add little to free speech and opinion (in countries where these are protected also in the analogue world). Conversely, the German solution would seem to restore environments of embeddedness at least to some extent to the ‘second dimension of alienation’ that can be viewed in electronic social media. With such norms indeed, context-specific new forms of embeddedness could form or be fostered. If they are created by platforms – as in the Facebook oversight board – and if they work efficiently the case for public interest regulation may be reduced. Banning participants from the platform may even form a highly efficient sanction. It may not be completely clear whether Granovetter sees the rational behaviour assumption and/or the assumption of total internalization of social norms as normative conceptions at all and not even whether his concept of embeddedness is seen as a descriptive (‘positive’) or a normative concept of behaviour. There would seem to be, however, a normative side to the desire that relations should be embedded. Embeddedness is important for trust in society, and it would seem inconsistent, for instance, if extended institutional systems were built for safeguarding trust in investment contexts (like insider dealing bans and all pervasive fiduciary duties), but not in human and social dignity contexts. The Delfi case would form an important cornerstone for creating at least a basic structure of community and community standards on the World Wide Web. The active role of social platforms in assuming responsibility and rules making them embedded (via installing a standard of obligations) would seem to be paramount in this context. Taking up (and indeed rewriting) the earlier quote from Granovetter, it could be said for the Internet: it is illusory that ‘social relations, rather than institutional arrangements or generalized morality, are mainly responsible for the production of trust’. The latter are indispensable for creating more embeddedness, at least for the problem of aggressive behaviour in human relationships.

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IV Private ordering, which was relevant for Granovetter’s critique of Williamson, is the focus of the third text, by Robert Mnookin and Lewis Kornhauser. The text mainly achieves two things, it (i) describes a revolution happening worldwide in the 1970s and 1980s in family law and justifies it with a completely new theory of freedom of contract in this area. Moreover, (ii) the text more broadly creates a fundamentally new image of default rules (ius dispositivum), which portrays them primarily in terms of their power to trigger a particular process of bargaining and mutual understanding. The text therefore starts from a rather specialized area but progresses to achieve a much more generalized impact. This is true, in particular, for the theory of default rules and the explanations given for their functioning. The article is divided into three sections. The first deals with the question of whether private ordering is a reality in divorce cases at all and enquires into what the advantages might be of an enlarged freedom given to the spouses to arrange the content of divorce agreements. The second describes the elements of such a bargaining model, if discretion was indeed given to the spouses, with a special focus on the role of default rules; that is, the shadow of the law under which parties bargain. The third section applies the theoretical framework outlined in the first two sections to specific divorce problems. The subject matter is divorce proceedings, which are peculiar in several respects. Most notably, unless the spouses accept to submit themselves to a judgment imposed on them, they cannot just walk away (so they are forced to negotiate), which is not the case in the negotiations of contracts where each party is free to find another partner to the transaction. If one therefore looks for a more general impact of the findings of this article, the most relevant areas will be matters of contract or company law where the parties would lose out considerably by refusing to negotiate, for example, in ongoing, long-term contractual relationships. It is in these situations that the parties most need adaptation, in repeat bargaining contexts (business partners) and in many areas of company law. As regards the latter, one very prominent example in Europe is negotiations about the co-determination regime, which is needed in all cross-border structural change cases.44 The article’s core lines of argument are twofold. As the authors put it in the introduction: ‘We see the primary function of contemporary divorce law not as imposing order from above, but rather as providing a framework within which divorcing couples can themselves determine their post-dissolution rights and responsibilities . . . [and] reexamination from the perspective of private ordering is timely . . . [but] this perspective [is not] meant to imply that law and the legal system are unimportant.’45 Sub-questions of this programme (how far should this freedom extend and what procedural and substantive safeguards are needed?) are also spelled out.

44

45

See K. Riesenhuber, ‘Schatten des Rechts: Contract Governance und Governance der Vertragsverhandlungen bei der SE-Mitbestimmung’, Festschrift for Klaus Hopt (Berlin: de Gruyter, 2010), pp. 1225–43. See Mnookin / Kornhauser, ‘Bargaining in the Shadow of Law’, 950 et seq.

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The first section is rather specific to divorce cases and to family law in general. It discusses the so-called non-fault revolution which occurred worldwide in the 1970s and 1980s. Divorce was no longer made dependent on the attribution of fault to one spouse. Rather, it was granted whenever matrimonial relations had broken down. The legal consequences were therefore largely left to be determined by agreement – most clearly with respect to financial issues, and in practice, if not in doctrinal thinking, with respect to custody decisions as well.46 ‘Order from above’ is only exercised when agreements are not reached. Mnookin and Kornhauser argue that – practically – courts accept agreements because they lack information regarding the really important factual questions, the legal standards to be applied are very vague and they cannot monitor their decisions afterwards. In the authors’ view: ‘The divorce process is dispute settlement, not child protection.’47 However, Mnookin and Kornhauser then progress to argue that this solution is also theoretically superior. Agreement is more efficient, legal certainty is furthered and the preferences of the parties most directly affected are best reflected. The claim is extended to child custody matters, and not limited to financial issues. What is novel in their account is not only the consistency with which the argument is advanced and how much the argument is based on different strands of social theory, but also the radical nature of the authors’ results. For example, their argument that divorce is no proof that the spouses are less good as parents and that the standard to be applied with respect to child custody should be one that continues the parental relationship. Equally radically, the authors argue that the state should ‘subject [spouses in divorce] only to the same minimum standards for protecting the child from neglect and abuse that the state imposes on all families’. As the article later demonstrates, most of the authors’ arguments extend beyond the realm of marital breakdown and can be transposed to the renegotiation of long-term relations more generally. In certain respects, the old US credo that the common law is more efficient than any doctrinal (or civil law) wisdom comes to surface. The second section develops the theory in all its novelty. The authors distinguish three questions of money (patrimony, alimony and child support) and one question of child custody and show that the former are very closely linked to each other (one can almost substitute one for the other). More surprisingly, the same is said to be true of the former and the latter, though to a lesser degree. On this basis, the authors argue that the core aim of the law is to organize a bargaining process, with a rich array of preferences and issues, and that this richness gives the best chances for a meaningful solution; that is, a solution with many comparative advantages for both parties (as compared with the default solution). The default solution(s) attendant on each issue are seen as ‘endowments’, which each party can use as bargaining chips. It is later shown how both parties ‘can retaliate’48 46

47

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While Mnookin and Kornhauser discuss this only for the United States and the United Kingdom, the same is, however, true at least in the major European countries: see Boele-Woelki / Braat / Sumner, European Family Law in Action, Questions 2 (pp. 13–54) and 4 (pp. 71–98). Here, however, pensions and social security would mostly be seen as non-negotiable. See Mnookin / Kornhauser, ‘Bargaining in the Shadow of Law’, p. 956 and (for the following quote and ideas ensuing from it) pp. 957 et seq. See Mnookin / Kornhauser, ‘Bargaining in the Shadow of Law’, 965, and for the rest of the argument and quotes in this paragraph, see 968 et seq.

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and that this helps to uphold the equilibrium in the relationship.49 These strategic concerns provide the context for the authors’ exploration of a ‘theory of (divorce) bargaining’. The authors, very tentatively and as an incentive for further research,50 identify five elements of importance (which are nowadays the basis of any alternative dispute resolution procedure). First, an assessment of the parties’ preferences. These preferences may or may not be known to the other party – thus opening possibilities for bluffing. They can be money-related or not, and can be absolute (albeit only below a certain threshold) or relative, selfish or altruistic. The second and third elements are related to the bargaining chips. The second is the ‘endowments of sorts’ which are given to the parties by the default rules (the fall-back position which ensures that ‘they bargain in the shadow of law’). The weight of each endowment changes in accordance with the third element, which is the certainty or uncertainty of the legal outcome if the court had to decide. The weight of the bargaining chip is therefore also affected by the risk aversion, risk neutrality or risk propensity of each of the parties. An important – and quite novel – suggestion is that ‘a bargaining backdrop clouded by uncertainty’ radically changes the bargaining mechanism. Mnookin and Kornhauser still discuss the issue rather neutrally, despite the fact that most later authors argued that such a background increases the parties’ propensity for cooperation.51 Transaction costs and the possibility that one party behaves strategically (standard aspects in economic theory, in game theory in particular, see Chapters 3 and 11) are introduced as elements four and five. The second section concludes with an overall assessment of why most divorces are solved by agreement – because of the rich array of comparative advantages opened by the multitude of issues to be solved – and why parties disregard these advantages only in exceptional cases, like vengeance. The authors conclude that ‘if the object of dispute cannot be divided into small enough increments’,52 there is an increased risk of not reaching agreement. Their argument is therefore for allowing nuanced agreements, not forcing parties to choose only between a limited set of standard decisions. The third section is an application of the conception to two substantive law problems and to three core players in the bargaining process of divorce. It shows how the bargaining process changes in accordance with the type of default rule or presumption that becomes the shadow of the law (maternal preference rule on the one hand, joint custody rule on the 49

50

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52

For this argument also in contractual long-term relationships, see: R. E. Scott, ‘Conflict and Cooperation in Long-Term Contracts’, 75 California Law Review 2005–54 (1987) or P. L. Joskow, ‘Vertical Integration and Long-Term Contracts: The Case of Coal-Burning Electric Generating Plants’, 1 Journal of Law, Economics & Organization 33–80 (1985), at p. 37; B. Arrun˜ada / L. Garicano / L. Vazquez, ‘Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution’, 17 The Journal of Law, Economics & Organization 257–84 (2001), at 280. For later developments of the discussion, see R. Cooter / S. Marks / R. Mnookin, ‘Bargaining in the Shadow of the Law: A Testable Model of Strategic Behavior’, 11 Journal of Legal Studies 225–51 (1982); R. Mnookin / L. Ross / K. J. Arrow / A. Tversky (eds.), Barriers to Conflict Resolution (New York: W.W. Norton, 1995). See, for a general survey of recent theories, B. Hay / K. E. Spier, ‘Settlement of Litigation’ in P. Newman (ed.), The New Palgrave Dictionary of Economics and the Law Vol. 3, (London: Macmillan Reference Limited, 2002), pp. 442–51. See Mnookin / Kornhauser, ‘Bargaining in the Shadow of Law’, 975.

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other, or an uncertainty rule such as the best interest of the child rule). It shows how bargaining processes are adversely affected if parties are not permitted to make binding promises with respect to a wide range of issues but only, for instance, with respect to the one issue of who gets custody. With regard to the core players, each is assessed in terms of whether they facilitate flexibility or help to further good outcomes in the bargaining process. The article therefore views lawyers in an ambivalent manner, courts which intervene in the parties’ agreements as highly problematic and a separate counsel for the child(ren) as mainly positive. In its conclusion, the article once again emphasizes its exploratory nature: ‘Given the absence of powerful theory or systematic data, this article makes no claims to being definitive. It instead suggests a theoretical perspective . . . .’53 Indeed, some progress has since been made, certainly with respect to ‘alternative procedural mechanisms [for] . . . dispute resolution’,54 but also, more radically, with respect to extending the article’s scope of application. As has been said, the article is concerned with renegotiation, rather than negotiation, under the shadow of law,55 but it has triggered discussion on the shadow of law generally, including the first negotiation scenario; that is, the situation in which parties are free to discontinue the bargaining process. In this scenario, the stickiness of default rules has been thoroughly investigated. For example, the phenomenon that default rules are often internalized by the parties as being a ‘just compromise’ between their interests (one type of embeddedness) and as therefore not easily changed, or that, even in the absence of such internalization, it is difficult for one party to propose too many deviations from the default rules.56 The phenomenon discussed is therefore one of greatly increased importance of default rules, compared with traditional liberal teaching. In fact, much literature has emerged discussing whether default rules should mimic parties’ preferences, or whether legislatures should propose their own preferred (‘just’) solutions.57 Bargaining could then be conceived as a triangular process between the two parties and the legislature, 53 54

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56

57

See Mnookin / Kornhauser, ‘Bargaining in the Shadow of Law’, 996 – also for the following quote. See namely R. Fisher / W. Ury / B. Patton, Getting to Yes: Negotiating Agreement Without Giving In (2nd ed., New York: Penguin Books, 1991); see also a good survey on the law and economics literature in R. Mnookin, ‘Alternative Dispute Resolution’, in P. Newman (ed.), The New Palgrave Dictionary of Economics and the Law, Vol. 1 (London: Macmillan Reference Limited, 2002) p. 56–60; A. Dixit, ‘Arbitration and Information’, Princeton University Working Paper, 2003. More broadly on this in the recent literature, among others: P. A. Swain/ S. Rice, In the Shadow of the Law: The Legal Context of Social Work Practice (3rd ed., Sidney: The Federation Press, 2009). On these phenomena see namely R. Craswell, ‘Contract Law: General Theories’, in B. Bouckaert / G. De Geest (eds.), Encyclopedia of Law and Economics, Vol. 3, The Regulation of Contracts (Cheltenham: Edward Elgar, 2000), pp. 1–24, at pp. 3–5; see also J. S. Johnston, ‘Strategic Bargaining and the Economic Theory of Contract Default Rules’, 100 Yale Law Journal 615–64 (1990). For, on the one hand, the so-called majoritarian or market-mimicking concept of default rules: I. Ayres / R. Gertner, ‘Majoritarian vs. Minoritarian Defaults’ (1999) 51 Stanford Law Review 1591–614; R. Craswell, ‘Contract Law: General Theories’, in B. Bouckaert / G. de Geest (eds.), Encyclopedia of Law & Economics, vol. 3 (Cheltenham: Edward Elgar, 2000), pp. 1–24, at pp. 3–5; E. Posner, ‘Economic Analysis of Contract Law After Three Decades: Success or Failure?’ 112 Yale Law Journal 829–80, (2003) at 839; H. Unberath / J. Cziupka, ‘Dispositives Recht welchen Inhalts? Antworten der o¨konomischen Analyse des Rechts’, 209 Archiv der civilistischen Praxis 37–83 (2009), at 48–63. In favour of a more autonomous stance which the legislator of default rules might take: R. Korobkin, ‘The Status Quo Bias and Contract Default Rules’, 83 Cornell Law Review 608–89 (1998), 611 and 675 et passim.

The Shadow of the Law and Social Embeddedness

515

with the latter bringing in particular expertise and mediating between the parties’ interests and aspects of the common good.58 Linking the text to Granovetter’s, the shadow of law as conceptualized by Mnookin and Kornhauser seems to abstract strongly from embeddedness as an element that is arguably outstandingly strong in family relationships. This novelty of view may account for the success of the paper; it may, however, also miss out on an important aspect in the negotiation process. As is evident from the above, the shadow of the law has particular importance – as a mere shadow and not as a command – where default regimes come into play and where parties have bargaining chips (defined by the law). This is obviously not the focus of the Delfi case. On the other hand, the fact that a certain number of countries impose surveillance duties, namely duties to discard hate speech, may trigger similar reactions as bargaining chips for – or against – the social media platforms. Such a bargaining chip can be seen in two ways. First, and given that the boundaries between countries are easily crossed in speech, defence and even in court proceedings, it may become costly or even impossible for platforms to continue with the non-duty standard even in countries that follow this standard (this would seem to be the case of the Facebook panel mentioned). As long as the United States is within these countries (or is thought to be) this may still not be pervasively the case. Second, however, the other countries may trigger a reputational rally – perhaps even for platforms with different regional areas as their main focus. When some platforms then must apply the standard of duty to discard (because of their regional focus), others might feel forced to follow with a view to remain attractive at least for (de facto) cross-border platform communities. The image of the shadow of the law may be meaningful in still another sense. So far, the analogue world has served as shadow of legal evaluation and value setting (fundamental right of protection of personality) only in a rather limited number of countries also with respect to online platforms. If this remains the preponderant view, misfeasors caught in the analogue world may one day point to the online platform regimes and claim equal treatment (as a shadow of the law). If the online world supremacy of ‘freedom’ is internalized, this might also slowly change moral attitudes altogether. V All three texts in this chapter therefore share a common ground: legislatures are important, but not only, and perhaps not even primarily, as top-down regulators of society (order from above). In modern societies, non-droit is also an option – both domestically and transnationally and on the World Wide Web potentially even more so. This realm of non-droit constitutes an area which can be filled by morals and customs (Carbonnier), by the parties’ embeddedness in their concrete social context (Granovetter), but also, more actively and 58

See, for a groundbreaking perspective, F. Mo¨slein, Dispositives Recht: Zwecke, Strukturen und Methoden (Tu¨bingen: Mohr Siebeck, 2011); see also the broader survey in: S. Grundmann / F. Mo¨slein / K. Riesenhuber, ‘Introducing Contract Governance: Dimensions in Law and Interdisciplinary Research’, in S. Grundmann / F. Mo¨slein / K. Riesenhuber (eds.), Contract Governance: Dimensions in Law and Interdisciplinary Research (Oxford: Oxford University Press, 2015), pp. 3–57.

516

New Private Law Theory

often also in a more detailed way, by private ordering (Mnookin and Kornhauser, and also Williamson). Non-droit can, however, also imply opening the floodgates to injustice. Thus, legislatures in modern societies can often be seen as partners of society and the parties, rather than as rulers. Default rules have been (re)discovered in this way as a complex phenomenon. Moreover, this would appear to be part of a more general trend in the 1990s, since it was at this time that the proceduralization of overall ‘societal justice’ – its negotiation process, as such – achieved prominence (see Chapter 10).

Index

overview, 37 American Revolution (1775), 195–6 Amsterdam Treaty (1999), 460 Amstutz, Marc, 468 Anchoring, bias of, 226–7 Anti-Discrimination Directive (EU), 261–2 Anti-discrimination law affirmative action and, 202, 266 customer preferences and, 8, 262, 268–9 direct discrimination and, 8–9 distribution agents and, 267–8, 269–70 equal choice, compatibility with, 264 in European Union, 258, 261–2 feminist legal theory and, 262, 266 freedom of contract and, 267 in Germany, 263–4 immigration and, 262 indirect discrimination, 268 indirect indirect discrimination, 268–9 material justice in private law, racial discrimination and, 198 mixed-race persons and, 193, 201, 202, 203, 204 overview, 261–2, 270–1 private power and, 258 quotas and, 202 sex differences approach, 265–7 sex inequality approach, 265, 266–7 sexual harassment, 264–7 social models and, 264–5 texts of reference, 262–3 in United States, 261, 270 Antitrust law competition and, 252–3 constitutionalization of private law and, 176–8 economic approach to, 406 in European Union, 255 in Germany, 176–7, 250, 251 in Italy, 176–7 monopolies and, 252–3 multilevel governance and, 462–3

Achnacarry Agreement (1928), 477 Ackermann, Josef, 370 Acquis Group, 441, 446 Adoption, 67 Adorno, Theodor, 42, 104 Advertising, information and, 238–9 Affirmative action, 202, 266 Agency relationship in corporations agency costs and, 384–8 bankruptcy, risk of, 387–8 capital markets and, 386 covenants limiting risk, 387 debt capital and, 383, 386–8 network of contracts and, 383–4 organization theory and, 397 overview, 369, 373–4, 389–90 ownership structure versus capital structure, 383, 388 private law and, 388 property rights theory and, 382–3, 388 risky investments, incentive for, 386–7 share capital and, 383, 385–6 texts of reference, 372 transaction costs and, 384 Aguilera, Ruth, 125, 127, 128 Ahlering, Beth, 117–18, 127, 417 Akerlof, George, 232–3, 234, 238, 239, 241–6, 247, 398, 400, 507–8. See also Information and private law Alchian, Armen, 413 Alexy, Robert, 157–8 Alienation, 42 Alimony, 512–13 Allocative efficiency, 380 amazon.com, 248 American critical legalism, 163 American legal realism critical legal studies and, 42, 163 et seq. formalism versus, 60, 195–6 judges, role of, 159 legal history and, 119

517

518

Index

Antitrust law (cont.) New Brandeis School, 248, 253 ordo-liberalism and, 252 organizational contracts, bilateral monopoly and, 326–7 private power and, 251–2 takeovers and, 406, 407–8 (See also Takeovers) in United States, 176, 251 Application-oriented nature of private law, 3 Arbitration in organizational contracts, 327–8 transnational law and, 481 Aristotle, 43, 122–3, 217 Armour, John, 128 Arrow, Kenneth, 87 Asclepius, 401–2 Atiyah, Patrick Selim, 194–5 Auer, Marietta, 1 Austin, John L., 52, 98, 127 Australia, shareholder protection rights in, 124–5 Austria Civil Code, 277, 439 codification of private law in, 182, 439 Nationalo¨konomie in, 3 tort law in, 277 Autopoiesis, 99 Availability, bias of, 226 Bachmann, Gregor, 484–5 Bank, Steven, 126, 127 Bankruptcy agency relationship in corporations and, 387–8 takeovers and, 406 von Bar, Christian, 441 Bargaining. See Negotiation de Beauvoir, Simone, 143 Beck, Ulrich, 272–4, 283–4, 289, 292–7. See also Tort law Becker, Gary, 331 Behavioural economics bias and, 221–2 private law and, 73 status-related rights and, 346, 349 Behavioural science bias, contract law and, 210, 221–8 (See also Bias) bounded rationality and, 90, 92 Belgium, shareholder protection rights in, 125 Ben-Porath, Yoram, 490 Benson, Peter, 2 Bentham, Jeremy, 52, 121 Berle, Adolf A., 255, 362, 372, 374–82, 383, 412. See also Ownership versus control of corporations Berle-Means corporations, 373 Berman, Harold J., 120, 473 Bernatzik, Edmund, 348, 350

Bernholz, Peter, 465 Bernstein, Lisa, 30, 31, 484–5, 487–91, 492. See also Private ordering Berthelemy, M., 350 Bezos, Jeff, 370 Bhopal chemical disaster, 293, 429, 432 Bias of anchoring, 226–7 of availability, 226 bounded rationality and, 222–5 contract law and, 210, 221–9 heuristics and, 225–6 negotiation and, 223–5 prospect theory and, 222 of representativeness, 226 Big data, 240–1 Bingham, Tom (Lord), 445 von Bismarck, Otto, 199, 285 Bix, Brian, 484–5 Blair, Tony, 342, 352, 354 Blankenburg, Erhard, 194–5 Bloch, Ernst, 187 Blood doping in sports, 248–9 Blum, Walter, 287 Bo¨ckenfo¨rde, Ernst-Wolfgang, 131 Bodenheimer, Edgar, 121–2 Bohle, Dorothee, 417, 426–7 Bo¨hm, Franz, 11, 25, 31, 134–5, 136–42, 145, 151, 152, 153, 154–5, 166, 168, 173, 213, 249–51, 252–5, 259, 454, 459, 461. See also Ordo-liberalism; Private power and private law Bounded rationality behavioural science and, 90, 92 bias and, 222–5 cognitive errors and, 91–2 evolution of, 78–9, 89–90 integration with economics versus departure from economics, 92–3 irrational behaviour and, 92 learning, role of, 91 neoclassical economics versus, 89–90 overview, 71–2, 73–4, 93–4 prospect theory and, 91–2 psychology and, 90, 92 rational choice theory versus, 90–1 simplifications and, 90–1 texts of reference, 72–4 transaction costs versus, 89–90 Bradford, Anu, 314 Brazil big data in, 240 private actors, constitutional protections against in, 132–3 Breast implants, tort law and, 272 Brexit, 128

Index Brownsword, Roger, 301, 302 Bru¨ggemeier, Gert, 283 Bukovina, living law in, 29 Bulgaria, Mediterranean model and, 427 Business judgment rule, 370–1, 380–1, 389, 409–10 Butler, Judith, 263, 266 Buxbaum, Richard M., 456–7, 460, 463–6, 467, 469–70. See also Multilevel governance Calabresi, Guido, 73, 77, 80, 84, 94, 272–4, 280, 282–3, 286–93, 297, 306, 405. See also Tort law Calliess, Gralf-Peter, 28, 309, 311 Camus, Albert, 143 Canaris, Claus-Wilhelm, 167–8, 173–6. See also Constitutionalization of private law Canon of texts of reference, 4. see also specific topic Capitalism private law and, 183, 195–6 Rhenish capitalism, 215–16 tort law and, 295–6 varieties of capitalism (VoC) (See Varieties of capitalism (VoC)) Capital markets agency relationship in corporations and, 386 corporations and, 372, 405 multilevel governance and, 457, 463–6 ownership versus control of corporations and, 377–82 takeovers and, 410 Capital Requirements Directive IV (EU), 387 Capitant, Henri, 347 Cappelletti, Mauro, 457 Carbonnier, Jean, 347, 497–8, 499, 500–3, 504, 515–16. See also Scope of law Castells, Manuel, 330 Cattle industry, private ordering in, 484, 487, 491–3 Centre for Judicial Cooperation, 445 Charmont, Edmont, 184 Chase Manhattan Bank, 428–9 Cheapest cost avoider, 282–3, 287–8, 289 Cheffins, Brian, 126, 127 Chernobyl nuclear disaster, 293, 294 Chicago Cubs, 370–1 Chicago School, 30, 62, 75, 82, 139 Chicago Tribune Inc., 371 Child custody, 512–13 Child support, 512–13 China, digital technology in, 307 Circularity in discourse theory, 107 in systems theory, 99–100 Civil rights anti-discrimination law (See Anti-discrimination law)

519

material justice in private law and, 193, 201, 202, 203, 204 Climate change, 180–1 Clinton, Bill, 477 CMEs. See Co-ordinated market economies (CMEs) Coase, Ronald, 30, 36, 55, 72–3, 74–7, 78, 79–85, 87, 93–4, 139, 230, 237, 238–9, 276–7, 286, 287, 288, 289, 325, 360–3, 365–8, 372, 397, 405, 443, 506, 508–9. See also Corporations; Law and Economics; Theory of the firm (Coase); Transaction costs Coase Theorem, 80–2 Codes of conduct organizational contracts and, 328 overview, 6, 7 private ordering and, 492 Codetermination laws, 201–2 Coffee, Jack, 128 Cognitive errors, bounded rationality and, 91–2 Cohen, Morris, 164 Cohn-Bendit, Daniel, 394 Coing, Helmut, 118 Collins, Hugh, 28, 309 Columbia University, 396 Common Agricultural Policy, 461 Common European Sales Law (proposed), 116, 183, 446, 447, 452 Communication process, 12–13 Communication theory discourse theory (See Discourse theory) inside versus outside question and, 36, 41–44, 57 overview, 95 philosophy and, 96 social sciences and, 96 systems theory (See Systems theory) texts of reference, 95–7 Commutative justice, contract law and, 216, 217 Comparative advantage, 465 Comparative institutional analysis, 71, et seq., 77, 87, et seq. 420, 431 Comparative law Cassis de Dijon case and, 111–12 functionalism and, 114–15 functional method in private law and, 443–5 (See also Functional method in private law) interdisciplinary approach to private law and, 18 legal history, relationship to, 113–16 Legal origin theory (See Legal origin theory (LOT)) texts of reference, 112–14 varieties of capitalism (VoC) and, 417 Comparative nature of private law communication process and, 12–13 hermeneutics and, 12–14 interdisciplinary approach, integrating, 11 interpretation and, 13–14

520 Comparative nature of private law (cont.) in jurisprudence, 11–14 as thesis of private law theory, 2–3 Competition law. See Antitrust law Computer technology. See Digital technology and private law Condon, Ro´na´n, 190 Consent, freedom of contract and, 213 Constitutionalization of private law antitrust law and, 176–8 contract law and, 173–6 defined, 166 evolution of, 169 family law and, 174 in France, 171–3 fundamental rights and, 169–71 in Germany, 173–6 human rights and, 169–71 in Italy, 176–8 ordo-liberalism and, 167–8, 169, 174 overview, 166, 178–9 social interests and, 171–3 subjective rights and, 171–3 texts of reference, 166–8 transnational law and, 483 Constitutional law economic constitution, 26 evolution of, 24–5 instrumentalization of rights and, 27 labour constitution, 26 ordo-liberalism and, 25 private law and, 24–9 statutory regulation and, 26–8 transnational private ordering and, 28–9 Constitutional pluralism, 351 Consumer law democratization of private law and, 188–91 in European Union, 346 in Germany, 346, 352, 356 information paradigm and, 247 material justice in private law and, 199 multilevel governance and, 458 in Netherlands, 346 private power and, 251 sharing economy and, 346–7 status-related rights and, 345–6, 354–8 Consumer Sales Directive (EU), 404 Contract law bias and, 210, 221–9 (See also Bias) commutative justice and, 216, 217 consent and, 213 constitutionalization of private law and, 173–6 corrective justice and, 216, 217 digital technology and, 306–7

Index in France, 404 function of contract law as limit on freedom of contract, 211, 212–15 in Germany, 211–12, 404 income tax, redistribution through versus, 217–20 incomplete contracts, 328–9 individualism and, 210–11 inequality of bargaining power, 221 inheritance tax, redistribution through versus, 217–20 justice of consensus (See Justice of consensus) justification of freedom of contract, 210, 211–16, 228–9 lenders, contractual obligations of, 59–60, 64, 65 market order and, 213 markets and, 216 negotiation (See Negotiation) normative tone of, 216 ordo-liberalism and, 213 organizational contracts (See Organizational contracts) overview, 207, 228–9 parties versus society, 216 private law theory and, 2 private power and, 251 redistribution as limit on freedom of contract, 210, 217–21, 228–9 reforms in, 404 regulation and, 216 relational contracting and, 85–6 responsible lending and, 207–8, 220 scope of law and, 499, 505, 508–9 socio-economic function of contract, 215 sociology and, 66–9 spot contracts, 323, 324–5, 335–7 state power and, 210–11 subsidiarity and, 219–20 systems theory and, 102–3 texts of reference, 208–9 tort law and, 285–6 total welfare and, 220 transnational law and, 477, 480–1 welfare state and, 188–91 Contributory negligence, 46–7 Control control premia, 409 in corporations, 394–5, 406–8 direct share purchases and, 408 proxy fights and, 408 takeovers and, 394–5, 406–9 Control premia, 409 Co-ordinated market economies (CMEs) comparative law and, 417 liberal market economies (LMEs) versus, 418–19, 425, 427

Index overview, 417 tort law in, 278 Corporate governance research, 395 Corporate social responsibility (CSR) comparative institutional analysis and, 431 contract governance and, 428 corporations, tort liability for violations of international law, 415–16 criticisms of, 420 different versions of, 420 in Ecuador, 428 empirical research in, 421, 430–1 in European Union, 419, 421, 432 evolution of, 419–20 globalization and, 421 international regulations and, 428 Internet and, 430 market for virtue, 427–8 NGOs and, 429 in Norway, 428 organizational contracts and, 315 organization theory and, 398, 404 origins of, 371 overview, 361–2, 414, 431 profitability and, 428–30 regulation and, 415 rise of, 417, 428 in South Africa, 428 texts of reference, 416–418 United Nations and, 421 varieties of capitalism (VoC) compared, 422, 424, 430 Corporations agency relationship in (See Agency relationship in corporations) Berle-Means corporations, 373 bipolar market-firm relationship rejected, 333–5 black box model of, 87–8, 372, 382, 383–4, 410 business judgment rule, 370–1, 380–1, 389, 409–10 capital markets and, 372, 405 control in, 394–5, 406–8 corporate governance research, 395 corporate social responsibility (CSR) (See Corporate social responsibility (CSR)) Delaware effect, 438–9, 443, 446, 447, 449–50, 465 direct share purchases, 408 as efficient means of economic organization, 363 executive pay in, 385 external relations of, 362 external versus internal governance, 395, 404 incorporation theory, 437 information paradigm and, 247 insider trading, 404–5 institutional economics and, 85–6, 360, 363 internal relations of, 362

521

law and economics and, 360, 394, 395–6, 404, 405 as legal organisms, 363–4 legal personhood of, 360 mergers (See Takeovers) minority shareholders, duties to, 360, 370–1 in neoclassical economics, 361–2 as network of contracts, 372 organistic theory of, 363–5 organizational actors, 369–71 overview, 360, 367–8 ownership versus control of (See Ownership versus control of corporations) principal-agent relationship in (See Agency relationship in corporations) property rights theory and, 369 proxy fights, 408 seat theory, 437 shareholders (See Shareholders) society as social organism and, 363, 364–5 stakeholders in, 369, 371 state and, 364–5 takeovers (See Takeovers) texts of reference, 360–2 theory of the firm, 365–7 (See also Theory of the firm (Coase)) tort liability for violations of international law, 415–16 transaction costs and, 360 transnational corporations (See Transnational corporations) Corporatism, 423 Corrective justice contract law and, 216, 217 tort law and, 275 Court of Arbitration for Sports (CAS), 248–9 Cover, Robert, 65 Creative destruction, 235 Creeping constitutionalization, digital technology and, 311 Critical approaches to private law, 4–5 Critical legal studies American critical legalism and, 163 American legal realism and, 42, 163 et seq. family law and, 67 legal history and, 119 values in private law and, 159–60, 162–3 Critical theory legal positivism versus, 53 Marxism and, 42 organization theory and, 397 overview, 42 Croatia, Mediterranean model and, 427 CSR. See Corporate social responsibility (CSR) Customer preference, anti-discrimination law and, 8 Cyberlaw. See Digital technology and private law

522

Index

Czech Republic Mediterranean model and, 427 private law in, 183 Dagan, Hanoch, 2, 27, 328 Damages private ordering, criticism based on, 489–90 in tort law, 293 Darwin, Charles, 402 Data protection, digital technology and, 304 David, Rene´, 113–14, 117, 446 Dawson, Mark, 471 Deakin, Simon, 117–18, 125, 126, 127, 128, 417 De Beers (diamond dealers), 487–8 Declaration of the Business Roundtable, 369 Decolar (Brazilian company), 240 Default rules in divorce, 513–14 scope of law and, 499–500, 515–16 de Filippi, Primavera, 303 Delaware effect, 438–9, 443, 446, 447, 449–50, 465 Delors, Jacques, 421 Democratization of private law capitalism and, 183 consequences of, 188 consumer law, 188–91 contract law, welfare state and, 188–91 courts, role of, 187 democratic deficit of EU, 182 evolution of, 182 freedom versus equality and, 187 judges and, 185, 186 justice versus reason and, 185 legal history and, 186 legislatures and, 184–5 methodology and, 186 ordo-liberalism and, 187–8 overview, 180, 191–2 socio-economic issues and, 187 texts of reference, 181–2 Demogue, Rene´, 341–3, 347–51, 352, 355, 357, 358, 359. See also Status-related rights DeMott, Deborah A., 59 Demsetz, Harold, 382, 413 Denmark, seat theory in, 437 Dependent market economies (DPM), 417, 417 Deutsche Bank, 370 Diamond industry, private ordering in, 484, 487–91 Dietz, Thomas, 484–5, 490 Digital technology and private law architecture and law, relationship between, 305–6 architecture defined, 303 in China, 307 code and law, relationship between, 301–2, 305–6, 307

code defined, 303 constitutionalization without state, 302, 309–10 contract law and, 306–7 creeping constitutionalization and, 311 data protection and, 304 digitization, effect of, 300–1 dilemma of rationalization and, 310 in European Union, 301–2, 304 hackers, 313 hierarchy of norms and, 312 judicial review and, 312–13 lex digitalis, 309–10 meta-rules, 313 Nazi memorabilia and, 308 overview, 298, 313–14 polycentric globalization and, 310–11 pornography and, 303–4 Privatrechtsgesellschaft (private law society) and, 302 regulation and, 302–3, 305 search engines, privacy and, 298 societal constitutionalism and, 308 structural linking of subsystems and law and, 311–12 texts of reference, 298–300 in United States, 301–2, 307 Dilthey, Wilhelm, 42, 43 Direct discrimination, 8–9 Direct share purchases, 408 Discourse theory circularity in, 107 facts and norms in, 104 hermeneutics and, 50–1 individual versus collective in, 104–5, 106–7 interdisciplinary approach to private law and, 18 language and, 104 legal positivism compared, 107 legislation and, 107–8 Marxism versus, 104 materialization of private law and, 105–6 methodology of, 104 overview, 108–9 procedural legitimacy of law in, 107–8 reciprocal recognition of co-operating legal persons in, 105–6 social contract and, 106, 107 subjective rights and, 105 systems theory compared, 96–8, 108–9 texts of reference, 95–7 Discrimination. See Anti-discrimination law Dishonesty, cost of, 242–3 Dispositives of power, 252 Distributive justice. See Material justice in private law Division of labour, sociology and, 62–3, 65, 66–9 Divorce bargaining process in, 513–15 default rules in, 513–14

Index elements of importance, 513 no-fault divorce, 512 private ordering in, 511–15 shadow of law and, 511, 513–15 Droit versus non-droit, 500–3, 515–16 Duguit, Le´on, 184, 185–6, 282, 347, 348–9, 350 Durkheim, E´mile, 29, 63, 66–9, 95, 172–3, 185–6, 480. See also Sociology and private law Duve, Thomas, 116, 118–19, 128 Dworkin, Ronald, 37–8, 41, 53, 156–7, 159, 160–3, 164, 165, 444. See also Values in private law Easterbrook, Frank, 302, 307–8, 448 E-Commerce Directive (EU), 497 Economic constitution constitutional law and, 26 multilevel governance and, 458–63 Economics and private law behavioural economics, 73 bounded rationality (See Bounded rationality) institutional economics (See Institutional economics) interdisciplinary approach to private law and, 18 overview, 71 texts of reference, 72–4 tort law and, 73, 77 transaction costs (See Transaction costs) Economic sociology embeddedness, 497, 504–10, 515–16 New economic sociology, 330, 504–5 organizational contracts and, 318, 319, 330–1 private law and, 63 Ecuador, corporate social responsibility (CSR) in, 428 Ehrlich, Eugen, 29, 30, 60, 61–2, 477, 478 Eidenmu¨ller, Horst, 446–7, 450 Ellickson, Robert, 30, 484–5, 487, 491–3. See also Private ordering Embeddedness, 497, 504–10, 515–16 Emergency Rescue Committee, 396 Employment law, corporations and, 366–7 England. See United Kingdom Enlightenment, 197–8 Enterprise liability in tort law, 278, 288–90 Esser, Josef, 13, 36, 37–8, 39, 41–51, 159. See also Hermeneutics Estonia internet platforms, freedom of expression of, 495 private law in, 183 Eucken, Walter, 136, 139, 141, 252, 459, 461 Euro crisis, 191, 421, 454–6, 457, 463 European Central Bank (ECB), 454, 455–6, 470 European Charter of Fundamental Rights constitutionalization of private law and, 27–8, 170 human dignity in, 211–12

523

European Civil Code (proposed), 115, 123, 182, 183–4, 274, 281, 351, 446 European Commission anti-discrimination law and, 191 antitrust law and, 177 comparative law and, 110, 116, 442 consumer law and, 355 contract law and, 441 European Civil Code (proposed) and, 183–4 multilevel governance and, 458 tort law and, 274, 281 European Convention on Human Rights, 497 European Court of Human Rights (ECtHR) constitutionalization of private law and, 27–8 Delfi AS v. Estonia (2015), 495–7, 502, 510 hate speech and, 495–7, 502, 510 internet platforms, freedom of expression of, 495–7, 502, 510 European Court of Justice (ECJ) generally, 45 anti-discrimination law in, 202, 262 Audiolux, 360, 367–8 Aziz v. Catalunyacaixa (2013), 175–6 CA Consumer Finance SA v. Bakkus (2014), 207–8 Cartesio (2008), 452 Cassis de Dijon case, 110–12, 123, 125–6, 128, 461 Centros Ltd (1999), 437, 441, 442, 443, 452, 453, 464 Centrum voor gelijkheid v. Feryn, 262, 271 common foundations of law in, 110 constitutionalization of private law in, 27–8, 170, 178–9 Corporate Social Responsibility (CSR) and, 430 Courage Ltd v. Crehan (2001), 178 direct discrimination and, 8 Francovich and Bonifaci v. Italy (1991), 296 Google Spain v. AEPD and Costeja Gonza´lez (2014), 298, 304, 308, 312–13, 314 Gruber (2005), 341, 350–1, 357, 358–9 Janecek decision (2008), 192 labour law in, 448 Manfredi v. Lloyd Adriatico Assicurazioni SpA (2006), 178 multilevel governance and, 460 Pringle v. Government of Ireland (2012), 454–6, 470–1 Rewe Zentrale v. Bundesverwaltung fu¨r Branntwein (1979), 110–12, 123, 125–6, 128 Schmitt v. TU¨V Rheinland LGA Products GmbH (2017), 272, 289–90, 291, 297 status-related rights in, 341, 350–1, 357, 358–9 European internal market, 267, 357, 358, 458, 460, 461–2, 467–8 European Law School, 445 European Parliament, 110, 116, 177, 182, 183–4, 191, 274 European Society for Comparative Legal History, 116 European Stability Mechanism (ESM), 454–6, 470–1

524

Index

European Stewardship Codes, 432 European Union. See also specific country Academic Draft Common Frame of Reference, 183, 191, 281, 441, 446 Anti-Discrimination Directive, 261–2 anti-discrimination law in, 258, 261–2 antitrust law in, 255 Banking Union, 502–3 Capital Requirements Directive IV, 387 Circular economy, 190 Common Agricultural Policy, 461 common foundations of law in, 110–11 consumer law in, 346 Consumer Sales Directive, 404 contract law in, 175 Corporate social responsibility (CSR) in, 419, 421, 432 digital technology in, 301–2, 304 E-Commerce Directive, 497 family law in, 174 free movement of goods in, 110–12 functional method in private law in, 441 Law and Economics in, 292 law as a product in, 452 organizational contracts in, 319 privacy law in, 298 Product Liability Directive, 279, 285–6 product liability in, 279 Sales Directive, 319 Takeover Directive, 368, 392 tax avoidance in, 449 tort law in, 289–90, 296 transaction costs in, 76–7 transfer of law in, 440–1 varieties of capitalism (VoC) and, 424 European University Institute, 445 Evolution, 402 Ewald, Franc¸ois, 284 Executive pay, 385 Existentialism, 143 Faber, Malte, 465 Facebook, 496–7, 510 Family law alimony, 512–13 child custody, 512–13 child support, 512–13 constitutionalization of private law and, 174 Critical legal studies and, 67 divorce, private ordering in, 511–15 in European Union, 174 feminist legal theory and, 67 in France, 174 no-fault divorce, 512 patrimony, 512–13

private ordering in, 484, 511–15 private power and, 251 sociology and, 67 Federalism law as a product in federal states, 449 multilevel governance (See Multilevel governance) Feminist legal theory anti-discrimination law and, 262, 266 family law and, 67 material justice in private law and, 202 Fiduciary duties, private ordering and, 493–4 Firms. See Theory of the firm (Coase) Fischel, Daniel, 448 Fischer-Lescano, Andreas, 96 Flume, Werner, 175 Ford, Henry, 431 Formalism American legal realism versus, 60, 195–6 legal formalism, 60 material justice replacing, 193–4, 199 (See also Material justice in private law) social question and, 347 Forsthoff, Ernst, 463 Foucault, Michel, 249–51, 252, 256–60. See also Private power and private law France Code Civil, 68, 182, 184, 185, 186, 187–8, 198, 277, 281, 282, 284–6, 343, 344–5, 347, 404, 439 Code Napole´on, 182 codification of private law in, 182, 439 constitutionalization of private law in, 171–3 contract law in, 404 European Constitution, rejection of, 116 evolution of civil law in, 184 family law in, 174 French Revolution (1789), 119–20, 121, 195–6, 343 internet platforms, freedom of expression of, 495 Mediterranean model and, 427 modernization in, 423 1968 riots, 503 organizational contracts in, 319 Parliament, 184 product liability in, 291 protest in, 394 special purpose companies in, 381 status related rights in, 343, 344–5 tort law in, 277, 281–2, 283–6 Workers’ Compensation Act, 281–2 Frank, Jerome, 119 Frankenberg, Gu¨nter, 114 Frankfurt School, 42, 104, 394, 397 Freedom of contract anti-discrimination law and, 267 consent and, 213 function of contract as limit on, 211, 212–15

Index income tax, redistribution through versus, 217–20 inheritance tax, redistribution through versus, 217–20 justification of, 210, 211–16, 228–9 market order and, 213 markets and, 216 ordo-liberalism and, 213 overview, 228–9 parties versus society, 216 redistribution as limit on, 210, 217–21, 228–9 regulation and, 216 socio-economic function of contract and, 215 Freedom of expression hate speech, 495–7, 502, 510 internet platforms, 495–7, 502, 510 Freiburg School, 25, 76, 136, 139 Freirechtsschule, 159 Freud, Sigmund, 42, 55 Fried, Charles, 2, 87 Friedman, Milton, 75, 420, 427, 429, 431 Friedmann, Wolfgang, 477 Friedrich II (Prussia), 120–1 Fry, Varian, 396 Fukushima nuclear disaster, 293 Fuller, Lon, 37, 39–41, 51, 52, 53, 158, 161 Functional differentiation, 69 Functional method in private law common law and, 445–6 comparative law and, 443–5 in European Union, 441 integration through law and, 442–3 interpretation and, 444–5 law as a product versus, 443 legal education and, 445 legal positivism and, 444 legal transplants and, 444 overview, 437, 438, 451–3 texts of reference, 437–9 Gadamer, Hans-Georg, 39, 42, 43–4 Galanter, Marc, 432 Game theory alternative game theory, 223–5 bargaining in, 21 irrational behaviour and, 225 iustum pretium and, 21–2 maximizers, 223–5 multiple shot versus one shot games, 23 negotiation and, 223–5 organizational contracts and, 321 other decision theory versus, 20 prisoner’s dilemma and, 22, 23–4 private ordering and, 491 reconstruction of interdisciplinary theory in law and, 23–4

525

relevance of interdisciplinary theory and, 20–3 satisficers, 223–5 third parties and, 225 trembling hand problem and, 23 usefulness of, 20 Gardner, John, 51–2 Gates, Bill, 370 Gelter, Martin, 157–8 General Agreement on Tariffs and Trade (GATT), 309 General Electric, 373 Ge´ny, Franc¸ois, 347, 354–5 George Mason University, 404 Germany Act against Restraints of Competition, 177 Allgemeines Gleichbehandlungsgesetz (German Equal Treatment Act), 263–4, 270 anti-discrimination law in, 263–4 antitrust law in, 176–7, 250, 251 Bank Surety case, 26, 166, 175–6, 178 Basic Law, 26, 175 Blinkfu¨er decision, 142, 149, 151–2, 153 Bu¨rgerliches Gesetzbuch (Civil Code) (BGB), 95, 100–1, 108, 133, 183, 187–8, 198, 199, 211–12, 277, 343–5, 356, 404 codetermination laws in, 201–2 codification of private law in, 182 communism, law under, 191–2 Constitution, 211–12 constitutionalization of private law in, 173–6 Constitutional Law, 17 consumer law in, 346, 352, 356 contract law in, 175, 211–12, 404 corporatism in, 423 Freirechtsschule (Free School) in, 159 Game Damage case (1989), 73, 82–3 Holocaust Law case (2018), 156, 161–2, 163–4 human dignity in, 211–12 internet platforms, freedom of expression of, 495 kickbacks in, 231 Liberal Democratic Party, 352 Lu¨th decision, 26, 132–3, 142, 149, 151–2, 153 material justice in, 199 National Socialism, law under, 191–2 new production regimes in, 423 organizational contracts in, 319 Pechstein/International Skating Union case (2016), 248–9, 255, 258–60, 481 protest in, 394 seat theory in, 437 shareholder protection rights in, 124 Social Democratic Party, 352 Sozialstaatsprinzip (Social State Principle), 26 Staatswissenschaften in, 3

526

Index

Germany (cont.) status-related rights in, 343–5 Stock Corporation Act, 371 tort law in, 277 values in private law in, 160 Volkswagen/Prevent Group case (2019), 315–17, 324, 326–7, 334, 337 welfare state in, 199 Gerstenberg, Oliver, 312–13 van Gerven, Walter, 445 Ghaleigh, Navraj Singh, 118–19 Gide, Andre´, 185–6 von Gierke, Otto, 4, 67, 169–70, 184, 187, 188, 196, 199, 200, 345, 356, 360–2, 363–5, 367–8. See also Corporations Globalization corporate social responsibility (CSR) and, 421 private power and, 248 status-related rights and, 342 transnational law and, 474, 475 Goldberg, Victor, 317–18, 333 Goldmann, Berthold, 479 Gond, Jean-Pascal, 420 Google, 370 Governance research, 74, 78, 85 Granovetter, Mark, 63, 319, 332, 333, 497–8, 499, 504–10, 511, 515–16. See also Scope of law Grechenig, Kristoffel, 157–8 Greece, Mediterranean model and, 427 Green, Leslie, 51 Greenhouse gas emissions, 180–1 Greskovits, Be´la, 417, 426–7 Grundmann, Stefan, 452 Grundnorm (hypothetical norm), 41, 52 Gurvitch, Georges, 185–6 Habermas, Ju¨rgen, 50–1, 95–8, 102–3, 104–8, 144, 152, 194–5, 196, 200–4, 263, 264–5. See also Discourse theory; Material justice in private law Hackers, 313 Hale, Robert, 164 Hall, Peter, 416, 417–419, 422–7, 429, 430, 431. See also Varieties of capitalism (VoC) Halliday, Terence C., 480–1 Hallstein, Walter, 255, 440 Hand, Learned, 36, 46–7, 55–6, 82, 278, 289 Hart, H.L.A., 37, 39–41, 51, 52, 53, 95, 158, 311 Harvard University, 396 Hate speech, 495–7, 502, 510 von Hayek, Friedrich A., 14–15, 56–7, 127, 173, 232–3, 234–7, 239, 240, 241, 247, 328, 352, 353, 467–8. See also Information and private law Health insurance, imperfect distribution of information and, 244 Heck, Philipp, 348

Hegel, Georg W.F., 69, 104, 120, 211–12, 349, 365, 506 Heidegger, Martin, 43–4 Heller, Michael, 2, 27, 328 Henry VIII (England), 120 Hermeneutics comparative nature of private law and, 12–14 compatibility with legal positivism, 13–14 discourse theory and, 50–1 evolution of, 43–4 freedom and limits in, 44 hermeneutic circle, 49–50 inside versus outside question and, 39 interdisciplinary approach to private law and, 12–14 judges, role of, 45–6, 47–9, 50–1 legal positivism compared, 41–2 methodology of, 44, 47–8, 50–1 overview, 57–8 precedent and, 48–9 pre-conception and, 39, 47, 48–9 principles and norms in, 44–5 private law theory and, 36 result-based decision-making in law and, 44 rule of law and, 48–9 systems theory and, 50–1 Hesselink, Martijn, 189 Heuristics, bias and, 225–6 Hirschman, Albert, 391, 394–404, 407, 410, 411–13, 446, 506. See also Organization theory Historical School, 197 Hobbes, Thomas, 106, 131–2, 146, 505 Hofer, Sybille, 198–9 Hollingsworth, J. Rogers, 432 Holmes, Oliver Wendell, 62, 127, 348 Homogeneity of design, 2 Hopt, Klaus, J., 456–7, 460, 463–6, 467, 469–70. See also Multilevel governance Horkheimer, Max, 42, 104 Human dignity, 211–12 Human rights constitutionalization of private law and, 169–71 status-related rights and, 349–50 transnational corporations and, 6–8 Hume, David, 146, 280, 352, 353, 354 Hungary Civil Code, 440 Mediterranean model and, 427 private law in, 183 Husa, Jaakko, 114–15 Husserl, Edmund, 143 Hybrid forms of organization, 7 Idea of justice (Sen), 135, 145–6 Identity Economics, 508 Immigration, anti-discrimination law and, 262 Income tax, redistribution and, 217–20

Index Incomplete contracts, 328–9 Incorporation theory, 437 Individualism contract law and, 210–11 discourse theory, individual versus collective in, 104–5, 106–7 methodological versus normative individualism, 505 social question and, 347 status-related rights versus, 350 in United States, 106 Industrial Revolution status-related rights and, 344 tort law and, 277–8 Information and private law advertising and, 238–9 big data and, 240–1 brand names as solution to imperfect distribution of information, 244–5 central planning, criticism of, 233, 234–7 commodity prices and, 234, 241–6 decentralized distribution of information, 233, 234–7 dishonesty, cost of, 242–3 health insurance and, 244 imperfect distribution of information, 233–4, 237–41 information economics, 237 information intermediaries, 244, 245 information paradigm, 246–7 institutions as solution to imperfect distribution of information, 244, 245 invisible hand and, 237 job selection and race and, 244 kickbacks and, 231–2 neoclassical economics, critique of, 234 organizational contracts, distributed knowledge and, 328 overlapping information, 240, 246–7 overview, 230–1, 233–4 ownership versus control of corporations and, 379–80 price dispersion and, 237–8 reputation as solution to imperfect distribution of information, 244 scientific knowledge versus ordinary knowledge, 235–6 screening and, 245–6 signals and, 236, 245–6 texts of reference, 232–3 transaction costs and, 230 used cars and, 243–4 Information economics, 237 Information overkill, 18–19 Inheritance tax, redistribution and, 217–20 Innovation

527

in legal positivism, 53, 54–7 sociology, legal innovation and, 64–5 Insider trading, 404–5 Institut fu¨r Sozialforschung (Frankfurtam Main), 42 Institutional economics corporations and, 85–6, 360, 363 evolution of, 77–8, 84–5 governance research and, 74, 78, 85 governance schemes and, 88–9 markets and, 85–6 monopolies and, 87–8 neoclassical economics versus, 86–7 new institutional economics, 30, 63, 363, 374, 416–17 overview, 71, 93–4 relational contracting and, 85–6 texts of reference, 72–4 total welfare and, 220 transaction costs versus, 87 varieties of capitalism (VoC) and, 416–17 Instrumentalization of rights, 27 Integration through law, 442–3, 457 Intellectualism, legal history and, 122–3 Interdisciplinary approach to private law communication process and, 12–13 comparative approach, integrating, 11 comparative law and, 18 discourse theory and, 18 economics and, 18 extension of interdisciplinary perspectives, 10 hermeneutics and, 12–14 information overkill and, 18–19 interpretation and, 13–14 in jurisprudence, 11–14 law and economics compared, 2, 15–17 legal history and, 18 legal practice, importance for, 14–15 legal scholarship, importance for, 14–15 methodology of, 18 overview, 9–10 pluralistic nature of private law as thesis of private law theory, 1–2 reconstruction of theory in law and, 18–19 relevance of theory and, 18–19 sociology and, 18 systems theory and, 18 which disciplines considered, 17–18 International Capital Markets Association (ICMA), 488 International law. See Transnational law International Skating Union, 248–9, 255 International Standardisation Body (ISB), 421 International Swaps and Derivatives Association (ISDA), 472, 478, 482, 483 Internet. See also Digital technology and private law corporate social responsibility (CSR) and, 430

528

Index

Internet (cont.) freedom of expression of internet platforms, 495–7, 502, 510 Internet Corporation for Assigned Names and Numbers (ICANN), 311, 312 Internet Engineering Task Force (IET), 312 Interpretation. See also Hermeneutics comparative nature of private law and, 13–14 functional method in private law and, 444–5 interdisciplinary approach to private law and, 13–14 in legal positivism, 53, 54–7 Invisible hand, 237 Israel, shareholder protection rights in, 124 Italy antitrust law in, 176–7 Codice Civile, 199 codification of private law in, 182 Constitution, 176 constitutionalization of private law in, 176–8 Mediterranean model and, 427 modernization in, 423 new production regimes in, 423 private actors, constitutional protections against in, 132–3 shareholder protection rights in, 124 status-related rights in, 345 values in private law in, 160 Ius commune, 25, 113, 115, 440. See also Legal history Ius Commune Casebooks for the Common Law of Europe, 445 Iustum pretium, game theory and, 21–2 Japan, modernization in, 423 Jellinek, Georg, 172, 349, 350 Jensen, Michael, 361, 362, 366, 372, 382–9, 397. See also Agency relationship in corporations Jessup, Philipp C., 472–4, 475–7, 481–2. See also Transnational law von Jhering, Rudolf, 105, 121, 171, 348–9, 350 Jobs, Steve, 370 Joerges, Christian, 5, 118–19, 157–8, 456–7, 466–9, 470–1. See also Multilevel governance Joint ventures, organizational contracts and, 328 Jolls, Christine, 92 Josserand, Louis, 272–4, 281–2, 283–6, 287, 292–3, 297, 347. See also Tort law Journal of Comparative Legal History, 116 Judicial review, digital technology and, 312–13 Juridical schematism, 257–8 Justice of consensus bias, contract law and, 210, 221–8 justification of freedom of contract, 210, 211–16 overview, 19

reconstruction of interdisciplinary theory in law and, 23–4 redistribution as limit on freedom of contract, 210, 217–21 relevance of interdisciplinary theory and, 20–3 texts of reference, 208–9 third parties and, 211 (See also Social ordering) Justified expectations, 70 Kahnemann, Daniel, 24, 75, 91–2, 208–9, 210, 221–8. See also Contract law Kahn-Freund, Otto, 444 Kalven, Harry, 287 Kang, Nahee, 420 Kant, Immanuel, 25, 43, 105, 106–7, 122, 146, 150, 173, 211–12, 215, 354, 478 Kantorowicz, Hermann, 4, 105, 356 Kaplow, Louis, 208–9, 210, 214, 216, 217–21, 228, 283, 291. See also Contract law Katelouzou, Dionysia, 432 Kelsen, Hans, 41, 52, 60, 61–2, 101, 105, 124 Kennedy, Duncan, 5, 119, 121, 156–7, 159–60, 162–5, 170, 174, 287, 342, 347, 348, 359. See also Values in private law Kennedy, John F., 188, 279, 354 Keynes, John Maynard, 234–5 Kickbacks, 231–2 Kilpatrick, Claire, 296 Kinderman, Daniel, 421 Kischel, Uwe, 117 Kjaer, Poul, 96 Knight, Frank, 366 Knowledge. See Information and private law Kornhauser, Lewis, 497–8, 499, 511–16. See also Scope of law Koschacker, Paul, 118 Ko¨tz, Hein, 82–3, 113–14, 117, 175, 437–9, 441, 443–6, 447, 448, 453. See also Functional method in private law Kranton, Rachel, 507–8 Krupp Company, 429 Ku¨bler, Friedrich, 181, 186–8, 190. See also democratization of private law Kuhn, Thomas, 256 Kumm, Mattias, 25, 169 Labour constitution, 26 Labour law, 354 Lando, Ole, 441 Lando Group, 441, 445 Language, discourse theory and, 104 La Porta, Rafael, 11, 112–13, 117, 123–7. See also Legal origin theory Lasalle, Ferdinand, 355 Latvia, private law in, 183

Index Law and Economics corporations and, 360, 394, 395–6, 404, 405 in European Union, 292 interdisciplinary approach to private law compared, 2, 15–17 in jurisprudence, 11 Law and Society Movement compared, 62 Legal Origin Theory and, 117 negligence and, 36 popularity of, 1 private ordering and, 29–31, 484 (See also Private ordering) redistribution, freedom of contract and, 208 sociology and, 60–1, 63, 68, 331, et seq., 488, 504–506 status related rights and, 346 tort law and, 280, 286, 292 in United States, 72 Law and Society Movement, 29, 62, 63 Law as a product criticisms of, 450–1 definition of appropriate market, 450–1 Delaware effect and, 438–9, 443, 446, 447, 449–50 in federal states, 449 functional method in private law versus, 443 overview, 437, 438, 451–3 regulatory competition and, 446–9, 450–1 texts of reference, 437–9 United States, European Union contrasted, 452 Legal formalism, 60 Legal history Cassis de Dijon case and, 111–12 comparative law, relationship to, 113–16 Critical Legal Studies and, 119 debate regarding, 113 democratization of private law and, 186 evolution of, 118–19 insufficiency of, 123 intellectualism and, 122–3 interdisciplinary approach to private law and, 18 Judeo-Christian culture and, 119 law as system of rules in, 119 legalism and, 122 Marxism and, 113 material justice in private law and, 197 overview, 112, 128 personalism and, 121–2 phases of European legal history, 119–21 social question in, 121 texts of reference, 112–14 Legalism, legal history and, 122 Legal norms, sociology and, 64 Legal origin theory (LOT) common law versus civil law, 124–7 comparative law contrasted, 117 lack of law, criticism based on, 127

529

law and economics and, 117 legal culture, criticism based on, 126–7 methodology of, 113 overview, 112–13, 128 prominence of, 117–18 shareholder protection rights and, 123–6 texts of reference, 112–14 transfers between legal orders in, 124 variables, criticism based on selection of, 126 varieties of capitalism (VoC) and, 417, 427 Legal positivism compatibility with hermeneutics, 13–14 critical theory versus, 53 discourse theory compared, 107 functional method in private law and, 444 Grundnorm and, 41, 52 hermeneutics compared, 41–2 innovation in, 53, 54–7 inside versus outside question and, 39–41 interpretation in, 53, 54–7 material justice in private law versus, 197 morality and, 39–41, 51–3 open society and, 53–4 overview, 57–8 Oxford positivism, 41 pluralism in, 53, 54–7 private law theory and, 36 systems theory compared, 101, 103 traditional positivism, 54 transnational law versus, 476 values in private law and, 158–9 Legal realism American legal realism (See American legal realism) values in private law and, 159–60, 162–3, 164 Legislation constitutional law, statutory regulation and, 26–8 discourse theory and, 107–8 organizational contracts and, 328 scope of law and, 515–16 sociology and, 66 systems theory and, 102 Legrand, Pierre, 114, 425 Lehman Brothers, 191, 293, 294, 421 Lele, Priya, 128 Lenders contractual obligations of, 59–60, 64, 65 one-off fees, 95, 100–1 responsible lending and, 207–8, 220 subprime lending, 207, 219, 220 Lessig, Lawrence, 298–300, 301–8, 309, 311, 312, 313–14. See also Digital technology and private law Lex digitalis, 309–10 Lex mercatoria, 478–80

530

Index

Liability in tort law. See also Tort law enterprise liability, 278, 288–90 organizational liability, 278 product liability, 278–9, 285–6 strict liability, 280, 285–6, 287–8 vicarious liability, 278 Liberalism, status-related rights and, 351–4 Liberal market economies (LMEs) comparative law and, 417 co-ordinated market economies (CMEs) versus, 418–19, 425, 427 overview, 417 tort law in, 278 Liberia, regulatory competition in, 447 Libertarian paternalist theory of regulation, 203–4 Lieder, Jan, 127, 128 Lisbon Summit (2000), 419–20, 421, 468 Lithuania, private law in, 183 Living law, 29, 30, 60 Llewellyn, Karl, 60, 119 LMEs. See Liberal market economies (LMEs) Loan Market Association (LMA), 64, 65 Lomfeld, Bertram, 96 London School of Economics, 396 Lopez-de-Silanes, Florencio, 11, 112–13, 117, 123–7. See also Legal Origin Theory LOT. See Legal origin theory (LOT) Luhmann, Niklas, 30, 45, 50–1, 69, 95–104, 105, 108, 258, 310, 335, 474, 478, 480, 503. See also Systems theory Lukes, Steven, 250 Luther, Martin, 402 Lyce´e Franco-Allemand, 396 Lysenko, Trofim, 256 Maastricht Treaty (1991), 177, 296, 454, 457, 460 Macaulay, Stewart, 317–18, 320–4, 337–8, 490, 509. See also Organizational contracts MacCormick, Neil, 341–3, 351–4, 355, 357, 358. See also Status-related rights MacKinnon, Catharine, 262–3, 264–7, 268, 269, 270. See also Anti-discrimination law Macneil, Ian, 317, 318–19, 323–4, 333 Maine, Henry, 67 Malfeasance, 505, 507–8 Mann, Frederick Alexander, 479 Manne, Henry, 139, 240–1, 250, 367, 391, 394–6, 404–13. See also Takeovers Manning, Bayless, 375 Marginal utility of money, 290 Market instruments versus hierarchies, 505, 508–9 Market order, 135, 152–3, 154–5, 213 Market rationality test, 111 Markets bipolar market-firm relationship rejected, 333–5

contract law and, 216 freedom of contract and, 216 institutional economics and, 85–6 networks distinguished, 335 platform markets, 255 Markovits, Daniel, 218–19 Marriage, 67 Marshall Islands, regulatory competition in, 447 Marx, Karl, 69, 344, 506 Marxism critical theory and, 42 discourse theory versus, 104 legal history and, 113 ordo-liberalism versus, 142, 254–5 status-related rights and, 351–4 Masferrer, Aniceto, 116 Material justice in private law civil rights and, 193, 201, 202, 203, 204 communitarian nature of, 200 consumer law and, 199 courts, role of, 199 democracy versus liberalism and, 198–9 evolution of, 196 feminist legal theory and, 202 freedom versus equality and, 198–9, 203–4 lack of institutional analysis, 203 legal history and, 197 legal positivism versus, 197 libertarian paternalist theory of regulation and, 203–4 natural law versus, 197–8 overgeneralized classifications and, 202–3 overview, 193, 203–4 proceduralist understanding of law and, 194–5, 201 racial discrimination and, 198 as replacing formalism, 193–4, 199 social model of private law and, 194, 197–200 socio-economic issues and, 198–9 state, role of, 200–1 texts of reference, 194–5 welfare state model of, 194, 200–3 Maturana, Humberto, 99 Mauss, Marcel, 214 Max-Planck Institute, 444 Means, Gardiner, 362, 372, 374–82, 383, 412. See also Ownership versus control of corporations Meckling, William, 361, 362, 366, 372, 382–9, 397. See also Agency relationship in corporations Mediterranean model, 417, 427 Die Meistersinger (Wagner), 54 Menger, Anton, 4, 187, 188, 196, 356 Mengoni, Luigi, 135, 152–3, 154–5 Mergers. See Takeovers Mestma¨cker, Ernst-Joachim, 25, 57–8, 73, 168, 456–7, 460–3, 464, 467. See also Multilevel governance

Index Michaels, Ralf, 127, 452, 486 Michoud, Le´on, 350 Minority shareholders, duties to, 360, 370–1 von Mises, Ludwig, 235 Mixed-race persons, discrimination and, 193, 201, 202, 203, 204 Mnookin, Robert, 497–8, 499, 511–16. See also Scope of law Mode´er, Kjell A., 116 Modern Age, 121 Moglen, Eben, 313 Monopolies antitrust law and, 252–3 institutional economics and, 87–8 organizational contracts, bilateral monopoly and, 326–7 private power and, 252–3 de Montaigne, Michel, 284 Montesquieu, 286 Mont Pe`lerin Society, 235 Moon, Jeremy, 420 Morality legal positivism and, 39–41, 51–3 scope of law and, 499–500 systems theory and, 101–2 More´teau, Olivier, 116 Morgenstern, Oskar, 20 Multilevel governance antitrust law and, 462–3 capital markets and, 457, 463–6 comparative advantage and, 465 consumer law and, 458 courts versus legislatures, 464 economic constitution and, 458–63 euro crisis and, 454–6, 457, 463 European Internal Market and, 460, 461–2, 467–8 experimentalist governance and, 457 harmonization of law and, 465 open method of co-ordination (OMC) and, 466–9, 470–1 ordo-liberalism and, 454, 456, 460–3 overview, 454–6, 469–71 public choice and, 464–5 regulation and, 458 role of law in, 457 Rome Treaty and, 460–1, 463 Single European Act and, 460, 461–2 social dimension of, 457, 466–9, 470–1 texts of reference, 456–7 United States, European Union compared, 457, 463–6, 470 Multiple-shot games, 23 Musk, Elon, 370

531

Nader, Ralph, 279, 447–8 Naphtali, Fritz, 254–5 Nash, John, 20 Nash Equilibrium, 21, 225 National, private law not deemed, 3–4 Natural law, material justice versus, 197–8 Negligence contributory negligence, 46–7 cost avoidance and, 72, 82–3 formula for determining, 36, 47, 55–6, 278, 289 law and economics and, 36 strict liability versus, 287–8 Negotiation. See also Contract law bias and, 223–5 divorce, bargaining process in, 513–15 game theory and, 223–5 inequality if bargaining power, 221 overview, 19, 207 reconstruction of interdisciplinary theory in law and, 23–4 relevance of interdisciplinary theory and, 20–3 texts of reference, 208–9 Nelken, David, 114–15 Neoclassical economics bounded rationality versus, 89–90 corporations in, 361–2, 365 information, critique of neoclassical economics and, 234 institutional economics versus, 86–7 tort law and, 276 Neo-liberalism, 138–9 Netherlands Civil Code, 180–1 consumer law in, 346 European Constitution, rejection of, 116 private law in, 183 Urgenda Foundation v. State of the Netherlands (2015), 180–1, 188, 192 Net-short debt investing, 484 Network arrangements organizational contracts and, 318, 319, 329–37 scope of law and, 504 spot contracts and, 335–7 Network contracts. See Organizational contracts von Neumann, John, 20 New Brandeis School, 248, 253 New Economic Sociology, 330, 504–5 New Economics of Organizations, 426 New Institutional Economics, 30, 63, 363, 374, 416–17 New York Diamond Dealers Club (DDC), 488–9 New Zealand, product liability in, 290 Nice Treaty (2001), 460 Nietzsche, Friedrich, 284 Nipperdey, Hans, 174 Nixon, Richard, 419–20

532

Index

Nobel Memorial Prize in Economics, 75, 234, 241, 363 No-fault divorce, 512 No¨lke, Andreas, 417 Non-discrimination. See Anti-discrimination law Nongovernmental organizations (NGOs), corporate social responsibility (CSR) and, 429 North, Douglas, 140, 423 Norway, corporate social responsibility (CSR) in, 428 Nuisance cases, transaction costs in, 79–80 Nuremberg Tribunals, 396–7 October Revolution (1917), 120 O’Hara, Erin, 446–7 Ohmae, Ken’ichi, 418 Olin, John M. Foundation, 29–30 One-shot games, 23 Open method of co-ordination (OMC), 466–9, 470–1 Open society, 53–4, 174 Operative constructivism, 99–100, 101 Ordo-liberalism antitrust law and, 252 beyond Germany, 459 Common Agricultural Policy and, 461 constitutionalization of private law and, 167–8, 169, 174 constitutional law and, 25 democratization of private law and, 187–8 economics and law, intertwining of, 139 evolution of, 136 freedom of contract and, 213 institutions and, 140 lack of definition of private law in, 142 laissez-faire versus, 136 Marxism versus, 142, 254–5 multilevel governance and, 454, 456, 460–3 (See also Multilevel governance) neo-liberalism versus, 138–9 normative analysis in, 137–8 normative claims of, 141–2 organization theory and, 397 overview, 134–5, 154–5 private power and, 250, 252, 254–5 Privatrechtsgesellschaft (private law society) in, 136–7 public ordering versus private ordering, 137–8 regulation in, 138–40 socialism versus, 254–5 state, role of, 137–8 subsidiarity and, 140–1 texts of reference, 133–4 Organizational contracts arbitration in, 327–8 bilateral monopoly and, 326–7 bipolar market-firm relationship rejected, 333–5

codes of conduct and, 328 contingencies in, 323 corporate social responsibility (CSR) and, 315 detrimental effect of legal planning on, 320 distributed knowledge and, 328 economic sociology and, 318, 319, 330–1 in European Union, 319 factors impacting legal planning in, 322 in France, 319 frequency of transactions and, 324–5 game theory and, 321 in Germany, 319 governance schemes for, 327–8 hierarchies distinguished from networks, 335 incomplete contracts compared, 328–9 institutional economics and, 318, 319 joint ventures and, 328 law context of, 318–19 legislation and, 328 markets distinguished from networks, 335 network arrangements and, 318, 319, 329–37 overview, 315, 337–8 private ordering and, 315 reciprocity and, 334 relational contracting, 85–6 social context of, 323–4 social norms and, 320–1 spot contracts versus, 323, 324–5, 335–7 subject matter of, 321 texts of reference, 317–18 transaction-specific investments and, 325–7 transnational law and, 315 trust and, 328, 334 uncertainty and, 324–5 in United States, 319 Organisation for Economic Co-operation and Development (OECD), 421, 428 Organization theory agency relationship in corporations and, 397 combination of exit and voice, 401–2 corporate social responsibility (CSR) and, 398, 404 critical theory and, 397 criticisms of, 403–4 economics and, 399 exit option in, 394, 395, 398–400, 412, 413 loyalty in, 398, 402–3, 412 marshalling forces and, 398 ordo-liberalism and, 397 overview, 391, 394, 411–13 pan-social theory and, 396 political theory and, 399 sociology and, 394, 395 texts of reference, 393 voice option in, 394, 395, 398, 399, 400–1, 412, 413 Orlando, Vittorio Emanuele, 350

Index ¨ ru¨cu¨, Esin, 114–15 O Overgeneralized classifications, material justice in private law and, 202–3 Ownership versus control of corporations agency relationship (See Agency relationship in corporations) allocative efficiency and, 380 business judgment rule and, 380–1 capital markets and, 377–82 debt capital versus share capital, 376–7 information and, 379–80 liquidity and, 378, 379–80 overview, 373, 389–90 price transparency and, 380 principal-agent relationship (See Agency relationship in corporations) property rights theory and, 374, 378–9, 381–2 publicly traded companies, 377 securitization and, 378 shareholder rights traded for expectations, 375–6 shareholders versus management, 374–5, 378–9 texts of reference, 372 Oxford positivism, 41 Panama, regulatory competition in, 447 Pandect law, 120 Pan-social theory, 396 Parsons, Talcott, 98, 331, 506 Pashukanis, Evgeny, 353 Patrimony, 512–13 Pax Americana, 478 Peace of Westphalia (1648), 182, 439 Personalism legal history and, 121–2 status related rights and, 344 Pescatore, Pierre, 467 Peter the Great (Russia), 119 Phenomenology, 143 Picard, E., 184 Pichai, Sundar, 370 Pigou, Arthur-Cecil, 83–4 Piketty, Thomas, 151 Pinker, Steven, 284 Pistor, Katharina, 125, 128 Planiol, Marcel, 350 Platform markets, 255 Plato, 174, 401–2 Pluralism constitutional pluralism, 351 in legal positivism, 53, 54–7 pluralistic nature of private law as thesis of private law theory, 1–2 Poland, Mediterranean model and, 427 Polanyi, Karl, 61, 69, 310, 451–2, 504, 506

Polycentric globalization, digital technology and, 310–11 Popper, Karl, 53–4, 174 Pornography, digital technology and, 303–4 Portugal, Mediterranean model and, 427 Positivism. See Legal positivism Posner, Richard, 40, 77, 161, 280, 283, 286, 442 Post-Modern Age, 121 Postmodernism, 143 Pound, Roscoe, 60, 445 Powell, Walter, 317–18, 319, 329–38. See also Organizational contracts Precedent, values in private law and, 162 Preconception, 39, 47, 48–9 Prevent Group, 315–17 Price dispersion, 237–8 Princeton University, 396, 428–9 Principal-agent relationship in corporations. See Agency relationship in corporations Principles of European Tort Law (PETL), 281 Pringsheim, Fritz, 118 Prisoner’s dilemma, 22, 23–4 Privacy law in European Union, 298 in United States, 298 Private law. See specific topic Private ordering advantages of, 487 approaches to, 485–7 in cattle industry, 484, 487, 491–3 codes of conduct and, 492 damages, criticism of, 489–90 in diamond industry, 484, 487–91 in divorce, 511–15 (See also Divorce) efficiency of, 489, 490–1 elements of, 492 exclusion as enforcement mechanism, 488–9 in family law, 484, 511–15 fiduciary duties and, 493–4 first-party, second-party, and third-party control in, 492 formal and informal rules in, 488 game theory and, 491 law and economics and, 29–31, 484 legal problems in, 31 meta-rules in, 492–3 net-short debt investing and, 484 organizational contracts and, 315 overview, 484, 493–4 private law and, 29–31 problems of, 491 reputation as enforcement mechanism, 490 sociology and, 29 software and, 484

533

534

Index

Private ordering (cont.) texts of reference, 484–5 theory of social co-operation in, 491–2 transaction costs and, 491 transnational private ordering, 28–9 Private power and private law anti-discrimination law and, 258 antitrust law and, 251–2 competition and, 252–3 consumer law and, 251 contract law and, 251 defining power, 257 democracy, compatibility with, 253–4 dispositives of power, 252 family law and, 251 globalization and, 248 juridical schematism and, 257–8 knowledge generation and, 256–7 legitimacy and, 253 monopolies and, 252–3 ordo-liberalism and, 250, 252, 254–5 overview, 248, 259–60 platform markets and, 255 preventive solution to problem of, 254 scientific knowledge and, 256 socio-economic inequality and, 258 structuralism and, 256–7 technology and, 248 texts of reference, 249–51 Privatrechtsgesellschaft (private law society) constitutionalization of private law and, 166, 174 digital technology and, 302 ordo-liberalism and, 136–7 overview, 25, 31 Proceduralist understanding of law, 194–5, 201 Product liability, 278–9, 285–6 Product Liability Directive (EU), 279, 285–6 Property rights theory agency relationship in corporations and, 382–3, 388 corporations and, 369 overview, 382 ownership versus control of corporations and, 374, 378–9, 381–2 Prospect theory bias and, 222 bounded rationality and, 91–2 Proxy fights, 408 Psychology bias, contract law and, 210, 221–8 (See also Bias) bounded rationality and, 90, 92 Public goods Corporate Social Responsibility (CSR) (See Corporate Social Responsibility (CSR)) varieties of capitalism (VoC) (See Varieties of capitalism (VoC))

Public reason, 131 Pure theory of law, 60, 101, 105 Quotas, 202 Rabel, Ernst, 113–14, 117, 446 Race job selection, imperfect distribution of information and, 244 mixed-race persons, discrimination and, 193, 201, 202, 203, 204 Radbruch formula, 158 Raiser, Ludwig, 105, 178, 186, 208–9, 210, 211–16, 217, 219, 221, 224, 228, 381. See also Contract law Rajan, Raghuran, 127 Rational choice theory, bounded rationality versus, 90–1 Rationalization of rule-making, 65–6, 69 Rawls, John, 11, 16, 50, 131, 133–5, 142–52, 153, 154–5, 354, 464. See also Theory of justice (Rawls) Raz, Joseph, 13–14, 36, 39, 41, 51–7, 95. See also Legal positivism Reciprocity, organizational contracts and, 334 Reconstruction of interdisciplinary theory in law game theory and, 23–4 justice of consensus and, 23–4 negotiation and, 23–4 overview, 18–19, 35–6 Redistribution income tax and, 217–20 inheritance tax and, 217–20 as limit on freedom of contract, 210, 217–21, 228–9 transaction costs and, 79 Regulation binding effect of, 499 constitutional law and, 26–8 contract law and, 216 corporate social responsibility (CSR) and, 415 digital technology and, 302–3, 305 freedom of contract and, 216 libertarian paternalist theory of, 203–4 multilevel governance and, 458 in ordo-liberalism, 138–40 scope of law and, 499, 515–16 systems theory and, 103 varieties of capitalism (VoC) and, 415 Reich, Norbert, 172, 341–3, 354–8. See also Statusrelated rights Relational contracts. See Organizational contracts Relevance of interdisciplinary theory game theory and, 20–3 justice of consensus and, 20–3 negotiation and, 20–3 overview, 18–19, 35–6

Index Renner, Karl, 187, 188 Representativeness, bias of, 226 Research agenda, 32 Resourceful Evaluative Maximizing Model (REMM), 505, 506 Responsible lending, 207–8, 220 Restatement (Second) of Torts, 279 Restatement (Third) of Torts, 279 Rhenish capitalism, 215–16 Ribstein, Larry, 446–7 Richman, Barack, 487–8 Ripert, Georges, 171–2, 174, 181, 184–6, 187, 188, 192, 347. See also Democratization of private law Ripstein, Arthur, 127 Risk deep pocket justification for risk allocation, 288, 291–2 evolution of, 275, 277–8 loss spreading justification for risk allocation, 288, 290–1 non-calculability of, 281, 283, 292–7 risk society, 281, 283, 292–7 social justice versus economic efficiency in allocation of, 274–6, 280–1 wealth distribution versus risk distribution, 294–7 Risk society, 281, 283, 292–7 Rockefeller, David, 428–9 Roman Catholic Church, 120 Roman Empire, 120 Romania, Mediterranean model and, 427 Romano, Roberta, 437–9, 443, 446–51, 453. See also Law as a product Rome I Regulation, 437 Romeo, R., 176–7 Rome Treaty (1957), 110, 119–20, 141, 176, 460–1, 463 Rousseau, Jean-Jacques, 106–7, 146, 186, 354 Royal Dutch Petroleum Company, 415–16, 427, 428, 429, 431, 432–3 Rubinstein, Ariel, 20 Russell, Bertrand, 143 Russian (October) Revolution (1917), 120 Ru¨stow, Alexander, 459 Sabel, Charles, 468–9 Saleilles, Raymond, 167, 171–4, 185–6, 282, 283, 347, 361. See also Constitutionalization of private law Sales Directive (EU), 319 Samuel, Geoffrey, 114–15 Sartre, Jean-Paul, 143 Satisficers, 223–5 von Savigny, Friedrich Carl, 47, 48, 50, 105, 142, 182, 186–7, 197 Scha¨fer, Hans-Bernd, 82–3 Scharpf, Fritz, 26, 188, 278, 354, 356–7 Scheuermann, William E., 468

535

Schleiermacher, Friedrich, 41, 42, 43 Schleifer, Andrei, 11, 112–13, 117, 123–7. See also Legal origin theory Schmidt-Rimpler, Walter, 175, 214–15 Schmitter, Philippe, 432 Schmitthoff, Clive, 479 Schnyder, Gerhard, 125, 127, 128 School of Bologna, 120 Schulz, Fritz, 118 Schumann Declaration, 119–20 Schumpeter, Joseph, 235 Scitovsky, Tibor, 465 Scope of law absence of law, 501–2 contract law and, 499, 505, 508–9 default rules and, 499–500, 515–16 divorce, private ordering in, 511–15 (See also Divorce) droit versus non-droit, 500–3, 515–16 legislation and, 515–16 malfeasance, 505, 507–8 market instruments versus hierarchies, 505, 508–9 morality and, 499–500 network arrangements and, 504 new economic sociology and, 504–5 overview, 495–7 regulation and, 499, 515–16 shadow of law, 502, 511, 513–15 social embeddedness and, 499–500, 504–10, 515–16 social norms and, 499–500 systems theory and, 502, 503 texts of reference, 497–8 Search engines, privacy and, 298 Searle, John R., 98 Seat theory, 437 Seccombe, Monica, 457 Securities. See Capital markets Securitization, 378 Self-regulation. See Private ordering Sen, Amartya, 11, 50, 57–8, 135, 144, 145–6, 150–1, 155 Separation of powers, values in private law and, 162 Sexual harassment, 264–7 Shadow of law, 502, 511, 513–15 Shaffer, Gregory, 480–1 Shakespeare, William, 55 Shareholders appraisal rights, 375 codetermination laws and, 201–2 minority shareholders, duties to, 360, 370–1 organization theory and (See Organization theory) ownership versus control of corporations (See Ownership versus control of corporations) protection rights, 123–6

536

Index

Shareholders (cont.) rights traded for expectations, 375–6 stakeholders versus, 389 takeovers and (See Takeovers) Sharing economy, 346–7 Shavell, Steven, 208–9, 210, 214, 216, 217–21, 228, 283, 291, 292. See also Contract law Shell Petroleum Development Company of Nigeria, Ltd, 415–16 Siems, Mathias, 114–15, 117, 125, 127, 128, 432 Simon, Herbert, 24, 73, 78–9, 87, 89–94, 222–3, 276–7. See also Bounded rationality Simplifications, bounded rationality and, 90–1 Single European Act comparative law and, 110 constitutionalization of private law and, 177 economic constitution and, 25 market integration and, 123 multilevel governance and, 456, 457, 458, 460, 461–2 status-related rights and, 356 Sinn, Hans-Werner, 448 Sinzheimer, Hugo, 26, 344, 347, 458–9 Slovakia, Mediterranean model and, 427 Slovenia, Mediterranean model and, 427 Smith, Adam, 237, 280, 382, 506 Smith, Stephen, 2 Smits, Jan, 114–15 Social contract discourse theory and, 106, 107 social ordering and, 131–2 Social democracy, 352–3 Social democratization, 26, 188 Social embeddedness, 497, 504–10, 515–16 Socialism, ordo-liberalism versus, 254–5 Social Justice Group, 171 Social model of private law, 194, 197–200 Social norms binding effect of, 499 organizational contracts and, 320–1 private ordering and, 491–2 scope of law and, 499–500 Social ordering market order, 135, 152–3 ordo-liberalism (See Ordo-liberalism) overview, 131–2 private actors, constitutional protections against, 26 social contract and, 131–2 texts of reference, 133–4 theory of justice (See Theory of justice (Rawls)) Societal constitutionalism, digital technology and, 308 Sociology and private law adoption and, 67 contract law and, 66–9 division of labour and, 62–3, 65, 66–9

economic sociology, 63 (See also Economic sociology) family law and, 67 functional differentiation and, 69 interdisciplinary approach to private law and, 18 justified expectations and, 70 law and economics and, 60–1, 68, 331, et seq., 488, 504–506 law-making versus law-finding, 66 legal innovation and, 64–5 legal norms and, 64 marriage and, 67 overview, 59 private ordering and, 29 rationalization of rule-making, 65–6, 69 relationship with law, 61–3 scope of law and, 499 shareholders and, 394, 395 socialization of private law, 69 solidarity and, 63, 68, 69–70 state and, 68–9, 70 texts of reference, 60–1 transnational corporations and, 67 Socrates, 401–2 Solidarity, 63, 68, 69–70 Somek, Alexander, 262–3, 264, 267–70, 468. See also Anti-discrimination law Soskice, David, 416, 417–419, 422–7, 429, 430, 431. See also Varieties of capitalism (VoC) South Africa, corporate social responsibility (CSR) in, 428 Spade, Dean, 270 Spain Mediterranean model and, 427 Spanish Civil War, 396 Spamann, Holger, 126, 128 Spence, Michael, 236, 241, 245–6 Spencer, Herbert, 67 Sports, blood doping in, 248–9 Spot contracts network arrangements and, 335–7 organizational contracts versus, 323, 324–5 Standard Oil of New Jersey, 428–9 State action doctrine, 495 State-centered, private law not deemed, 3–4 Status-related rights balancing approach, 348 behavioural economics and, 346, 349 civil law and, 342–3, 354–8 consumer law and, 345–6, 354–8 evolution of, 343–7 fragmentation of legal order caused by, 343 in France, 343, 344–5 in Germany, 343–5 globalization and, 342

Index human rights and, 349–50 individualism versus, 350 Industrial Revolution and, 344 in Italy, 345 labour law and, 354 Law and Economics and, 346 law context of, 341–2 legal subject, locating, 347, 348–9, 350 middle way between Marxism and liberalism, 351–4 overview, 341, 358–9 personalism and, 344 politico-philosophical context of, 342, 351–4 social democracy and, 352–3 social question and, 344–6, 347 subjective rights and, 349–50 texts of reference, 341–3 will and, 350 Statutory regulation, 26–8 Steinmo, Sven, 424 Stigler, George, 230, 232–4, 237–41, 242, 247. See also Information and private law Stiglitz, Joseph, 241, 245–6 Streeck, Wolfgang, 418, 432 Strict liability in tort law, 280, 285–6, 287–8 Structural coupling, 102 Structuralism, private power and, 256–7 Structure of book, 31–2 Study Group, 441, 445–6 Subjective rights constitutionalization of private law and, 171–3 discourse theory and, 105 status-related rights and, 349–50 Subprime lending, 207, 219, 220 Subsidiarity, 140–1 Sunstein, Cass, 92 Super-diversity, 3 Surowiecki, James, 14–15 Sustainable Development Goals, 190, 421 Sweden, shareholder protection rights in, 124 Switzerland kickbacks in, 231 Swiss Foundation U v. Portfolio Management A (2006), 231–2, 239–40 Systems theory circularity in, 99–100 contract law and, 102–3 courts, role of, 103–4 discourse theory compared, 96–8, 108–9 evolution of, 98–9 hermeneutics and, 50–1 interdisciplinary approach to private law and, 18 legal positivism compared, 101, 103 legislation and, 102–3 morality and, 101–2

537 operative closure of legal system in, 99 operative constructivism and, 99–100, 101 overview, 108–9 regulation and, 103 scope of law and, 502, 503 self-referentiality in, 99–100 structural coupling and, 102 texts of reference, 95–7 transnational law and, 472–3, 474, 478

Tadros, Victor, 250 Takeover Directive (EU), 368, 392 Takeovers antitrust law and, 406, 407–8 bankruptcy and, 406 capital markets and, 410 combination of exit and voice and, 403 control and, 394–5, 406–9 draconian measures to prevent, 391–2 mechanisms of, 410–11 overview, 391–3, 394, 405, 411–13 proportionality test, 391–2 shareholders benefitting from, 411 shareholders versus management, 391, 392–3 texts of reference, 393 Technology digital technology (See Digital technology and private law) private power and, 248 Teubner, Gunther, 28, 50, 96, 97, 99, 178, 194–5, 276, 298–300, 302, 308–13, 472–4, 475, 477–82. See also Digital technology and private law; Transnational law Thaler, Richard, 75, 92 Thatcher, Margaret, 352, 419–20 Theory as practice, 5 Theory of justice (Rawls) basic rights and liberties in, 148–50 conditions for substantive solutions, 145–6 consent-based nature of, 143–5 criticism of, 150–1 justice as fairness, 143, 147 original position in, 144, 145, 146–7 overview, 134–5, 154–5 principles of, 148–50 private law and, 151 reflective equilibrium in, 147 social and economic inequalities in, 148–50 texts of reference, 133–4 veil of ignorance in, 146–7 Theory of practice, 5 Theory of the firm (Coase), 365–7. See also Corporations employment law and, 366–7 individual versus firm, 365

538

Index

Theory of the firm (Coase) (cont.) necessity of firm, 365 in neoclassical economics, 365 overview, 360 planning and, 365–6 price mechanism and, 365–6 transaction costs and, 365–6 uncertainty and, 366 Theses of private law theory application-oriented nature of private law, 3 comparative nature of private law, 2–3 pluralistic nature of private law, 1–2 state-centered or national, private law not deemed, 3–4 Thibaut, Anton, 186–7 Thomasius, Christian, 122 Thornhill, Chris, 96 Tissier, Albert, 184 de Tocqueville, Alexis, 185 Tort law accident defined in, 284 in Austria, 277 breast implants, 272 capitalism and, 295–6 cheapest cost avoider, 282–3, 287–8, 289 contract law and, 285–6 corporations, liability for violations of international law, 415–16 corrective justice and, 275 damages in, 293 deep pocket justification for risk allocation, 288, 291–2 economic analysis of law (EAL) and, 276–7, 280 economic analysis of potential cost, 282–3 economics and, 73, 77 enterprise liability in, 278, 288–90 in European Union, 289–90, 296 evolution of, 275, 277–8 in France, 277, 281–2, 283–6 in Germany, 277 Industrial Revolution and, 277–8 law and economics and, 280, 286, 292 liberal market economies (LMEs) versus coordinated market economies (CMEs), 278 loss spreading justification for risk allocation, 288, 290–1 marginal utility of money and, 290 negligence (See Negligence) neoclassical economics and, 276 non-calculability of risk in, 281, 283, 292–7 organizational liability in, 278 overview, 297 product liability, 278–9, 285–6 risk allocation in, 287–8 risk society and, 281, 283, 292–7

social justice versus economic efficiency in, 274–6, 280–1 strict liability in, 280, 285–6, 287–8 subjective versus objective liability in, 281–2 texts of reference, 272–4 transaction costs and, 82, 276–7 in United States, 296 vicarious liability in, 278 wealth distribution versus risk distribution, 294–7 Total welfare contract law and, 220 institutional economics and, 220 Transaction costs agency relationship in corporations and, 384 bounded rationality versus, 89–90 Coase theorem and, 80–2 corporations and, 360, 365–6 in European Union, 76–7 evolution of concept, 74–5 information and, 230 institutional economics versus, 87 lack of definition, 79 mistaken assumptions underlying, 81–2 in nuisance cases, 79–80 overview, 71, 84, 93–4 private ordering and, 491 reciprocal nature of problem, 80, 81 redistribution and, 79 state, role of, 82 texts of reference, 72–4 tort law and, 82 in United States, 75–6 welfare economics versus, 83–4 Transfer of law debate regarding, 440–1 in European Union, 440–1 evolution of, 439–40 functional method in private law (See Functional method in private law) law as a product (See Law as a product) overview, 437 texts of reference, 437–9 Transitional justice, 158 Transnational corporations codes of conduct, 6, 7 human rights and, 6–8 as hybrid form of organization, 7 rise of sociology and, 67 Transnational law arbitration and, 481 civil society and, 478 constitutionalization of, 483 contract law and, 477, 480–1 domestic law versus, 481

Index functional concept of, 472–4, 475–7 functional definition of, 476 globalization and, 474, 475 legal positivism and, 476 lex mercatoria and, 478–80 organizational contracts and, 315 overview, 472 Pax Americana and, 478 public ordering versus private ordering, 482–3 sociological understanding of rule-making in, 476–7 structural coupling and, 475 systems theory and, 472–3, 474, 478 theoretical approaches to, 482 traditional relation between law and nation-state and, 477 transnational legal orders and, 480–1 transnational situations and, 476 Transnational private ordering, 28–9 Trembling hand problem, 23 Trstenjak, Verica, 115 Trubek, David, 5, 157–8, 468 Trust, organizational contracts and, 328, 334 Tuori, Kaarlo, 310 Tuori, Kaius, 118 Turkey, Mediterranean model and, 427 Tversky, Amos, 24, 91–2, 208–9, 210, 221–8. See also Contract law Twigg-Flesner, Christian, 301 Uber, 240, 241 Uncertainty corporations and, 366 organizational contracts and, 324–5 United Kingdom Brexit, 128 City Code on Takeovers, 392 Conduct of Business Sourcebook (COBS), 231 contract law in, 175 Dexia Crediop S.p.A. v. Comune di Prato (2017), 472, 475, 476, 477, 478, 480–1, 482–3 Financial Conduct Authority (FCA), 231 Financial Services Authority, 231 Glorious Revolution (1688), 120–1 inside versus outside question in, 40 kickbacks in, 231 New Labour, 342, 352 product liability in, 278–9 Redwood Master Fund Ltd v. TD Bank Europe Ltd (2006), 60, 64, 65, 67, 69, 70 Retail Distribution Review (RDR) of 2013, 231 shareholder protection rights in, 124 transnational private ordering and, 28 United Nations constitutional order and, 309 corporate social responsibility (CSR) and, 421

539

Global Compact, 421, 428 Guiding Principles, 428 sales convention, 404 sustainable development goals, 190, 421 United States Alien Tort Statute, 415–16 American critical legalism in, 163 American Revolution (1775), 195–6 anti-discrimination law in, 261, 270 antitrust law in, 176, 251 Brown v. Board of Education (1954), 163, 261, 265 Carroll Towing Co., United States v. (2nd Cir. 1947), 17, 36, 46–7, 55–6, 289 Civil Rights Act of 1964, 196, 261, 265–6 Civil Rights Act of 1968, 261 Civil Rights Movement in, 193, 394 Commerce Clause, 463 Delaware law, importance of, 391–2 digital technology in, 301–2, 307 Doe v. Wal-Mart Stores Inc. (9th Cir. 2009), 6–8 Equal Protection Clause, 265 Federal Trade Commission, 489 First Amendment, 495 Fourteenth Amendment, 265 Godby v. Montgomery County Board of Education (M.D. Ala. 1998), 193, 203, 204 individual versus collective in, 106 inside versus outside question in, 40 internet platforms, freedom of expression of, 495 Kiobel v. Royal Dutch Petroleum Co. (2013), 28, 311, 415–16, 421, 422, 427, 430, 432–3 law and economics in, 72 law as a product in, 452 legal realism in (See American legal realism) Lochner v. New York (1905), 163, 174, 195–6 National Security Agency (NSA), 313–14 New Deal, 174, 381–2 organizational contracts in, 319 privacy law in, 298 product liability in, 279 protest in, 394 racial discrimination in, 198 Securities Act of 1933, 234 Securities and Exchange Commission (SEC), 407 Securities Exchange Act of 1934, 234 shareholder protection rights in, 124 Sherman Antitrust Act, 251 Shlensky v. Wrigley (Ill. 1968), 370–1, 380–1, 389, 420 state action doctrine in, 495 subprime lending in, 207, 219, 220 tort law in, 296 transaction costs in, 75–6 transnational private ordering and, 28 Unitrin, Inc. v. American General Corp. (Del. 1995), 391–3, 403, 409–10, 412

540

Index

United States (cont.) U.S. Bank National Association v. Windstream Services, LLC v. Aurelius Capital Master, Ltd (S.D.N.Y. 2019), 484, 488, 492, 493–4 values in private law in, 160, 163, 165 Vietnam War and, 394 Unitrin, Inc., 391–3 University of California, Berkeley, 396–7 University of Chicago, 404, 405 University of Maastricht, 445 University of Munich, 446 Used cars, imperfect distribution of information and, 243–4 Valcke, Catherine, 118 Values in private law abstract versus concrete rights and, 161–2 American critical legalism and, 163 critical legal studies and, 159–60, 162–3 criticism of legal reasoning and, 163–4 delegitimation of legal institutions, danger of, 164 hard cases, 160 intermediary position, 159 judges, role of, 160–1 legal positivism and, 158–9 legal realism and, 159–60, 162–3, 164 methodology and, 159 overview, 156, 165 philosophical judge (Hercules) and, 162 policies versus principles, 160–1 politics and, 163 precedent and, 162 principle-based adjudication, 161 separation of powers and, 162 texts of reference, 156–8 United States, European Union compared, 160, 163, 165 value-based legal reasoning and, 163–4 van Themaat, Peter Verloren, 461 Varieties of capitalism (VoC) actor-related approach, 424 business strategy infrastructure and, 426 comparative law and, 417 co-ordinated market economies (CMEs) (See Co-ordinated market economies (CMEs)) corporate social responsibility (CSR) compared, 422, 424, 430 corporations, tort liability for violations of international law, 415–16 corporatism and, 423 criticisms of, 418–19 culture, role of, 425–6 decline of, 417 definition of institution for purposes of, 423

dependent market economies (DPM), 417, 417 emergence of, 416 European Union and, 424 history, role of, 425–6 informal rules, role of, 425–6 institutional complementarities and, 426 institutional economics and, 416–17 institutional infrastructure and, 426 institutions, role of, 425 legal origin theory (LOT) and, 417, 427 liberal market economies (LMEs) (See Liberal market economies (LMEs)) Mediterranean model, 417, 427 modernization and, 423 national economies and, 424 new production regimes and, 423–4 organizations, role of, 425 overview, 414 regulation and, 415 relational perspective, 425 texts of reference, 416–418 Vettori, Giuseppe, 168, 176–8. See also Constitutionalization of private law Vicarious liability in tort law, 278 Vietnam War, 394 Vishny, Robert W., 11, 112–13, 117, 123–7. See also Legal Origin Theory Vliegenthart, Arjan, 417 VoC. See Varieties of capitalism (VoC) Vogel, David, 416, 424, 427–31. See also Corporate social responsibility (CSR) Volkswagen, 315–17 Voltaire, 120–1 Vorversta¨ndnis (preconception), 39, 47, 48–9 Wagner, Richard, 54 Wallerstein, Immanuel, 478 Wal-Mart, 6–8 Watson, Alan, 444 Weber, Max, 26, 29, 61, 62–9, 95, 98, 183, 252, 257, 294, 320, 322, 345, 422, 497, 499. See also Sociology and private law Weiler, Joseph H.H., 394, 457 Welch, Jack, 373 Welfare state contract law and, 188–91 in Germany, 199 material justice in private law, welfare state model of, 194, 200–3 welfare economics, 40, 83–4 Wells, Harwell, 126, 127 White, Harrison Colyar, 333 White Paper on European Governance, 442, 458, 461

Index Wieacker, Franz, 11, 112, 113, 118–23, 124, 126, 128, 194–5, 196, 197–200, 203–4, 258, 264–5, 444. See also Legal history; Material justice in private law Wielsch, Dan, 484–5 Wietho¨lter, Rudolf, 194–5 Wilhelmsson, Thomas, 172, 181, 188–91. See also Democratization of private law Williamson, Oliver, 30, 63, 72–3, 74, 77–8, 84–9, 93–4, 139, 238–9, 250, 276–7, 317–18, 319, 321, 322, 323, 324–9, 331–2, 333, 337–8, 366, 397, 398, 406, 505, 507, 508–9, 511. See also Institutional economics; Organizational contracts Windscheid, Bernhard, 105 Wirtschaftsdemokratie (economic democracy), 254–5 Wisdom of the crowds, 14–15 Wittgenstein, Ludwig, 143 World Bank, 117, 427

541

World Trade Organization (WTO), 309 Wright, Aaron, 303 Wrigley, William Jr., 371 Yahoo, 308 Yale University, 396, 404, 405 Zeitlin, Jonathan, 468, 469 Zimmermann, Reinhard, 115, 120, 124 Zingales, Luigi, 127 Zuckerberg, Mark, 370 Zumbansen, Peer, 28, 309 Zweigert, Konrad, 113–14, 117, 175, 437–9, 441, 443–6, 447, 448, 453. See also Functional method in private law