New Private Law Theory: A Pluralist Approach 1108486509, 9781108486507

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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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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

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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

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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

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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 soc