PREVENTIVE LAW AND INTERNATIONAL TRADE
by Matti Rudanko (1)
In the following presentation I try to bring together perspectives of preventive law, creative problem solving, relational contracting, and law and economics, with a view of developing flexible contract law tools for application especially in international trade.
(1) The first chapter deals with developing contracting skills, a most challenging task for lawyers and other professionals engaged in business contracting. The quality requirements that are encountered on this field are emphasised in the multi-cultural environment of international trade. Oddly enough, these skills are often neglected in traditional legal education.
(2) The second chapter focuses on perspectives of the so-called relational contracting, a contract law tradition with special emphasis on the contractual relationship as a phenomenon of private governance left to the parties by the state. The sphere of private governance cannot adequately be managed by traditional legal means that are to a high degree oriented to governing conflicts with the application of legal rules. Instead, more flexible tools are needed. In developing these rules, lawyers do have a key role because all of this deals very much with human relations. The role of lawyers could be manifested both in contract planning and in contractual risk management. For achieving an effective legal approach to serve these tasks, a lot can be learned from methods developed in law and economics traditions. Of course, all of this has much to do with preventive law.
(3) The third chapter tries to combine some preventive law views with traditional contract law patterns of thinking. For this purpose, a more flexible view on contract is adopted which could help both contractual planning and risk management. This requires new tools for a contract law approach, such as the concept of contract as a dynamic procedure and an open system view on contract. These views refer to the formation of the contract and other phases of the contractual relation in which no conflicts have yet arisen (the preventive law aspect) as well as to conflicts that are already at hand (the creative problem solving aspect).
1. Developing Contracting Skills
Forms and ways of co-operating in business are seen differently and changing accordingly. Employment and contracting relationships, partnerships and company sales, networking, knotworking (Y. and R. Engeström and T. Vähäaho) etc. form a constantly changing field whose border lines are becoming vague. Some products are more and more individually designed for a certain customer (co-configuration, B. Victor & A.C. Boynton) which deepens the relationship. At the same time internet sales are becoming more common, enabling an easy way to pick a different supplier for every purchase. Needs and demands vary and business actors have to be able to adjust themselves to different situations and ways to co-operate. The demand for ability to interaction increases in this kind of business reality and even more so in a globalizing world.
Traditional scientific thinking has been largely based on clear definitions. Now, we seem to have come to a phase where the other side of the coin is demanding to be seen. Besides defined systems, rules, analytical thinking and knowledge, processes, practices, intuition and skills are coming into sight. Instead of seeing the world as a linear development we may see it as a spiral which never reaches a harmonious and safe perfection but may reach a state of dynamic balance. When our goal is a dynamic balance we may with self-reflection and skills be able to feel the needs of an individual situation in specific time and space.
In the traditional world view our actions would be based on defined and generalised knowledge. When things are not any more seen as clear entities which have a certain essence, which was the starting point of the so called modern science, we begin to concentrate on transformation processes themselves (like M. Foucault) and interactions which have no core. Knotworking is a good example of such a way to co-operate: it has no centre, the knots i.e. temporary teams for a specific task are untied when they have served their purpose. Centralisation and externalisation need always continuous balancing. Tight partnering-contracts may be seen as an example of the former and outsourcing as an example of the latter - the resulting situation may in both cases be very similar.
The growing emphasis on leadership instead of management is part of the same phenomenon: leadership is more like a human skill when management is more based on status in a certain organisation. In networking kind of doing business leadership is widely needed, both inside ourselves and serving the entity and people in question. Vague and flexible working frames do not function for long if there is no trust and commitment in the market and inside firms. Human co-operation and human resources need care. Business is based on skills and expertise of flesh and blood people.
Contracting is in the centre of business, as well as of many other forms of human co-operation. Outlines and forms of business are laid down in contracting. Thus, it is also a very central area in law. In law contracting has traditionally been seen as a certain kind of legal transaction, not as human interaction. Approaches like relational contracting (S. Macaulay, I. Macneil) have pointed out the needs of long-term contract relationships. This approach has become part of transaction cost economics (O.E. Williamson). These approaches have recognised the interaction side of contracting. Besides the theoretical understanding of the meanings of interaction, what is needed in practice is interaction skills. Answers to this need represent new terms like emotional intelligence (D. Goleman) and skill-training techniques.
So called active listening is central in dialogue. In active listening one should try to make sure one has understood the other right and be able to notice also the non-verbal messages. This ability demands knowledge of differences between people´s ways to express themselves and comprehend things. This manifests on a practical level the more recent scientific understanding that our knowledge and research is always subjective, we are bound to our world views and are able to be the more objective the more we are aware of our own connections and presuppositions. In active listening we do not assume that we understand the Other. Instead of supposing, making our own interpretations we try to make clarifying questions.
Active listening is emphasised in the preventive law approach (L. Brown). When the idea is to find out what the customer wants and what her needs are to be able to make successful legal plans for her the lawyer has to pay attention and make sure she has understood the wishes correctly. The same applies to mediation, the mediator has to listen to the parties actively to be able to understand the situation and help the parties to find a suitable solution. There are same needs in contracting: to be able to lay the basis for a fruitful co-operation it is important to listen to each other actively and naturally make oneself also understood as well as possible. It takes negotiation skills to be able to make a deal which fulfills the wishes of both parties in the best possible way. Written contracts, when they are made, should serve the intended purpose and not only for example legal needs.
In the above mentioned flexible and changing ways of co-operation contracting i.e. planning, negotiating and governing co-operation and settling its conflicts, interaction skills are continuously needed as well as sensitivity to find ones way on this floating field. Research and development of the ways to manage functioning in the nowadays business world is much needed. The lack of teaching skills and not only knowledge on the university level of education has been recently recognised. Businesspeople and lawyers do not need only expert knowledge but also professional skills. Professional education should also serve practical needs and learn from practice. E.g., we should research ordering and supplying chains of firms and their ways to function in this kind of co-operation, because project enterprises (contractors and sub-contractors) feel the need for research and know-how about co-operation.
Theoretical thinking and practice are parts of the same reality. Theoretical presuppositions effect the way we see the world. The question is whether we see flexible interaction with no core, or defined and central organisations, whether we see people as egotistic seekers for own benefit or capable of win-win co-operation - or both. These assumptions effect practice largely through professional education. The other side of the coin is not seen if we have been taught to see the world through certain frames. To be able to see other sides one has to be able to question old beliefs and try to listen actively to the surrounding reality and practice.
Economic, legal and substance knowledge (for example technical) have not always been able to co-operate very successfully in business life. In order to use the know-how of all of these sciences professionals have to learn to understand the wholeness of the business project to make their professionalism serve the common purpose, to learn to talk to each other in an understandable way, to realize the value of each others´ competence and use it. From the point of view of successful business there is no logic to separate the know-how into bits and pieces and not to use them all. Risk management has been a topic of growing interest in research in the grey zone between law and economics. Co-operation skills are an important part of risk management in practice.
Besides law and economics, understanding the role of contract as a tool of interaction and a common language, requires a survey of co-operation skills i.a. with methods of communicative sciences. The challenges to this approach have increased decisively for the demands of doing business in a multi-cultural environment of international trade. As a method, also the Developmental Work Research approach which is a Finnish application of the Cultural-Historical Activity Theory for studying and developing work practices, could be used.
2. Relational Contracting; Law and Economics
Relational contracting -views are based, i.a., on the separation between traditional rule-oriented contract law and contracting-oriented business reality, with the idea of these two spheres having practically nothing in common. (2)
The basics of contractual relations such as the prerequisites of mutual reliance form an area of private governance that cannon be managed in courts specialized in conflict solution. Mutual reliance and the continuity of business relationships are considered much more important to business practice than the accurate compliance with contracts and the application of contractual liability rules. In fact, the rigid application of the contract and reference to the legal dispute settlement, especially court proceedings, is often a disastrous alternative from the point of view of business activity.
Relational contracting tradition tries to develop theoretical models for planning good contracts, with a view of a possibility of supplementing the contract outside the court in need. Social and psychological techniques, engineering skills and a keen sense of economics are needed to achieve these goals. Nowadays, only juristic techniques are applied in lawyering and legal education. Much has to be learned also from the law and economics tradition (and the old method of legal reasoning on the basis of the so-called real argumentation). Let us think for example about the detailed economic analysis of the effective risk bearer in law and economics and its application on contract law liability rules.
The relational contracting view confronts the pivotal position of rules and courts in traditional legal thinking, its normative rationality and legal centralism with private governance manifested in practical contracting. This difference is expressed e.g. in the views on re-negotiating in long-term contracts under changed circumstances. While traditional contract law considers re-negotiation as an obligation of the parties in changed circumstances that tend to bring about a breach of the contract, relational contracting sees that kind of a situation as a normal phase of adaptation of the contract. In this view, re-negotiation clauses as an integral part of the contract making it a flexible tool for the cooperation between parties and achieving their mutual purposes.
The rule-oriented legal centralism of traditional legal thinking is expressed in its typical patterns of problem solving. The facts are transformed into "legal facts" in order to apply legal rules to them. For example legal theories on good faith and distribution of risks between partners, although more flexible than classical liability rules, have a character of legal centralism. The rules seem to work rather for the system than for the parties, and legal security (predictability) is a stronger value than understanding the cooperative elements of a relationship.
It is obvious that the legal protection provided by the court system as a last resort is important for business relations. However, the binding force of contracts is secured in business with private means rather than by referral to the official court system the role of which is considered insignificant. The private guarantees of the binding force of contracts include such arrangements as making use of specific assets (such as customer relations, supply, transport, service and other systems and research cooperation) for mutual goals, credible (bilateral) commitments ("changing hostages"), investment in a common project, self-redress, changing business secrets, cross-ownership, gentlemen´s agreements, questions of image, and also (horizontal or vertical) integration between undertakings. (3)
3. Flexible Views on Contract (4)
In a traditional legalistic view, aspects concerning the general level like social and macroeconomic factors cannot be taken into account in individual case argumentation. E.g. market functioning is in this view irrelevant with respect to the relationship between the parties. But let us take an object of comparison from the securities markets. If we introduce remedies like recovery of damages in securities markets situations, as the courts have done in many countries, it is, perhaps, worth considering whether new tools of argumentation could be useful in solving conflicts. Primarily I think a more flexible attitude concerning general principles of contract and tort law. E.g., an open system view (5) on legal relationships would allow general level arguments to be taken into account, such as the efficacy of the market, as factors affecting the liability question.
The liability in contract law for information given in marketing has been developing in Scandinavian and Finnish law, and the provisions in the Finnish Sale of Goods Act (1987) on this kind of liability can obviously be seen as an expression of a general principle. (6) A similar tendency in securities markets regulation could produce arguments for the same kind of extension of contract law rules to information given in connection with acts like general bids closely related to offers or other acts regulated traditionally in contract law.
In business, it is useful not to draw too sharp boundaries around a contractual relationship, i.e., the privity of contract doctrine cannot be maintained in all business situations and especially not in international trade with points of reference to many legal cultures. This means, e.g., that the question of the final conclusion of the contract should be approached flexibly and taking into account differences in legal thinking between different countries. As it has been put by J. Pöyhönen (7), a Finnish legal scholar, the binding force of the contract develops step by step during contract negotiations and all the preliminary phases of the contractual relationship. According to this view, called also the concept of contract as a dynamic procedure, the beginning (and ending) of full binding force of the contract cannot be attached to any fixed point of time.
Respectively, it is useful to avoid too precise definitions of the circle of persons bound by the contract, because as a rule in business, many parties are connected with an ordinary contractual project with several contractors, sub-contractors and suppliers involved. The responsibilities of these parties should perhaps not be differentiated on the mere basis of existing or non-existing contractual relations between them. Formal contractual ties may depend on a chance and be understood differently by parties representing different legal systems. Thus, it would be useful to have the possibility of extending contractual effects to persons formally not parties to the contract.
Among the trends towards lowering the "privity of contract" fence there is the flexible attitude in Scandinavian contract law concerning the use of the "expectation" and "reliance interests", i.e. standards for fixing damages in connection with valid and, respectively, void contracts. According to widespread opinions, these standards must not be applied in a schematic manner but taking into account real interests of parties.
The international Critical Contract Law tradition has also elaborated tools designed to take into account individual factors affecting the role of parties to a contractual relationship, especially those pertaining to economic, social or other imbalances in their contractual powers. Scandinavian doctrine has developed an offspring of this tradition, called Social Contract Law. (8)
For example, the adjustment of contracts, often seen as a phenomenon pertaining to social contract law, includes an assessment of the legal relationship as a whole, the protection of the weaker party, conscionability, preservation of the purposes of the parties and the balance between them. It may also be noticed that the recent reform of court proceedings in Finland has focused on the possibility of an out-of-court reconciliation between parties. This possibility is emphasized also in the Reflexive Law tradition (Günther Teubner). The development of restructuring of debt systems in various countries is a sign of an increased tendency of taking into account social and economic interests in law, too.
1. LL.D., professor of private law of Helsinki School of Economics and Business Administration. Leader of the project of the Academy of Finland on the behaviour and interests of parties to business relationships. He has focused in contract law and financial markets law. His academic dissertation was about breaches of contractual duties of the employer in building contracts, and he has written books on contractual liabilities in housing production, on product liability, banking law, and securities markets law. He is also a co-editor (general civil law) of the Finnish Legal Encyclopaedia (Encyclopaedia Iuridica Fennica). In his teaching, he has applied preventive law and relational contracting views.
2. On the basics of the relational contract doctrine, see Macaulay, Non-contractual Relations in Business: a Preliminary Study (1963) 28 American Sociological Review 55, dito, An Empirical View of Contract, (1985) Wis. L.Rev. p. 465, Macneil, The Many Futures of Contracts, (1974) 47 S. Cal. L.Rev. p. 691, dito, Contracts: Adjustment of Long-Term Economic Relations under Classical, Neoclassical, and Relational Contract Law (Northwestern University Law Review 72 (1978) p. 854), and dito, The New Social Contract (New Haven, Conn.: Yale University Press 1980). See also Whitford, Ian Macneil's Contribution to Contracts Scholarship, (1985) Wis. L.Rev. p. 545, and Gordon, Macauley, Macneil, and the Discovery of Solidarity and Power in Contract Law, (1985) Wis. L.Rev. p. 565.
3. See Cooter Ulen, Law and Economics (2nd Ed. 1997) p. 196 and 200, Macauley (1985) Wis. L.Rev. 466, 475 and 477, and Charny, Non-legal Sanctions in Commercial Relationships, (1990) 104 Harv. L.Rev. p. 392.
4. Even the recent feminist law research on contract law has produced new flexible tools for efficient legal argumentation and problem solving also in business relations. See e.g. Wheeler - Shaw, Contract law (1994), p. 105 107 and 125. On feminist views in contract law see also Frug, Postmodern Legal Feminism (New York: Routledge 1992) p. 116. These views cannot, however, be presented in detail in this discourse.
5. The open system view on contract was introduced by me in the book "Pankkiasiakkaan ja pankin oikeussuoja" (The Legal Protection of a Bank's Customer and the Bank; Helsinki: Publications of the Helsinki University Institute of International Economic Law 21, 1995), see p. 112 and 280 et seq.
6. See Bärlund, Köplagens marknadföringsregler och formbundna avtal (The Marketing Rules in the Sale of Goods Act and Contracts Subject to a Specified Form; Tidskrift, utgiven av Juridiska Föreningen i Finland 1992 pp. 1 24).
7. In his study Sopimusoikeuden järjestelmä ja sopimusten sovittelu (The System of Contract Law and the Adjustment of Contracts, 1988, with an English summary); see e.g. p. 214 et seq.
8. On Critical Contract law and its Scandinavian implications, see Unger, The Critical Legal Studies Movement (Cambridge, Mass.: Harvard University Press 1983), Teubner, The Transformation of Law in the Welfare State, in: Teubner (ed.): Dilemmas of Law in the Welfare State (Berlin New York: Walter de Gruyter 1986) p. 3, Wilhelmsson, Questions for a Critical Contract Law and a Contradictory Answer: Contract as Social Cooperation, in: Wilhelmsson, (ed.): Perspectives of Critical Contract Law, 1993, p. 9 et seq. See also Wheeler Shaw 1994 p. 112.