Private Orderings

By Lisa Bernstein

SIOE members might be interested in a recent symposium issue of the Journal of Legal Analysis on Private Orderings that contains papers from a conference “sponsored by the Centre for Corporate Reputation at the University of Oxford, Saïd Business School, in September 2014. Through their work, the authors explore the ways that legal and extralegal rules and institutions, networks, reputation, and social capital interact to shape regimes of private ordering.” As Lisa Bernstein, Alan Morrison and J. Mark Ramseyer explain in their introduction to the issue:

“In The Medieval Law Merchant: The Tyranny of a Construct, Emily Kadens argues that although private ordering may indeed be a powerful force, the classic example used to illustrate its promise, the “story” of the medieval law merchant, is nothing but a myth. It is, of course, a widely accepted myth that continues to influence the development of commercial law. Kadens traces the origin of the idea of a uniform and universal merchant-created custom to the seventeenth century. She introduces evidence that casts doubt on the traditional account of medieval trade, and provides an alternative account of the way medieval merchants did business. Kadens demonstrates that merchants did not conduct transnational trade during the middle ages through a spontaneous private order. Rather, they relied on a mix of governmental actions, individual intermediaries, private institutions, and networks of trading relationships. Town governments heavily regulated sales, and merchants expected to be bound by the town's laws—laws that foreign traders learned through local information brokers, such as innkeepers, notaries, and sales brokers. These local intermediaries also introduced foreign traders into local exchange networks and thereby enabled them to do business without any uniform and universal law merchant.

Mark Ramseyer and Lisa Bernstein make explicit the roles played by networks and social capital in securing compliance with the law and in supporting commercial exchange (roles that were implicit in Kadens’ description of medieval commerce). In Social Capital and the Formal Legal System: Evidence from Prefecture-Level Data in Japan, Ramseyer, draws on verifiable proxies for social capital across prefectures in Japan, and explores the connection between levels of social capital and citizens’ propensity to keep their commercial promises and comply with legal mandates. He uses the data to “identify environments where social norms both constrain behavior and substitute for judicial enforcement.” He finds that where “social capital is high people do indeed more willingly comply with social norms.” They pay their debts, comply with legal mandates, and are in general less litigious than individuals in contexts with lower levels of social capital.

In Private Ordering, Social Capital and Network Governance in Procurement Contracts: A Preliminary Study, Bernstein draws on social capital theory to better understand contractual relations between original equipment manufacturers in the mid-west and their suppliers. She explores the ways that contract provisions, contract administration mechanisms, and other formal structures created by buyers and suppliers interact with the forces created by repeat dealing, relational social capital, and the positions of buyers and suppliers in the network of relevant firms (structural social capital), to support the creation and maintenance of cooperative contractual relationships. She demonstrates that together these mechanisms and social forces can adequately reduce shirking, bond relationship-specific investment, control opportunism, and support both joint and supplier led innovation—largely outside the shadow of the law.

Robert Scott and Alan Schwartz’s contribution, Third Party Beneficiaries and Contractual Networks, argues that recognizing the embeddedness of certain types of bilateral (dyadic) contracts in networks of relations should fundamentally change the contexts in which efficiency-minded courts give so-called third-party beneficiaries of contracts the right to sue on the contracts. Based on a large sample of cases, they observe that courts applying third-party beneficiary doctrine tend to focus on the “intent” of the contracting parties to benefit the third parties, and suggest that this inquiry focuses on the wrong normative question. In their view, courts should define the class of third-party beneficiaries entitled to sue, by looking at “whether it would [have been] ex ante profitable for the network contracting members to serve the potential beneficiary class to which the plaintiff belongs.” In turn, this inquiry would facilitate “optimal network formation and function.” Like Bernstein, they conclude that any understanding of complex dyadic contracts among sophisticated commercial actors will be highly incomplete unless understood in the context of the network of firms and individuals surrounding the contracting parties.

This blog post will be continued next week ...