The Organizational Contract

From Exchange to Long-Term Network Cooperation in European Contract Law

Stefan Grundmann, Fabrizio Cafaggi

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317022176
• Edition: 1
• Topic: Droit
• Subtopic: Droit commercial

This book introduces and develops the paradigm of the organisational contract in European contract law. Suggesting that a more radical distinction should be made between contracts which regulate single or spot exchanges and contracts that organize complex economic activities without creating a new legal entity, the book argues that this distinction goes beyond that between spot and relational contracts because it focuses on the organizational dimension of contracting and its governance features. Divided into six parts, the volume brings together a group of internationally renowned experts to examine the structure of long-term contractual cooperation; networks of contracts; knowledge exchange in long-term contractual cooperation; remedies and specific governance rules in long-term relationships; and the move towards legislation. The book will be of value to academics and researchers in the areas of private law, economic theory and sociology of law, and organizational theory. It will also be a useful resource for practitioners working in international contract law and international business transaction law.

PART I Overview

1 The Contractual Basis of Long-Term Organization – The Overall Architecture

Stefan Grundmann, Fabrizio Cafaggi and Giuseppe Vettori

DOI: 10.4324/9781315554952-1

Introducing the Paradigm of the Organizational Contract

This book broadly introduces the paradigm of the organizational contract in European contract law – which, of course, is not completely unheard-of, but not really developed either, neither in national law nor in European contract law. Bits and pieces of this paradigm are known. There are some particular (restricted) discussion circles, namely in the realm of networks (see section below on the Network Character and Part III), where there is solid ground in economic theory and governance research, namely with respect to long-term contractual relationships (see section below on the Long-Term Character and Part II), and problems such as information in long-term and networks’ contractual relationships are seen as highly important in practice (see section below on the Long-Term Character and Part IV). There is, however, no paradigm of an ‘Organizational Contract’ in national or European contract law.

Such an ‘organizational contract’ is, of course, not a contract type in the traditional sense within a codified system – one for each type of one particular characteristic duty such as the delivery of a good or a right (sale of goods or of rights) or the providing of the use of a good or right (rental or lease contracts) or of a particular service (works’ or services contracts) etc, in most cases with an obligation to pay imposed on the other party. Rather the concept of ‘organizational contract’ describes a phenomenon and tries to discuss it in its entirety, conceiving the different aspects as core elements which interact. The phenomenon is – broadly speaking – that within contracts a more radical distinction should be made between those which regulate single or spot exchanges and those that organize complex economic activities without creating a new legal entity. This distinction goes beyond that between spot and relational contracts because it focuses on the organizational dimension of contracting and its governance features. ¹

¹ See O. Williamson, ‘Transaction-Cost Economics: The Governance of Contractual Relations’ 22 Journal of Law & Economics 233–261 (1979); and O. Williamson, Mechanisms of Governance (New York: Oxford University Press, 1996) ch. 4.

The interaction of heterogeneous elements of contract law and theory is important, because the links between the different elements are seen as being inseverable and characteristic. In terms of traditional contract law, one could say that elements of a specific part of contract law (types of contracts) and of a general part of contract law (general for all types of contracts) interact – namely parts of the law of agency, of service contracts and parts of a more generic kind, such as plurality of contracts, all these complemented by many more elements which are little discussed as such and which certainly are not discussed in their interplay. While this phenomenon is certainly not so recent and while it is so important that, in fact, it has to be considered as the second, equally important, pole of contract law besides mere exchange contracts, discussion on this second pole is largely lacking, and still, the organizational contract has become more important as a phenomenon and in the refinement of the clauses used over the last few decades. ² In its rather holistic approach, research on the organizational contract, of course, owes a lot to governance research whose characteristic is, among others, the holistic approach, ³ and more particularly to contract governance research which at last seems to be evolving over the last few years as an area in its own right. ⁴

² See, for instance, M. Klausner, ‘Governance Mechanism in Long-Term Contracts’, in S. Grundmann, F. Möslein and K. Riesenhuber (eds), Contract Governance – Dimensions in Law and Interdisciplinary Research (Oxford: Oxford University Press, forthcoming). ³ Ground-breaking Williamson (1979), n 1 above; good survey on the booming development of the approach – namely in the 80s and 90s – in P. Behrens, ‘Corporate governance’, Festschrift for Drobnig (Tübingen: Mohr Siebeck, 1998) 491–506; K. Hopt, H. Kanda, M. Roe, E. Wymeersch and 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 and L. Renneboog (eds), Corporate Governance Regimes – Convergence and Diversity (Oxford: Oxford University Press, 2002); and (mainly US and economic theory) A. Shleifer and R. Vishny, ‘A Survey of Corporate Governance’ 52 Journal of Finance 737–83 (1997); today, T. Clarke (ed.), Corporate Governance – Critical Perspectives on Business and Management, 5 vols (London/New York: Routledge, 2005); K. Hopt ‘Comparative Corporate Governance: The State of the Art and International Regulation’ 59 American Journal of Comparative Law 1–73 (2011); J. Lieder, ‘Legal Origins und empirische Rechtsvergleichung – Zur Bedeutung des Rechts für die Entwicklung von Kapitalmärkten und Corporate-Governance-Strukturen’ 109 Zeitschrift für vergleichende Rechtswissenschaften 216–64 (2010). For the holistic character of governance discussion and research, see in more detail F. Möslein, ‘Contract Governance within Corporate Governance’, in this volume below 297–319. ⁴ See F. Möslein and K. Riesenhuber, ‘Contract Governance – A Draft Research Agenda’ 5 European Review of Contract Law 248–89 (2009); Grundmann, Möslein and Riesenhuber (eds), n 2 above; A. Habel, Contract Governance – eine verfassungsrechtliche und rechtsdogmatische Analyse zu vertraglichen und vertragsrechtlichen Regelungsstrukturen in Belangen des Gemeinwohls (Baden-Baden, Nomos, 2012); and in this volume below § 12 (Möslein, last n above); particularly close before, namely in the English literature, J. Brownsword, Contract Law – Themes for the 21st Century (2nd edn, Oxford: Clarendon, 2006); H. Collins, Regulating Contracts (Oxford: Oxford University Press, 1999).

Three elements would seem to be the cornerstones of the architecture:

Duration: This is, first, that the backbone of the organizational contract is its long-term character, its increased stability, as opposed to its characteristic of exchange. With the peculiarities of long-term relationships, the organizational contract may even be more distinct from the exchange contract than from other areas of the law, namely organizations such as companies. The phenomenon of duration is, of course, not monolithic. Even in exchange contracts, there are simultaneous and deferred exchanges (with a time span between formation of the contract and execution), the latter already creating a problem of duration which calls for some governance responses. There are simple and complex exchanges. The phenomenon of (complex) long-term contracts in its largest sense, however, encompasses more. Typically, in long-term contracts, contrary to what is the case in simple exchange contracts (‘discrete contracts’), core objects cannot be defined in advance, not even the object of performance itself, or only very vaguely. Long-term contracts – as opposed to short-term contracts – often create the problem that even the object of performance needs to remain open, because the future vicissitudes of the relationship are ignored by the parties. A second distinction largely runs parallel, but has its own merits nevertheless. This is the distinction between discrete contracts and relational contracts, the latter being characterized by a largely increased interdependence of performances – which again implies that the degree of risk sharing is much higher than in traditional exchange contracts and that therefore each party may have additional tools beyond legal sanctions for reacting to (‘punishing’) poor performance by the other party.

Number of participants: The second cornerstone would seem to be that the organizational contract, while in principle also possible between two parties only, would mostly come with a plurality of parties, either as linked contracts or (more seldom) as a genuine multiparty contract. Therefore one traditional foundation of contract law, privity or relativity of contracts, the credo that there are effects in principle only between two parties, is questioned in relation to linked contracts among heterogeneous parties.

Finally, the relationship to company law: If really the ‘organizational contract’ forms a second pole besides the traditional exchange contract, not only are we faced with a new pole in contract law, adding a lot of heterogeneity to contract law and its foundations – from ‘exchange to cooperation’ or more precisely: cooperation supplementing exchanges and common activities as a second paradigm of contract law – but yet another comparison would seem to be needed. If organization is traditionally associated with the law of organizations and companies (so-called ‘hierarchies’) and exchange with the law of contracts, the concept of an organizational contract would certainly raise the question of its relationship with company law; it would need to be compared to core features of company law. The third ‘architectural’ question would therefore be what distinguishes the organizational contract from organization via company law, and which are the parallels? Considering cross-sections between company and (this branch of) contract law might even be a field of inquiry in its own right. ⁵ Along these lines two important issues need to be addressed. Is it possible and desirable to partition assets of the contracting parties so that the resources for the common project will be separated from those deployed for individual projects? Furthermore can contracts with limited liability be created similarly to the partition conventionally adopted in company law where both entities with and without limited liability coexist?

⁵ S. Grundmann, ‘On the Unity of Private Law – From a Formal to a Substance Based Concept of Private Law’ European Review of Private Law 1055–78 (2010); focusing rather on the interplay than on a comparison, Möslein, n 3 above, 297–319.

It should be emphasized that organizational contracts are characterized by something more than pure exchanges. Parties can develop a common project (creation of a platform for logistics, creation of a new patent) with the organizational contract. Both in linked contracts and in multiparty contracts, parties often combine exchanges of information and performances with activity in common. For example in research and development contracts, parties perform activities together, but little or no exchanges take place. Slightly differently in supply chains, there are exchanges, but they are instrumental to the production of a final product. Therefore, there is not only the divide between spot contracts and long-term contracts, but – running often in parallel – also the divide between exchange contracts and contracts for cooperation, the latter often even a mix of several types of duties and contracts.

The Long-Term Character of the Organizational Contract

High Practical Importance, Limited Research and Legislation

Among the important trends in market economies of the last decades, transition from the manufacturing age to a services age (or a combination of both) would seem to be a particularly meaningful one. It seems to be the case that in all modern market economies, the share of services nowadays equals and often exceeds that of industrial production, ⁶ and that the distribution of industrial production and the networks needed for this typically include an effective sharing of services as well. Ever more sales of goods are complemented by services both at time of sales and after sales. Two types of interdependencies are growing

⁶ See, on a summary basis, P. Love and R. Lattimore, in OECD Insights: International Trade: Free, Fair and Open? (OECD Publishing: 2009), 51.

1. functional interdependence between goods and services exchanged
2. structural interdependence along the supply chain among the different knots providing services in addition to goods (when manufacturers provide know-how to suppliers in order to meet quality standards).

Network contracts are long-term relationships characterized by strong interdependence among contractual performances and a shared objective. The two are obviously linked. It is the existence of a shared objective that makes several sales interdependent or more interdependent – even though no common scope (with profit sharing) is formulated. The existence of a shared objective, like exporting a portfolio of products under the same trademark abroad may make production of unrelated goods interdependent. The puzzling question concerns how the governance design is affected by the pursuit of the shared objective even when performances remain separate. Interdependence goes well beyond specific investments and offers an opportunity to revise Williamson’s theoretical insights to a much broader range of cases.

In the following, the distinction is made between shared objectives and common objectives/purposes, although not all national laws (or European Company Law) draw the line (exactly) the same way – common purpose implies the agreement to have inputs pooled and share profits according to a pre-established ratio, a shared objective implies, primarily, only a common interest (and at least no agreement to share profits): all parties want the network of contracts to succeed. On the other hand, the law can infer (and under many national laws does infer) that, given this shared interest, there are implied duties (i) at least not to obstruct this shared interest (duty to abstain), or also (ii) to promote it actively.

Against this background, it would seem as if transnational legislation and also research rather lagged behind: the contract type paradigmatic of the industrial era, the sales contract, has been the object of extensive international and supranational harmonization, while the same is not true for services contracts. The EC Sales Law Directive of 1999 and the draft for an (Optional) Common (European) Sales Law of 2010 followed by a regulation proposal on EU Sales stand out. ⁷ And on the international level, the CISG was clearly seen as an overall model for contract law more generally. ⁸ The EC Services Directive clearly is not of parallel importance for a services contract law, in fact, its importance as a model for contract law is more than limited. ⁹ A parallel act to the CISG on the side of services contracts is missing altogether. The picture is similar at the national level in many countries, for instance in the large re-codification endeavour of the German Schuldrechtsmodernisierung, in which the general regime on breach of contract has been completely modelled after the (international regime of the) sales contract (transposing, it is true, the EC Sales Directive). Long-term (services) contracts received little attention, basically in one rule on termination (sec. 3...