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Contracts & The Law

February 25, 2010

For many of us, if we think about the law at all, we associate it with principles of equity, fairness and predictability. It offers a foundation for social interaction at both individual and organizational level. The rule of law – and hence respect for the law – is fundamental to social integration.

Yet in reality, the law has also favored and been the tool of those with power. Lawmakers (typically drawn from, or representing, the powerrful) have often created rules that reflect or protect their interests, at both national and international level. Shifts in power are typically accompanied by changes in the law – and it has often been the case that attempts by ‘the old regime’ to use laws as a means of enforcing compliance have resulted in rebellion or revolt. There comes a point at which laws must have some level of social acceptance for them to work. And in addition, people must feel that there is broad equality of access to the law, that the possibility of recourse is real.

Contracts – as in some respects an extension of the law – follow similar principles. Most of us would agree that they should deliver clarity to relationships and the responsibilities of the parties, and predictability to the consequences of specific actions or inactions. Many of us would hope that they also represent principles of equity and fairness, in order to bind the parties together as willing partners, rather than some form of master / slave relationship. And it is here, of course, that contracts are coming under growing pressure, because far too often they are being used as instruments of power. Dominant companies and dominant cultures frequently impose terms and conditions that are clearly self-interested (and reject those that they did not invent, do not understand, or feel may shift the balance of power – for example, UNCISG). Emerging nations flex their muscles by acting selectively in their attitudes to contract terms, justifying their actions because they see these as unfair and reflecting power imbalances – for example, the readiness of some countries simply to override contractual rights (think Venezuela, Russia), or to turn a blind eye to areas such as breaches of intellectual property rights. These attitudes are compounded by a very real inequality of access, driven by the costs associated with litigation. There is no question that in most societies today, the law favors those with money and power.

Establishing greater balance is important not only because it is morally right, but also because the interests of both parties to a contract must be respected if the system itself is to survive and trade is to flourish.  Just as the law has to adpat to changing social, political and economic realities, so must contracting. That is why debates over issues like the purpose of contracts is important. Those discussions must also extend to cover other topics, for example:

  •  contract standards (is it right that individual big corporations can dictate terms and conditions, or should there be industry standard frameworks, with freedom to negotiate certain principles?)
  • access to the law (is it right that lawyers remain dominant in the contracting process, with the implications this has to cost, understanding and special interests?)
  • principles of dispute resolution (already we see a trend to move away from the courts. How far should this go and what alternatives should be established to ensure that the system is not simply hijacked by other – or even exisiting – special interest groups?)

Today’s system of contracting is not yet broken, but it is clear (to me at least) that it is in relatively urgent need of reform. At present, aspects of that reform are occurring, but in a relatively unplanned and piece-meal fashion. We have entered an era where the ability of individuals and companies to engage in trade across jurisdictional boundaries is demanding a contracting system that supports clarity and ensures equity, fairness and predictability. For many engaged with the law, this is threatening – it challenges their core knowledge, their sources of income, their instincts to protect familiar institutions. At times, it may also involve questioning the perceived interests of their masters (the large corporations, the politically powerful and wealthy). Yet at some point change will occur – surely it is better that this is through consesnus and planned debate, rather than a result of suppressed frustration?

I am excited that these debates are beginning. I hope many more will become involved and put their weight behind the development of new contracting principles and methods that support a code of trading standards and practices fit for the 21st century.

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