In the last chapter we visited classical contract theory and considered the various challenges to it, with particular emphasis on those posed by the regulation state and welfarism. The response of many members of the judiciary and the legislature has been to try to adjust the classical model so that it better suits the goals of social policy and the marketplace of today. So, for instance, the judiciary has seen fit to provide greater protection for certain categories of people, most notably consumer, in order to mitigate the inequalities of the market place and social life. Later chapters in this book, such as those on implied terms, consideration and unfair terms, will sketch out some of the detail of how some sense of balance has been achieved during this ‘neo-classical’ period. What has emerged is a mixture of approaches in which market individualism still competes for attention with the more modern notion of consumer welfarism. However, the classical, albeit in a modified form, continues to have much influence on how lawyers approach contracts. In the minds of many contemporary academics in the field, this is an unsatisfactory development. A number have suggested that we have only tinkered with the classical model when what is needed is a rethinking of the principles which should underpin this field of law. A growing number of scholars have argued that the very relevance and legitimacy of the assumptions underpinning the classical model are in crisis.

In this chapter we seek to look at some contemporary critiques of contract which encourage us to look at contractual relationships in different ways. The strength of these various theories, and the reason why they have so much resonance in a book of this kind, is their attention to how contract is used and operates in everyday life. Commentators have expressed concern that the study and practice of law may become too narrowly based and tend to divorce itself from the general culture of which we are all a part.

Rather than seeing the function of law as being to declare how contracts ought to be, many of the approaches we will examine are based on the premise that law should reflect what constitutes ethical and workable commercial practice. The shift is described here as being from formalism to realism. The new breed of authors whose work is considered owe much to a socio-legal or realist tradition of scholarship, which takes as its starting point the need to understand how the law is received by the community it seeks to regulate.


The socio-legal movement in law was in large part a reaction against traditional approaches to studying law, which tended to focus on the importance of the rules at the expense of studying their impact. Legal formalism, with its emphasis on how things ought to be, tended to encourage the spurious idea that law is in some way autonomous, an end in itself, rather than a means to social order. By way of contrast, socio-legal scholars have sought to put law firmly in its social, political and economic contexts. They look for relationships between law, legal systems and the wider society; and ask questions about the functions and effects of legal rules.

Socio-legal scholars have argued that there should be a connection between law and the standards of everyday life if law is to retain its legitimacy. According to this school of thought, the standards by which individuals and groups actually govern their relations consist only partly of the law to be found in statutes and judicial decisions. In other words, the centre of gravity lies not in legislation nor in judicial decision, but in society itself. It is argued that ‘living law’, or the rules and norms that people in the commercial sector use to govern their contracts, may be more advanced than doctrine developed by the courts because of an ability to develop quickly in response to problems in the marketplace. In her study of the cotton industry, Bernstein (2001) has argued convincingly that a ‘private legal system’ operates to create and maintain successful co-operative contracting relationships. She has argued:

The stability of this and other cooperative-based commercial systems may also be due, in whole or in part, to the fact that social norms of honour, particularly when reinforced through group activity and a basic human desire to think of one’s self as trustworthy, are more powerful motivators of transactional behaviour than economic models of behaviour typically assume. (p. 1774)

The development of standards within industries has also been encouraged by lack of access to the courts, as contract litigation is commonly regarded as a last resort. Moreover, profits earned from relationships maintained through goodwill and the compromise of differences often outweigh damages awarded against a company that now trades elsewhere. It could be argued then, that the business community has, for reasons of perceived convenience, efficiency and cost, been virtually impelled to develop its own customs, practices and techniques designed to avoid or mitigate business or ‘legal’ risk and loss.

The judiciary has not been insensitive to the need for the law to remain relevant to practice. For example, in the seventeenth century, in order to remedy weaknesses in the common law of the time, the judges began to incorporate into it what was known as the ‘law merchant’. This was a body of relatively sophisticated rules and techniques developed for use in agreements between merchants, or in particular trades or centres of business. But the question of whether it is the law that should be sensitive to practice, or everyday practice of contracts that should be mindful of formal law, remains controversial. It is an issue that poses serious questions about the role of law and the judiciary, since for some there seems to be a growing remoteness from commercial realities on the part of the law.

It would seem that, to a large extent, business has withdrawn from contract law because of its expense, the time it takes to litigate and the irrelevance of formal to everyday notions of obligation. This is particularly the case as far as dispute resolution is concerned. The business community has come to place much greater reliance on bilateral negotiation, commercial mediation and arbitration in preference to the courts, which in turn means that the raw material from which judicial precedents are set is depleted. Some observers have gone further and suggested that the classical model would no longer be recognised in the modern world of commercial contracts. These arguments suggest that we should go beyond the material contained in most textbooks on the subject because of their propensity to focus only on the issue of what the formal law is. In short, we need to move from a position in which law is taken to be synonymous with commerce to a position where the most logical question to pose is of whether commercial exchange needs law.


In the latter half of the last century, a number of important empirical studies of the use of contract law on a day-to-day basis were undertaken which provided fertile ground for reconsideration of the relevance of classical and neo-classical models. These studies are important because they have prompted the emergence of new theories about the role of contract that help us to visualise alternatives to the traditional models. The most obvious starting point for a discussion of the lived world of contract is the work of Stewart Macaulay who was the first legal researcher to explore in a systematic way the use that the business community made of contracts. He started with the assumption that contracts had the potential to serve two key functions. The first of these is the rational planning of transactions with careful provision for as many future contingencies as can be foreseen. The second is the existence, or use of, legal sanctions to induce performance or compensate for non-performance. In his seminal work, Macaulay (1963) saw planning as involving such things as the definition of performances, the effect of defective performances and the legally binding nature, or otherwise, of the agreement. His expectations about the role that contract might play in exchanges would have been familiar to classical scholars who focused considerable attention on planning and dispute resolution. What proved innovative about his work was the response of manufacturers and lawyers to his questions about the actual use to which the contract was put.

Somewhat surprisingly, Macaulay (1963) found that business people were not very concerned about planning their transactions in detail in advance. In a later study, Beale and Dugdale (1975) found that business people in the engineering industry considered it expensive to plan in detail. This was especially the case where a dispute or loss seemed unlikely. Lengthy negotiations resulting in detailed planned contractual documents took place only where high-risk, complex, expensive items, such as aircraft, were involved. Indeed, Macaulay (1963) found that detailed negotiations at the beginning of a relationship have even been found to be a sign of mistrust. It would seem that it is good relations and profit margins rather than legal rights and duties which are uppermost in the minds of commercial contractors when they make contracts. In Macaulay’s 1963 study, most respondents discussed what constituted performance for the purposes of the contract and the effect of certain things happening during performance. But less than half negotiated the consequences of non-performance and even less gave thought to the type of legal sanctions that would apply in such situations.

Macaulay (1963) found evidence of two widely accepted norms of business practice which bound the parties and business community in ways not anticipated by the classical model with its heavy emphasis on individualism and self-interest. First, an adherence to the principle that commitments should be honoured in almost all situations and a strong feeling that one should not ‘welsh’ on a deal. Second, that one ought to produce a good product and stand behind it. Neither of these motivations was as altruistic as might at first appear to be the case. Firmly behind these norms was a sure knowledge of the commercial value of trouble-free, continuing relationships with good customers.