IMPLICIT D I M E N S I O N S OF C O N T R A C T This collection of essays, derived from an international workshop, explores the significance of the implicit understandings and tacit expectations of the parties to different kinds of contractual agreements, ranging from simple discrete transactions to long-term associational agreements such as those formed in companies An interdisciplinary and comparative approach is used to investigate how the law comprehends and gives effect to the these implicit dimensions of contracts The significance of this enquiry is found not only in relation to the interpretation of contracts in many different contexts, but more fundamentally in how the social practices involved in making contracts should be analysed and comprehended International Studies in the Theory of Private Law This series of books edited by a distinguished international team of legal scholars aims to investigate the normative and theoretical foundations of the law governing relations between citizens The context for such investigations of private law systems is set by important modern tendencies in systems of governance The advent of the regulatory state marks the withdrawal of the state from direct control and management of social and economic activity, and the adoption instead of procedural regulation and co-regulatory strategies that promote the use of private law techniques of ordering and self-regulation in social and economic interactions between citizens The tendency known as globalisation and the corresponding increases in cross-border trade produce the responses of transnational regulation of commerce and private governance regimes, and these new systems of governance challenge the hegemony of traditional national private law systems Furthermore, these tendencies towards transnational governance regimes compel an interaction between different national legal traditions, with their differences in culture and philosophy as well as their differences based upon variations in market systems, which provokes questions not only about competing policy frameworks but also about nature and adequacy of different kinds of legal reasoning itself The series welcomes a diverse range of theoretical approaches in the examination of these issues including approaches using socio-legal methods, economics, critical theory, systems theory, regulation theory, and moral and political theory With the aim of stimulating an international discussion of these issues, volumes will be published in Germany, France, and the United Kingdom in one of the three languages Editors Gunther Teubner, Frankfurt University Christian Joerges, European University Institute Hugh Collins, London School of Economics James Whitman, Yale Law School Antoine Lyon Caen, Universite de Paris Volumes published in German by Nomos Verlagsgesellschaft, Baden-Baden Peer Zumbansen, Ordnungsmuster im modern Wohlfahrtsstaat: Lernerfahrungen zwischen Staat, Geseelschaft und Vertrag (2000) Dan Wielsch, Freiheit und Funktion: Zur Struktur- und Theoriegeschichte des Rechts der Wirtschaftsgesellschaft (2001) Implicit Dimensions of Contract Discrete, Relational and Network Contracts Edited by DAVID CAMPBELL HUGH COLLINS JOHN WIGHTMAN •HARTPUBLISHING OXFORD AND PORTLAND, OREGON 2003 Hart Publishing Oxford and Portland, Oregon Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 5804 NE Hassalo Street Portland, Oregon 97213-3644 USA © The Editor and Contributors jointly 2003 The authors have asserted their right under the Copyright, Designs and Patents Act 1988, to be identified as the authors of this work Hart Publishing is a specialist legal publisher based in Oxford, England To order further copies of this book or to request a list of other publications please write to: Hart Publishing, Salter's Boatyard, Folly Bridge, Abingdon Road, Oxford OX1 4LB Telephone: +44 (0)1865 245533 or Fax: +44 (0)1865 794882 e-mail: mail@hartpub.co.uk WEBSITE: http//www.hartpub.co.uk British Library Cataloguing in Publication Data Data Available ISBN 1-84113-349-3 (hardback) Typeset by Hope Services (Abingdon) Ltd Printed and bound in Great Britain on acid-free paper by Biddies Ltd, www.biddles.co.uk Freface This collection of essays explores the significance of the implicit understandings and expectations of the parties to different kinds of contracts, ranging from simple discrete transactions to long-term associational agreements such as those formed in companies An interdisciplinary and comparative approach is used to investigate how the law comprehends and gives effect to these implicit dimensions of contracts The significance of this enquiry lies not only in relation to the interpretation of contracts in many different contexts, but more fundamentally in how the social practices involved in making contracts should be analysed and comprehended The genesis of this collection was in an international workshop held at the London School of Economics in October 2001 The editors are grateful to the Modern Law Review for a grant that enabled the participants to attend the workshop, and to the Research Committee of the Cardiff Law School and the ESRC Research Centre for Business Relationships, Accountability, Sustainability and Society for supplemental financial assistance We are also grateful to all the participants who commented extensively on the original versions of these papers, and regret that space precludes publication of all those contributions David Campbell Hugh Collins John Wightman Contents List of Contributors Introduction: The Research Agenda of Implicit Dimensions of Contracts Hugh Collins Discovering the Implicit Dimensions of Contracts David Campbell and Hugh Collins The Real and the Paper Deal: Empirical Pictures of Relationships, Complexity and the Urge for Transparent Simple Rules Stewart Macaulay ix 25 51 After Investors: Interpretation, Expectation and the Implicit Dimension of the 'New Contextualism' Roger Brownsword 103 Beyond Custom: Contract, Contexts, and the Recognition of Implicit Understandings John Wightman 143 A Comparison of British and American Attitudes Towards the Exercise of Judicial Discretion in Contract Law William C Whitford 187 Reflections on Relational Contract Theory after a Neo-classical Seminar Ian R Macneil 207 Discretionary Powers in Contracts Hugh Collins Recontractualising the Corporation: Implicit Contract as Ideology Paddy Ireland 219 255 viii Contents 10 Implicit Contracts, Takeovers, and Corporate Governance: In the Shadow of the City Code 289 Simon Deakin, Richard Hobbs, David Nash and Giles Slinger 11 Expertise as Social Institution: Internalising Third Parties into the Contract Gunther Teubner 333 12 Implicit Dimensions of Contract and the Oppression of Minority Shareholders Christopher Riley 365 Index 397 List of Contributors Roger Brownsword, Professor of Law, University of Sheffield David Campbell, Professor of Law, Cardiff Law School and ESRC Research Centre for Business Relationships, Accountability, Sustainability and Society Hugh Collins, Professor of English Law, London School of Economics Simon Deakin, Robert Monks Professor of Corporate Governance, Judge Institute of Management, University of Cambridge Richard Hobbs, Researcher, Faculty of Law, University of Cambridge Paddy Ireland, Kent Law School, University of Kent at Canterbury Stewart Macaulay, Malcolm Pitman Sharp Hilldale Professor, Theodore W Brazeau Bascom Professor of Law, University of Wisconsin Law School Ian R Macneil, John Henry Wigmore Professor of Law Emeritus, Northwestern University School of Law David Nash, Research Fellow, Judge Institute of Management, University of Cambridge Christopher A Riley, Department of Law, University of Durham Giles Slinger, Associate, AT Kearney and Co, London Gunther Teubner, Professor of Law, Johann-Wolfgang-GoetheUniversitat, Frankfurt am Main William C Whitford, Emeritus Professor Law, University of Wisconsin Law School John Wightman, Kent Law School, University of Kent at Canterbury 388 Christopher Riley approach the section on a 'case by case' basis.64 A recurrent theme, however, picked up from Ebrahimi, was that whilst the articles formed the starting point in analysing the petitioner's interests, these might not 'fully reflect the understandings upon which the shareholders [were] associated.'65 There were, then, detailed factual investigations (and lengthy case reports) into the history of the parties' relationship, and the informal understandings and expectations that co-existed with the formal constitutional arrangements The shared, articulated understandings of the parties about such matters as participation in management, dividend policy, pre-emption rights, future ownership of the company, and the like, could all be taken into account in actions under section 459.66 These informal agreements became subsumed under the rubric of 'legitimate expectations' It became clear, however, that in undertaking these sorts of investigations into the parties' expectations, the courts did stray beyond that which was agreed, albeit informally Often, the expectations of the parties were plausibly in conflict, and the courts' holding that one set of expectations was reasonable was based on some (rarely articulated) judicial sense of what is commonplace or conventional 67 Moreover, it is also arguable that, in moving towards this enforcement of the 'full' or 'real' bargain between the shareholders, the courts were in fact continuing to qualify express provisions within the articles This was most apparent in relation to the courts' approach to 'buy out' provisions in the company's constitution Faced with the threat of minority actions under section 459, majorities commonly try to settle those actions by offering to purchase the minority's shares Moreover, some shareholders expressly plan for such an eventuality by inserting provisions—in the articles or some separate shareholders' agreement— specifying the terms on which a shareholder who wants to leave should sell her shares, or even requiring her to sell her shares in particular circumstances.68 But the courts were ready to ignore such provisions, holding that they should not apply where unfair prejudice was 64 Neill LJ, Saul D Harrison [1995] BCLC 14,30 « Hoffmann LJ, ibid, 19 66 See Riley, n above, 793-4 67 See for example Re Elgindata Ltd [1991] BCLC 959, where the court had t o decide a m o n g s t competing interpretations of reasonable expectations regarding standards of managerial competence 68 Such as in the event of her ceasing to be a director Implicit Dimensions of Contract and Oppression of Shareholders 389 proven.69 In Virdi v Abbey Leisure?0 for example, the Court of Appeal refused to apply the valuation machinery in a pre-emption provision to a minority shareholder's sale of her shares following a successful section 459 petition The court construed the contractual pre-emption provision as not applying to a 'forced' sale under section 459 More significantly, in Re a company (No 00330) ex p Holden, Harman J refused to enforce a provision in the company's articles that permitted the majority to compel the minority to sell her shares.71 The Judicial Retreat Whilst many welcomed this approach, others were less convinced There are constant reminders throughout the cases that '[s]ection 459 enables the court to give full effect to the terms and understandings on which the members of the company became associated, but not to rewrite them.' 72 And recent years have seen a hardening of this judicial line Perhaps the clearest example of this is the House of Lords' recent 69 In a stimulating analysis of the s 459 jurisprudence, G o d d a r d , n above, 78ff, argues that it is w r o n g to regard the court as ignoring the articles Rather, we should see the articles as themselves incomplete, such that the court can still be said to be merely completing, rather than rewriting, their terms G o d d a r d offers t w o reasons for calling the contract incomplete First, he argues that it is characterised by 'situational insensitivity' A coarse contractual term treats alike a number of distinguishable future contingencies This analysis, which d r a w s on the w o r k of Ayres and Gertner, (they refer to these coarse terms as 'insufficiently state contingent': see I Ayres and R Gertner, 'Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules' (1989) 99 Yale Law Journal 87 and, for a similar analysis, see Schwartz, n 28 above) is essentially economic T h e incompleteness is a failure to exploit all possible gains from trade by replacing a single coarse term with t w o (or more) more finely crafted terms But G o d d a r d fails to acknowledge that, even from an economic perspective, the failure to exploit all gains from trade may be a rational (efficient) response to the perceived costs and risks of developing ever more finely nuanced terms And he also fails t o show why, in any case, we should treat an economic analysis of contractual relationships as determining the correct legal way t o characterise the judiciary's treatment of such contracts G o d d a r d ' s second argument does potentially focus on this legal question His second argument claims that it is unlikely that the parties intended the over-broad rule t o apply to the particular contingency n o w before the court We are not presented with any empirical evidence to substantiate such a claim, however Moreover, the proper issue should surely be w h a t reasonable men would take the parties' language and conduct to mean, not whether the parties, had they k n o w n then what they know now would have agreed that their 'coarse' term did not cover the contingency that has subsequently arisen 70 71 72 8,14 [1990] BCLC 342 [1991] BCLC 597 Per Hoffmann J (as he then was), Re Posgate & Denby Agencies Ltd [1987) BCLC 390 Christopher Riley decision in O'Neill v Phillips.72 P was the sole shareholder of a private company In January 1985, he gave O 25 per cent of the company's shares, and made him a director In December 1985 P retired from the board, leaving O as managing director It was understood that in return for so acting, profits would be split equally between the two shareholders There was also some discussion about O's shareholding being increased to 50 per cent In 1991, the company's fortunes floundered, and P resumed effective control of his company O remained an ordinary board member, but he was paid only his salary and the dividends attributable to his 25 per cent shareholding Moreover, it was made clear that his shareholding would not be increased to 50 per cent O brought proceedings under section 459 He claimed that the failure to continue paying him 50 per cent of the company's profits, and the refusal to increase his shareholding to 50 per cent, amounted to unfair prejudice The trial judge found in favour of P The Court of Appeal reversed that decision, but the House of Lords allowed P's appeal Lord Hoffmann delivered the judgment of the House He emphasised the need for the petitioner to show an actual agreement that P would behave in some way other than the articles entitled him to 'I think that one useful cross-check in a case like this', he argued, 'is to ask whether the exercise of the power in question would be contrary to what the parties, by word or conduct, have actually agreed.'74 And the House of Lords accepted the trial judge's finding that there had been no concluded agreement—formal or otherwise—that P would increase O's shareholding to 50 per cent Equally, the agreement to pay O 50 per cent of the profits was not unconditional It depended upon O remaining managing director of the company Two points emerge and deserve emphasis The first is that Lord Hoffmann's judgment seems to allow the court to continue to discover, and enforce, actual but informal agreements entered into by the shareholders The original trial judge spent some not inconsiderable time examining the parties' past history to deal with that issue, and Lord Hoffmann himself clearly thought it right that he had done so However, subsequent cases have suggested that the courts might become still more restrictive here So, in Re Guidezone Ltd Parker J accepted that the majority might be regarded as acting unfairly where they ignored some agreement or understanding that would not itself be 73 74 O'Neill v Phillips sub nom Re a company Ibid, 10 h No 00709 of 1982 [1999] BCLC Implicit Dimensions of Contract and Oppression of Shareholders 391 enforceable at law However, where such an agreement or understanding was reached not at the time the company was formed, but during the subsequent life of the company, the minority would need to show it had acted in reliance on that agreement.75 Likewise, in Re Benfield Greig Group pic76 the executors of a deceased shareholder were led to understand that the company would not insist upon the application of certain buy-out machinery in the company's articles which applied on the death of a member.77 Nevertheless, at first instance Arden J refused to accept that the breach of such an understanding could amount to unfair prejudice Although the judgment is not entirely clear, it seems to have been based on the fact that the assurances were given by the directors rather than by the shareholders, the lack of reliance by the executors on those assurances and on the public nature of the company.78 The second point arising from O'Neill goes back to the issue of implied terms The petitioner's need to show an actual agreement suggests that petitioners cannot ground unfair prejudice in the mere breach of 'conventionalist norms' or 'hypothetical bargains' This view gains support from Lord Hoffmann's dicta about looking to what the parties had actually agreed, and his warning against 'legitimate expectations' enjoying a 'life of their own' Similarly, in Re Benfield Greig Group pic,79 the petitioner's claim to read into the articles an implied term requiring equal treatment of the parties, equal access to information, and a right to make submissions to the valuer was also rejected.80 75 [2000] BCLC 321 One obvious difficulty with this requirement, which renders the corporate case somewhat different from many other long-term relationships, is the locked-in nature of share-ownership It becomes hard t o argue that a minority shareholder is relying o n a promise made t o her by remaining within the company when she has little chance of leaving anyway 76 Re Benfield Greig Group pic, Nugent and another v Benfield Greig Group pic and others [2000] BCLC 488 77 In particular, the executors were led to understand that the directors would n o t force a compulsory sale and any sale would be at an agreed value 78 Ibid, 507 d-508 g 79 n 76 above 80 T h e executors subsequently appealed, arguing that the auditors could n o t be regarded as independent under the terms of the articles In support of t h a t claim, they pointed t o the fact that the auditors had acted for the company for the purposes of negotiating with the Inland Revenue about the value t o be attributed t o shares t o be issued to the company's employees T h a t appeal was allowed, although it does n o t seem to affect Arden J's discussion of the principles governing s 459 itself See R e Benfield Greig Group pic, Nugent and another v Benfield Greig Group pic and others [2002] BCLC 65 392 Christopher Riley Arden J held that terms could only be implied into the articles as a matter of necessity in order to make the articles workable, and not just because it would be fair or reasonable to so.81 However, against this, other dicta by Lord Hoffmann in O'Neill seemed to accept that there might be an implication that a shareholder in a company in which substantially all the shareholders were directors would have an expectation of remaining a director thereof, or of being bought out on fair terms if the directorship were terminated.82 Nothing was said that would restrict such a right to cases where there was some actual, albeit informal, understanding to that effect Rather, it seemed to be an implication of what is usual in such cases, a 'micro rule' that applies by default in this type of company unless expressly excluded by the parties, and whose breach can amount to unfair prejudice CONCLUSIONS We can identify three broad phases in the courts' approach to the construction of the inter-shareholder contract, including the implicit elements of that contract Under the pre-section 459 jurisprudence, the courts insist upon a relatively strict application of majority rule This recognises that shareholders have created their own machinery for dealing with their disputes, and that their contractual personal rights will often be subjugated to the majority rule principle This occurs in respect of contractual rights agreed informally, outwith the articles, but applies also even to formal rights within the articles The introduction of section 459 leads to a second phase, in which the courts embrace the complexity, and implicit aspects, of the parties' agreements They are prepared to engage in detailed and thorough examinations of the parties' relationship and the course of their dealing, discovering and enforcing commitments outwith the formal contractual agreements that created the company They begin to build up a set of legitimate expectations—particularly in relation to 'quasi partnerships'—that are often seen as legitimate by virtue of their conventionalism Finally, these understandings and expectations are sometimes now permitted even to overrule clear express terms with which they conflict 81 82 n 76 above, 512 b n 73 above, 16 e-f Implicit Dimensions of Contract and Oppression of Shareholders 393 In the third phase, the courts draw back and insist upon showing greater fidelity to the shareholders' express agreements They are still to look to informal agreements, including those made subsequent to the original settling of the constitutional documentation (provided, perhaps, that there is reliance).83 Moreover, unfair prejudice might still be found in the breach of those micro default rules that have been crystallised out of past case law—such as rights of management participation, income sharing, and the like However, section 459 does not offer a basis for judicial intervention based just on the ex post identification of, say, conventionalist norms or hypothetical bargains How might we explain this change of judicial emphasis? One explanation that might be offered would be a renewed commitment to 'freedom of contract' To recognise and enforce what is merely implicit in the parties' bargain somehow 'rewrites' that bargain and thus undermines freedom of contract 84 It might be suggested that O'Neill does no more than require us to focus upon what the parties did agree; it thus rules out attempts to invoke conventionalist norms that conflict with, rather than merely supplement, the parties' express terms However, this looks hard to sustain As noted already, the history of the courts' construction of the parties' contractual relationship is not one that has deferred heavily to what the parties expressly agreed The courts were happy to ignore express provisions in the company's constitution that inconveniently interfered with the operation of majority rule Moreover, the very process of determining what the parties 'really' agreed must, as Campbell and Collins show, have regard to these implicit dimensions A more compelling explanation for the judicial retreat here is this The courts are responding to many of those pragmatic concerns that characterise the economic analysis of judicial regulation of inter-shareholder relationships, described in section III above So, in the UK there has been a growing concern at the mounting costs of litigation Although, so far as I am aware there has been no rigorous research into the costs such actions have incurred, there has been anecdotal evidence of the growth in litigation, which is often fairly protracted as shareholders carefully dissect the behaviour of their partners over the whole length of their relationships 83 See, for example, Brownlow vGH Marshall Ltd [2000] BCLC 655, where the court was prepared to find 'a family expectation, growing over the years, that [the petitioner] would, so far as possible and so far as personal circumstances allowed, be b r o u g h t into the management of the affairs of the company.' If this expectation could n o t be fulfilled, then 'something would have t o be done t o realise the value of [her] shares.' (p 669 g-1) 84 See Campbell and Collins, ch in this volume 394 Christopher Riley Moreover, these costs are too often, it is claimed, out of all proportion to the fairly modest value of the companies involved in many such cases.85 And such costs are being borne not just by companies (or shareholders), but also by courts Not only does this take up court time that might be saved if disputes were sorted out internally within companies, but it also involves judges dealing with matters of business in relation to which, they say, they have little expertise Finally, the ready availability of such actions permits, it is suggested, minorities to blackmail majorities The mere threat of commencing proceedings, given the costs and time such an action would consume, is enough to force majorities to buy out the minority's shares at an inflated price From these pragmatic concerns there is developing an unfair prejudice regime somewhat closer to the (admittedly incompletely specified) economic prescription for minority shareholder protection set out above Crucial here is the rejection of an open-ended judicial power of control over majoritarian opportunism grounded in respect for conventionalist norms Instead, from the substantial case law generated by the earlier, expansive treatment of section 459, the courts have some data about commonplace expectations in so-called quasi-partnership companies to crystallise a set of micro default rules applicable thereto These rules together add up to what one author has called a 'code of conduct' for such companies.86 Their existence saves on transaction costs for parties, mitigates any failure on their part to realise the need for such rules, and provides some measure of control on opportunism In this regard, it is interesting, if a little disappointing, to note the response of the Company Law Review Steering Group to the Law Commission's recent proposals.87 In its review of shareholder remedies, the Commission had expressed concern at the costs and disruption caused by the growth of section 459 actions, and of the resulting inefficiency of that regime in resolving inter-shareholder disputes And it had proposed a set of default rules designed to provide, ex ante, for the resolution of inter-shareholder disputes.88 However, after a pro85 See e g R e Rotodata Ltd [2000] BCLC 122,124 B H a n n i g a n , 'Section 459 of the Companies Act 1985—A Code of Conduct for the Quasi-partnership?' [1988] Lloyds Maritime and Commercial Law Quarterly 60 87 L a w Commission, esp parts 7—12 a n d 18; L a w Commission, Report 246, Shareholder Remedies (London, The Stationery Office, 1997) esp part 88 These rules would the following: first, create a presumption of unfairness in respect of certain cases of exclusion from management; second, create a presumption in favour of a pro-rata valuation on a buy-out; and third, provide a model 'buy out' article 86 Implicit Dimensions of Contract and Oppression of Shareholders 395 tracted period of consultation, the Company Law Review Steering Group declared itself unconvinced of the case for adopting the Commission's proposed rules.89 The Group's cautious approach serves as a sharp reminder of the difficulties inevitably encountered in designing ex ante rules that cover a reasonably wide contracting population, whilst retaining sufficient flexibility to control future opportunism by both majority and minority shareholders 89 See CLRSG, Modern Company Law for a Competitive Economy: Developing the Framework (London, DTI, 2000) paras 4.102—4.104; Modern Company Law for a Competitive Economy: Completing the Structure (London, DTI, 2000) paras 5.75ff and Modern Company Law for a Competitive Economy: Final Report (London, DTI, 2001) para 7.41 Index abuse of rights doctrine see good faith obligations adjustments 55 agency theory 272—5 Alchian, Armen 277 American law: approaches 56—9 default rules 63—4 economic role 71-3, 76-9 end-game norms 64—5 federalism 199 freedom of contract 205 intuitive approaches 66-8 judiciaries 199-204 legal culture's distinctiveness 192—4, 204 legal realism 57-9, 62-3,192-4 legislature's distinctiveness 194—9 parol evidence rule 56 predictability 201-3 regulatory competition 300-3 Uniform Commercial Code 58—9, 61, 65-8, 77-8,143,155 associations, unincorporated 224—5 Barnett, R E 370 Beale, H 13,44 Bentham, Jeremy 136—7 Berle, Adolf 262, 275-6 Bernstein, Lisa (A~6,156-8 Blair, Margaret 294 breach of trust 292-5 Brownsword, Roger 84 Cahill, Mia 98 calculability Campbell, David 273, 277, 287 Campbell, Duncan 71—2 Cardozo, Benjamin 287 Cheffins, Brian 261-2, 283 City Code on Takeovers and Mergers 297-300 classical model 25-7, 69-71, 208, 210, 215-16 Coase, Ronald 267 commercial relations 4—5 commitments see obligations common law: approach 40 rules 29-30 standard forms and 181-2 unilateral expectations and 183—4 compensatory damages 43 competitiveness 3-7 consent, validity 28—9 consideration, doctrine of 30—1 construction techniques 181—2, 235 consumers: see also personal consumption model protection legislation 239—40 contextualism 34,104,108-9,116, 140-1 contextual standards 113—15 and contracting community model 151-5 and contracting culture 123-4, 134-6 distinct from literalism 103,109-112 limits 106-8 and neoformalism 155—9 practice-based 112,116-23, 134-6 reasonable expectations and 105 contingencies 54 contracting community model: and contract law 151—5 coverage 159-60 features 149-51 and neoformalism 155—9 co-operativism 123—4 comparative survey 128—33 end-games and 135 and individualism 124—7 limits 127-33 Corbin, Prof 57 corporate contractualism 255-6 see also corporate shareholders agency theory and 272-5 corporate law and 266—7 398 Index corporate contractualism (cont.): fiduciary duties and 264-9, 282-3 implicit contract and 268-72, 280-4 joint stock companies 256-9 limited liability and 264-5 marketisation 276-9,284-8 nexus of contracts and 256—64 in quasi-partnerships 271-3 corporate governance 289-92,329-31 see also takeovers codes of conduct 297-6 and directors 296-7,329 employee protection 303-6 regulatory competition 300-3 corporate marketisation 276-9 corporate shareholders 259-61 see also takeovers and directors 265-6,296-7 primacy 295-9, 306 recharacterisation 262—4, 280-2 rentier status 272—6 courts: and implicit dimensions 47,188-9, 253 inter-shareholder relationships 377—9, 392-5 practice 35-6 credence goods 161—2 customary understandings 175 see also unilateral expectations absence 175—7 Daintith, Terence 76—7 dangerous supplements 35-6 Deakin, Simon 74—5 deals: adjustments 55 contingencies 54 meanings gap 53—4 real and paper 53—6, 101—2 strategic considerations 55 delay, responses 44—5 Demsetz, Harold 277 developing economies 71-5 discrete contracts 81-3, 88-9,175-6, 211-12 discretionary powers 219-26 consumer protection legislation 239^0 determination 220-2 economic rationale 226-33, 250-3 efficiency assumptions 232—3 employment contracts 221,229-31, 243-4,248 express provision for 219—20 fiduciary obligations 222—3 force majeure clause 220 freedom of contract 222 fundamental breach and 234-5 good faith obligations 222-5,231-2, 238, 241, 244, 246-9 as governance mechanism 226—7 implicit dimensions 249—54 impossibility test 243 irrationality standard 245 legal codes and 222-3 nature of 219 notification requirements 242—3 opportunism 227-9, 231—2 perversity standard 245 power-holder's performance obligations 233—41 reasonable expectations 236—9 repudiatory breach 243 subjects' performance 241—5 symbiotic contract analysis 229—31 termination clauses 245—9 in unincorporated associations 224-5 doctrine of consideration 30-1 Dugdale, T 13,44 Durkheim, E 374 Duxbury, Neil 192-3 Easterbrook, Frank 264, 267-9, 287-8, 380 embeddedness see expert liability employment contracts 3—4, 221, 229-31 end-game norms 64—5,156—7 entitlement-based intentions 105—6, 112 reasonable expectations and 136-40 equitable estoppel 32 equitable techniques 29 essential contract theory 212-16 behavioural patterns 213—14 humanitarian concerns 215—16 estoppel 32 ethics 124-7 expectations see reasonable expectations experience goods 161 expert liability 333—7 see also third party liability 351—3 conditions 337 Index economic issues 341—3 implicit dimension 335-6 interaction of parties 340-1 landmark case 333—5 professional concepts 344—5 restrictions 337 scope 336-7 and the social institution 345-6 and social relations 343-6 trust 343-4 expertise: see also third party liability as bilateral contract 348—9 as economic transaction 347—8 integrity 347 judicial intervention 349—51 orientation conflicts 346-7 partisan 349-50 as social institution 346—53 express terms 8—9, 210—12 fair dealing see co-operativism Farber, Daniel A 73^t fiduciary obligations 222—3 and corporate contractualism 264-9 Fischel, Daniel 264, 267-9, 287-8, 380 fissures in legal reasoning 7—13 force majeure clause 220 formal and substantive rationality 70, 77-8 formation of contracts 28-32 freedom of contract 47—8, 205, 222 inter-shareholder relationships 379-81 Friedman, Lawrence 57 Fuller, Lon 34, 65 functional perspectives 27—8 fundamental breach 181-2, 234-5 399 hostile takeovers see takeovers hybrid organisations implicit understandings 144—9,165—7, 184-6 incentive structures 6-7 individualism, and co-operativism 124-7 information asymmetry 164,178—9 infrequent purchaser 162—3 innocent misrepresentation 29 institutional embeddedness see embeddedness intentions: of parties 12-13 reasonable 30,40 inter-shareholder relationships 365—7 see also unfair prejudice regime articulated meanings 370 consequentionalist reasoning 372 contractual incompleteness 368—70 courts regulation 377-9, 392-5 different expectations 371 economic context 372—5, 379—85 ex post gap filling 382—5 formalism 382 freedom of contract 379-81 legal rules 371-2 in small, private companies 367—8 social context 375—7 tacit assumptions 370—1 interpretation 33—7 irrationality standard 245 Galanter, Marc 98 general clauses 33 general regulatory standards 190-1 German law: expert liability 333—5 Takeover Law 303—4 good faith obligations 222-5, 231-2, 238, 241, 244 Gordon, Robert 81—2 Jensen, Michael 260, 277 Johnson, Simon 73 joint cost minimisation 43—5 joint stock companies 256—9 judicial discretion 189-92 distinctiveness 199—204 economic consequences 191—2 federalism and 199 freedom of contract 205 general regulatory standards 190-1 legal cultures and 192-4, 204 legislative systems and 194—9 predictability 201-3 rule of law 191 selection and 200-1 Hart, H L A 34,193-4 Hoffman, Lord 103-4 Kant, Immanuel 137 Kirchner, Christian 304 400 Index Lane, Christel 74-5 language: games 34—5 legal realism 57-9, 62-3,192-4 meanings gap 53—4,377—8 legal cultures 192-4 legal realism 57-9, 62-3,192-4 limited liability 264-5 literal approaches 35-7 distinct from contextualism 103, 109-12 Llewellyn, Karl 58-60,65-7, 79,143, 193,196, 204 loss: mitigation 43—5 remoteness 45—6 Macauley, S 10, 143,155 McLauchlan, D W 104 McMillan, John 73 Macneil, Ian 80-3, 88,100,143,175, 270 Manne, Henry 276—7 Mason, Edward 276 matrix of fact 33 Means, Gardner 275-6 Meclding, William 260,277 mergers see takeovers mitigation of loss 43—5 negotiations 32 neoformalism 155-9 neutral analytical principle 207-8 new contextualism see contextualism nexus-of-contracts theory 256—64, 272—4, 295 North, Douglass 73-4 obligations: content 32—3 court practice 35-6 interpretation 33-7 literal approaches 35-7 primary 38—9 qualifications 35—6 Okun, Arthur 74-5 Painter, Richard 304 Parkinson, John 271,278 parol evidence rule 56 party autonomy see freedom of contract personal consumption model 160-1, 176-7 see also standard forms coverage 172—5 credence goods 161-2 experience goods 161 features 161—5 implicit understandings 165—7,173 information asymmetry 164, 178-9 infrequent purchaser 162—3 trust 165-7 perversity standard 245 Pettet, Ben 266 planning documents: expression limitations 41—2 formal contracts as 37-8 primary obligations 38—9 qualification 40 reasonable intention 30, 40 risk terms 39 weight attribution 41—2 practice-based intentions 105-6, 112 pragmatism 48—9 pre-contractual negotiations 32 procedural justice 10—13 professional concepts 344—5 'radical judicial error' 48 rationality, substantive and formal 70, 77-8 reasonable expectations 105,112, 378 discretionary powers 236—9 entitlement based theory 136-40 reasonable intentions 30, 40 relational contract theory 80-3, 207—8, 217 core propositions 208—10 essential contract theory 212—16 relationship preserving norms 156-8 remedies 42—6 compensatory damages 43 explicit provisions 46 joint cost minimisation 43—5 remoteness of loss 45—6 rentier status 272-6 repudiatory breach 243 Restatements of Contracts (US) 196—7 restitution for benefits conferred 32 risk, allocation and remedies 39 rule of law 68-71 Hart and 193-4 judicial discretion 191 Schleifer, Andre 293-4 Scott, Kenneth 260 Index Scott, Robert 60-2, 67-8,100 settlements, court inducements 84-5, 88-9,98-101 examples 85-8,89-98 Shamir, Ronen 78 shareholders see inter-shareholder relationships signatures 2—3 Silbey, Susan S 71 social embeddedness 337—40 social institution, the 345-6 Spencer, Herbert 279 standard forms 168—72 disseminated knowledge 169—70 express negotiations 168 implicit understandings 172 term shopping 168—9 standards 52 strategic considerations 55 subjective expectations see unilateral ^ expectations substantive justice 10—13 substantive rationality 70, 77—8 Summers, Lawrence 293—4 takeovers 292-5,329-31 see also corporate governance City Code on Takeovers and Mergers 297-300 disposals of assets 322-4 effects 315 (table) incidence and success rates 310-14 (table) job losses 322—4 qualitative study 306-8 regulatory process, perceptions 308—9, 309 (table), 315, 317-21 shareholder value enhancement 324-9 takeover wave (1990s) 307-8 terms implied in fact 38 Teubner, G 33 third party liability 351-3 401 antagonistic interests 360-1 contractual defences 362—3 doctrinal construction 353—6 exclusion 362—3 institutional dimension 355—6 and partisan counsel 361—2 project participation 357—60 scope of protection 357-62 transaction chains 360 Trebilcock, Michael J 83 trust 165-7,178-9 undue influence 28—9 unfair prejudice regime 385-6, 392-5 see also inter-shareholder relationships enactment effect 387-9 judicial reservations 389-92 Uniform Commercial Code (US) 58-61, 65-8,77-8,143,155 as legislation 195-6 unilateral expectations 177-9 common law and 183—4 construction techniques and 181—2 information asymmetry 178—9 legal recognition 180-4 unincorporated associations 224-5 United States see American law validity of consent 28-9 variation of contract see discretionary powers Weber, Max 70-1, 77, 283 Whitford, William 99-100 Whittaker, Simon 127-8 Wightman, John 285 Wilkinson, Frank 74—5 Wittgenstein, Ludwig 34 Wolfe, Alan 274 Woodruff, Christopher 73 Zimmermann, Reinhard 127—8