Abstract
Contractarians view the corporation as a nexus of contracts, constituted by the express or implied consent of each party to or contracting with it. Strong form contractarianism takes this claim literally and holds that a corporation can be created and sustained by contract alone, thanks notably to the courts’ supportive gap-filling role. We argue that this view is undermined by the way courts actually treat implied terms. While courts do attempt to fill gaps and hold parties to their bargains, courts do not typically manufacture counterfactual consent by resorting to the hypothetical bargain logic of contractarianism. Even under the most flexible form of contract law, the common law contract, the capacity of courts to imply third-party obligations in multi-party contracts is highly limited. This makes the contractarian reliance on contract and the courts to construct the complex set of multi-party obligations that make up the corporate form implausible.
Highlights
Even under the pressure to develop solutions, the courts were prevented by the paradox of implied terms from basing those solutions in consent, which supports our conclusion: the corporation cannot be created by contract alone
Having seen how the paradox applies to the corporate form somewhat more generally, it is instructive to consider the bearing that the paradox of implied terms has on an additional feature of the corporation, namely fiduciary duties, and the duty of loyalty
The claim that the corporate form cannot be created by contract alone is not new
Summary
Contractarianism holds that ‘everything is negotiable’.7 From this perspective, to say of a corporation that it is a nexus of contracts is to refer, in shorthand form, to ‘the complex arrangements of many sorts that those who associate voluntarily in the corporation will work out among themselves’.8 Whether the contracts involve suppliers of capital or suppliers of labour or any other stakeholder, all these arrangements are bound by express or implied agreements: ‘Some may be negotiated over a bargaining table. From this perspective, to say of a corporation that it is a nexus of contracts is to refer, in shorthand form, to ‘the complex arrangements of many sorts that those who associate voluntarily in the corporation will work out among themselves’.8. Some may be implied by courts or legislatures trying to supply the terms that would have been negotiated had people addressed them explicitly.’. Some may be implied by courts or legislatures trying to supply the terms that would have been negotiated had people addressed them explicitly.’9 Corporate law, from this perspective, is a ‘set of terms available off-the-rack so that participants in corporate ventures can save the costs of contracting’, thereby ‘enabling the venturers to concentrate on matters that are specific to their undertaking’ such that their joint wealth is maximised. The role of courts is viewed in exactly the same light: parties ‘call on courts to duplicate the terms [they] would have selected, in their joint interest, if they had contracted explicitly’.11 To show that corporations are essentially contractual and that courts fulfil their gap-filling role with an eye on the parties’ wealth-maximisation objective, contractarians supply historical examples and appeal to the authority of economic science
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