The Dual Nature of Private Law: Private Investment Funds, the Crash of 2008, and Why We Contract

Robert C. Illig, University of Oregon

Abstract

During the financial panic of 2007 to 2009, a number of players in the private equity markets appeared to breach the terms of their investment contracts. Their business partners failed to sue them, however, opting instead to restructure their relationships outside of the legal system.

Professor Illig uses this apparent preference for non-legal problem-solving to ask why it is that sophisticated parties contract. Why, in other words, would some of Wall Street’s most knowledgeable and experienced players hire lawyers to draft enforceable contract rights if not to rely on them?

The answer suggested by this Article is that contract law, in addition to warranting the parties’ reasonable expectations, serves important ceremonial and symbolic functions that are highly valued by sophisticated market participants.

Based on this observation – and supported by insights from anthropology and behavioral economics – Professor Illig argues that contract law operates along a continuum not unlike that described by Ian Macneil. When contracts are discrete, traditional neo-classical notions of enforcement are of paramount importance. However, as contracts become more “relational,” enforcement lessens as a priority and the process-related benefits of contracting become more salient. Ideally, our common law of contracts would take account of this dynamic.