Contractual Freedom and Family Business
Research Handbook on Partnerships, LLCs and Alternative Forms of Business Organizations (Robert W. Hillman and Mark Loewenstein eds., Edward Elgar Publishing, 2015, Forthcoming)
16 Pages Posted: 7 Nov 2014 Last revised: 13 Nov 2014
Date Written: 2015
This chapter argues for a conception of contractual freedom that places renewed emphasis on the importance of default rules and background equitable principles as tools for facilitating the parties’ business relationship. In other words, contractarianism should not be seen as synonymous with contract; a meaningful freedom of contract is broader and more complex than the proverbial blank sheet of paper on which to draft and a deferential court willing to enforce the results, however nonsensical. Declaring contract king does not establish that it is actually capable of governing its realm. Rather, to facilitate the underlying contractual values of personal autonomy and welfare maximization, it may be better to guide the parties’ relationship with well-crafted default rules and reasonable equitable constraints. In a family business, for instance, a contractarian framework is typically insufficient to support the expectations of family participants. As is true of any closely held business, contracts in family businesses establish relationships rather than the terms of specific, bargained-for exchanges, and the parties cannot be expected to anticipate and adequately address all eventualities that may occur over time. For family businesses, relational aspects are particularly significant: the time horizon stretches across generations, objectives often include more than simple profit maximization, and business dealings involve emotional consequences for the participants that also need to be acknowledged. Instead of adhering to a false assumption that the parties to a business venture are capable of negotiating adequate protections for themselves and likely to do so, contract law should offer a resource — a set of principles that credit the parties’ negotiated bargain in full context but that also compensate for what they cannot anticipate or adequately address.
Keywords: family business, contractual freedom, fiduciary duty, alternative entities
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