New Columbia Center Studies Novel Contracts of Globalization

Imagine this: A start-up U.S. jeans company is hoping to become the next fashion sensation. The company incorporates in the Bahamas, opens a factory in China, outsources its legal work to attorneys in India and its phone and Internet purchases to Pakistan.

 

Welcome to the global economic revolution. And welcome to Columbia Law School’s new Center for Contract and Economic Organization, a year-old entity focused on examining the contracts and business structures created when a corporation goes global. The Center’s ultimate goal is to analyze how economic theory and contract law affect real corporations.

 

“The technological revolution brought on by access to less expensive, but skilled labor around the world has created opportunities for innovation in how firms structure themselves,” said Robert Scott, the Alfred McCormack Professor of Law and co-director of the Center. And that, in turn, has created a demand for more innovation in contracts, Scott said.  “What we are seeing are new forms of economic organization in response to the need to rapidly adapt.”

 

This new economic restructuring has many components, he explained, but contract law is perhaps the most important.

 

The Center’s work poses questions such as: Why do people write certain contracts? How are their choices affected by changes in economic structure? And how can the law help develop more efficient mechanisms for contracting?

 

Experts in the field say the Center offers a creative approach to the relatively new field of contract theory. Harvard Professor Oliver Hart, one of the country’s foremost researchers in contract theory, called the Center “very promising” in spanning the areas of economics, business and law.

 

While other universities have very talented people in economics and law, it’s rare to find a way for them to work together, Hart said.

 

The field of contract theory, while only 30 years old, is rapidly evolving and has already produced three Nobel Prize winners in economics.  Columbia has recruited top economists to build bridges among the law and business schools and beyond the academic arena into the real world, explained Scott, who came to Columbia Law School in July 2006.  

It was the Center’s potential that convinced him to leave the University of Virginia School of Law, where he had taught since 1974 and served 10 years as dean.  This year, Scott is teaching three courses: a basic course on contracts, Contracts and Economic Organization and a seminar called Contract Theory & Commercial Practice.

 

 A fast-paced business environment demands more than the traditional boilerplate contract, in which Party A promises to produce 1,000 widgets and sell them for $100 each to Party B by a specified date. If A does not deliver, B can sue. In the current global business world, lawsuits are slow and costly ways of enforcing contracts.

 

Under theories being studied at the Center, new contracts -- co-designed by both parties with flexibility over time -- will emphasize collaboration, said Scott. The contracts will start with small steps that increase as the two parties build their relationship and trust.

 

Scott envisions “an elaborate governance structure” in which each party names a management team that must agree unanimously on each new step or change in the contract being negotiated.  Disputes are “kicked upstairs” to the two bosses, who hopefully reach an accord.   He says the nature of an evolving contract encourages compromise “by making it more costly to leave the relationship and start over with a new partner.”

 

Scott’s approach meshes well with Center Co-director and Columbia Business School professor Patrick Bolton, who believes the Center is well-positioned to drive the dialogue between economists and legal scholars.  

 

Facilitating this discussion will be accomplished through hosting visiting fellows, workshops and at least one major conference annually.  In addition, a faculty/scholar colloquial series circulates papers to a large group of scholars around the world. On January 18, scholars from many of the nation’s top universities will present papers at the Center’s Law and Economics Workshop on Contract and Economic Organization.

 

Another professor involved with the center, Columbia University economist Bentley MacLeod, also stressed the importance of strengthening contracts. 

 

“The extent to which parties abide by their agreements is in my view one of the most fundamental ingredients for a well functioning society. Where one finds failure of contract, one finds lower economic growth,” he said.

 

The Center also hopes to offer a joint graduate-degree program in law and economics that will enroll three or four students per year.

 

Those who know Scott well describe him as an open, thoughtful and warm person with a great sense of humor and a commanding presence.

 

“He was a really great catch for Columbia,” said Yale Law School professor Alan Schwartz, who has known Scott for more than 25 years. “And he is probably the best classroom teacher in America.”

 

While teaching is his first love (gardening is his second), Scott, who combined his formal legal education with self-taught studies in economics, is also a respected scholar. He has co-authored five books on contracts and commercial transactions, including the first casebook on law and economics published in 1981.

 

“Leaving [the University of] Virginia was a tough decision for us,” Scott said.

 

His wife, Elizabeth Scott, also left the University of Virginia, where she was co-director of the Interdisciplinary Center for Children, Families and the Law. As the Law School’s Harold R. Medina Professor of Law, she is teaching a course called Family Law and a seminar titled Perspectives in Family & Gender.

 

Ultimately, Scott said he was lured by “the opportunity to start this Center, and to see if we can move an interdisciplinary collaboration forward.”

 

Sue Reisinger is a senior reporter at Corporate Counsel and American Lawyer magazines.