The purpose of this study is to contribute to the testing what may be called "the Macauley hypothesis", that contract law is marginal to business practice. To this end I sought out a person running a small business; I will call her "Ms Pettle". She agreed to spend about an hour with me discussing her affairs. The instrument I used is attached as an appendix . After running through it I followed up answers and asked for illustrative anecdotes, and finally checked the overall picture with Ms Pettle.

In this way I attempted to a find a compromise between the ‘"structured" and the "unstructured" interview. Both structured and unstructured interviews can in their different ways lead to distortion, see Shipman (1988 86f) for some discussion. The aim of this interview was to structure Ms Pettle’s account as to relevance only, and to include every substantial relevant point she made. Of course, this means that there is still room for the interviewer’s subjective decisions to affect the result. In a deeper sense this account of Ms Pettle’s affairs does inevitably introduce some distortion in that she may not have thought to consider her business in relation to the law of contract if I had not approached her for this purpose. It has often been remarked that "facts are theory laden" (eg Morrow 1994 44) in that facts are collected in relation to a theory in the first place. Such, obviously, is the situation here. Within these constraints, however, the description of Ms Pettle’s business presented below is intended to be Ms Pettle’s own.

Macauley’s original work in 1963 dealt largely with manufacturing industry in Winsconsin in the United States. His work has been substantially replicated by other studies such as that of Beale and Dugdale (1975) in the city of Bristol in Britiain. As Macauley would later summarize his findings: "Contract planning and contract law, at best, stand at the margin of important long-term continuing business relations."(Macauley 1985 467) Studies in some other countries, for example Taiwan and Japan, have found an even greater marginality of the overt legal framework to business practice. See, generally, Upham (1994).

This is not to say, obviously, that business people do not make agreements or that there are no sanctions for breaking those agreements. However, as Macauley (1963 63) described the situation, sanctions tend to be "relational" in nature. Those sanctions may be as formal, at one extreme, as a bad credit rating; or at the other extreme as informal as hostile gossip in the social groups where business people gather. Closely related to this consideration is the positive market value of a good reputation.

On the other hand there are also sanctions against what is seen as a "legalistic" attitude even to formal contracts. Macauley (1963 61) quotes as a "common business attitude" that "One doesn’t run to lawyers if he wants to stay in business because one must behave decently". Business people may have long term relationships of a variety of types; and shared attitudes of decent behaviour, including not "welshing" on deals, but also including attitudes cutting across legal concepts of contract. Macauley found for example that in general the business people he talked to felt able to freely cancel non-executed contracts in circumstances which a lawyer might regard as a breach. Likewise ,where disputes emerge business people may resort to extra-legal "direct action",such as withdrawal of payment. (Macauley 1963 61-63)

There are several reasons for this situation. One is that legal action can be expensive. Another is, as implied above, that such action may damage an ongoing relationship. Both these factors are highlighted by the exception found by Beale and Dugdale (1975 55) that "the only formal remedy used with any regularity is the action for debt", a comparatively very straightforward action and also one that for obvious reasons is likely to occur at the end of a business relationship. Finally, all these factors are particularly significant for small businesses which are dependent on the goodwill of larger businesses for their survival. As Macauley noted in his reflective 1985 article:

Nevertheless, that contract law is little invoked does not mean it is insignificant. As Macauley (1963 62) remarks: "…it makes a difference if one is demanding what both concede to be a right or begging for a favour". In this the law of contract may be compared to the criminal law. Assuming, as a matter of common experience, that comparatively few assaults are ever prosecuted as such in the courts; still the existence of a law of assault is not irrelevant. It delimits a field of behaviour. Macauley’s results might suggest that the business community tends to treat contract law in a similar way, rather than as a body of enabling law positively structuring behaviour.

Ms Pettle’s business is much smaller than the businesses Macauley, and Beale and Sugdale looked at. One possible prediction we might make is that because of this she depends more on contract in her dealings with larger businesses than do larger businesses among themselves. "…contract law curbs power to some degree" as Macauley (1985 479) notes. Another prediction might be that she "can only take orders". Or, we might expect that contract law is overtly marginal to her business relationships much as we would probably expect that criminal law is overtly marginal to her personal relationships.

The business I looked at was a retail florist trading 7 days a week with altogether 5 staff; including Ms Pettle the owner, another florist working part-time, an apprentice, a shop assistant and a casual driver. Gross turnover is under $200,000 which is to say that the business is economically marginal. To some extent it is part of the black economy, the shop assistant for example is employed on an informal cash-only basis. The business is labour intensive, dealing mostly with "make-up" work, which is to say with relatively complex flower arrangements which involve a high percentage of value-added. Ms Pettle is very proud of her skills and of her creativity. She buys 60-70% of her stock from a regular supplier who provides the high quality flowers, of "European" type, with which she prefers to work; and the remainder from various sources.

In large part the business derives its income from one-off jobs obtained through a network of contacts; real estate agents are a big part of the customer base; and also weddings and funerals provide a lot of work. In particular Ms Pettle has agreements with certain with funeral directors according to which they refer all business to her in exchange for a ten per cent discount. In addition there are a number of regular supply arrangements; the largest being a twice weekly supply of flowers for a company which I’ll call "Hollywood Ltd" bringing in around $500 a week, payment being monthly. But sometimes they only need flowers once a week, and sometimes thrice. (Here we have the equivalent of the larger business community’s "breachable" contract, but without contractual trappings.)

None of this business involves written contracts. In fact Ms Pettle was reluctant to concede that there is any kind of mechanism for ensuring that commitments were kept, contractual or otherwise. Personal relationships are extremely important, "everyone is very lovey", the business is not carried out in a coercive atmosphere. Furthermore, as Ms Pettle points out, the cost of flower arrangements is a very minor part of the expenses of the businesses she deals with; "just coffee money, really".

Occasionally there are disputes over the quality of the work and people do not wish to pay full price. Ms Pettle deals with this situation (whether in one-off jobs or in supply relationships) by discussing the problem and in no circumstances by threatening legal action. She told me quite a long story about a woman who foolishly insisted on having tulips at her summer wedding and then did not want to pay for them because they opened out wide as tulips do in the heat. On another occasion "Hollywood" questioned the value of a "hyper modern" arrangement. But both these disputes, and a few others similar, were sorted out by discussion and finally paid in full. Ms Pettle claims to accumulate perhaps one bad debt a year, these being small debts from individual rather than business customers. Her practice is to let these debts go; as not worth the trouble, the expense and the unpleasantness of pursuing them.

With her regular supply relationships, however, late payment is a more common problem. This is fairly frequent with "Hollywood". When payment is late Ms Pettle delivers flowers in person, bringing her invoice books, and "hangs around" saying hello to everyone until she is asked if payments are up to date. This always works. Ms Pettle made a point of adding that she sometimes goes in personally even when payment is not up to date. On other occasions she will telephone customers to remind them that they have forgotten to pay her account. She is visibly uncomfortable talking about ways of inducing payment.

Cash-flow is a constant problem, and she is often late in paying her own regular supplier. On one occasion the supplier ceased to supply her over a debt of $1000. This seems to have been without acrimony however, and at no stage was legal action threatened. Instead the supplier suggested she seek alternative supplies and trade out of her difficulties. She managed to do this, using tropical flowers for her more up-market work. After a few weeks she made a small payment towards her debt and resumed the arrangement with her main supplier. Ms Pettle had a strong motive to come to terms with this supplier as it was the only viable source for her preferred type and quality of flower. She does not agree that maintaining her reputation was a significant motive for her eventual payment of the debt.

In short, Ms Pettle is reluctant to admit the existence of extrinsic negative sanctions of any sort, even relational sanctions. Instead she describes arrangements as governed by positive goodwill and by the positive value actors place on each others’ services. Failing to pay a service provider will eventually lead to the loss of their services. (This might be called an "intrinsic" sanction.) Very likely this is influenced by Ms Pettle’s personality and values; but it is easy to see, from the nature of the business as she describes it, that litigation (and therefore formal contracts which function as a base of litigation) has little practical value.

So Ms Pettle does not use contract at all; her business in fact represents an extreme end of the "Macauley hypothesis". At the same time the suggestion that she "can only take orders" does not reflect her own understanding of her experience. Her own basic response to the question of why she does not make more use of contract law is to turn the question around and ask why she would be expected to. Again, empirical comparisons with criminal law are likely to be fruitful.

Beale, H and

Dugdale, T ‘Contracts Between Businessmen: Planning and the Use of Contractual Remedies’

2 British Journal of Law and Society 45

Macauley, S ‘Non-contractual Relations in Business: A Preliminary Study’ (1963) 28 American

Sociological Review 55

Macauley, S ‘An Empirical View of Contract’ [1985] Wisconsin Law Review 465

Morrow, R.A. Critical Theory and Methodology, Sage Publications, Thousand Oaks CA., 1994

Shipman, M The Limitations of Social research, (3^rd ed.) Longman, New York, 1988

Upham, F ‘Speculation on Legal Informality: On Winn’s "Relational Practices and the

Marginalization of Law" ‘ (1994) 28 Law and Society Review 233