Nonlegal Sanctions in Commercial Relationships

Transactors commonly make commitments that are not enforceable under the formal rules of contract formation. These commitments may be too vague, may lack consideration, may fail to satisfy legal formalities, or may include an explicit disclaimer of legal liability. Nonetheless, transactors consider many of these nonlegal commitments reliable because "nonlegal sanctions" - such as the desire to maintain reputation or profitable relationships, the concern for standing among peers, and the force of conscience - induce the promisor to keep his commitments. In this Article, Professor Charny provides a systematic analysis of these nonlegal sanctions. The analysis begins by explaining why current contract doctrine and theory have difficulty providing a coherent account of when nonlegal commitments should give rise to legal liability. Professor Charny then advances three theses. First, he demonstrates that transactors often rationally rely on nonlegal rather than legal sanctions to enforce their commitments and that, in this situation, courts harm transactors by interfering. Second, he shows that, when transactors have poor judgment or face high drafting costs, legal intervention may improve the welfare of transactors, taken as a group. Third, Professor Charny applies these conclusions to reassess common law and administrative regulation of commercial transactions. In particular, a proper understanding of nonlegal sanctions implies a more rigorous, and analytically coherent, approach to legal regulation through open-ended doctrines such as promissory estoppel and the duty of good faith.