Part I

Many would argue that the single-minded pursuit of profit-maximization leads firms to “do bad things” such as pollute the environment, exploit workers, and create barriers to market entry.^{Footnote 29} Further, most would agree that the law should deter or, at the very least, not promote such behaviour. Despite accepting both these propositions, Schwartz and Scott maintain that commercial contract law should be designed with the sole aim of promoting self-interested and profit-motivated trade and investment by firms. They acknowledge that the activities of firms may cause social harms, but a key premise of their theory is that an “analysis of contract law as such… can assume the absence of externalities.”^{Footnote 30} In making this assumption, they rely on the “specialization principle” to argue that negative externalities should be regulated by dedicated institutions such as environmental, employment and antitrust laws and not by contract law.^{Footnote 31} However, Schwartz and Scott’s discussion of the externalities objection and their general claim that all externalities can be ignored when constructing a normative theory of contract conflates three distinct lines of argument, which track three different types of externalities. When we separate them and examine each independently, we can see more clearly that, while Schwartz and Scott may be correct in a limited sense with respect to certain externalities, their broader claim fails.

First, we might think that externalities that bear little or no direct relationship to contract can be ignored when constructing a normative theory of contract law. An example of this kind is pollution.^{Footnote 32} Harms such as the over-consumption of non-renewable resources, water pollution, and excess carbon emissions are more effectively addressed through targeted environmental laws and regulations, and further, such regulations relate to the use and ownership of property, not contract. As an economist would put it, “the main allocative function of property rights is the internalization of beneficial and harmful effects”;^{Footnote 33} the problem of environmental pollution is an example of such harmful effects and as such the solution lies in modifying property rights. Environmental externalities are addressed by asking when we should prefer private ownership, common ownership or state regulation of property. So, for example, the social costs of carbon emissions associated with private industrial activity may be addressed by creating a tax or placing restrictions on such activities; the risk of over-fishing may be managed through market-based quota systems; and the overuse and pollution of public parks and beaches may be addressed through regulated use of common property or by modifying incentives through privatization. In each case the institutional response is to modify property rights. What does not make sense is to ask how contract law doctrine could be designed to remedy concerns regarding environmental pollution; such externalities emanate from the use and ownership of property, not contractual exchange. That is not to say that such policies won’t have an impact on the negotiation of contracts; once environmental law policies define property rights and restrictions they may influence the terms of an agreement, but they will not shape contract doctrine. I agree with Schwartz and Scott on this line of argument: analysis of contract law can ignore externalities that are not causally attributable to contract law. However, this does little to support Schwartz and Scott’s general claim that contract theory may ignore all externalities. The salient types of social harms are those that arise from contracts, which is where the analysis should be focused.

A second type of externality does relate directly to contractual relationships but is caused by structural asymmetries between the parties. An example of this is contracts for employment. Workers are vulnerable because there is an imbalance of bargaining power inherent in the employee/employer relationship. Schwartz and Scott acknowledge that profit-maximizing firms may engage in practices that negatively impact workers, but argue that externalities that reflect asymmetries intrinsic to the relationship between the parties are more effectively addressed through targeted legal institutions.^{Footnote 34} Employment and labour law policies such as minimum wage requirements, maximum standard workweeks, and collective bargaining rights are designed to improve the bargaining position of workers. Another example, which reflects a different kind of asymmetry between contracting parties, is consumer protection law.^{Footnote 35} Consumer protection laws are, in part, aimed at assisting consumers in making better-informed choices in the market by requiring detailed disclosure of information about products. They are designed to ameliorate the information asymmetries inherent in the manufacturer/customer relationship. Schwartz and Scott provide a short answer to why contract law can ignore this second category of externalities: their theory addresses only commercial contracts between firms.^{Footnote 36} That is, they assume that contracting parties possess a level of commercial sophistication that does not make them vulnerable to harm which is a function of the parties’ relationship.^{Footnote 37} I agree that it is sensible to establish a specific regime of regulation to address issues that are symptomatic of a particular kind of relationship; it is more effective to have a specialized body of law to address harms that repeatedly arise because of who the parties are. However, even if we accept this argument, the question remains: how do we identify such special relationships? This paper aims to address Schwartz and Scott’s argument on its own terms, so I will not critique their decision to limit their inquiry to sophisticated parties, but it is worth noting that they do not provide an account of when a particular type of contractual relationship becomes important enough to warrant a targeted regime of its own. There is no discussion of the factors that motivate relational asymmetries; they simply ascribe such differences to a matrix of contractual relationships based on the broad categories of “firm” and “individual”.

This leaves the third and final type of externality: those that arise directly from firm-to-firm contracts. Schwartz and Scott appear to provide two arguments to support their assertion that contract theory can also assume that externalities of this type are absent. First, they claim that, “as a descriptive matter, most commercial contracts affect only the parties to them”, whereas externalities are caused by “a firm’s systematic decisions that may affect third parties in material ways.”^{Footnote 38} Their theory assumes that there is no causal relationship between the regulation of a “single contract” and “systematic” behaviour; thus, they conclude that “transactions regulated by contract law do not create externalities, unless there is a particular reason to believe that they do.”^{Footnote 39} The implication is that normative contract theory should evaluate the impact of legal rules on a transaction-by-transaction basis. Schwartz and Scott’s analysis of contract doctrine throughout reflects this methodology; they employ economic modeling to demonstrate how a particular rule (e.g., the prohibition of bans on modification) impacts on the profit maximizing behaviour of parties in a particular transaction.

Second, Schwartz and Scott argue that, to the extent that a firm engages in “[s]ystematically inefficient or unfair behavior” it will be “subject to legal regulation” through other institutions.^{Footnote 40} They cite the examples of environmental, employment and antitrust laws in support of this specialization principle. But, as I have shown in the foregoing discussion, environmental and employment law are of no help in supporting the argument that we can ignore this third type of externality. The former deals with costs associated with property law, not contract law, and the latter remedies structural asymmetries inherent in the contractual relationship; neither is an institutional response to a harm arising solely from firm-to-firm contracts. However, antitrust law is an example of an institutional response to negative externalities that arise from commercial contracts. For example, exclusivity agreements may have deleterious effects on the market by erecting barriers to entry and competition.^{Footnote 41} Schwartz and Scott argue that contract law doctrine need not address such anti-competitive behaviour; antitrust laws operate to restrict such harmful behaviour. Accordingly, they conclude that externalities of this type can also be disregarded in constructing a normative theory of contract.

Both of Schwartz and Scott’s arguments suffer from serious flaws. First, their claim that commercial contracts do not create externalities is unsupported and descriptively false. Schwartz and Scott’s article was published before the financial crisis of 2008 (the “Global Financial Crisis”), which resulted in the most serious global economic recession since the Great Depression.^{Footnote 42} The Global Financial Crisis was a complex event resulting from multiple interconnected factors. While the U.S. mortgage and housing collapse instigated the Global Financial Crisis, it is generally accepted that over-the-counter (“OTC”) derivatives contracts played an important role in exacerbating the negative consequences. Very generally, an OTC derivative is a financial contract between two parties in which the parties specify conditions under which payments are to be made between them based on an underlying reference asset (e.g., interest rates, the price of oil, etc.). The U.S. Senate Subcommittee on Investigations, which issued a report analyzing the causes of the Global Financial Crisis, identified “a variety of troubling and sometimes abusive practices involving the origination” of OTC derivatives by investment dealers as a key factor in precipitating the Global Financial Crisis.^{Footnote 43} Investment dealers such as Goldman Sachs and Deutsche Bank “set up structured finance transactions which enabled them to profit at the expense of their clients”; created and marketed OTC derivatives contracts using underlying reference assets “that senior employees within the investment banks knew were of poor quality”; sold OTC derivatives contracts “without full disclosure of the investment bank’s own adverse interests”; and “exploit[ed] conflicts of interest with the firm’s clients”.^{Footnote 44} As a result, leaders of the G20 nations have made commitments to implement a comprehensive legal framework for the regulation of OTC derivatives contracts.^{Footnote 45} The role of OTC derivatives contracts in causing the negative externalities associated with the Global Financial Crisis directly contradicts Schwartz and Scott’s claim that “transactions regulated by contract law do not create externalities.” OTC derivatives fall directly within the sphere of “Category 1” contracts between commercial firms that is the subject of Schwartz and Scott’s normative theory. It was the profit-motivated behaviour of sophisticated firms entering into derivatives contracts that contributed to the social harms realized during the Global Financial Crisis.

To this objection Schwartz and Scott might respond that commercial contracts generally do not create negative externalities “unless there is a particular reason to believe they do” and, in the event that they do, institutional responses such as proposed OTC derivatives regulation are better suited to handle them than contract law.^{Footnote 46} But this reveals the flaw in the second part of their argument: Schwartz and Scott fail to tell us when there is a “particular reason” to believe that contracts between firms will give rise to externalities. That is, they do not provide an account of when or how single commercial contracts between sophisticated parties may rise to the level of “systematic” behaviour that we should be worried about. Instead, they simply make the assumption and then focus on analyzing the impact of contract doctrine at the level of a single transaction. The overemphasis on individual transactions has been leveled as a critique of economic analysis of contract law; contract scholars have noted that economic analysts often neglect the impact of doctrinal rules at the institutional or systemic level.^{Footnote 47} Schwartz and Scott’s argument here is a perfect example of just such blind spots in economic analysis of contract law.

To the extent that Schwartz and Scott’s analysis does recognize the presence of externalities, it takes them to be a known quantity; they assume that we already know the social harms that profit-maximizing firms create and that we have institutional protections in place to mitigate such harms. But, as the Global Financial Crisis demonstrates, such institutions are created after the harm has already been suffered; OTC derivatives regulation is an institutional reaction to the harm caused by investment dealers and the use of complex financial contracts. Other examples relied upon by Schwartz and Scott to support their argument for institutional specialization, such as securities law and antitrust law, also reflect the same dynamic. The Securities Act of 1933 was introduced in response to the Wall Street Crash of 1929; it introduced the regulation of the distribution of new securities by ensuring that companies disclose sufficient information in order to allow investors to make an informed decision about whether or not to purchase securities. Similarly, antitrust law such as the Sherman Antitrust Act and the Clayton Antitrust Act were created to prevent the anticompetitive behaviour of firms of the time, such as the Standard Oil Company, that were seen to be damaging to the economy as a whole. In these cases, self-interested market actors engaged in behaviour, including entering into agreements, that resulted in negative externalities which were subsequently addressed through new forms of regulation.

In one sense, Schwartz and Scott’s argument for institutional specialization is convincing: externalities can be more effectively handled through specialized institutions. But they neglect a critical element of the specialization principle, as they utilize it: if contract law does ignore externalities, other institutions will be reactive and not proactive in the sense that they respond to social harms only after they materialize rather than aim to prevent them from happening in the first place. We are faced with a choice. One could argue that we ought to prefer institutional arrangements that promote unrestrained self-interested behaviour in the private arena, with other institutions playing catch-up to regulate harms that periodically arise as a result; call this the “Reactive Approach”. Conversely, one could argue that we should prefer that broad standards of market conduct be imposed in order to temper self-interest and prevent, or at least moderate, social harms before they occur; call this the “Proactive Approach”. The Reactive and Proactive Approaches to negative externalities reflect fundamentally different pictures of society. The former places greater value on profit maximization at the cost of suffering harms that may eventually arise and can be responded to only once they have materialized. The latter accommodates growth in the market subject to limitations that are aimed at preventing the cultivation of behaviour that would create harm in the first place. The question of which of these two approaches we ought to prefer is a question about the values of the community and how they are reflected in its legal and political institutions. In either case, the position must be defended; it cannot simply be assumed. Schwartz and Scott’s argument for institutional specialization implicitly endorses the Reactive Approach without defending that choice.

The Reactive/Proactive dimension of the principle of institutional specialization has implications at a lower level of abstraction; it can also motivate normative arguments for and against specific contract doctrine. Consider the obligation to act in good faith in contract law. The doctrine has its origins in the common law but has come to be codified in sections of the UCC and expressed as a principle in the Restatement (Second) of Contracts.^{Footnote 48} The UCC provides that “[e]very contract or duty within this Act imposes an obligation of good faith in its performance or enforcement.”^{Footnote 49} Good faith is defined as “honesty in fact and the observance of reasonable commercial standards of fair dealing.”^{Footnote 50} Importantly, the obligation to act in good faith is mandatory and cannot be disclaimed by agreement between the parties.^{Footnote 51} Similarly, the Restatement provides that “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement”.^{Footnote 52} Very generally, the concept has been employed by U.S. courts to ensure that parties do not try to regain what they have bargained away as part of the contract when things go badly and to ensure that one party, through a failure to cooperate, does not prevent another from performing under the terms of the contract.^{Footnote 53} Unlike the law in continental jurisdictions, U.S. contract law does not require parties to bargain in good faith; American contract law requires parties to act in good faith only once a contract has been created, whereas continental contract law requires parties to negotiate in good faith prior to formation.^{Footnote 54} Similarly, in a recent judgment, the Supreme Court of Canada held that the general principle of good faith underlying contract law gives rise to a common law duty of good faith in performance, which requires parties to be honest with each other in relation to the performance of their contractual obligations.^{Footnote 55} A comprehensive analysis of when the doctrine of good faith has been applied and how it has been interpreted is beyond the scope of this paper; the issue is how it would be evaluated under the Reactive and Proactive Approaches.

Schwartz and Scott’s efficiency-based theory rejects the obligatory standard of good faith in contract law. As discussed above, they claim that general standards, such as “‘reasonably,’ ‘conscionably,’ ‘fairly,’ [and] ‘in good faith,’” fail to satisfy the evaluative criterion of efficiency because they do not provide parties with ex ante guidance and they create unacceptable moral hazard.^{Footnote 56} Further, they argue that “[t]he rules regulating contracts between business firms thus should be mandatory only when the parties’ contract creates an externality or is the product of market failure”^{Footnote 57}; dismissing any other justification as a form of “paternalism” that “override[s] the parties’ expressed preferences out of concern for the parties’ welfare.”^{Footnote 58} The examples of acceptable mandatory rules that Schwartz and Scott offer reflect the Reactive Approach to addressing externalities through institutional design: externalities such as price-fixing should be prevented by mandatory anti-competition laws and the failure of the market to protect consumers should be remedied through strict liability rules in tort.^{Footnote 59} Again, they do not offer an account of how to prevent potential externalities or market failures such as those that culminated in the Global Financial Crisis; in both examples, institutions respond to a known social harm or failure in the market arising from the profit-motivated behaviour of firms. For Schwartz and Scott, a mandatory rule is justified if it prevents an externality, but only one that we can point to, not one which we might foresee. Thus, their efficiency-based theory of contract and its commitment to the Reactive Approach has no room for a standard of general application requiring parties to act in good faith.

In contrast, the Proactive Approach points to a different conclusion. The aim of the Proactive Approach to contract law would be to prevent externalities by designing doctrine that does not promote the type of behaviour that may lead to social harms. For example, the failure of investment dealers to disclose conflicts of interest when creating and marketing OTC derivatives, the broker’s omission of material risks about a company when issuing new securities, and the manufacturer’s failure to clearly label the products it manufactures with their associated risks all reflect bad faith dealing in which self-interest motivates the non-disclosure of material facts at the time of contract formation. Rather than waiting until after the harm to OTC derivative counterparties, purchasers of securities, and consumers of commercially manufactured products materializes, and addressing it through OTC regulations, securities law, and consumer protection/strict liability in tort, the Proactive Approach would recommend an evaluative standard of general application, such as good faith, which imposes a requirement of ethical behaviour on contracting parties. Accordingly, the Proactive Approach to externalities would support not only the mandatory application of a good faith standard (as is currently the case in U.S. and Canadian common law) but would extend the application of such a standard to negotiations and dealings prior to contract formation (as is the case in continental law). Such a standard would require parties to an agreement to deal with honesty and in a fair manner with their counterparty, both during negotiations and after a contract has been made. The economist might object that such an ambiguous standard would cause firms to act more cautiously, take fewer risks and therefore diminish the effectiveness of the market in creating wealth.^{Footnote 60} But this is precisely the point: the question is whether a highly efficient market which may, from time to time, create harms that, once realized, require an institutional response is better than a somewhat less efficient market that aims to prevent those harms from ever happening in the first place.

The aim of this Part is not to advocate for one view over the other, though I think there are good arguments to be made in favour of the Proactive Approach; rather I have argued that the manner in which Schwartz and Scott employ the institutional specialization principle to answer the negative externalities objection is incomplete. They fail to acknowledge the institutional dynamic of the Reactive Approach to the problem of externalities, which their theory adopts. Consequently, they simply assume, rather than argue for, an important question of political value.

Part II

The value objection to Schwartz and Scott’s efficiency-based theory of contract argues that the law should promote values other than just profit-maximization. A common criticism leveled at economic theories of law is that the normative aim of maximizing aggregate wealth comes at the cost of ignoring other values such as distributive justice. Schwartz and Scott accept that distribution and fairness are valid and legitimate aims that should be pursued through legal institutions, just not through contract law.^{Footnote 61} Thus, the structure of their argument in answer to the value objection is the same as to the externalities objection: they rely on the institutional specialization principle to argue that “efficiency is the only institutionally feasible and normatively attractive goal for contract law that regulates deals between firms” because other institutions are better-suited to realizing other valid social aims.^{Footnote 62}

The clearest example of this is a market economy, based on private property and contract, coupled with a redistributive system of taxation. The former is designed to increase total wealth, while the latter distributes that wealth according to some principle of economic justice. According to the logic of Schwartz and Scott’s argument, the sole institutional role of commercial contract law is to maximize profit and, because firms are better at maximizing profit, “a contract law that regulates firms should be the contract law that firms would prefer generally to apply”;^{Footnote 63} any redistributive concerns should be addressed by the tax system alone.^{Footnote 64} Their approach to the institutional specialization principle isolates and assigns each legitimate social aim to a particular institution; there is no room for the values promoted by one to bleed into another. Thus, Schwartz and Scott espouse what I will call “Strong Form” institutional specialization, pursuant to which different social values are strictly compartmentalized. This allows them to develop a theory of contract law with the exclusive aim of promoting profit maximization.

However, Strong Form institutional specialization presents a challenge to Schwartz and Scott’s theory. The basic argument is that it is untenable to design legal institutions to promote only the self-interested motivations of legal subjects and expect those same legal subjects to support and comply with institutions with aims, such as distributive justice, that are contrary to their self-interest. What does it mean to say that this is untenable? The difficulty manifests in two ways.

First, any normative justification of a legal institution must consider the negative effects that such a rationale may have on the motivation of individuals to support just institutions. The problem of moral motivation presents an important challenge to the demands that justice places on individuals. This problem persists even where the demands of justice are placed on institutions; individuals must be motivated to support the establishment and maintenance of just institutions. But Strong Form institutional specialization exacerbates this psychological difficulty by its insistence on a strict partition of aims: it promotes self-interested aims in certain realms and quarantines other-regarding aims into specific institutional spaces.

My argument against Strong Form institutional specialization is similar in spirit to G.A. Cohen’s critique of John Rawls’ institutional theory of justice. Cohen’s target is the Rawlsian view that the principles of social and economic justice apply only to those political institutions that comprise the basic structure of society.^{Footnote 65} While his argument is subtle and complex, one of its themes is that it is untenable to, on the one hand, accommodate (or promote) the selfish motivations of individuals, and on the other, expect those same individuals to support just institutions. Therefore, Cohen concludes that, as a matter of normative political philosophy, principles of justice ought to apply both to society’s institutions and to the choices that individuals make within those institutions.^{Footnote 66} Thomas Nagel identifies the division of moral labour between individuals and institutions as a challenge to the stability of liberal societies; attempts to externalize the impartial demands of justice through institutions depend on the internal motivation of individuals acting within such institutions to sustain them.^{Footnote 67} One of Nagel’s central insights is identifying the way in which the stability of political and legal institutions rests on how they reconcile the impersonal standpoint of the collective with the personal standpoint of the individual; an ideal theory would have us design institutions which would “allow everyone to be publicly egalitarian and privately partial.”^{Footnote 68} But, Nagel concludes, such an ideal is a “pipe dream” when it comes to actual legal and economic institutions and the individual motivation necessary to support and sustain them.^{Footnote 69} While these debates are engaged at an abstract level of normative political theory, the arguments are germane to the value objection to Schwartz and Scott’s contract theory: the assumption that competing values can be partitioned and pursued through targeted institutions, and that the goal of welfare maximization, narrowly understood, can be pursued through one institution without having a corrosive effect on the goals pursued by another, is problematic.

This point can be illustrated with an example. Schwartz and Scott’s claim is that contract doctrine should be designed with the sole aim of facilitating the satisfaction of firms’ preferences, in order to maximize the aggregate social welfare, because institutions like tax law can take care of redistributing those welfare gains. The picture that they paint is one in which contract law facilitates and encourages firms to maximize profits while expecting those same firms to support and comply with redistributive systems of taxation. However, experience shows that, as a descriptive matter, this is a difficult position to defend. Commercial firms actively advocate against the creation of redistributive tax laws. For example, hedge-fund managers legally structure their compensation as “carried interest” to benefit from capital gains treatment under tax law and consequently lower rates of taxation. Political lobbying by the financial industry has obstructed efforts by the Obama administration to eliminate this loophole.^{Footnote 70} In the 112th Congress, approximately 2,221 organizations spent an estimated $773 million on tax lobbying to ensure that such tax benefits remain part of the tax law.^{Footnote 71} The example of tax lobbying shows that Schwartz and Scott’s assumption of Strong Form specialization, that legal theory can institutionally isolate competing policy goals, is unrealistic.^{Footnote 72} In other words, when we justify commercial contract law on the basis that it should solely promote the self-interested, wealth-maximizing behaviour of firms, we cannot ignore the effects that justification may have on those same firms that are expected to support just systems of tax and transfer: in terms of psychological motivation, company directors may tend to employ the same reasoning in their attitude to the tax law, resulting in just the sort of lobbying that is commonplace. Others have similarly argued that a normative theory of law must account for the ways in which legal institutions influence individuals’ moral motivation and agency.^{Footnote 73} The argument I develop here builds on those claims: a normative theory of a legal institution must account for its impact on the ethical lives of individuals, and this impact is more severe when a normative theory relies on the principle of Strong Form specialization in its defense.

The second way that Strong Form institutional specialization is problematic is that it promotes systemic design that is internally incoherent. A normative theory of law must also consider how the justification of one legal institution affects the way legal subjects are motivated to comply with other institutions in the same system. Put another way, a legal institution (e.g. contract law) should not be designed to solely promote one aim (e.g. wealth maximization) which is inconsistent with the legitimate aims of other institutions (e.g. distributive justice). Whereas the problem articulated above related to how the rationale for a legal institution impacts on the individual’s motivation to support a just legal system (i.e., the individual’s motivations in an extralegal context), the concern here is over the effects that such a rationale would have on an individual’s motivation to comply with other legal institutions within the same legal system (i.e., the individual’s motivations within legal contexts). What I am suggesting here is this: the design of a particular legal institution should not negatively impact on the goals of the broader legal system of which it is one part. When constructing a normative theory of contract law, we must consider the values that other legal institutions are designed to promote and offer a justification for contract that is not wholly inconsistent with those other aims. Contract law must be justified in a way that does not compromise the integrity of the legal system as a whole.

This argument can be illustrated with another example in tax law, highlighting how the problem of tax lobbying differs from the problem of tax avoidance. While firms may act self-interestedly when entering into private agreements of exchange, they may also act self-interestedly when complying with the redistributive rules of taxation. For example, firms such as Apple invest in aggressive tax avoidance planning in order to arrange their affairs in a way that minimizes their share of the tax burden.^{Footnote 74} By engaging in tax avoidance schemes, firms frustrate the redistributive aims of tax laws, eroding the tax base, while still remaining in technical compliance with those laws. This problem is exacerbated by a system designed around Strong Form specialization. A legal system that promotes behaviour through one legal institution that is directly at odds with the aims of another institution suffers from an internal incoherence that undermines the aims of the system as a whole. If, on the instrumental view, what matters is the output of the system as a whole, the design of the system and its constituent parts must also be approached holistically.

The two objections are connected: we do not want a legal system that is internally incoherent because it would intensify the problem of moral motivation. If the legal system encourages individuals to, on the one hand, act self-interestedly, and on the other, act morally, it adds to the psychological burden of acting rightly in two contexts: it may have negative effects on the individual’s motivation to support just institutions (i.e., effects on behaviour outside of the law) and it may have negative effects on the individual’s motivation to comply with just institutions (i.e., effects on behaviour inside the law). The Strong Form institutional specialization espoused by Schwartz and Scott exacerbates this problem for the individual because it advocates for a stricter partition between areas of law that expect us to be attentive to impartial moral demands, and areas of law that induce us to act purely on the basis of partial self-interest.

An alternative way to think about the institutional division of labour, one which alleviates the tension between institutions with competing aims, is “Weak Form” specialization. A Weak Form approach recognizes that, while it may be more effective to target particular values through separate legal institutions, such institutions should, at a high level of generality, be structured around principles that are not wholly incompatible with one another. Of course, to make this claim one would also need to provide an account of the range of political and moral values that are legitimately pursued through the law. I offer here only the core commitment of the argument for Weak Form specialization at an abstract level: if we accept, as Schwartz and Scott do, that some of our legal institutions should promote other-regarding aims such as redistribution, the altruistic spirit of such values cannot be completely dispensed with in other areas of the law.

Institutional responses to the problem of tax avoidance described above can help illustrate this idea. One solution to the problem of tax avoidance that has been adopted by some countries is a more general, standard-based anti-avoidance rule.^{Footnote 75} For example, while taxpayers may have arranged their affairs in strict compliance with the rules, they may be denied a tax benefit if they have engaged in an avoidance transaction. An “avoidance transaction” is any transaction that results “directly or indirectly, in a tax benefit, unless it may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.”^{Footnote 76} The strategy is to import a general evaluative standard into tax laws that requires legal subjects to deliberate on the other-regarding aims and goals of the institution rather than simply approaching the rules in a purely selfish manner. Anti-avoidance standards in tax law can be seen as imposing a market ethic or standard of conduct similar to the good faith doctrine in contract law discussed above. While the requirement to deal fairly and in good faith is not designed to achieve distributive goals through tax law, it does ask that parties to a contract give thought to and consider the interests of their counterparty when negotiating the terms of their agreement. In this way, Weak Form specialization allows for institutions that are aimed at achieving particular goals, without entirely quarantining any single legal institution from the underlying values of the legal system.

One objection to this approach is that it would result in a shift of the institutional burden from legislator to judge and, as a result, raise questions of legitimacy. Rules permit ex ante determination of the law; standards require ex post determinations of the law. A legal subject must interpret a legal standard in order to determine how it will apply before choosing to act on it. One may engage in moral reflection on the content of that standard, or one may interpret it in a self-interested manner and not turn one’s mind to moral considerations at all. In either case, a legal determination of the content of the standard will only be made, after the person has acted, by an adjudicator. This raises deep and important questions about democratic legitimacy: should courts be making such determinations? These concerns go beyond the scope of this article, but there are compelling arguments on both sides of the issue. For example, in his article on the connection between law and the protection of human dignity, Jeremy Waldron—himself one of the most prominent critics of judicial review in earlier work^{Footnote 77}—has argued that the adjudicatory process and the opportunity for engaging in argumentation “are indispensable to the package of law’s respect for human agency.”^{Footnote 78} He argues that the legal determination of general standards through the adversarial process of the courts reflects the “respect for the freedom and dignity of each person as an active intelligence”, which law and legality rest on.^{Footnote 79} For the purposes of this paper the point is this: we ought to turn our minds to the moral question involved in the argument for institutional specialization, and the democratic legitimacy point is only one issue to consider. It is at least an open question whether legitimacy considerations would lead us to reject or favour Weak Form specialization of the kind I discuss.