Enforcing Contracts in Dysfunctional Legal Systems: The Close Relationship Between Public and Private Orders: A Repy to McMillan and Woodruff

When the public order is dysfunctional, a private order for enforcing contracts will develop. In the absence of courts, transactors will seek ways to secure performance without recourse to legal sanctions. Social and economic sanctions imposed on the party in breach, whether by the aggrieved party or by the economic and social community in which both parties operate, replace legal sanctions. These sanctions sometimes arise within a private order functioning spontaneously, as when ongoing contractual relationships prevail between the parties, or when a close-knit economic or social community exists in which information concerning breaches of contract flows freely. In other cases, sanctions will be enforced within an organized private order, in which market intermediaries and trade associations enable information to flow and thereby provide transactors with the security essential for entering contracts. John McMillan and Christopher Woodruff have examined the characteristics of the private order that emerges in response to a dysfunctional public order, and the private order’s influence on transactors. Their article relies mainly on empirical studies conducted by the authors in Vietnam and in several Eastern European countries. They start with the assertion that, for various reasons, the public order is dysfunctional in these countries, and legal sanctions enacted against the party in breach are therefore ineffective. They examine how private order arises in response to this purported deficiency, and analyze the interaction between public and private orders when both function concurrently. This paper responds to their work by focusing on some of the contours of the relationship between public and private orders.