A Bargaining Dynamic Transaction Cost Approach to Understanding Framework Contracts

A Bargaining Dynamic Transaction Cost Approach to Understanding Framework Contracts

68 Am. U. L. Rev. 1621 (2019).

* Everett D. and Eugenia S. McCurdy Professor of Contract Law, Case Western Reserve University School of Law.  Elizabeth Connors, Jessica Ice, Rachel Ippolito, Steve Kovacic, James Oliver, and Stephanie Starek provided extraordinary research help.  Thanks are also due to Liza Vertinsky, Professor of Law, Emory University School of Law, for her insights and to Stewart Macaulay and William C. Whitford of the University of Wisconsin School of Law for encouraging me to do the empirical research on this project.  Peter M. Gerhart and Bill Whitford provided valuable insights on an earlier draft.

This Article recognizes that the new production innovation economy has spurred the adoption of the long-term agreement (“LTA”) with its information sharing protocols.  Those information sharing protocols help parties navigate uncertainty and promote informal enforcement.  Despite the advantages, preliminary empirical data suggests that parties continue to use alternatives to the LTA.  To explain the use and non-use of LTA’s in the supply chain, this Article suggests a bargaining lens explanation.  Each party in the supply chain will seek to solve durable problems of opportunism under conditions of uncertainty and will adopt a particular type of contract (LTA or alternative) only if the benefits of achieving the parties’ goals through that contract form outweigh the costs.  Firms constantly seek a way to minimize costs while maximizing contractual benefits.  That search underlies the deliberate choice of some suppliers to opt into or out of an LTA because they do not see the new benefits of the LTA to be greater than the net benefit of an alternative.  This bargaining lens theory will also provide guidance on whether and how the law should formally sanction parties.  Finally, the Article will offer advice for lawyers advising clients in the supply chain.