Evolving contract as a device for flexible coordination and control

American Business Law Journal

Volumn 34, Issue 3, 1997, Pages 329-384

  Salbu, Steven R ^a  

^a UNIVERSITY OF TEXAS AT AUSTIN   (United States)

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EID: 0040600781     PISSN: 00027766     EISSN: None     Source Type: Journal    
DOI: 10.1111/j.1744-1714.1997.tb00898.x     Document Type: Article

References (252)

1. The function of contractual control is most clearly manifested in classical conceptions, in which control is embodied in the fixation of certain outcomes. As neoclassical contractual approaches gained ascendancy in the early 20th century, some elements of control via certainty were supplanted by concern for objects such as fairness and justice. For discussion of certainty in contract law, see Daniel J. Klau, Note, What Price Certainty? Corbin, Williston, and the Restatement of Contracts, 70 B.U. L. REV. 511 (1990). While the control functions of modern contract have been attenuated by injection of consideration of fairness, contract today remains fundamentally a means of fixing obligations among consenting parties.
2. See infra notes 16-17 and accompanying text.
3. Specific performance exerts economic control directly by mandating that a breaching party execute its promises. For discussion of the effects of specific performance, see Alan Schwartz, The Case for Specific Performance, 89 YALE L.J. 271 (1979); Thomas Ulen, The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies, 83 MICH. L. REV. 341 (1984). Damages exert economic control indirectly, but no less forcefully, by charging the breaching party an amount necessary to place the aggrieved party in the economic position she would have occupied had the contract been performed. U.C.C. § 1-106 (1990).
4. Specific performance exerts economic control directly by mandating that a breaching party execute its promises. For discussion of the effects of specific performance, see Alan Schwartz, The Case for Specific Performance, 89 YALE L.J. 271 (1979); Thomas Ulen, The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies, 83 MICH. L. REV. 341 (1984). Damages exert economic control indirectly, but no less forcefully, by charging the breaching party an amount necessary to place the aggrieved party in the economic position she would have occupied had the contract been performed. U.C.C. § 1-106 (1990).
5. For detailed discussion of this phenomenon, see generally Steven R. Salbu, The Decline of Contract as a Relationship Management Form, 47 RUTGERS L. REV. 1271 (1995).
6. See Zenichi Shishido, Conflicts of Interest and Fiduciary Duties in the Operation of a Joint Venture, 39 HASTINGS L.J. 63, 63 (1987) (referring to the increasing growth of strategic alliance activity).
7. Interorganizational linkages have become increasingly common in recent years, as they "enable the organization to manage some of its environmental constraints and control some of the contingencies it confronts." Jeffrey Pfeffer & Phillip Nowak, Joint Ventures and Interorganizational Interdependence, 21 ADMIN. SCI. Q. 398, 398 (1976).
8. While theoretically distinctive, these various organizational forms frequently overlap in reality. The difficulty in distinguishing among forms may be due in part to the ofttimes fuzzy or permeable nature of organizational frontiers or borders. Jeffery Atik, Complex Enterprises and Quasi-Public Goods, 16 U. PA. J. INT'L Bus. L. 1, 21 (1995). Networks, the primary units of analysis in this article, are an example of relational structures borne of amorphous frontiers, as the relationships among network participants can encompass a limitless range of degrees of integration or differentiation. The network reflects characteristics of mutual (i.e., interfirm or intrafirm) access and communicational connectivity, rather than any particular relational structure. In terms of relatedness, the network can comprise any embodiment within the classic range spanning from market to hierarchy. For discussion of networks generally, see Benjamin Gomes-Casseres, Group Versus Group: How Alliance Networks Compete, HARV. BUS. REV., July-Aug. 1994, at 4.
9. While theoretically distinctive, these various organizational forms frequently overlap in reality. The difficulty in distinguishing among forms may be due in part to the ofttimes fuzzy or permeable nature of organizational frontiers or borders. Jeffery Atik, Complex Enterprises and Quasi-Public Goods, 16 U. PA. J. INT'L Bus. L. 1, 21 (1995). Networks, the primary units of analysis in this article, are an example of relational structures borne of amorphous frontiers, as the relationships among network participants can encompass a limitless range of degrees of integration or differentiation. The network reflects characteristics of mutual (i.e., interfirm or intrafirm) access and communicational connectivity, rather than any particular relational structure. In terms of relatedness, the network can comprise any embodiment within the classic range spanning from market to hierarchy. For discussion of networks generally, see Benjamin Gomes-Casseres, Group Versus Group: How Alliance Networks Compete, HARV. BUS. REV., July-Aug. 1994, at 4.
10. Neoclassical liberalization of contract law makes some concessions that erode the strict control function of classical contract, at least partially in deference to increasing interdependence among transactors. As Hillman notes, classical contractual enforcement of consensual obligations has been tempered "by principles, such as reliance and unjust enrichment, that focus on the fairness and the interdependence of parties rather than on parties' actual agreements." Robert A. Hillman, The Crisis in Modern Contract Theory, 67 TEX. L. REV. 103, 104 (1988).
11. Increasingly cooperative endeavors will tend to decrease control needs because a manifest function of cooperation is the pursuit of mutually desired goals, which are self-enforcing and will therefore require less policing. However, because opportunism among cooperators remains a threat, and because some cooperators are less trustworthy than others, not all cooperative endeavors will necessarily entail a decrease in desirable levels of control.
12. Indeed, the hybridization of cooperative/adversarial relationships has become increasingly formalized with the growth of strategic alliance activity among firms that otherwise view themselves as competitors. For discussion of this trend, see Neal Templin, Strange Bedfellows: More and More Firms Enter Joint Ventures with Big Competitors, WALL ST. J., Nov. 1, 1995, at A1.
13. Despite the cooperative nature of strategic alliances, potential disagreements and conflicts will arise not only as a product of human nature, but also from difficulties that frequently exist in forging successful alliances. See Joseph A. Pantoja, Desirable Economic Cooperation Among High-Technology Industries: A Look at Telephone and Cable, 1994 COLUM. BUS. L. REV. 617, 619 (observing the difficulties associated with the choice of good alliance matches). As long as the development of beneficial alliances remains an imperfect art, any human tendencies towards conflict are likely to be exacerbated by tensions that result from mismatches. Unavoidable dissension necessitates the maintenance of some degree of contractual control to govern even cooperative relationships.
14. Control can manifest itself formally, through relationship management structures specifically adapted to govern particular transactions, or informally, through development of a relational culture. For more detailed discussion of these forms of control, see Salbu, supra note 4, at 1332-40.
15. Relevant definitions of coordination emphasize proper ordering and harmonious combination or interaction of relationships. RANDOM HOUSE DICTIONARY OF THE ENGLISH LANGUAGE 447 (2d ed. unabridged 1987).
16. Of course, others might define and distinguish coordination and control differently. One can imagine a more all-encompassing definition of control that includes both the coordinative function and the creation and enforcement of behavioral incentives, under which coordination would be a subset of control. The less comprehensive definition of control here is one of many possible definitions, intentionally chosen to be narrow enough to render coordination and control relatively discrete rather than overlapping categories.
17. In other words, coordination and control are not necessarily ordinal processes. They can be implemented simultaneously, both at the planning/contracting stage and the stage of contractual execution.
18. See Daniel T. Ostas & Burte A. Leete, Economic Analysis of Law as a Guide to Post-Communist Legal Reforms: The Case of Hungarian Contract Law, 32 AM. BUS. L.J. 355, 366 (1995) ("Contract law. . . encourages the performance of voluntary agreements by providing a sanction for breach.").
19. See, e.g., Transamerica Consumer Receivable Funding v. Warhawk Investments, 842 F.Supp. 536, 541 (1994); Fields v. Thompson, 297 S.E.2d 100 (Ga. Ct. App. 1982).
20. See Marc Galanter & David Luban, Poetic Justice: Punitive Damages and Legal Pluralism, 42 AM. U. L. REV. 1393, 1413-17 (1993)(discussing recent increases in the number of breach of contract lawsuits, as well as increases in the size of awards). Increases in both quantity of suits and quantity of damages should increase the risk of breaching a contract, and therefore discourage breach.
21. This trend arguably echoes a similar phenomenon within organizations, in which the exercise of hierarchic control appears to be declining. For example, rational organizational strategy models, under which managers induce behaviors, are being challenged by autonomous behavior models, under which top-down control is replaced by individual self-initiation at the operations level. Stuart L. Hart, An Integrative Framework for Strategy-Making Processes, 17 ACAD. MGMT. REV. 327, 328-30 (1992).
22. Many cooperative endeavors are likely to experience an increase in naturally occurring, mutually acceptable behavior as they move away from traditional, adversarial models of interaction. This occurs simply because cooperation entails goal-sharing. The more goals interacting organizations share, the greater the chance that selfishly motivated behaviors will prove mutually beneficial. Moreover, the spirit of cooperation will tend to forge relational elements of trust, which can substitute for contractual elements of control. As Sitkin and Roth observe, trust may be more effective moderators of behaviors in these instances than legalistic control mechanisms. Sim B Sitkin & N.L. Roth, Explaining the Limited Effectiveness of Legalistic "Remedies" for Trust/Distrust, 4 ORG. SCI. 367 (1993).
23. Mayer et al. note that even in the absence of trust, cooperating parties may evince mutually desirable behaviors when "the trustee's motives. . . lead him or her to behave in a way that coincides with the trustor's desires." Roger C. Mayer et al., An Integrate Model of Organizational Trust, 20 ACAD. MGMT. REV. 709 (1995). While cooperation does not necessarily imply trust, it does increase the likelihood that the motives of trustor and trustee will happen to coincide.
24. This growing need for systematic coordination is a function of the very essence of cooperative endeavors. Just as the design of organizations can be seen as effecting a minimization of costs of coordination, so the design of interorganizational relations would be most rational to the degree that it achieved these same ends. For discussion of this "coordination-cost" model of organization design, see Praveen R. Nayyar & Robert K. Kazanjian, Organizing to Attain Potential Benefits from Information Asymmetries and Economies of Scope in Related Diversified Firms, 18 ACAD. MGMT. REV. 735, 742 (1993).
25. Network structures exemplify increased fluidity and interdependence among organizations whose boundaries are drawn with diminishing clarity. See Walter F. Powell, Neither Market Nor Hierarchy: Network Forms of Organization, 12 ORG. BEHAV. 295, 303 (1990) ("In network modes of resource allocation, transactions occur neither through discrete exchanges nor by administrative fiat, but through networks of individuals engaged in reciprocal, preferential, mutually supportive actions. Networks can be complex: they involve neither the explicit criteria of the market, nor the familiar paternalism of the hierarchy. [A] basic assumption of network relationships is that one party is dependent on resources controlled by another, and that there are gains to be had by the pooling of resources.")(citation omitted).
26. See generally OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND ANTITRUST IMPLICATIONS (1975).
27. This is not to suggest that acontractual transactions must lack coordination, but rather that they tend to be characterized by reduced levels of coordination. In fact, we can break down the functions of an agreement to include two purposes: coordination and obligation. Coordination can exist with or without technical legal obligation. The stability of coordinative efforts is certainly enhanced when some mechanism is available to ensure compliance with coordinative plans. While the obligational element of contract is one such mechanism, it is not the only one. As Vincent-Jones observes, mutual expectations of parties coordinating transactions can be ensured contractually or extracontractually, through informal arbiters of social interaction such as conventional norms or the recognition of self-interest in honorable behavior. Peter Vincent-Jones, Contract and Business Transactions: A Socio-Legal Analysis, 16 J. L. & SOC'Y 166, 169 (1989) (referring to the work of sociologist Max Weber).
28. The threat of over-coordination or under-coordination is a substantial one, in part because contract law is relatively rigid in its options for resolving disputes. As Professor Scott observes, courts typically have only two options in determining whether to enforce a contractual risk distribution scheme-enforcement under the contract as written or nonenforcement under the contract as written by applying doctrines of excuse. Courts rarely adjust contractual allocation of risk to converge upon some middle ground. Robert E. Scott, Conflict and Cooperation in Long-Term Contracts, 75 CAL. L. REV. 2005, 2006-07 (1987). Because courts have not traditionally intervened to rewrite contractual allocation risks according to equitable precepts, contracts subject to litigation will frequently result, in their ultimate judicial application, in consequences that are overly-coordinated (as when the contracts are enforced despite extenuating circumstances) or under-coordinated (as when contractual intent that has been impaired but not rendered completely irrelevant is entirely dismissed under doctrines such as commercial impracticability).
29. A "moderately controlling relationship management form" refers here to one that incurs a lower net cost of over-and under-control than either traditional contract or the adoption of acontractual relations.
30. The sacrifice of some degree of control is frequently a necessary condition, but never a sufficient condition, for the realization of increments of flexibility. This is because some flexibility will require a forestalling of commitment to enhance free movement, but commitment can also be forestalled gratuitously, with no foreseeable impact upon the kinds of flexibility upon which a firm is likely to call. Likewise, the sacrifice of some degree of flexibility is frequently a necessary condition, but never a sufficient condition, for realization of increments of control. By definition, control fixes obligation, which in turn impinges upon freedom of movement and hence upon flexibility. Yet it is possible for firms to sacrifice flexibility with no meaningful gain in control, as when the forfeiture of flexibility has no relationship to the kinds of commitments likely to be needed by the firm.
31. Interdependence of transacting parties can take many forms. One example is the development of partner-specific investments. Jeffrey H. Dyer & William G. Ouchi, Japanese-Style Partnerships: Giving Companies a Competitive Edge, SLOAN MGMT. REV., Sept. 22, 1993, at 51. For discussion of organizational interdependence as a contractual control substitute, see Steven R. Salbu and Richard A. Brahm, Strategic Considerations in Designing Joint Venture Contracts, 1992 COLUM. BUS. L. REV. 253, 302-05.
32. Interdependence of transacting parties can take many forms. One example is the development of partner-specific investments. Jeffrey H. Dyer & William G. Ouchi, Japanese-Style Partnerships: Giving Companies a Competitive Edge, SLOAN MGMT. REV., Sept. 22, 1993, at 51. For discussion of organizational interdependence as a contractual control substitute, see Steven R. Salbu and Richard A. Brahm, Strategic Considerations in Designing Joint Venture Contracts, 1992 COLUM. BUS. L. REV. 253, 302-05.
33. For discussion of relational governance functions of hostages, see Anna Grandori & Giuseppe Soda, Inter-firm Networks: Antecedents, Mechanisms and Forms, 16 ORG. STUD. 183 (1995); Thomas M. Jones, Instrumental Stakeholder Theory, 20 ACAD. MGMT. REV. 404 (1995); Anoop Madhok, Revisiting Multinational Firms' Tolerance for Joint Ventures: A Trust-Based Approach, 26 J. INT'L BUS. STUD. 117 (1995); Oliver E. Williamson, Credible Commitments: Using Hostages to Support Exchange, 73 AM. ECON. REV. 519 (1983).
34. For discussion of relational governance functions of hostages, see Anna Grandori & Giuseppe Soda, Inter-firm Networks: Antecedents, Mechanisms and Forms, 16 ORG. STUD. 183 (1995); Thomas M. Jones, Instrumental Stakeholder Theory, 20 ACAD. MGMT. REV. 404 (1995); Anoop Madhok, Revisiting Multinational Firms' Tolerance for Joint Ventures: A Trust-Based Approach, 26 J. INT'L BUS. STUD. 117 (1995); Oliver E. Williamson, Credible Commitments: Using Hostages to Support Exchange, 73 AM. ECON. REV. 519 (1983).
35. For discussion of relational governance functions of hostages, see Anna Grandori & Giuseppe Soda, Inter-firm Networks: Antecedents, Mechanisms and Forms, 16 ORG. STUD. 183 (1995); Thomas M. Jones, Instrumental Stakeholder Theory, 20 ACAD. MGMT. REV. 404 (1995); Anoop Madhok, Revisiting Multinational Firms' Tolerance for Joint Ventures: A Trust-Based Approach, 26 J. INT'L BUS. STUD. 117 (1995); Oliver E. Williamson, Credible Commitments: Using Hostages to Support Exchange, 73 AM. ECON. REV. 519 (1983).
36. For discussion of relational governance functions of hostages, see Anna Grandori & Giuseppe Soda, Inter-firm Networks: Antecedents, Mechanisms and Forms, 16 ORG. STUD. 183 (1995); Thomas M. Jones, Instrumental Stakeholder Theory, 20 ACAD. MGMT. REV. 404 (1995); Anoop Madhok, Revisiting Multinational Firms' Tolerance for Joint Ventures: A Trust-Based Approach, 26 J. INT'L BUS. STUD. 117 (1995); Oliver E. Williamson, Credible Commitments: Using Hostages to Support Exchange, 73 AM. ECON. REV. 519 (1983).
37. Daniel Sutter, Asymmetric Power Relations and Cooperation in Anarchy, 61 S. ECON. J. 602 (1995); Peter S. Ring & Andrew H. Van de Ven, Developmental Processes of Cooperative Interorganizational Relationships, 19 ACAD. MGMT. REV. 90, 94 (1994).
38. Daniel Sutter, Asymmetric Power Relations and Cooperation in Anarchy, 61 S. ECON. J. 602 (1995); Peter S. Ring & Andrew H. Van de Ven, Developmental Processes of Cooperative Interorganizational Relationships, 19 ACAD. MGMT. REV. 90, 94 (1994).
39. Danny Miller, The Architecture of Simplicity, 18 ACAD. MGMT. REV. 116, 121 (1993) ("Most executives are so committed to the strategies and cultures they have nurtured that it is painful for them to admit that these are obsolete.").
40. Commitment to implementing strategies is frequently attributed to involvement in the formulation of those strategies. See, e.g., DORINE C. ANDREWS & SUSAN K. STALICK, BUSINESS REENGINEERING: THE SURVIVAL GUIDE 30-31 (1994)(citing involvement as a means of facilitating implementation and minimizing resistance to change).
41. See Dick Axelrod, Getting Everyone Involved: How One Organization Involved its Employees, Supervisors, and Managers in Redesigning the Organization, 28 J. APPLIED BEHAV. SCI. 499, 502 (1992) (referring to developing commitments that arise during a series of conferences).
42. See id. (demonstrating this process using a model of functionalized stages - in this case, (i) visioning, (ii) customer-oriented issues, (iii) technical issues, (iv) organizational design issues, and (iv) implementation issues.) While setting organizational objectives in functional stages is an orderly, logical method of sequencing planning, other rational means of ordering objectives also have potential to support effective planning.
43. This psychological commitment has been observed to continue even when the sequentially adopted planning stages would appear, objectively, to be failing. The organizational behavior literature refers to the phenomenon as escalation of commitment to declining or failing courses of action. See, e.g., Joel Brockner, The Escalation of Commitment to a Failing Course of Action: Toward Theoretical Progress, 17 ACAD. MGMT. REV. 39 (1992).
44. A scenario may help explain this hazard. Two transacting parties may seek to reduce contractual control during the early years of their relationship, hoping thereby to increase their flexibility in a volatile environment. If psychological commitment to various planning assumptions proves an effective substitute for highly specified contractual commitment, any ostensible gains in flexibility during these early years may be illusory. Suppose that after five years, a crisis in the businesses of both parties is precipitated by a business cycle shift or an unforeseen alteration in strategic environments. As cash flows become increasingly precarious for both parties, each tries to manage costs. If the parties deal vertically with one another, these mutual cost-cutting impulses create discord. Whereas the parties achieve no real flexibility gain by adopting a low-control transactional stance, they may experience real losses during the financial crisis. The absence of clearly specified and presentiated rights and duties may impede resolution of disagreement, thereby costing both parties in terms of uncertainty, risk, and resources that ultimately may be directed towards dispute resolution.
45. This increase exists in theory but sometimes not in practice because the benefits of fixing contingencies may obtain only if the planning assumptions upon which contractual terms were predicated are accurate. Fixation of contingencies based on inaccurately predicted assumptions increases the likelihood that contractual specification will prove over time to have been dysfunctional.
46. Risk in relation to planning is a function of the likelihood that given impediments will arise over the course of a relationship, multiplied by the magnitude of harm associated with these impediments. Contracting can reduce risk by locking in those resources most likely to be affected by contingencies otherwise beyond the control of the parties.
47. Contract can become an integral part of an organization's strategy, including its risk management strategy, by circumscribing relationships among interdependent parties seeking to create projects jointly around a multiplicity of diverse purposes. For discussion of this nexus between contract and strategy, see DANIEL R. GILBERT, JR., THE TWILIGHT OF CORPORATE STRATEGY: A COMPARATIVE ETHICAL CRITIQUE 169 (1993).
48. An analogy can be borrowed effectively here from international relations, where "[d]ynamic international obligations result from agreements that are structured to allow consensual changes in the obligations imposed in order to fulfill the object of. . . [a] treaty in uncertain conditions. Dynamic obligations arise under agreements that allow the parties to mutually adjust commitments while maintaining a shared perception of reciprocal responsibility." Edwin E. Smith, Understanding Dynamic Obligations: Arms Control Agreements, 64 S. CAL. L. REV. 1549, 1557 (1991).
49. This more optimistic conceptualization is indeed the equivalent of the immediately preceding statement, because the risk of undercoordination is the flip side of excessive concessions in the contractual management of stability, while the risk of overcoordination is the flip side of excessive concessions in the maintenance of complete acontractual discretion.
50. I refer here to the gradual shift away from the requirement of complete specification of all contingencies, and towards the recognition of enforceable agreements when there is manifestation of intention and consent to be bound, and when there are reasonable bases of inference in regard to unspecified terms. For a good discussion of the developmental context of contingency in contract law, see Juliet P. Kostritsky, Bargaining with Uncertainty, Moral Hazard, and Sunk Costs: A Default Rule for Precontractual Negotiations, 44 HASTINGS L.J. 621, 621-25 (1993) (observing that increased complexity of contractual relations has reduced the importance of full elaboration of all contingencies within a contract).
51. Contingencies can be incorporated into contract using conditions precedent, in which case conditions trigger obligation, or using conditions subsequent, in which case conditions defuse obligation. For discussion of conditions precedent, see Platt Pacific Inc. v. Andelson, 862 P.2d 158, 162 (Cal. 1993) (describing conditions precedent as acts that parties are required to perform or uncertain eventualities that must occur prior to the accrual of contract rights and duties); for discussion of conditions subsequent, see Alaska v. Hammond, 625 P.2d 844, 848 (Alaska 1981) (defining conditions subsequent as contingencies upon the occurrence of which contractual duties are extinguished). In the case of either conditions precedent or conditions subsequent, obligation is rendered contingent, respectively, on the occurrence or the nonoccurrence of a certain event or certain events.
52. Re Estate of Sadler, 98 So. 2d 863 (Miss. 1957).
53. For example, Party A agrees to purchase 1,000 gadgets from Party B once the prime rate goes below X%, having determined that a project utilizing 1,000 gadgets as inputs will be profitable only under a set of particular cost-related conditions. This example simply reflects the common practice of capital budgeting, under which a tipulated hurdle rate of return is a function of, among other things, the weighted average cost of capital. Party A recognizes that the approval of the project will depend on independent conditions, such as cost of debt, but wishes to lock in financing commitments should the feasibility of the project be triggered.
54. Parties employing contingent contract create a pivotal obligation, under which eventuality A will trigger the response desired under one set of conditions while eventuality B will trigger the response desired under another set of conditions. This flexibility has the effect of ameliorating a number of potentially negative effects of ucertainty in contracting. Simple, unidimensional obligation under such complex conditions may result in either the enforcement of suboptimal agreements or the defeat of expectations under exonerating doctrines such as impossibility, commercial impracticability, or frustration of purpose. In the event of enforcement, unidimensional contract may yied oppressive obligation. In the event of exoneration from enforcement, contract becomes unstable and therefore hinders exchange by failing to provide assurance of future performance or assessment of damages. For discussion of the dysfunction of unstable contracts generally, see Mary Lou Serafine, Repudiated Compromise After Breach, 100 YALE L.J. 2229, 2239 (1991). By improving the utility of contract in meeting the needs of contracting parties as they develop, contingency pivots mitigate the risks of both suboptimal enforceable contract and defeat of expectations via exoneration of performance.
55. In economic terms, tandem scores for duodimensional contingencies reflect analysis of the overlapping indifference curves of contracting parties, such that certain combinations of interest rates and supply prices are preferable to both parties. Assuming parties that seek satisficing rather than optimizing outcomes, the boundaries of acceptable contingency choices would consist of overlapping areas of the outcomes satisfactory to both parties, in terms of the two dimensions. For explanation of indifference curves, see ROBERT COOTER & THOMAS ULEN, LAW AND ECONOMICS 23-24 (1988). For discussion of the tendency of decision makers to make satisficing rather than optimizing choices, see JAMES G. MARCH & HERBERT A. SIMON, ORGANIZATIONS 140-41 (1958).
56. In economic terms, tandem scores for duodimensional contingencies reflect analysis of the overlapping indifference curves of contracting parties, such that certain combinations of interest rates and supply prices are preferable to both parties. Assuming parties that seek satisficing rather than optimizing outcomes, the boundaries of acceptable contingency choices would consist of overlapping areas of the outcomes satisfactory to both parties, in terms of the two dimensions. For explanation of indifference curves, see ROBERT COOTER & THOMAS ULEN, LAW AND ECONOMICS 23-24 (1988). For discussion of the tendency of decision makers to make satisficing rather than optimizing choices, see JAMES G. MARCH & HERBERT A. SIMON, ORGANIZATIONS 140-41 (1958).
57. For example, the posture of European Community Competition law to cooperative ventures has been described as more encouraging to joint ventures than U.S. antitrust law Suhail Nathani, Note, From the United States to Europe: A Comparative Study of Production Joint Ventures, 2 DUKE J. COMP. & INT'L L. 163, 192 (1992).
58. While many countries have prohibited majority foreign ownership of businesses or ventures within their borders, more recent foreign investment legislation has tended to reduce these barriers. For example, under Mexico's Foreign Investment Act of 1993, "foreign investors may own up to 100 percent of the capital stock of Mexican-based businesses in all areas of the economy not specifically excluded" under the Act. Henry T. King, Jr., Joint Ventures and Technology Transfers in Mexico, 11 CORP. COUNSEL Q. 36, 38 (1995).
59. Suppose, for example, that the restrictive policies of Asian country X once deterred a company in Asian Country Y from entering a joint venture with a company in country X. The company opted instead to enter a joint venture in African country Z. Upon the liberalization of country X's joint venture laws, termination of the venture in African country Z and development of a venture in country X may become advisable. Ventures with African companies may become suboptimal, given transportation costs, legal impediments, import/export difficulties, cultural compatibility between supplier and end-user, etc. Even if interest rates and supply prices meet the duodimensional contingencies posited earlier, ongoing relations with suppliers in African country Z may prove dysfunctional for Asian companies.
60. Predetermined subset selections are truly contractual commitment subsets, whereas negotiable subset selections, discussed infra, text accompanying notes 61-101, are acontractual/noncommittal subsets.
61. Compare this approach to the approach discussed in the preceding Subsection. The "contingent sets of commitment" examined in that Subsection were triggered by events that are usually beyond the control of the parties. Once a contract employing contingent sets of commitment becomes effective, the parties to the contract are obligated in some unforeseeable ways, but the contingencies that will determine the ultimate obligations are entirely independent of any choices to be made by those entering the agreement. In contrast, the "alternative commitment sets" confer a greater amount of discretion to the party granted the power to choose among alternatives. While the party agrees to choose one from a group of listed options, the party can indulge inclinations or preferences in selecting among these options apart from any triggering event.
62. Decisional layers refer here to the number of decision-making sources evoked by a given relationship management mechanism. The obligee is one layer; the obligor is second layer; the external environment of unmanageable contingencies is a third layer. The concept of multidimensionality recognizes that the numerous mechanisms discussed in this paper for reconciling degrees of over-control and under-control can be employed jointly.
63. This statement assumes, of course, that the recipient of the disjunctive promises also makes a promise that qualifies under the requirements of consideration and that the promises of the parties constitute a bargained-for exchange. The disjunctive promises invoke the legal detriment necessary for consideration, as the obligor of the disjunctive promises has constrained his or her legal freedom under either of two events. For discussion of the bargain requirement of consideration, see Caroll v. Lee, 712 P.2d 923, 926 (Ariz. 1986)(discussing consideration in terms of exchanged promises, mutuality of obligation, and bargained-for performance). For discussion of the legal detriment requirement for consideration, see Hamer v. Sidway, 27 N.E. 256 (N.Y. 1891); Laibly v. Halseth, 345 P.2d 796 (Wy. 1959). For discussion of the qualification of conditional promises as consideration, see Wilson v. Continental Body Corporation, 418 N.E.2d 56, 59 (Ill. 1981).
64. I refer to nondisjunctive commitments as "simple" promises. These are all those examples of consideration that require the obligor to perform one concrete, specified act, without the creation of discretion through the application of choice.
65. Alternative promises qualify as consideration if each alternative, standing alone, would comprise consideration. Torncello v. U.S., 681 F.2d 756 (1982).
66. This mitigation of hardship is a form of what we refer to colloquially as "room to breathe." Suppose obligor knows that under Contingency N, performance of Option 1 will be relatively easy while performance of Option 2 will be relatively onerous. Under alternative Contingency M, performance of Option 2 will be relatively easy while performance of Option 1 will be relatively onerous. If obligor knows that either Contingency N or Contingency M will play out, a promise to perform either Option 1 or Option 2 at the obligor's election permits performance of the obligation without risk of undue burden.
67. This statement is somewhat oversimplified in that it assumes that the magnitude of risk of over-control for the obligor is equal to the magnitude of risk of under-control for the obligee. If these risks are not equal in magnitude, shifting a weightier risk from the shoulders of one party and thereby converting it to a lighter obverse risk on the shoulders of the other party will both shift and reduce risk. Nonetheless, the conditions in Proposition (i) do not automatically or systematically reduce the overall levels of risk associated with transactions.
68. For discussion of the nature of differences in risk propensity and risk aversion among individual decision-makers, see Sim B Sitkin & Laurie R. Weingart, Determinants of Risky Decision-Making Behavior: A Test of the Mediating Role of Risk Perceptions and Propensity, 38 ACAD. MGMT. J. 1573, 1574-80 (1995).
69. As in the case of contingency contracting, the inability to predict risks effectively undermines the utility of even flexible commitment options. Both contingent contracts and flexible commitment options require what Goetz and Scott describe as the ability "to allocate explicitly the risks that future contingencies may cause one or the other to regret having entered into an executory agreement." Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interaction Between Express and Implied Contract Terms, 73 CAL. L. REV. 261, 267 n.10 (1985).
70. EDWIN MANSFIELD, ECONOMICS 20 (5th ed. 1986).
71. Econometrics is the function of describing "the marketplace in which a business functions," specifying "the behavioral relationships which influence a product or marketplace." AN EXECUTIVE'S GUIDE TO ECONOMETRIC FORECASTING 3 (Al Migliaro & C.L. Jain eds., 1987).
72. Gardner Ackley, Three Ways the Pros Assess the Outlook-Don't Rely on Just One, DUN'S BUS. MONTH, Nov. 1984, at 51; Juan Cameron, The Economic Modelers Vie for Washington's Ear, FORTUNE, Nov. 20, 1978, at 102. It bears noting, however that even computerized econometric forecasting models are limited in their ability to forecast accurately. Shelley A. Lee, The Prophets of Atlanta, 20 BUS. DATELINE: BUS. ATL. 55 (1991).
73. Gardner Ackley, Three Ways the Pros Assess the Outlook-Don't Rely on Just One, DUN'S BUS. MONTH, Nov. 1984, at 51; Juan Cameron, The Economic Modelers Vie for Washington's Ear, FORTUNE, Nov. 20, 1978, at 102. It bears noting, however that even computerized econometric forecasting models are limited in their ability to forecast accurately. Shelley A. Lee, The Prophets of Atlanta, 20 BUS. DATELINE: BUS. ATL. 55 (1991).
74. Gardner Ackley, Three Ways the Pros Assess the Outlook-Don't Rely on Just One, DUN'S BUS. MONTH, Nov. 1984, at 51; Juan Cameron, The Economic Modelers Vie for Washington's Ear, FORTUNE, Nov. 20, 1978, at 102. It bears noting, however that even computerized econometric forecasting models are limited in their ability to forecast accurately. Shelley A. Lee, The Prophets of Atlanta, 20 BUS. DATELINE: BUS. ATL. 55 (1991).
75. See MICHAEL GODET, THE CRISIS IN FORECASTING AND THE EMERGENCE OF THE "PROSPECTIVE" APPROACH 18-19 (1979) (discussing nature and sources of uncertainty in forecasting).
76. Quantifiability enhances predictability of outcomes, or at least of the sets of possible outcomes. Forecasters can choose to predict the most likely few scenarios, or any of a number of increasingly unlikely scenarios, according to their needs and the relative costs and benefits of an expanded thoroughness. While the ordinal nature of numbers does not ensure that increasingly outlying scenarios are as reliably predict able as more familiar, more likely scenarios, ordinality does suggest an orderly method of analysis along an infinite range of easily identified numerical possibilities.
77. See, e.g., Carol Haber, Electronic Breakthroughs: Big Picture Eludes Many, ELECTRONIC NEWS, June 13, 1994, at 46 (discussing high degree of unpredictability of breakthroughs in modern electronics industry).
78. Volatility and complexity of environments, such as the volatility caused by increasingly rapid changes in technology, may be exacerbated by imperfections in the measurements that firms or analysts use to understand those environments. For example, Boyd et al. have observed a low degree of consensus between archival environmental measures, such as industry sales growth or concentration ratios, and more subjective judgments that are frequently employed by members or key informants of firms. Brian K. Boyd et al., Divergence Between Archival and Perceptual Measures of the Environment: Causes and Consequences, 18 ACAD. MGMT. REV. 204, 204-05 (1993).
79. Either of these forms of neoclassical obligation can bind parties excessively under some circumstances. Specifically, any commitment to negotiate with a particular party reduces the ability to shift the relevant transaction to other network sources. A firm agreement to come to terms virtually eliminates the possibility of an intranetwork transactional shift, whereas an agreement to engage in reasonable negotiation before abandonment of relations merely delays the prospect of otherwise potentially advantageous shifts. In other words, any truly contractual mechanism, be it classical or neoclassical, impairs the quasi-severability of relations that is becoming increasingly vital to the optimal utilization of strategic networks.
80. Agreements to agree are sometimes considered binding, despite criticism that they are too indefinite to enforce. Enforcement of agreements to agree is usually based on a theory of reliance: that the aggrieved party has suffered opportunity costs by presuming that the breaching party will make a good faith effort to come to terms. International Chamber of Commerce, FORMATION OF CONTRACTS AND PRECONTRACTUAL LIABILITY 25 (1990).
81. For discussion of agreements considered to be binding, the detailed terms of which have not been determined at the time of commitment, see Harvey L. Temkin, When Does the "Fat Lady" Sing? An Analysis of "Agreements in Principle" in Corporate Acquisitions, 55 FORDHAM L. REV. 125, 125-28 (1986).
82. See FORMATION OF CONTRACTS AND PRECONTRACTUAL LIABILITY, supra note 70, at 26 (describing standards for performance of agreements to agree in terms of good faith and best efforts).
83. In the modern literature, the serious recognition of governing business relationships without benefit of contract begins with the classic work of Macaulay Stewart Macaulay, Non-Contractual Relations in Business, 28 AM. SOC. REV. 55 (1963).
84. Many acontractual planning sets thus replace contract with nonobligational planning. For more detailed examination of this concept, see Steven R. Salbu & Richard Brahm, Planning Versus Contracting for International Joint Venture Success: The Case for Replacing Contract with Strategy, 31 COLUM. J. TRANSNAT'L L. 283 (1993). Of course, when contract is rejected as a relational governance mechanism, parties must resort to alternative modes of moderating exchange relationships. These can include forms of integration, self-interest stakes, norms, ethical compulsior, and reputational stakes. Gregory T. Gundlach & Ravi S. Achrol, Governance in Exchange: Contract Law and Its Alternatives, 12 J. PUB. POL'Y & MKTG. 141, 141 (1993).
85. Many acontractual planning sets thus replace contract with nonobligational planning. For more detailed examination of this concept, see Steven R. Salbu & Richard Brahm, Planning Versus Contracting for International Joint Venture Success: The Case for Replacing Contract with Strategy, 31 COLUM. J. TRANSNAT'L L. 283 (1993). Of course, when contract is rejected as a relational governance mechanism, parties must resort to alternative modes of moderating exchange relationships. These can include forms of integration, self-interest stakes, norms, ethical compulsior, and reputational stakes. Gregory T. Gundlach & Ravi S. Achrol, Governance in Exchange: Contract Law and Its Alternatives, 12 J. PUB. POL'Y & MKTG. 141, 141 (1993).
86. Option theory has become popular in both financial economics and strategic management to describe a contractual mechanism long familiar to legal scholars and lawyers - the creation of an option, supported by consideration, by which the purchasing party can make a short-term, relatively minor investment in the right to lock in a commitment in the future, for long-term, relatively major gain. For discussion of option theory generally, see Edward H. Bowman & Dileep Hurry, Strategy Through the Option Lens: An Integrated View of Resource Investments and the Incremental-Choice Process, 18 ACAD. MGMT. REV. 760, 761-62 (1993).
87. For more detailed discussion of the valuation of options, see WILLIAM A. KLEIN & JOHN C. COFFEE, JR., BUSINESS ORGANIZATION AND FINANCE: LEGAL AND ECONOMIC PRINCIPLES 281-85 (5th ed. 1993).
88. See generally Oliver Williamson, Transaction-Cost Economics: The Governance of Contractual Relations, 22 J.L. & ECON. 233 (1979).
89. For example, Williamson observes that exchanges of transaction-specific assets encourage the supplanting of autonomous trading with unified ownership in the form of vertical integration. This result reflects the tendency of transaction-specific assets to create a "lock-in" effect, whereby sellers cannot shift goods to alternative markets and buyers cannot seek alternative sources. The nonmarketability of transaction-specific assets encourages the movement of governance structures towards hierarchy and away from market contract. OLIVER WILLIAMSON, THE ECONOMIC INSTITUTIONS OF CAPITALISM 53 (1985).
90. Id. at 239-40.
91. Todd H. Chiles & John F. McMackin, Integrating Variable Risk Preferences, Trust, and Transaction Cost Economics, 21 ACAD. MGMT. REV. 73, 74 (1996).
92. Id.
93. The commodity component refers to the fungibility of the particular product at issue; frequency of usage refers to the dimension of demand for the fungible goods. A commonly used commodity is highly transaction-nonspecific because the parts are interchangeable and there are many substitute buyers who may be interested in a seller's product should the original buyer renege. Of course, a seller's ability to shift supplies to substitute purchasers will be affected as well by competition among supply sources.
94. As asset specificity refers to the degree to which the subject matter of a transaction is idiosyncratic to that transaction, complete asset specificity suggests that the subject matter of a transaction is entirely idiosyncratic to that transaction. In other words, there are no potential substitute buyers of the completely transaction-specific asset. As Shell describes asset specificity in terms of situations in which "assets are specifically tailored to the transaction and cannot fully be salvaged outside the transaction," so complete asset specificity would entail situations in which assets have no salvage value outside the transaction. G. Richard Shell, Opportunism and Trust in the Negotiation of Commercial Contracts: Toward a New Cause of Action, 44 VAND. L. REV. 221, 229 (1991).
95. See Williamson, supra note 77, at 239-40.
96. See id. ("Items that are unspecialized among users pose . . . hazards, since buyers in the circumstances can easily turn to alternative sources, and suppliers can sell output intended for one order to other buyers without difficulty.").
97. Whereas contract is necessary to protect indivertible resource commitments under conditions of asset specificity, contract serves a less critical function when assets are highly transaction nonspecific.
98. The end measurement is intentionally the point of resource commitment rather than the point of implementation of decision, because we are measuring the period during which information can be gathered and evaluated, and during which choices can be made.
99. This dimension simply refers to differences that exist in the pace of transactions and decisions under different circumstances. Many financial markets, for example, are frantically fast-paced, and transactions in these markets are achieved in a manner of moments. Likewise, culture and environment can affect transaction pace; for example, business may move more quickly in urban areas than in rural areas, in some U.S. regions as opposed to others, and in some nations as opposed to others.
100. For example, some decision alternatives cannot be adopted immediately because governmental constraints require steps of regulatory application or compliance, such as the receipt of permits, the successful passing of inspection, or the qualification to engage in particular behavior through licensing or screening processes.
101. Obligational relations can, of course, be renegotiated in many ways. Old contracts can be mutually disavowed or limited to a smaller sphere of transaction and more limited relations; moreover, existing relations can be consensually adjusted, redefined, and reordered. Old obligations can be traded for newer, better serving obligations, under the doctrine of mutual rescission. See Steven B. Katz, Note, The California Tort of Bad Faith Breach, the Dissent in Seaman's v. Standard Oil, and the Role of Punitive Damages in Contract Doctrine, 60 S. CAL. L. REV. 509, 525 n.65 (1987) (describing mutual rescission: "[w]hen parties want to pursue more lucrative deals they form a new contract to obliterate the old one."). While all these varieties of movement from obligation to new relationship are feasible, they will tend to take more time, ceteris paribus, than parallel movement from nonobligation to new relations. Because contractual expectations confer to the parties rights upon which those parties rely, severance of obligation is likely to require some amount of negotiation. Negotiation to undo relational patterns is time-consuming in unpredictable ways and at unpredictable levels. While parties contemplating relational shifts away from extant obligation can try to predict the degree of difficulty and cost, and hence to predict as well the amount of time the shift will ultimately consume, such prediction will be subject to varying margins of error. Parties that are obliged by prior contract and are operating under time constraints will tend to discount certain realliance options, therefore, for two reasons: (a) The parties may predict that they have inadequate time for the acceptable termination of existing obligations and the subsequent establishment of substitute relations, or (b) The parties may believe that there is likely to be adequate time to achieve these ends, but be unwilling to accept the risk that they are wrong. Accordingly, when decision time frames are abbreviated, the previous adoption of acontractual planning sets rather than contractual commitment sets will mitigate the degree and risk of over-control and increase the number of future viable options for intranetwork shifting of relations.
102. Volatility refers to a relationship's climate in terms of dynamism or frequency of change within given strategic or contractual time frames. I refer to strategic and contractual time frames as separate entities here, in deference to the fact that this Subsection supports a movement away from contracting under certain conditions. Accordingly, when contract is employed, the contractual time frame refers to the prospective period during which the obligational functions of the contract are in operation. Strategic time frames are those horizons employed in the process of planning, considered to be relevant because (a) they are sufficiently proximate to affect current decisions; and (b) they are sufficiently proximate to be reasonably within the purview of foreseeability of those engaged in present decision-making. While noncontracting parties must think in terms of strategic rather than contractual time frames, the two concepts are similar in function-each time frame is used to harness risk and facilitate the future development of the firm.
103. For a good generic discussion of these changes and their likely effects, see Stanley Karnow, What Will Happen When the Chinese Take Back Their "Fragrant Harbor"?, SMITHSONIAN, Apr. 1989, at 40.
104. For discussion of the delayed marketing of DAT technology, see Takeshi Matsuzaka, Resurgent DAT Defies Industry Pundits: Improved Sales Coincide with Debut of Rivals, NIKKEI WKLY., Nov. 15, 1993, at 9; Industry Trend: Full DAT Sales Begin, JIJI PRESS TICKER SERVICE, Aug. 17, 1990.
105. For discussion of the delayed marketing of DAT technology, see Takeshi Matsuzaka, Resurgent DAT Defies Industry Pundits: Improved Sales Coincide with Debut of Rivals, NIKKEI WKLY., Nov. 15, 1993, at 9; Industry Trend: Full DAT Sales Begin, JIJI PRESS TICKER SERVICE, Aug. 17, 1990.
106. Id.
107. Of course, legal sources of volatility existed during the period between laboratory refinement and the marketing of the product. This volatility must also be assessed by firms that are deciding whether to employ acontractual planning sets in lieu of flexible contract forms of relationship management.
108. See supra note 93. Concerns of the recording industry regarding intellectual property rights were expediently resolved, and the process was brought to market on a large scale during the early 1990s.
109. The literature of intraorganizational strategy recognizes the relationship between technology and organizational structure. See, e.g., Raghavan Parthasarthy & S. Prakash Sethi, The Impact of Flexible Automation on Business Strategy and Organizational Structure, 17 ACAD. MGMT. REV. 86 (1992) (discussing the relationship between strategy, structure, and technology in an environment of flexible automation). Given that structure is the organizational correlate of contractual governance mechanisms in markets, the law of contract might similarly benefit from more careful analysis of the effects of technology on relationship management.
110. See Catherine Arnst, AIDS Drug Snags Highlight Slow Drive Towards Cure, REUTERS, Financial Report, Dec. 3, 1991 (discussing the precarious prospects of any drug being developed for the treatment of AIDS); see also John Medearis, AIDS Research Strains Hemacare Funds, L.A. TIMES, Mar. 5, 1991, at 9A ("For any company, the chances of coming up with an effective treatment for acquired immune deficiency syndrome are slim.").
111. See Catherine Arnst, AIDS Drug Snags Highlight Slow Drive Towards Cure, REUTERS, Financial Report, Dec. 3, 1991 (discussing the precarious prospects of any drug being developed for the treatment of AIDS); see also John Medearis, AIDS Research Strains Hemacare Funds, L.A. TIMES, Mar. 5, 1991, at 9A ("For any company, the chances of coming up with an effective treatment for acquired immune deficiency syndrome are slim.").
112. Steven R. Salbu, Should AIDS Research be Regulated? A Manhattan Project for AIDS and Other Policy Proposals, 69 IND. L.J. 425, 438 (1994).
113. The literature in economics and organizations refers to the foreseeability of volatility in terms of certainty versus uncertainty in the selection of decision-making alternatives. For discussion of environmental and organizational certainty as it relates to organizational conflict in decision-making, see MARCH & SIMON, supra note 48, at 119.
114. Because the arena of possible outcomes can be identified and analyzed prior to the rendering of a decision, obligations created by contract can be forged intelligently, with awareness of the results associated with each obligation, be it simple or contingent. As the arena of outcomes in a volatile environment becomes less foreseeable, efforts to presentiate future behavior are much riskier, because the obligations are assumed in ignorance of an increasingly greater number of potentially unconsidered outcomes. As the likelihood of the actualization of an unconsidered outcome increases, so does the likelihood that contract - even contingent contract-will lock a party or parties into obligations that are unacceptable or unadvisable for reasons that were not anticipated at the moment of agreement. Contract subjects parties to increased risk of over-control as the elements of volatility become increasingly unpredictable.
115. See supra text accompanying notes 43-101.
116. The "partially acontractual" flexible coordination tools were those in which option contracts gave a party a unilateral right to impose obligation on the other party at the option holder's election.
117. The "completely acontractual" flexible coordination tools were those in which contract was entirely rejected in favor of planning, coordination, and ongoing negotiation.
118. See supra text accompanying notes 61-101.
119. Among these characteristics are those identified by Daft and Levin: flat hierarchy, decentralized decision making, capacity to tolerate ambiguity, permeability of organizational boundaries, capacity for renewal, and mechanisms for self-integrating coordination. Richard L. Daft & A.Y. Lewin, Where are the Theories for the "New" Organizational Forms: An Editorial Essay, 4:4 ORG. SCI. i (1993).
120. For discussion of the history and functions of the negotiability of contractual rights and duties, see Fredrick K. Beutel, Colonial Sources of the Negotiable Instruments Law of the United States, 34 ILL. L. REV. 137, 13742 (1939); Kevin M. Teevin, A History of Legislative Reform of the Common Law of Contract, 26 U. TOL. L. REV. 35, 61-63 (1994).
121. For discussion of the history and functions of the negotiability of contractual rights and duties, see Fredrick K. Beutel, Colonial Sources of the Negotiable Instruments Law of the United States, 34 ILL. L. REV. 137, 13742 (1939); Kevin M. Teevin, A History of Legislative Reform of the Common Law of Contract, 26 U. TOL. L. REV. 35, 61-63 (1994).
122. While back-end realignment potential can substitute for front-end flexibility, the two are not mutually exclusive. They can be used in tandem to optimize the facilitation of flexible coordination. In other words, coordinate flexibility can result from the negotiability of assets as well as the exercise of caution in committing resources to assets. Such substitutability must be tempered, of course, with assessment of the relative transaction costs associated with deferred commitment versus immediate but negotiable commitment. Most obviously, the costs of negotiating commitment must approach zero before negotiation can be viewed as a perfect replacement for deferral.
123. See infra text accompanying notes 112-31.
124. See infra text accompanying notes 132-210.
125. See infra text accompanying notes 211-27.
126. Quasi-severability thus contains elements of both commitment and severabihty. The element of commitment is inherent in the contractual nature of the mutually accepted terms. The element of severability is contained in the alienability and negotiation prospects appurtenant to the rights and duties that are fixed contractually. Quasi-severability thereby seeks to maximize flexible coordination and control simultaneously. This effort is significant because it challenges the received notion that flexibility and stability are mutually inconsistent. An effective implementation of systemically supported quasi-severability would create a win-win environment, in which the benefits of both stability and maneuverability could be heightened simultaneously.
127. Because quasi-severability is limited by the ability to find partners willing to enter into voluntary exchange of rights, there remains a baseline stability resulting from the ultimate assurance that contractual rights will either remain intact or be replaced consensually. The worst case scenario is that the originally conceived relationship cannot be shifted, and parties are bound by the promises made within the original contractual dyad. If parties choose to negotiate rights and can locate third parties for this purpose, we can assume that they are motivated by a belief that conditions have rendered the newly chosen dyad superior to the dyad created under the original contractual terms. Quasi-severability via intranetwork negotiation of rights thus avoids over-control and under-control risks at the extremes. Under-control is mitigated by the essentially obligational nature of the original contract, and indeed, the simple dyadic obligation encased therein is as reliable as any other simple contractual relationship achieved without provision for negotiability; moreover, over-control risks are reduced substantially as renegotiation of transaction partners, terms, and assumptions is enabled. Stated somewhat differently, assignability of rights in general can be conceptualized as a mechanism that reduces the harsh constrictiveness of otherwise binding agreements. Were contractual rights unassignable, parties would have less post-agreement maneuverability than they gain with the prospect of assignment. Facilitation of intranetwork negotiability can be viewed, then, as a means of leveraging the flexibility conferred by the possibility of making assignments. The assignment is the conceptual tool permitting the avoidance of overcommitment in theory; the development of networks and systems within those networks for the negotiation of rights creates an infrastructure wherein the benefits of assignment can be exploited to their full potential. Whereas assignment provides the legal-contractual basis for avoiding the rigidity of overcommitment, network development is the relational extension of the literal concept.
128. Relational assets and transactional assets are synonymous for the purpose of this discussion. They refer to contractual rights that can be traded with faclity within a network structure. They are ralational in their application to interacting intranetwork collaborators of traders at any time. They are transactional by virtue of their underlying contractual source. Finally, they are referred to as "assets" to reflect the value of contractual rights both to the holder of those rights and to prospective purchasers of the rights within an intranetwork marketplace.
129. The fundamental criteria for a free market here are (i) the liberal alienability of property interests, and (ii) the right to constrain that alienability by contract. These qualities are consistent with the goal of optimizing flexible coordination and control. Increasing the alienability of contractual rights approaches maximization of flexibility of coordination. To optimize the tradeoff between coordination and control, aleinability is tempered by the capacity of the parties to place restrictions on alienation in regard to a specific transaction.
130. See id. Because the unit of analysis in this Section is the network, one might suggest an alternative to the proposition that only the parties to a transaction must approve that tracsaction. Were assignability of rights to affect not only, immediate parties but also the network system, one could argue that network participants who lack privity to a particular transaction also have an interest in approving or vetoing a given assignment. This description might conceivably characterize small, highly interdependent networks, for example. Nonetheless, even under conditions of substantial mutual intranetwork interdependence, the value of free transferability should prevail over protection of network member interests. Limitations on transferability created by parties in privity are justifiable because they incorporate the expectations of those who have a tangible, nonspeculative interest. Conferring power to limit transferabihty to network members not in privity would permit the imposition of transaction costs by those who may not have a real stake in the transaction. Such conferral would skew the rational decisionmaking process in regard to transferability in favor of cautious restriction, thereby impeding the free market of intranetwork transferable interests without assessing costs to those seeking to impose the restriction. The resulting inefficiency cannot be justified.
131. For discussion of the right of assignability of contract law, see Zale Corp. v. Decorama, Inc., 470 S.W. 2d 406, 408 (Tex. 1971); Lancaster v. Greer, 572 S.W. 2d 787, 789 (Tex. 1978).
132. For statutory provision of the general assignability of rights, see U.C.C. § 2-210(2) (1990).
133. Indeed, Farnsworth has observed that, without provision for assignment of contracts, "our modern credit economy could not exist." E. ALLEN FARNSWORTH, CONTRACTS 780 (2d ed. 1990).
134. I use the term "negotiability" loosely here, to refer to the act of trading and the ability to trade, rather than in its stricter sense under the Uniform Commercial Code's treatment of "negotiable instruments."
135. U.C.C. § 2-210(2) (1990).
136. Heffington v. Hellums, 212 S.W.2d 245 (Tex. 1948) ("Rights arising out of contract cannot be transferred if they involve a relation of personal confidence, such that the party whose agreement conferred those rights must have intended them to be exercised only by him in whom he actually confided.")
137. Schupach v. McDonald's System, Inc., 264 N.W.2d 827 (Neb. 1978).
138. Id.
139. Id.
140. Pulaski Stave Co. v. Miller's Creek Lumber Co., 128 S.W. 96 (Ky. 1910).
141. Parrish Chiropractic Centers v. Progressive Casualty Ins. Co., 874 P.2d 1049, 1052 (Colo. 1994); Rother-Gallagher v. Montana Power Co., 522 P.2d 1226, 1228 (Mont. 1974).
142. See LAURENCE P. SIMPSON, HANDBOOK OF THE LAW OF CONTRACTS 272 (2d ed. 1965)("It is the promise which creates the right and the promisor may make the resultant right as narrow as he pleases.").
143. Indeed, it is for this reason that the law establishes assignability rather than nonassignability as the default assumption in the absence of any agreement between parties. Courts frequently observe that the law generally favors free assignability of contract. See, e.g., Martynes and Assoc. v. Devonshire Square Apts., 680 P.2d 246, 247 (Colo. Ct. App. 1984) ("The law generally favors the assignability of contract rights. . . .").
144. Restriction of assignability by agreement of the parties impedes the otherwise free negotiation of contractual rights, as well as the general flow of commerce. Detailed examination of the modern trend to restrict agreements that prohibit assignment is beyond the purview of this discussion. The trend does, however, facilitate the development of intranetwork markets which enhance the potential for rapid quasi-severability and realignment of contractual relations.
145. U.C.C. § 2-210(2) (1990) ("A right to damages for breach of the whole contract or a right arising out of the assignor's due performance of his entire obligation can be assigned despite agreement otherwise."). For discussion of the differences between the treatment of anti-assignment provisions under the common law and the U.C.C., see FARNSWORTH, supra note 119, at 795-96.
146. The literature on standardization of contract dates back well over half a century. For a classic early discussion of standardization of contract terms, see Nathan Isaacs, The Standardizing of Contract, 27 YALE L.J. 34 (1917).
147. Intranetwork standardization of the elements of contracting imposes a substantial degree of externally determined structure to the behavior of otherwise autonomous firms. The imposition of structure upon a network's constituency therefore presumes a network that is sufficiently well-organized and formal to be equipped to adapt to the relative formality of standardization. Accordingly, any recommendation of standardization of contractual terms or provisions with the aim of enhancing negotiability through the development of a common currency is more suitable to formal than to informal network structures. This observation suggests a possible tension or conflict in the ends served by networks. Specifically, informally structured networks may benefit from the ease and fluidity with which firms enter and exit. Realignment of network membership can occur without the potential impediments of formality when the network develops naturally rather than artificially. One resulting benefit may be the optimization of fit among members of the network constituency. High quality fit can yield potential benefits. For example, the quality of contractual prospects, both original and assigned, should tend to improve as the composition of the network from which the prospects are chosen becomes increasingly compatible with a given member firm. Nonetheless, the gains in quality of compatibility within the network that are potentially realized by eliminating official barriers to entry to and exit from the constellation may be offset by difficulties in achieving standardization economies in the absence of some formal structure. Firms seeking to formalize emergent network relations in order to exploit standardization advantages must therefore be cautious to avoid excessive bureaucratization of membership that may ultimately cause stagnation and impede strategic evolution of the network in response to changing conditions.
148. For discussion of standardization and negotiability of contractual terms as marketable products, see Arthur A. Leff, Contract as Thing, 19 AM. U. L. REV. 131 (1970); W. David Slawson, Standard Form Contracts and Democratic Control of Lawmaking Power, 84 HARV. L. REV. 529 (1971).
149. For discussion of standardization and negotiability of contractual terms as marketable products, see Arthur A. Leff, Contract as Thing, 19 AM. U. L. REV. 131 (1970); W. David Slawson, Standard Form Contracts and Democratic Control of Lawmaking Power, 84 HARV. L. REV. 529 (1971).
150. See RAMESH K.S. RAO, FINANCIAL MANAGEMENT 320-21 (3d ed. 1995) (discussing how standardization of futures contracts facilitates trade in secondary markets).
151. Commonality of language or organizational vocabulary has long been recognized as a quality that facilitates comparability of responses under commonly recurring situations. In this vein, Bitzer notes that comparable situations prompt comparable responses, giving birth to specialized vocabularies, grammars, and styles. L.F. Bitzer, The Rhetorical Situation, 1 PHIL. & RHETORIC 1, 13 (1968).
152. See William L. Schaller & Robert V. Schaller, Applying the Wilko Doctrine's Anti-Arbitration Policy in Commodities Fraud Cases, 61 CHI.-KENT L. REV. 515, 518, n.12 (1985) (referring to the fungibility of standardized contracts).
153. G.H. HARDY & E.M. WRIGHT, AN INTRODUCTION TO THE THEORY OF NUMBERS 2 (corrected 4th ed. 1962).
154. While our understanding of chemical elements has improved over the years, scholars as far back as Aristotle analyzed matter by attempting to classify it into its most fundamental, basic constituents. WILLIAM F. KIEFFER, CHEMISTRY: A CULTURAL APPROACH 20 (1971).
155. See id. (citing Aristotle's modern view of an element as the most basic component that can be analyzed).
156. Basic sources might include the Uniform Commercial Code, The Second Restatement of Contracts, or form books. More customized and therefore better sources in a given industry might be the files of existing contracts used by firms that specialize in the industry's peculiar contracting needs. To the extent that a firm's contract work in the industry is highly developed, the firm is likely to have drafted a wide range of contractual terms that approaches comprehensiveness. A large, highly specialized firm might effectively divide its collection of industry contract terms into basic components. Alternatively, if no firms servicing a small network have access to a thorough catalogue of basic terms, network members can pool resources to create a representative collection of contract terms to be analyzed jointly.
157. Disadvantages of zero-based assessment of contract elements include inefficiency in redetermining the composition of contracts that already exist and incomprehensiveness or incompleteness in cataloguing contractual elements without reference to actual documents. Advantages of zero-based assessment of contract elements include the opportunity to reassess the contractual ideal without undue adherence to historic precedent, which may be more or less functional in meeting current intraindustry relational and transactional needs.
158. I refer to generic contract in contrast to industry-specific or other contingency-specific contract, in deference to the possibility of elemental variance across any number of possible factors.
159. U.C.C. § 2-306 (1990).
160. U.C.C. §§ 2-304, 2-305 (1990).
161. U.C.C. § 2-309 (1990).
162. U.C.C. § 2-308 (1990).
163. U.C.C. § 2-307 (1990).
164. U.C.C. §§ 2-310, 2-325, 2-326 (1990).
165. U.C.C. §§ 2-319 to 2-324 (1990).
166. U.C.C. § 2-311 (1990).
167. U.C.C. §§ 2-312 to 2-318 (1990).
168. U.C.C. §§ 2-326, 2-327 (1990).
169. U.C.C. § 2-303 (1990).
170. U.C.C. § 2-209 (1990).
171. The use of data bases to catalogue contract rights is analogous to processes already employed by merger and acquisition teams to retrieve names of potential acquisition candidates. See Charles E. Paul, Jr., Scouting the M&A Landscape for Quality Targets, MERGERS & ACQUISITIONS, Mar./Apr. 1995, at 20 (discussing the process of using data bases to find acquisition candidates). Applying this process to contract rights simply shifts an organizationally entrenched process from the level of interfirm intergration to the level of market transactions in contract rights. In other words, what is already being used to support hierarchical change can also be empoyed to advantage to enhance exchage-related change.
172. Boolean connectors - "or," "and," and "not" - permit searchers to look for various shaded areas of what can be diagrammed as the overlapping circles of a Venn diagram, with each circle representing a term being searched in the data base. For a more elaborate and detailed discussion of how Boolean logic is employed in effective data base searchers, see CHRISTINA L. KUNZ ET AL., THE PROCESS OF LEGAL RESEARCH: SUCCESSFUL STRATEGIES 298-300 (2D ED. 1989).
173. Conjunctive connectors search for contract candidates that contain both of two, or all of more than two, characteristics or terms.
174. Disjunctive connectors search for contract candidates that contain either of two, or any of several, characteristics or terms.
175. Positive connectors indicate that all of the characteristics are desired characteristics. Conjunctively requiring characteristic A and characteristic B utilizes a positive connector.
176. Negative connectors indicate that one characteristic is desired while another characteristic, particularly one that is frequently paired with the desired characteristic, is not desired. Searching for "characteristic A but not characteristic B" utilizes a negative connector.
177. For example, Party A might search for lots of widgets, between 100 and 200 quantity, in price ranges between $.90 and $.94 per unit, delivered F.O.B., with sixty-day credit offered at 12 percent annual interest, and warranties limited to a number of specified express warranties. This is an instance in which the desired characteristics of a contractual right are stipulated conjunctively, by couching the request in terms of the combined presence of all desired qualifications. Party B could alter the search disjunctively, looking for contractual rights to lots of widgets {between 100 and 200 quantity in price ranges between $.90 and $.94 per unit} or {between 201 and 300 quantity in price ranges between $.85 and $.89 per unit}. The ability to engage in disjunctive searches allows a network participant to recognize interactive effects upon decision-making - i.e., in this case, the concept that acceptable price and quantity ranges are interrelated - and to draw forth instantly all qualifying options from the pool. Party C could add a further degree of complexity by employing both positive and negative search requests: For example, C might search for contractual to lots of widgets {between 100 and 200 quantity in price ranges between $.90 and $.94 per unit} or {between 201 and 300 quantity in price ranges between $.85 and $.89 per unit}, but not manufactured by Supplier X or Supplier Y. Negative search requests allow further refinement of the group of contractual rights called forth, such that the searcher can achieve two important ends: the inclusion of all and only those contractual rights that meet certain threshold conditions, and the exclusion of all contractual rights that violate certain disqualifying conditions.
178. Processing refers to a movement beyond the aggregation of data, and includes tasks such as organization and quality control. For discussion of the role of networks in managing the integrity of the information they collect for exchange, see Allen S. Hammond, Private Networks, Public Speech: Constitutional Speech Dimensions of Access to Private Networks, 55 U. PITT. L. REV. 1085, 1105 (1994).
179. For further discussion of equivocality in the organizational literature, see Richard L. Daft & N.B. Macintosh, A Tentative Exploration into the Amount and Equivocality of Information Processing in Organizational Work Units, 26 ADMIN. SCi. Q. 207 (1981).
180. Nayyar & Kazanjian, supra note 22, at 748.
181. This follows logically when Llewellyn's manufacturing metaphor is applied in full to transactions in contractual rights. See Llewellyn, infra note 197. As the interchangeability of standardized parts in mass production creates manufacturing efficiencies, so interchangeability of contractual terms creates contract negotiation efficiencies.
182. For example, a simple contractual transaction may provide for the sale of 1,000 units from A to B, and a one-year exclusive servicing arrangement wherein A is to fix and maintain all units at stipulated prices. Depending upon the intention of the parties, these provisions may comprise a single transaction - i.e., both the sales terms and the promised service may have been necessary as conditions rendering the agreement acceptable to B. Nonetheless, the terms may also be free-standing, in that the delegation of an obligation to C leaves both the delegated obligation and the remaining obligation unimpaired. This would likely be the case, for example, in a delegation to C of the duty to provide a portion of the units remaining to be transferred under the terms of the contract, where the units are commodity products, seen as fungible throughout the network. Because service obligations typically are nondelegable, the service element of the agreement could not be alienated by delegation to C. If the duty to provide fungible units were contractually designated negotiable - i.e., delegable within the network -then this simple sale and service obligation would be subject to successful quasiseverance, as the delegator can retain the right and duty to service any units at the stipulated prices, while passing the sales baton to a delegate midway through the contract.
183. The ability to negotiate terms cleanly is important for two reasons: First, any need to patch either the terms negotiated or the contract from which the terms are taken will incur costs, essentially undermining the efficiencies a network strives to achieve through standardization. In essence, when the terms cannot be cleanly removed without alteration, they require customized work, which is the antithesis of standardization. Second, these costs will tend to discourage negotiation of rights and duties, thereby undermining the ultimate goals of enhanced back-end realignment flexibility that are the subject of this Section.
184. The desirability of potentially free-standing terms as a facilitator of intranetwork negotiability must be weighed against countervailing considerations. For example, interdependence of contractual terms will tend to create a web of interdependency among parties that may encourage compliance and thereby serve as a nonjudicial source of self-enforcement among the original parties.
185. For discussion of benefits of commoditized contracts in secondary markets, see Henry T. Greely, Contracts as Commodities: The Influence of Secondary Purchasers on the Form of Contracts, 42 VAND. L. REV. 133 (1989).
186. For further discussion of concerns relating to linguistic commonality among parties to contracts forged in the context of strategic alliances, see Steven R. Salbu, Parental Coordination and Conflict in International Joint Ventures: The Use of Contract to Address Legal, Linguistic, and Cultural Concerns, 43 CASE W. RES. L. REV. 1221, 1240-58 (1993).
187. Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 VA. L. REV. 757, 837 (1995).
188. J.-C. Spender, Book Review, Dynamics of Competitive Strategy, by K.G. Smith, C.M. Grimm, and M.J. Gannon, 19 ACAD. MGMT. REV. 829, 832 (1994).
189. This phenomenon among human decision makers applies as well when decision making is computerized. In either instance, existence of a common language is essential to communication and coordination of decisions. Justin B. Starren, Medical Decision Making Systems: An Integrated Approach, MED. OBSERVER, May 1995, at 56.
190. Gains associated with increasingly expedient decision-making will be particularly pronounced as conditions of continual change become the hallmark of the contemporary firm, a trend which has been observed by recent commentators. See, e.g., WILLIAM BERQUIST, THE POSTMODERN ORGANIZATION: MASTERING THE ART OF IRREVERSIBLE CHANGE (1993). As the speed of change accelerates and the pervasiveness of change expands, expediency of decision-making processes permits the firm to postpone decision-making, thereby utilizing the most current information. The later the decision is made, the greater the number of changes that can be incorporated into the process and the more responsive the process will be to the firm's ultimate needs.
191. Both of these stages are essential components of the bargaining and negotiating processes. Parties' ability to understand and rank alternatives quickly will affect two aspects of bargaining and negotiation - the selection of parties with whom to transact and the refinement of the terms and procedures that will govern the relationship and transaction that are ultimately chosen. For discussion of the separate negotiation functions of selecting among alternative parties and fixing terms and procedures of the relationship chosen, see Ring & Van de Ven, supra note 31 at 97-98.
192. See Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 CAL. L. REV. 261, 262 (1985) (observing that standardization reduces negotiation costs).
193. For discussion of the ease and efficiency associated with transacting in a single, familiar currency, see Nick Louth, European Industrialists Hail Single Currency Agreement, REUTERS BUS. REP., Dec. 11, 1991, available in LEXIS, News Library, Curnws File.
194. Conversely, use of standardized units such as official weights, quantity standards, and labelling requirements has been identified as reducing "buyers' information costs about products and transaction terms" and avoiding "confusion among market actors." Tamar Frankel, Essay, The Legal Infrastructure of Markets: The Role of Contract and Property Law, 73 B.U. L. REV. 389, 398 (1993).
195. For discussion of the difficulties attending adaptation to unfamiliar or alien norms in business transactions, see Srilata Zaheer, Overcoming the Liability of Foreignness, 38 ACAD. MGMT. J. 341 (1995).
196. The potential to realize efficiency gains by resorting to standardized terms and conventions is more obviously accessible to formalized networks than to informal networks. Network structures that arise by concerted effort and that are organ zed using an explicit structure will tend to have relatively clear boundaries. Membership will be more explicit, more identifiable, and therefore better subject to management. Conversely, informal networks that emerge naturally rather than concertedly will tend to develop more organically, so that commonality of contractual terms is more likely to be haphazard and disorganized. Overlapping network structures will exacerbate this tendency toward disorganization. The ramifications of these observations are complicating but not insurmountable: First, the capacity of networks to employ standardization as a means of achieving efficiencies will simply be greater for formalized networks, and particularly industry-specific networks that already share common languages and cultures, than for informal networks. Second, standardization within informal networks is not impossible, but requires more effort, in the form of identifying relevant network structures, formalizing some of their processes, and recognizing ways in which commonly overlapping network groups might be able to utilize cross-network standardization.
197. Greely observes that uniformity of contractual forms can expedite deals within an industry by, inter alia, lowering transactional information costs. Greely, supra note 170, at 141. This same effect should logically apply across any networks, whether they be industry specific or industry spanning.
198. Thorn EMI Results, Origin Universal News Services Limited, 1991 Universal News Services, May 30, 1991, available in LEXIS, News Library, Allnws File.
199. Commonality of language in network contracting can be viewed as the analogue of commonality of behaviors, or routines, in production systems. Production system routines such as communication protocols and standardized operating procedures have been noted to support self-organization. Raghu Garud & Suresh Kotha, Using the Brain as a Metaphor to Model Flexible Production Systems, 19 ACAD. MGMT. REV. 671, 686 (1994). Analogously, standardization of the elements of contract should tend to support a naturally occurring, internalized governance among members of a network. This natural concordance will likely include comfort with and confidence in decision assessments regarding prospective intranetwork transactions.
200. FARNSWOBTH, supra note 119, at 311.
201. Bowman & Hurry, supra note 75, at 763.
202. For discussion of relationship between risk and demand for assets, see FREDERIC S. MISHKIN, THE ECONOMICS OF MONEY, BANKING, AND FINANCIAL MARKETS 97 (3d ed. 1994).
203. As Kessler has observed, uniformity of contractual terms can enhance the precise determination of risk. Friedrich Kessler, Contracts of Adhesion - Some Thoughts About Freedom of Contract, 43 COLUM. L. REV. 629, 631 (1943). Accurate understanding of risks logically should increase transactional comfort levels and decrease rejection of beneficial deals due to unacceptable degrees of risk-related ambiguity.
204. Comfort with and confidence in the assessment of proposed transactions or assignments will be especially important when the parties considering the exchange are in actual or potential conflict. Under the dialectical theory of dynamic organizations, firms exist "in a pluralistic world of colliding events, forces, or contradictory values that compete with each other for domination and control." Andrew H. Van de Ven & Marshall S. Poole, Explaining Development and Change in Organizations, 20 ACAD. MGMT. REV. 510, 517 (1995). As conflicting goals engender potential opportunistic behavior and lack of trust, parties' confidence in any transaction, including negotiation of contractual rights, should increase as the clarity and commonality of understanding of the contractual terms in question improve. This increase in confidence should logically result in potential increased utilization of assignment of rights within a strategic network.
205. The attractiveness of simplified processes has been highlighted by the reengineering movement of the 1990s. While the simplification movement has focused predominantly on manufacturing tasks, its tenets are applicable to nonmanufacturmg organizational processes. For discussion of the benefits of simplified business processes, see MICHAEL HAMMER & JAMES CHAMPY, REENGINEEBING THE CORPORATION: A MANIFESTO FOR BUSINESS REVOLUTION 51 (1993).
206. Although agency costs are sometimes treated as a specific kind of transaction cost, they are examined separately in this Subsection to reflect the particular issues that they raise.
207. For recent, contrasting perspectives regarding the utility of transaction cost theory, see Sumatra Ghoshal & Peter Moran, Bad For Practice: A Critique of the Transaction Cost Theory, 21 ACAD. MGMT. REV. 13 (1996); Peter Moran & Sumantra Ghoshal, Theories of Economic Organization: The Case for Realism and Balance, 21 ACAD. MGMT. REV. 58 (1996); Oliver E. Williamson, Economic Organization: The Case for Candor, 21 ACAD. MGMT. REV. 48 (1996).
208. For recent, contrasting perspectives regarding the utility of transaction cost theory, see Sumatra Ghoshal & Peter Moran, Bad For Practice: A Critique of the Transaction Cost Theory, 21 ACAD. MGMT. REV. 13 (1996); Peter Moran & Sumantra Ghoshal, Theories of Economic Organization: The Case for Realism and Balance, 21 ACAD. MGMT. REV. 58 (1996); Oliver E. Williamson, Economic Organization: The Case for Candor, 21 ACAD. MGMT. REV. 48 (1996).
209. For recent, contrasting perspectives regarding the utility of transaction cost theory, see Sumatra Ghoshal & Peter Moran, Bad For Practice: A Critique of the Transaction Cost Theory, 21 ACAD. MGMT. REV. 13 (1996); Peter Moran & Sumantra Ghoshal, Theories of Economic Organization: The Case for Realism and Balance, 21 ACAD. MGMT. REV. 58 (1996); Oliver E. Williamson, Economic Organization: The Case for Candor, 21 ACAD. MGMT. REV. 48 (1996).
210. Transaction costs refer to costs associated with the exchange of goods and services in the contracting process, including searches, negotiations, offers and acceptances, as well as costs related to delivery, inspection, and warranty of products. Henry N. Butler & Barry D. Baysinger, Vertical Restraints of Trade as Contractual Integration: A Synthesis of Relational Contracting Theory, Transaction-Cost Economics, and Organization Theory, 32 EMORY L.J. 1009, 1029 n.50 (1983).
211. For an explanation positing facilitation of trade as the reason parties use standard form contracts, see ANTHONY T. KRONMAN & RICHARD A. POSNER, THE ECONOMICS OF CONTRACT LAW 80 (1979).
212. See Frankel, supra note 179, at 389 (associating reduced transaction costs with the standardization of terms).
213. Economies of scale exist when an increase in production is accompanied by a decline in production costs per unit. Satyajit Chatterjee, Making More Out of Less: The Recipe for Long-Term Economic Growth, 130 BUS. REV. 3 (1994).
214. RICHARD A. BRALEY & STEWART C. MYERS, PRINCIPLES OF CORPORATE FINANCE 821, n.4 (4th ed. 1991). For application to contract, see Karl N. Llewellyn, Book Review, 52 HARV. L. REV. 700, 701 (1939) (reviewing O. Prausnitz, The Standardization of Commercial Contracts in English and Continental Law (1937), and observing, "Standardizing contracts is. . . a counterpart of standardizing goods and production processes. . . . Nothing can approach the speed and sanity of readaptation of the machinery of standard forms of a trade, built to meet the particular needs of that trade. They save trouble in bargaining. They save time in bargaining. They infinitely simplify the task of internal administration of a business unit, of keeping tabs on transactions, on knowing where one is at, of arranging orderly expectation, orderly fulfillment, orderly planning.").
215. RICHARD A. BRALEY & STEWART C. MYERS, PRINCIPLES OF CORPORATE FINANCE 821, n.4 (4th ed. 1991). For application to contract, see Karl N. Llewellyn, Book Review, 52 HARV. L. REV. 700, 701 (1939) (reviewing O. Prausnitz, The Standardization of Commercial Contracts in English and Continental Law (1937), and observing, "Standardizing contracts is. . . a counterpart of standardizing goods and production processes. . . . Nothing can approach the speed and sanity of readaptation of the machinery of standard forms of a trade, built to meet the particular needs of that trade. They save trouble in bargaining. They save time in bargaining. They infinitely simplify the task of internal administration of a business unit, of keeping tabs on transactions, on knowing where one is at, of arranging orderly expectation, orderly fulfillment, orderly planning.").
216. Continual reinvention of language and culture for each network transaction is expensive. One pair of commentators has observed that transaction costs tend to be higher among entrepreneurial firms than among established firms, as the former tend to lack the established patterns, products, cost structures, and other kinds of information that are well developed in the latter. Roger L. Hudson & Angeline W. McArthur, Contracting Strategies in Entrepreneurial and Established Firms, ENTREPRENEURSHIP: THEORY AND PRACTICE, Mar. 22, 1994, at 43. This observation is consistent with the notion that entrenched linguistic and cultural conventions will tend to yield transaction cost economies.
217. Negotiating and drafting contracts are fundamental transaction costs. Ranjay Gulati, Does Familiarity Breed Trust? The Implications of Repeated Ties for Contractual Choice in Alliances, 38 ACAD. MGMT. J. 85, 86 (1995).
218. What I refer to here as "one-time development" is an idealized type and represents a tendency rather than a reality. A common language and culture of contracting within a strategic network will, of course, develop and change over time, through a process of continual adjustment and fine-tuning. These costs undermine the pure conception of fixed cost amortization, much as the maintenance of fixed assets in manufacturing belies the ideal notion of one insular, front-end investment.
219. Ostas and Leete observe that transactors can avoid the burden of individual negotiation of routine exchanges by using standardized forms. Ostas & Leete, supra note 16, at 366, 368.
220. Standardization allows both traditional and innovative relational arrangements to benefit from the linguistic and cultural fixation of a received set of mass-produced building blocks of relatively fixed cost structure. Economies can be realized both in the original development of the contract and in subsequent assignment of rights under the contract, as familiarity of language and culture reduces both the cost of structuring the original agreement and the cost of interpreting and analyzing existing contractual rights being sold in the market.
221. For discussion of the relationship between information flows and transaction cost levels, see Testimony, Frances B. Smith, Executive Director, Consumer Alert, on H.R. 1362, Financial Institutions Regulatory Relief Act of 1995, in FED'L DOC'T CLEARING HOUSE CONGRESS'L TESTIMONY, May 24, 1995 ("Technological and other innovations allow transaction costs to be reduced for both buyer and seller, principally by improving the flow of information.").
222. For discussion of cost-benefit analysis of customization versus standardization of contracting in one industry, see Justin Sweet, Essay, The American Institute of Architects: Dominant Actor in the Construction Documents Market, 1991 WIS. L. REV. 317, 325.
223. Within any contract, marginal reductions in the use of idiosyncratic elements can yield marginal reductions in transaction costs. Intranetwork standardization need not be total in order to achieve efficiencies. To the extent that contractual arrangements can be broken into truly elemental components of some universalizable application, customization is an inefficient, novel configuration of otherwise familiar and interchangeable elements.
224. For discussion of agency theory generally, see Kathleen M. Eisenhardt, Agency Theory: An Assessment and Review, 14 ACAD. MGMT. REV. 57 (1989); Michael C. Jensen & W.H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. FIN. ECON. 305 (1976); Barry M. Mitnick, Regulation and the Theory of Agency, 1 POL. STUDS. REV. 442 (1982).
225. For discussion of agency theory generally, see Kathleen M. Eisenhardt, Agency Theory: An Assessment and Review, 14 ACAD. MGMT. REV. 57 (1989); Michael C. Jensen & W.H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. FIN. ECON. 305 (1976); Barry M. Mitnick, Regulation and the Theory of Agency, 1 POL. STUDS. REV. 442 (1982).
226. For discussion of agency theory generally, see Kathleen M. Eisenhardt, Agency Theory: An Assessment and Review, 14 ACAD. MGMT. REV. 57 (1989); Michael C. Jensen & W.H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. FIN. ECON. 305 (1976); Barry M. Mitnick, Regulation and the Theory of Agency, 1 POL. STUDS. REV. 442 (1982).
227. Thomas M. Jones, Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics, 20 ACAD. MGMT. REV. 404, 409-10 (1995).
228. Possibilities for opportunistic behavior of agents are varied and may be easily camouflaged. For example, the finance literature suggests that some diversification strategies may be suboptimal for shareholders, and are adopted in the interests of managers seeking to reduce risk to themselves. Don O. May, Do Managerial Motives Influence Firm Risk Reduction Strategies?, 50 J. FIN. 1291 (1995). This type of opportunism is easily muted and may be hidden by plausible but disingenuous arguments posited to support various diversification strategies as being in shareholders' best interests.
229. But see Anthony J. Crawford et al., Bank CEO Pay-Performance Relations and the Effect of Deregulation, 68 J. BUS. 231 (1995) (suggesting that managerial discretion may be a positive force that is instrumental in the creation of shareholder wealth).
230. Reductions in agency costs should render the purchasing of contractual rights more attractive for two reasons. First, as the contract itself becomes more efficient, rational prospective assignees will tend to view the contract as more valuable. Second, rational prospective assignees will recognize that low agency costs provide opportunities for the assignee to appropriate at least some fraction of the contract's overall efficiency, increasing the likelihood that the assignee can negotiate a good bargain for valuable rights.
231. Communications and information theory have long recognized the importance of information flows within the organization. See, e.g., WILLIAM STALLINGS & RICHARD VAN SLYKE, BUSINESS DATA COMMUNICATIONS 1-2 (2d ed. 1994). The role of enhanced information flows in making companies more manageable logically extends to interorganizational networks. Because networks comprised of numerous organizations are potentially more complex than single organizations, information flows are likely to play an especially critical role in intranetwork relationships.
232. Kessler, supra note 188, at 630.
233. For discussion of confidentiality in contracting that may be implicit as well as expressly stipulated, see Sharon M. Gilles, Promises Betrayed: Breach of Confidence as a Remedy for Invasions of Privacy, 43 BUFF. L. REV. 1, 11-12 (1995).
234. See HOWARD O. HUNTER, MODERN LAW OF CONTRACTS: FORMATION, PERFORMANCE, AND RELATIONSHIPS OF PARTIES 25-3, 25-4 (1987) (discussing historical perspective of contract in terms of private agreement).
235. Complete confidentiality refers to situations in which both the existence of a contract and the terms of that contract are kept secret. Partial confidentiality refers to situations in which the network has access to knowledge of a contractual relationship in the abstract, but less or no knowledge regarding the transactional details of that relationship, because the contractual provisions themselves are incorporated into confidential documents.
236. Firms that frequently engage in transactions requiring confidentiality may develop a culture of furtiveness in which the presumed mode of operation is to treat all information as classified and restricted. In such situations, some endeavors that need not be held private for strategic reasons may be treated as private under a generic umbrella of confidentiality that pervades the firm's ethos.
237. See Martin Atkins, Stakeholders and the Strategy Formation Process in Small and Medium Enterprises, INT'L SMALL BUS. J., Apr.-June 1994, at 12 (noting the prominent role of strategic networks in modern business). The proliferation of network activity is associated with benefits such as strategic responsiveness, flexibility, and operational efficiency. Gianni Lorenzoni & Charles Baden-Fuller, Creating a Strategic Center to Manage a Web of Partners, 37 CAL. MGMT. REV. 146 (1995).
238. See Martin Atkins, Stakeholders and the Strategy Formation Process in Small and Medium Enterprises, INT'L SMALL BUS. J., Apr.-June 1994, at 12 (noting the prominent role of strategic networks in modern business). The proliferation of network activity is associated with benefits such as strategic responsiveness, flexibility, and operational efficiency. Gianni Lorenzoni & Charles Baden-Fuller, Creating a Strategic Center to Manage a Web of Partners, 37 CAL. MGMT. REV. 146 (1995).
239. See Atkins, supra note 217.
240. For discussion of potential costs of confidentiality and benefits of openness in dynamic organizations, see Art Kleiner, The Gurus of Corporate Change, BUS. & Soc. REV., Mar. 22, 1992, at 39.
241. Rationality describes behavior that maximizes a decision maker's utility. See MARCH & SIMON, supra note 48, at 137 (discussing the optimizing nature of economic rationality, and limitations of the concept of economic rationality). By definition, dysfunctional behaviors are not fully rational. Inertia in the form of failure to reassess traditional behaviors that are becoming increasingly outmoded may be a source of irrational furtiveness among firms in competitive environments.
242. These analysis and sorting processes could apply to any number of dimensions that are relevant to a particular network. Analysis and sorting would serve the obvious function of organizing rights for purposes of locating candidates for purchase. Analysis and sorting may also serve the more incidental function of spurring intranetwork strategic thinking, as those who identify classifications are also likely to identify gaps that can be filled and modifications that may be useful.
243. See e.g., NEW YORK STOCK EXCHANGE, INC., CONSTITUTION AND RULES (1993).
244. See generally THOMAS A. RUSSO, REGULATION OF THE COMMODITIES FUTURES AND OPTIONS MARKETS (1994).
245. Auctions are presently used in some industries as a venue for the exchange of contracts or specific contractual rights. See, e.g., Paul Nathan, Brief News of Various Author Contracts and Rights Auctions in the Publishing Industry, PUB. WKLY., Sept. 19, 1994, at 16 (reporting sales of various rights at auction in the publishing industry); Stefan Wagstyl, Oryx Buys Contract Rights to 74 Aircraft at Auction, FIN. TIMES, June 19, 1990, at § 1, 28 (reporting transaction in contract rights at auction in aircratt industry).
246. Auctions are presently used in some industries as a venue for the exchange of contracts or specific contractual rights. See, e.g., Paul Nathan, Brief News of Various Author Contracts and Rights Auctions in the Publishing Industry, PUB. WKLY., Sept. 19, 1994, at 16 (reporting sales of various rights at auction in the publishing industry); Stefan Wagstyl, Oryx Buys Contract Rights to 74 Aircraft at Auction, FIN. TIMES, June 19, 1990, at § 1, 28 (reporting transaction in contract rights at auction in aircratt industry).
247. This means that the network participants responsible for circumscribing the conditions of any auction have a responsibility to apply the conditions most meaningful to their constituency. Differing definitions or classifications of the properties collected at any particular auction will have varying degrees of success in meeting the needs of those members of the network likely to attend.
248. For discussion of the role of auctions in valuation, see CHARLES W. SMITH, AUCTIONS: THE SOCIAL CONSTRUCTION OF VALUE 80 (1989); C. HUGH HIDESLEY, SOTHEBY'S GUIDE TO BUYING AND SELLING AT AUCTION 122-23 (1984). For discussion of some specific conditions under which auction may be an effective valuation mechanism, see Paul Milgrom, Auctions and Bidding: A Primer, J. ECON. PERSP., Summer 1989, at 3.
249. For discussion of the role of auctions in valuation, see CHARLES W. SMITH, AUCTIONS: THE SOCIAL CONSTRUCTION OF VALUE 80 (1989); C. HUGH HIDESLEY, SOTHEBY'S GUIDE TO BUYING AND SELLING AT AUCTION 122-23 (1984). For discussion of some specific conditions under which auction may be an effective valuation mechanism, see Paul Milgrom, Auctions and Bidding: A Primer, J. ECON. PERSP., Summer 1989, at 3.
250. For discussion of the role of auctions in valuation, see CHARLES W. SMITH, AUCTIONS: THE SOCIAL CONSTRUCTION OF VALUE 80 (1989); C. HUGH HIDESLEY, SOTHEBY'S GUIDE TO BUYING AND SELLING AT AUCTION 122-23 (1984). For discussion of some specific conditions under which auction may be an effective valuation mechanism, see Paul Milgrom, Auctions and Bidding: A Primer, J. ECON. PERSP., Summer 1989, at 3.
251. This observation is consistent with organismic models of firms, which emphasize that "organizational systems are dependent on their environments for resources, and they can adjust the behavior of their parts to maintain the properties of the whole within acceptable limits." Barbara A. Spencer, Models of Organization and Total Quality Management: A Comparison and Critical Evaluation, 19 ACAD. MGMT. REV. 446, 455 (1994)(citation omitted). The adjustment of behaviors within organic systems to which Spencer refers is more consistent with coordinative mechanisms than with control mechanisms.
252. For discussion of a vast literature on evolution and change in organizational environments, see Jeffrey D. Ford & Laurie W. Ford, Logics of Identity, Contradiction, and Attraction in Change, 19 ACAD. MGMT. REV. 756, 756-58 (1994).