Boilerplate and economic power in auto-manufacturing contracts

Boilerplate: The Foundation of Market Contracts

Volumn , Issue , 2007, Pages 29-44

  Ben Shahar, Omri ^a   White, James J ^b  

^a UNIVERSITY OF MICHIGAN   (United States)

^b UNIVERSITY OF MICHIGAN LAW SCHOOL   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 77953686907     PISSN: None     EISSN: None     Source Type: Book    
DOI: 10.1017/CBO9780511611179.005     Document Type: Chapter

References (27)

1. Benjamin Klein, Robert G. Crawford & Armen A. Alchian, Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J. L. & Econ. 297 (1978).
2. Oliver Hart, Firms, Contracts, and Financial Structure 7 (1995)
3. Oliver Williamson, The Economic Institutions of Capitalism 114-15 (1985).
4. Courts that have adjudicated such termination provisions in lower-tier cases and one recent OEM-tier-1 case have held the contracts to be unenforceable.
5. Dedoes Indus. v. Target Steel, No. 254413, 2005 WL 1224700 (Mich. Ct. App. May 24, 2005)
6. Gen.MotorsCorp. v. Steel Dynamics, No. CR-04-056983-CK (Cir. Ct. OaklandCounty, Mich. Aug. 4, 2004).
7. Jane Spencer, TheBestCarDealAround:NeverPaying forRepairs-NewLongerWarranties Open Door to Car Hypochondriacs, Wall St. J., Nov. 12, 2002, at D1.
8. Craig Fitzgerald, Getting SeriousAbout Quality, Auto. Indus., July 2004, at 45.Adifferent source suggests that American OEMs spend on warranty claims between $537 and $628 per vehicle, whereas Japanese vehicles average only $226 per vehicle sold in the United States.
9. Craig Fitzgerald Auto Warranties, Warranty Week, January 27, 2004, http://www.warrantyweek.com/archive/ww20040127.html.
10. Fitzgerald, Auto Warranties, Warranty Week, January 27, 2004, http://www.warrantyweek.com/archive/ww20040127.html.
11. There are many theoretical accounts of this “stickiness” of boilerplate. Omri Ben-Shahar & John Pottow, On the Stickiness of Contractual Default Rules, 33 Florida St. L. Rev. 651 (2006)
12. Stephen J. Choi & G. Mitu Gulati, Contract as Statute (in this volume)
13. Marcel Kahan & Michael Klausner, Standardization and Innovation in Corporate Contracting, 83 Va. L. Rev. 713 (1997) at 761-64.
14. Klein et al., supra note 1. The Klein account of the Fisher Body-GM merger and its illustrative role for the theory of the firm has been widely embraced.
15. Dennis W. Carlton and Jeffrey M. Perloff, Modern Industrial Organization 13 (2d ed. 1994).
16. In recent studies, Ronald Coase and others have argued that GM’s takeover of Fisher Body did not intend to solve contractual hold-up by Fisher Body-in fact, no such hold-up ever occurred-but, rather, to secure GM’s stronghold over a critical supplier vis-à-vis other OEMs. See
17. R. H. Coase, The Acquisition of Fisher Body by GeneralMotors, 43 J. L. & Econ. 15 (2000)
18. Douglas G. Baird, In Coase’s Footsteps, 70 U. Chi. L. Rev. 23 (2003)
19. Ramon Casadesus-Masanell & Daniel F. Spulber, The Fable of Fisher Body, 43 J. L. & Econ. 67 (2000)
20. Robert Freeland, Creating Holdup Through Vertical Integration: Fisher Body Revisited, 43 J. L. & Econ. 33 (2000).
21. Oliver Hart, Firms, Contracts, and Financial Structure 7 (1995).
22. Johnson Controls v. A.P.T. Critical Sys., 323 F. Supp. 2d 525 (S.D.N.Y. 2004).
23. Coase, supra note 9.
24. Baird, supra note 9, at 26 (noting that the GM-Fisher hold-up account is not plausible because GM could have retained ownership of dies, which it would be able to retrieve in case Fisher engaged in hold-up).
25. Coase, supra note 9.
26. During the time that we conducted this study, five major automobile suppliers filed in Chapter 11: Delphi (the world’s largest tier-1 supplier), Tower Automotive, Intermet, Meridian, and Collins and Aikman.
27. One prominent example is Collins and Aikman (“C&A”), a tier-1 supplier that entered bankruptcy in May 2005.When C&A filed for bankruptcy under Chapter 11, it threatened to stop performance unless its contracts were renegotiated and the prices increased-that is, it engaged in classic hold-up. The payoff was quick: The three OEMs agreed to give C&A $82.5 million by raising the prices on their existing supply contracts with C&A by 15 percent, to purchase $140 million of tooling, and to make a loan of $82.5 million. See JeffreyMcCracken, PlanOK’d forAid toKeepC&ASupplying, Detroit Free Press, July 8, 2005, available at 2005 WLNR 10705184.