Now That’s a Complete Contract!

29 January 2010 at 12:27 pm 4 comments

| Peter Klein |

A major theme of the contracting literature in organizational economics is that formal contracts are inevitably incomplete, meaning that they do not specify actions and remedies for every possible set of circumstances. Given genuine uncertainty about the future, parties may decide that formal contracts to not adequately protect relationship-specific investments, providing an important rationale for vertical integration or another mechanism to protect quasi-rents (alliances, equity-sharing arrangements, reputation, and other “hybrids”).

A recent WSJ piece suggests that writing complete contracts may not be so hard after all:

Decked out in sequined black and gold dresses, Anne Harrison and the other women in her Bulgarian folk-singing group were lined up to try out for NBC’s “America’s Got Talent” TV show when they noticed peculiar wording in the release papers they were asked to sign.

Any of their actions that day last February, the contract said, could be “edited, in all media, throughout the universe, in perpetuity.”

My Mom says she once told me I was the best little boy in the world, to which I responded, “and all the planets too?” The WSJ gives several examples of similarly expansive coverage:

  • The terms of use listed on Starwars.com, where people can post to message boards among other things, tell users that they give up the rights to any content submissions “throughout the universe and/or to incorporate it in other works in any form, media or technology now known or hereafter developed.”
  • In a May 15, 2008, “expedition agreement” between JWM Productions LLC, a film-production company, and Odyssey Marine Exploration Inc., a shipwreck-exploration outfit, JWM seeks the rights to footage from an Odyssey expedition. The contract covers rights “in any media, whether now known or hereafter devised, or in any form whether now known or hereafter devised, an unlimited number of times throughout the universe and forever, including, but not limited to, interactive television, CD-ROMs, computer services and the Internet.”

And my personal favorite:

A 189-word sentence in a September agreement between Denver-based Spicy Pickle Franchising Inc. and investment bank Midtown Partners & Co. — which has helped raise capital for the sandwich and pickle shops dotted across the region — unconditionally releases Spicy Pickle from all claims “from the beginning of time” until the date of the agreement.

Says Spicy Pickle’s Marc Geman, “the length of the paragraph is only limited by the creativity of the attorney.”

Entry filed under: - Klein -, Law and Economics, Strategic Management, Theory of the Firm. Tags: .

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4 Comments Add your own

  • 1. gabrielrossman  |  29 January 2010 at 1:52 pm

    reading a little about tasini v NYT will make it quite clear why this kind of language is now standard in contracts. to the extent that you worry about the high transaction costs implied by highly dispersed and overlapping property rights, this is a good thing. certainly i’d rather have access to complete databases than the right to sue for my nickel when journal articles i’ve written get transferred into holograms.

  • 2. Dick Langlois  |  29 January 2010 at 2:10 pm

    Actually, isn’t this the opposite of a compete contract? It’s an attempt to deal with the “residual” category of “all possible things we can’t think of” by assigning an open-ended property right to one party, who can then decide what to do once uncertainty is resolved. This is the incomplete-contract idea of Hart et al., or at least a version of it.

  • 3. Peter Klein  |  29 January 2010 at 2:39 pm

    Yes, in a sense — but we don’t usually handle transfers of property titles that way. When I buy a car, I don’t sign a contract with the seller saying “I hereby acquire the right to operate your car on earth, and throughout the universe, using any propulsion technology that is now known or will ever be discovered.” We just say “now it’s my car.” But I agree that making a contract complete by adding “and I get to decide what do do in all other circumstances” is a cheap form of completeness.

  • 4. Jongwook Kim  |  29 January 2010 at 5:36 pm

    Aren’t property rights constrained by convention, in addition to the formal clauses (de facto vs. de jure rights)? Owning a car means I have residual control rights over it, but those residual control rights do not include colliding with other cars, for instance. For a clause that gives someone certain rights” throughout the universe, in perpetuity” is somewhat meaningless until those rights are contested (and you lose). So wouldn’t we have to say that even the residual rights as defined by Oliver Hart et al. are limited in certain ways? The implicit assumption is that we’d have to have some decent expectation that the residual rights are verifiable and enforceable.

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