Law Commons^™

The literature on contract theory expects parties to use incentive mechanisms that minimize the costs of verifying breach in court if these mechanisms can effectively deter breach. This paper tests this hypothesis about relational governance in the context of franchising, an organizational form that provides parties with a suite of governance choices that span the range from those that require little or no verification to those that entail expensive and uncertain litigation. While relational governance options may be inexpensive, they may not be as effective as using incentives that require enforcement of written contracts, such as the threat of contract …

A recent movement in contracts scholarship—the so-called New Formalism—seeks to justify limitations on the introduction of extrinsic evidence to interpret contracts on the instrumental grounds of efficiency and empirical observation. Less attention has been directed at the development of a similar instrumental argument for the more contextual types of interpretation observed in the Uniform Commercial Code and the Restatement (Second) of Contracts. This Article engages this question by arguing that the relative ability of transactors to draft complete contracts is likely to be an important determinant of their preferred interpretive regime. Where low contracting costs allow commercial parties to draft …