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42 Stan. L. Rev. 927 (1989-1990)
Problematic Relations: Franchising the Law of Incomplete Contracts

handle is hein.journals/stflr42 and id is 943 raw text is: Problematic Relations: Franchising and the Law of Incomplete Contracts Gillian K. Hadfield* Commitments to take or refrain from taking certain actions are in- dispensable elements in most forms of interaction and exchange. Even the purest form of spot-market transaction rests on commitments: the commitment of the state to value a piece of paper in future exchanges, and the commitment of the individual not to steal back what has been sold. As transactions spread out over time and become more complex, however, more is needed to ground the exchange than the mere stabil- ity of currency and property: The solidity of contract is also required. In the case of the complete contract, which specifies in a manner immediately verifiable by a third party precisely what performances are required for all possible future conditions, classical notions of contract enforcement serve well to secure the commitment supporting the trans- action. In this case, courts stand ready to examine the contract and, going no further than the balance reached in this private ordering, hold the parties to their commitments.' In reality, few contracts can be complete. Accordingly, classical contract law has always provided for the accidental failure of complete- ness resulting from linguistic ambiguity, or from the absence of provi- sions specifying the performances required under certain, perhaps unanticipated, conditions. More recently, however, contract scholars have recognized that the failure of completeness is not always a mere stumble on the classical path.2 Often, contracts are necessarily and in- tentionally incomplete because mutual desires for flexible, but * Acting Professor, University of California at Berkeley (Boalt Hall). Doctoral Candi- date (Economics), Stanford University. J.D., Stanford Law School, 1988. The author received the 1988 Richard S. Goldsmith Award at Stanford Law School for this article; an earlier ver- sion appeared in the Stanford Center on Conflict and Negotiation Working Paper Series. This work was completed while I was a New Directions Mellon Fellow at Stanford University. I am grateful to the Mellon Foundation and theJohn M. Olin Program in Law and Economics at Stanford Law School for support. I thank Bob Gordon, Peter Menell, Mitch Polinsky, Todd Rakoff, Roberta Romano,Judge Stephen Williams and Ralph A. Winter for useful discussions, and participants in the faculty workshops at Berkeley, Chicago, Columbia, Harvard, Michigan, New York University, Stanford, and Yale law schools for comments and criticism. 1. The courts may also face a commitment problem in carrying out the sanctions that contract law requires. Courts may be tempted to relieve the parties of their cc ante obligations. I will not deal directly here with this aspect of commitment. 2. See, e.g., Oliver E. Williamson, Transaction Cost Economics: The Governance of Contractual Relations, 22J.L. & EcON. 233, 235-38 (1979). 927

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