Contract Law

The modern 21st century day has witnessed continuous technological advancements and major developments within as well as between corporations. This is proving to be a challenging time for firms regarding the organisation of strategies and logistics both within and outside the firm. Uncertainty has heightened the need for firms to have specified contracts which can stipulate contingencies for almost all major unforeseen crisis’s, not to add that firms seek for binding agreements which outline each party’s expectations and obligations from the start. Contract law is a highly debated topic within the science of law, the subjective nature of analysis rises due to the endless differences between various countries and specific cases- which give rise to uncertainty. Hence, why legal experts and judges who fully comprehend the legal statues on which formal decisions can be based on regarding contractual completeness must fill in the scrutiny of contractual ‘gaps’.

This paper will focus on the aspect of inter-business transactions, which can be facilitated by contracts. We base this on the notion of transaction cost theory developed by Ronald Coase that focuses on the fact that costs arise when making economic exchanges. The theory outlines specific attributes which affect the efficiency of contracting, throughout this paper we try to solve this conundrum by asking the vital question of when one should internalise or outsource their production processes? This being ‘one of the most challenging and critical issues confronting management’ lead me to analyse the make-or-buy decision based on a transaction cost procedure, from which precise empirical inferences and conclusions can be drawn up from. Moreover, this topic will be approache...

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...cription of a set of possible contingencies and explicit contract terms dictating a performance response for each contingency (Al-Najjar, 1995; Hart and Moore, 1988).

Not only do they minimise the costs of drafting a complete contract, but they also minimise information costs, negotiation costs as well as costs of renegotiation when a hold-up situation occurs, which could also lead to high costs incurred when redrafting takes place.

This being influenced greatly by transaction cost economics, is why firms tend to avoid the hassle of writing a complete contract and ultimately decreasing transaction costs which arise. Moreover a complete contract is only one form of ‘governance mechanism’ for guiding the behavior of contracting parties (Al- Najjar, 1995)- this implies that incomplete contracts are efficient when the opportunity costs of drafting completeness are high