Reframing Court Intervention in Relational Contracts

Abstract: A rather monochromatic conception of court enforcement—where a tribunal’s role is understood as executing the straightforward if costly task of interpreting, or verifying, performance—is a central device in the contract design and theory of the firm literatures. Recent legal scholarship has added color to courts’ enforcement function by arguing that parties use certain types of contract terms to shift costs between ex ante drafting and ex post enforcement. This paper continues in that vein, introducing a new dimension by which parties economize on ex post enforcement costs. Focus centers upon the unique dispute resolution systems often employed in contemporary strategic alliance agreements, which bifurcate and even trifurcate the adjudication of disputes between different tribunals. Those contracts manage verification costs through a modular logic, whereby disputes arising from certain types of exchange hazards are cabined and allocated to the most appropriate institutions. Modularity not only reduces verification costs through specialization but also protects the integrity of a broader relational contract by isolating disputes, and allows for enforcement infrastructure to be recombined with greater ease from deal to deal. Because verification is more complex than a simple interpretation function of a single tribunal, normative debates over formalist vs. contextualist intervention in relational contracts partially miss the mark, and positive theories of contract design and firm boundaries are incomplete.