Contract Remedies for New Economy Collaborations

Abstract

Much productive activity that once took place within a single firm now occurs when two firms collaborate to produce a new product such as a drug or software program. The agreements that govern these collaborations are not enforceable contracts; they lack standard terms such as prices and quantities. Rather, parties create “framework agreements” that specify the collaboration parties’ tasks – e.g., conduct R&D, explore marketing opportunities; govern the exchange of proprietary knowledge --e; and sketch a plan to exploit a successful result.

The COVID vaccines provide an example: two firms jointly exploited their comparative advantages at R&D and drug development to create the vaccines. The COVID collaborations, however, were unusual because there was both an assured demand for – and great reputational gains from – creating a successful product, and public pressure to finish promptly. In the usual case, it is difficult to induce potential parties to enter a collaboration, and to stay with it when doubts about ultimate success arise. Collaboration breakups at the startup and implementation stages are common. Yet, surprisingly, disappointed collaboration parties seldom sue each other.

This Article makes two principal contributions. Our first contribution is to show that parties do not sue because contract law provides no remedies for a party disappointed by a collaboration party’s defection. Thus, a party cannot have a protectable expectation if a collaboration ends before there is a new product to deliver. Our second contribution is to develop remedies that would encourage parties to make and continue potentially productive collaborations. We aim therefore to begin creating a relational contract law for a significant part of the economy that functions today without any contract law at all.