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Effect of Contract Ambiguity in Interorganizational Governance

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Contract ambiguity in relation to one’s obligations can be a strategic tool to enhance joint problem solving and collaboration while also deterring litigation, thereby enhancing performance.

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Effect of Contract Ambiguity in Interorganizational Governance

  1. 1. From: Effects of Contract Ambiguity in Interorganizational Governance Zheng, Griffith, Ge, and Benoliel (2020)
  2. 2. From:From:  A contract, or provision of a contract, that is reasonably susceptible to more than one interpretation  Examples of ambiguous language: “reasonable costs,” “good faith effort”  Examples of contracted obligations: Franchisor support – “McDonald’s shall advise and consult with Franchisee periodically in connection with the operation and also, upon Franchisee’s request, at other reasonable times” (McDonald’s Franchise Agreement 2013, p.3)  We study contracts between franchisor and franchisees  Example: Independently owned McDonald’s restaurants What is contract ambiguity? Zheng, Griffith, Ge, and Benoliel (2020)
  3. 3. From:From: Contract ambiguity in relation to one’s obligations can…  Enhance joint problem solving and collaboration: stimulates discussions among contracting parties (e.g., to clarify meaning), implying greater cooperation and joint problem solving.  Deter litigation: increases the perceived costs of litigation, as it is expensive to try to “prove” that those ambiguous terms such as “good faith efforts” have not been met. Why does contract ambiguity work? Zheng, Griffith, Ge, and Benoliel (2020)
  4. 4. From:From:  By suppressing franchisee-initiated litigation, each ambiguous phrasing leads to a .56% ($3623) increase in franchisor net income. What are the financial implications of contract ambiguity in a franchise system? Zheng, Griffith, Ge, and Benoliel (2020) Notes: The numbers are calculated based on the mean values of the variables in our dataset, consisting of 106 franchisors over a ten-year time window (2004-2013).

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