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. From:
Effects of Contract Ambiguity in
Interorganizational Governance
Zheng, Griffith, Ge, and Benoliel (2020)
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. 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. 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).