Page -1-The Center for Law and Economic StudiesColumbia University School of Law435 West 116th StreetNew York, NY 10027-7201(212) 854-3739Lawyers Asleep at the Wheel? The GM-Fisher Body Contract Victor P. GoldbergWorking Paper No. 316August 2007Do not quote or cite without author’s permission.This paper can be downloaded without charge at:The Social Science Research Network Electronic Paper Collectionhttp://papers.ssrn.com/paper.taf?abstract_id=1010982An index to the working papers in the Columbia LawSchool Working Paper Series is located at:http://www.law.columbia.edu/lawec/Page -2-Lawyers Asleep at the Wheel? The GM-Fisher Body ContractVictor P. GoldbergAugust 2007AbstractIn the analysis of vertical integration by contract versus ownership one event hasdominated the discussion–General Motors’ merger with Fisher Body in 1926. The debates haveall been premised on the assumption that the ten-year contract between the parties signed in 1919was a legally enforceable agreement. However, it was not. Because Fisher’s promise wasillusory the contract lacked consideration. This note suggests that GM’s counsel must haveknown this. It raises a significant question in transactional engineering: what is the function ofan agreement that is not legally enforceable.1His first use of the example was in Klein, Crawford, & Alchian (1978).2For a partial listing, see Coase (2006, p. 262-263).3“The problem with this widely used example is that the events, so minutely described,never happened.” (Coase 2006, p. 255). See also, Coase (2000, 2006), Freeland (2000), and Casadesus-Masanell & Spulber (2000).4Cite. Page -3-Lawyers Asleep at the Wheel? The GM-Fisher Body ContractVictor P. GoldbergOh no! Not another paper on the GM-Fisher Body-did-holdup-make-them-do-it battle. Not quite. I want to go back one step to reexamine one matter that none of the combatants hasquestioned. They have all focused on the question: why was there a transition from the ten-year,exclusive contract to vertical integration? The underlying assumption of all the participants inthe Fisher wars was that the contract was a legally enforceable document. It wasn’t. A courtback in 1919 (and most likely even today) would have found Fisher’s promise illusory and thecontract, in the language of the day, a nudum pactum. The debate, recall, concerns Ben Klein’s (1988)1 claim that hold-up issues induced theparties to switch from a long-term contract (vertical integration by contract) to full-fledgedvertical integration (integration by ownership). The Fisher story has been featured in numerousarticles and books; it might well be the best-known illustration of organizational structure sinceAdam Smith’s pin factory.2 Klein’s interpretation has been attacked by others, notably RonaldCoase,3 who deny the relevance of hold-up. Klein, in turn, has responded to his critics. (2000,2007)Until recently the debate went on without access to the actual contract, with the variousauthors relying primarily on the characterization of the contract in executives’ testimony in theDuPont-General Motors antitrust trial in the1950's.4 After the spate of articles appeared in 2000,Klein obtained a copy of the original contract. Neither he nor Coase, who also wrote afterobtaining access to the contract, questioned whether the contract was legally enforceable. There is broad agreement on the basic facts. In 1919, GM took a sixty percent ownershipshare in Fisher Body and entered into a ten-year manufacturing contract for automobile bodies,characterized as an exclusive dealing contract. Fisher manufactured both open and closedbodies. There is general agreement that the rapid growth of the closed body share of the automarket meant that the arrangement was very profitable and that the cost-plus pricing formularesulted in a large share of those profits going to Fisher. There is also general agreement that in1926 there was a dispute over the location of a new Fisher plant, with GM wanting it proximateto its Buick plant in Flint, and Fisher desiring a less GM-specific location in Detroit, where itwould have better access to other car manufacturers. Following the merger in 1926, the Detroitplant was closed. Klein claims that Fisher’s relative success in the early 1920's involved a hold-up by5Coase (2006, pp. ) notes, with some sarcasm, that Klein’s identification of whatconstituted a hold-up has evolved. The text description is from Klein (2007).6See Goldberg (1976, p. __).7Williamson (1992, p. 285), who often invokes the Fisher Body example, also puts a lotof weight on legal enforceability: “[I]dentical disputes within ‘make’ transactions (internalprocurement) and ‘buy’ transactions (outside procurement) are treated differently–in that thecourts will hear the one and will refuse to be drawn into the resolution of the other.” (Emphasisin original)Page -4-Fisher and that the merger in 1926 involved Fisher’s fear that co-location of the new Buick plantwould make it vulnerable to hold-up by GM.5 Klein’s critics–notably Coase–agree on the basicfacts, but disagree about the hold-up characterization. Since Shavell (____) credits me withbeing the first economist to write about hold-up,6 I am a bit biased. Nonetheless, in this paper Ido not intend to engage the question. My purpose is to demonstrate that the alternative to verticalintegration in this case was not, as the literature presumes, a preexisting legally enforceablecontract. The non-enforceablity of the contract adds a new wrinkle to the story. If a long-termcontract is an intermediate point on a continuum from spot contracting to full integration, whereon that continuum does an unenforceable contract fit? What is the role of legally unenforceablecontracts? Why do they work as well as they do? I only to intend to raise these matters here.The assumption that the agreement was legally enforceable plays a role (albeit not thecentral role) for many of the protagonists.7 Herein, a sampling:! Since GM was contractually obligated to buy all of its automobile bodies from Fisher fora period of 10 years, GM could not threaten to move its demand to another supplier, andFisher's specific investments were protected against GM's hold-up threat. Klein (2000, p.108)! With regard to the Fisher Body supply holdup in 1925-26, the court presumably wouldhave enforced the imperfect long-term, exclusive dealing contract that locked in GM,thereby permitting
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