The Center for Law and Economic Studies Columbia University School of Law 435 West 116th Street New York NY 10027 7201 212 854 3739 Lawyers Asleep at the Wheel The GM Fisher Body Contract Victor P Goldberg Working Paper No 316 August 2007 Do not quote or cite without author s permission This paper can be downloaded without charge at The Social Science Research Network Electronic Paper Collection http papers ssrn com paper taf abstract id 1010982 An index to the working papers in the Columbia Law School Working Paper Series is located at http www law columbia edu lawec Page 1 Lawyers Asleep at the Wheel The GM Fisher Body Contract Victor P Goldberg August 2007 Abstract In the analysis of vertical integration by contract versus ownership one event has dominated the discussion General Motors merger with Fisher Body in 1926 The debates have all been premised on the assumption that the ten year contract between the parties signed in 1919 was a legally enforceable agreement However it was not Because Fisher s promise was illusory the contract lacked consideration This note suggests that GM s counsel must have known this It raises a significant question in transactional engineering what is the function of an agreement that is not legally enforceable Page 2 Lawyers Asleep at the Wheel The GM Fisher Body Contract Victor P Goldberg Oh 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 has questioned 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 in the Fisher wars was that the contract was a legally enforceable document It wasn t A court back in 1919 and most likely even today would have found Fisher s promise illusory and the contract in the language of the day a nudum pactum The debate recall concerns Ben Klein s 1988 1 claim that hold up issues induced the parties to switch from a long term contract vertical integration by contract to full fledged vertical integration integration by ownership The Fisher story has been featured in numerous articles and books it might well be the best known illustration of organizational structure since Adam Smith s pin factory 2 Klein s interpretation has been attacked by others notably Ronald Coase 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 various authors relying primarily on the characterization of the contract in executives testimony in the DuPont 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 after obtaining 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 ownership share 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 closed bodies There is general agreement that the rapid growth of the closed body share of the auto market meant that the arrangement was very profitable and that the cost plus pricing formula resulted in a large share of those profits going to Fisher There is also general agreement that in 1926 there was a dispute over the location of a new Fisher plant with GM wanting it proximate to its Buick plant in Flint and Fisher desiring a less GM specific location in Detroit where it would have better access to other car manufacturers Following the merger in 1926 the Detroit plant was closed Klein claims that Fisher s relative success in the early 1920 s involved a hold up by 1 His first use of the example was in Klein Crawford Alchian 1978 2 For 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 4 Cite Page 3 Fisher and that the merger in 1926 involved Fisher s fear that co location of the new Buick plant would make it vulnerable to hold up by GM 5 Klein s critics notably Coase agree on the basic facts but disagree about the hold up characterization Since Shavell credits me with being the first economist to write about hold up 6 I am a bit biased Nonetheless in this paper I do not intend to engage the question My purpose is to demonstrate that the alternative to vertical integration in this case was not as the literature presumes a preexisting legally enforceable contract The non enforceablity of the contract adds a new wrinkle to the story If a long term contract is an intermediate point on a continuum from spot contracting to full integration where on that continuum does an unenforceable contract fit What is the role of legally unenforceable contracts 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 the central role for many of the protagonists 7 Herein a sampling Since GM was contractually obligated to buy all of its automobile bodies from Fisher for a period of 10 years GM could not threaten to move its demand to another supplier and Fisher 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 would have enforced the imperfect long term exclusive dealing contract that locked in GM thereby permitting Fisher to engage in a holdup by not making the desired investments and by charging GM relatively high body prices Klein 2000 p 125 The only way GM could opt out of not performing to the literal imperfect terms of the long term Fisher Body contract that is not continuing to buy bodies at cost plus from improperly located plants until the contract expired in 1929 was to declare bankruptcy Klein 2000 p 130 The exclusive contract meant that General Motors could not counter threaten in its negotiations with Fisher Body that it would use an alternative body manufacturer to supply co located body capacity at its Chevrolet assembly facilities if it did not reach agreement with Fisher Body Klein 2007 p 26 However Fisher Body was largely
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