Networks of Collaborative Contracts for Innovation

Pablo Marcello Baquero

• Publisher: Hart Publishing
• Year: 2020
• ISBN:
  9781509929979
• Edition: 1
• Topic: Jura
• Subtopic: Vertragsrecht

With the rise of automation and artificial intelligence, the companies that will succeed in the future are those who operate under a constant state of innovation. Not just that, they will often need to ensure that they pursue 'open innovation'. This book explores the contractual basis for innovation, examining the legal challenges raised by contracts to innovate. Offering a dual perspective, it takes an empirical approach to examine how agreements are structured to overcome the inherent uncertainty implicit in innovative activity. It also presents a legal framework for contracts to innovate, based on the duty of loyalty to the contractual network, which could provide guidance to navigate the uncertainty of these relationships.

1

Contractual Networks to Innovate: The Search for a Legal Concept

In comparative legal studies, contractual networks started to be consistently discussed by the late 1980s,¹ reflecting the growing phenomenon of de-verticalisation in company activities. Nevertheless, there is no universally accepted concept for contractual networks. Indeed, despite the recognition of the importance of contractual networks for the transnational commercial practice, there is a discrepancy in legal studies regarding the perspective to deal with them, particularly in the contrasting approaches prevailing in the United States and in Europe.

In the ambit of legal studies in Europe, there is no consensus as to whether a legal concept of contractual networks would be desirable. For Grundmann² and Brownsword,³ it should be enough to identify the main issues generated by contractual networks and address them through the current legal approaches and rules available. According to Grundmann, while adaptations may be beneficial, the creation of a new legal concept would be too ‘visionary’. In contrast, Teubner⁴ and Collins⁵ claim that contractual networks possess distinguishing features not apprehended by traditional categories of contract and minor adaptations would be insufficient. For them, a fully fledged concept should be elaborated. Collins particularly contends that the notion of ‘productive networks’ of companies simultaneously competing and cooperating could provide a better guidance for interpretation of these transactions.⁶

Based on this perspective, a number of legal concepts and frameworks have been proposed in the European context to deal with contractual networks. It is questionable, however, whether the development of a specific legal framework would contribute to promote inter-firm collaboration.

In this sense, the European approach contrasts with the US perspective on this subject. In US legal scholarship, there is an implied acceptance that most specific challenges in contractual networks should be regulated through contractual design and governance mechanisms previously established by the network members – disregarding the need to elaborate a robust concept of contractual networks or systematic doctrinal solutions for them.

The initial difficulty in the conceptualisation relates to the fact that different jurists have used the concept ‘networks of contracts’ to label distinct legal structures covering different factual patterns. Likewise, the definition of network in the social sciences has been abused to designate varied phenomena.⁷ However, in the context of productive relationships, the concept has discernible features, evidenced in studies across economics,⁸ management⁹ and sociology.¹⁰ These studies have been, for many legal scholars, the departure point in seeking a suitable legal concept for contractual networks.¹¹ That does not mean defending that the concept of network from economics or sociology should be transposed to legal studies, but envisioning the construction of a legal concept from the internal logics of the legal system, while having ‘communications’ with other sub-social systems, as postulated by autopoietic theory.¹²

In order to address this issue, this chapter initially discusses both the inadequacies of traditional legal concepts to deal with contractual networks and the first legal concepts that have been proposed to cover this phenomenon (relational contracts, linked contracts and symbiotic contracts), without accounting for their features identified in the interdisciplinary literature. Then, the chapter discusses the legal concepts specifically proposed to deal with contractual networks, considering the peculiarities of the production practices related to organisations mingling competition and cooperation. It concludes by proposing that contractual networks (especially in civil law systems) would be better regulated if a legal concept were developed and refined. While contractual freedom should be embraced – allowing for a variety of tailored governance mechanisms to be designed by the parties into their agreements – at the same time, a minimal ‘trans-typical’ legal concept of contractual networks, building on comparative insights, would represent a useful tool to facilitate the legal treatment of contractual networks. Such a legal concept or framework for contractual networks would provide three main benefits. First, this concept could clarify the validity of certain governance structures in contractual networks which under some legal systems (especially civil law countries) could be barred or at least fall under a grey area of uncertainty as to their validity. Second, these contractual networks would be subject to a distinctive interpretative guideline than most contracts, particularly to a duty of loyalty to the contractual network. Third, these networks of contracts, especially the ones involving small and medium companies, could be subject to more flexible tax and corporate rules, as a form to encourage their activities.

I.THE BUSINESS REALITY: CONTRACTUAL NETWORKS VERSUS THE TRADITIONAL LEGAL CONCEPTS

A.The Phenomena of Contractual Networks: Neither Contract nor Corporation

This section points out, based on examples, that networks of contracts do not fit the traditional categories of contract, corporation or traditional partnerships.

The first example referred to Chrysler’s relationship with its first-tier suppliers.¹³ The second example is the development of the Boeing 787.¹⁴ Networks of contracts are markedly present in the aerospace industry due to the inability of one single company to produce a variety of highly complex components. This circumstance leads to the formation of inter-firm alliances where the distinction between the design of the aircraft and the manufacturing of its components give room for integration of the different tasks assigned to different companies in a collaborative process.¹⁵ The performance of each of the components or subsystems of the aircraft depends on the other subsystems. One cannot improve the engines without adapting the electric system, the wing technology and so forth. Therefore, the production in each subsystem cannot evolve without coordination with the others. At the same time, this coordination often involves distinct companies because a single company will hardly have the capacity to conduct cutting-edge innovation in each of the subsystems by itself. Such integration results in savings regarding costs, time and the ability to remain at the innovative edge. The downside is the difficulty in coordinating the activities of the different firms and the ensuing risks involved in creating a functional product. This joint production has been called ‘platform’ organisation of production and is observable in other industries, such as the development of computer operating systems or last-generation cell phones.¹⁶

From an economics perspective,¹⁷ these are hybrid structures located in the intersection between markets and hierarchies. They reveal an ambiguous structure, which does not fit market (contractual) or organisational (company) structures.¹⁸ While they do not involve an economic vertical structure, such as a firm undertaking all the risks and investments to develop a product (organisation), neither do they involve simple horizontal contractual exchanges between competing companies (market).¹⁹ Rather, they constitute inter-firm alliances (without giving rise to a new entity) with close cooperation towards the accomplishment of a certain project.²⁰ Partners in a network are not chosen randomly according to a cost–benefit analysis, but according to resource complementarity between the companies necessary to achieve a specific goal.²¹

Thus, networks of contracts can be distinguished from corporations. They do not form a single firm, but rather are composed of legally independent companies contractually connected to undertake a common project. Neither are they part of the same economic group, such as in the case of a parent company producing in connection with its subsidiaries. In that case, it would be possible to classify them as a group of companies, a de facto economic unit. In cases of fraud by one of the companies in the group, different national laws would often provide for the possibility of piercing the veil of one subsidiary company in the group to hold the parent company liable.²² This is not the case presented here: the companies are legally and, de facto, independent, albeit with (partial) interdependencies created by the mutual investments. However, each retains its autonomy for making decisions, its own separate budget, they often develop business relationships with other firms that may be competitors of its partner in the network and each will come apart as independent firms if the joint project does not evolve promisingly.

The distinction between networks of contracts and traditional contracting practices is not obvious and, for that reason, several authors downplay the distinctiveness of networks. In a sense, most commercial contracts are connected with several other types of contract. A traditional mass production of clothes serves as an example. To set up a piece of clothing, a company may contract with several other companies to have different components supplied (fabric, paint, etc), constituting a ‘network’ of independent companies towards the production of a final product. In another hypothesis, a builder may be hired for the construction of both a shopping centre and a nearby parking lot for its potential customers. If the shopping centre is built but there is a breach in the ability to secure the nearby real estate for the construction of the parking lot, that will obviously affect the value of the shopping centre. For indeed, in both cases, the contracts are linked, and it is arguable that both the interpretation of each contract and the related agreements should be considered in certain circumstances.

Nonetheless, these traditional contractual practices are far from the challenges facing actual collaborative contractual networks to innovate. In the previous examples, the task of each of the companies is ex ante, defined with reasonable precision. One will provide fabric or buttons, the other procures the construction of a parking lot. In contractual networks aimed at innovating, there is no such precision. The terms of the contract and the productive process will be constantly re-adjusted as the collaboration evolves; therefore, they have to coordinate their activities. Furthermore, the parties work together, either in inter-firm cross-functional teams, through platforms of production or using other technological forms of communication. In the less intense forms of cooperation, they will at least share technology and know-how for their joint production. They almost function like a single company, although they remain independent and, therefore, there is difficulty in initially establishing the parties’ obligations. Furthermore, there are intense coordination challenges regarding the need to continually adjust the relationship between the parties. These challenges, generated by the strong interdependency between the partners, are not present in the traditional examples above. In a network of contracts, as the term is used in the majority of European legal studies, there is a much stronger economic interdependency between the companies than in traditional contractual relationships.²³

It has been suggested, but outstandingly rejected, that the possibility of partnership-like institutions could be the basis for joint venture initiatives, as with those undertaken through networks of contracts.²⁴ Under Article 1 of the UK’s Partnership Act 1890, a partnership involves ‘a business in common with a view of profit’. The partnership under English law allows for the undertaking of common activity on a purely contractual basis, without the need for creating a legal entity. Partnerships, however, are inadequate to deal with the kinds of transaction normally undertaken through networks of contracts for innovation. The f...