Contract Renegotiation Research Articles

Inquiring for truth and the re-engineering of the corporate contract

The British Prime Minister, Gordon Brown, has called for a global re-negotiation of a social contract between investment banking and wider society. Given the scale of the losses now borne by the taxpayer as a consequence of the global financial crisis in jurisdictions as diverse as Iceland, the United Kingdom, Ireland and the United States, the proposal has undoubted rhetorical strength. It is also exceptionally difficult to render operational, not least because of (purposive) ambiguity over what constitutes and who should decide terms of reference. Moreover, piecemeal change may not only not secure legitimacy but may also have enormous if unintended consequences for the conceptual underpinning of corporate and securities law and the resulting regulatory framework. At a national level, one mechanism proposed to address this issue is through the establishment of a 'truth commission' an option chosen by Iceland. A second option is to convene an independent commission, a mechanism used throughout the Commonwealth, or an independent tribunal of inquiry, as used with increased frequency in the Republic of Ireland throughout the 1990s but rejected in relation to the global financial crisis. A third option is to convene a bi-partisan political commission, as deployed in the United States. Each option is exceptionally problematic within the domestic context, not least because of contention over remit and degree to which the findings translate into policy changes. The difficulties are compounded when applied to multi-faceted multi-jurisdictional problems such as the global financial crisis. This article examines whether – and if so how – independent commissions can provide a mechanism to re-negotiate a social and corporate contract capable of external validation and replication, critical factors for the maintenance of legitimacy, or whether official discourse simply reinforces the politics of illusion, privileging symbolic posturing over substantive change.

The Ex-Middle Problem for Law-and-Economics

Abstract Law-and-economics has an ex-middle problem. First, there is the problem of preserving law’s deterrent power, and its ability to influence later behavior, even when it is sensible to renegotiate incentives later on. The issue is hardly limited to contract renegotiation, and the ubiquity of this kind of ex-middle thinking is examined here. Second, there is the idea that the more our thinking is driven by an ex-ante perspective, the more it distances itself from common ethical intuitions that tend to involve ex-post observations, or simply results. Solving ex-middle problems by tinkering with incentives leads to increased objections from ethically oriented audiences, who find efficiency claims unattractive when they burden individuals in the interest of future unidentifiable beneficiaries. This conflict makes it hard for law-and-economics to have its deserved influence on lawmaking. When law renegotiates with positive incentives, it reduces its ex-ante impact; when it relies on negative incentives, either ex-post or ex-middle, accompanied by a readjustment of the optimal ex-ante rule, it runs the risk of offending ethical sentiments, and then it rarely takes hold. One aim here is to draw attention to ex-middle recalibrations, and the second aim is to suggest that a law-and-economics approach is most successful when it devises efficient rules that are not at odds with ethical sentiments.

From the dependable to the demanding partner: the renegotiation of French nuclear cooperation with India, 1974–80

ABSTRACT This article examines the shift in French nuclear export policy during 1974–80 leading to renegotiation of bilateral contracts between India’s Department of Atomic Energy (DAE) and France’s Commissariat à l’énergie atomique (CEA). This reassessment of French-Indian nuclear partnership by Giscard d’Estaing’s government initially resulted from its concerns that France might be implicated in India’s 1974 nuclear explosion. Neither country had signed the Nuclear Non-Proliferation Treaty, the CEA and DAE were long-time technology partners, and both opposed multilateral safeguards. The French reassessment later received a major thrust from improved US-French bilateral relations, and French participation in the Nuclear Suppliers Group.

Contract Enforcement and Productive Efficiency: Evidence From the Bidding and Renegotiation of Power Contracts in India

Weak contract enforcement may reduce the efficiency of production in developing countries. I study how contract enforcement affects efficiency in procurement auctions for the largest power projects in India. I gather data on bidding and ex post contract renegotiation and find that the renegotiation of contracts in response to cost shocks is widespread, despite that bidders are allowed to index their bids to future costs like the price of coal. To study heterogeneity in bidding strategies, I construct a new measure of firm connectedness, based on whether a firm has been awarded coal concessions by the Government. Connected firms choose to index less of the value of their bids to coal prices and, through this strategy, expose themselves to cost shocks to induce renegotiation. I use a structural model of bidding in a scoring auction to characterize equilibrium bidding when bidders are heterogeneous both in cost and in the payments they expect after renegotiation. The model estimates show that bidders offer powerbelowcost due to the expected value of later renegotiation. The model is used to simulate bidding and efficiency with strict contract enforcement. Contract enforcement is found to be pro‐competitive. With no renegotiation, equilibrium bids would rise to cover cost, but markups relative to total contract value fall sharply. Production costs decline, due to projects being allocated to lower‐cost bidders over those who expect larger payments in renegotiation.

Negotiating Employee Contracts Case Study Review Negotiations and Conflict Resolution

This paper is a review of a case study in human resource management with a slant towards the legal aspect of contract of employment and renegotiation of contracts. As none of the authors is a lawyer, the paper is reviewed from the managerial rather than from the legal point of view. Cindy is the lady employee in question who worked for a company for many years and never thought that a time would come when her employer would transfer her to a far off and forlorn place in the midst of nowhere. Her relocation puts her off and she thought she had been unfairly treated by her employer. In the analysis of the issues at stake in the scenario, the authors came to the conclusion that both Cindy and her employers had merit in their case should they go to court for adjudication and pronouncement of a verdict. Cindy on her part did not follow due process at the onset to ask questions about her job. It seemed also that her employers on their part did not do full disclosure about the nature of the job and the need to relocate staff when necessary. The authors decided to use the exploratory approach methodology in this case study review as there was not much information in the scenario to go by. The case study method has been found to be a suitable method of research that enables a phenomenon to be examined closely at a micro level so that knowledge from a small sample can be extended to cover generalizations of all similar cases, using the deductive and inductive approaches. Therefore the authors made some assumptions and used the deductive and inductive approach to arrive at logical conclusions. This article is therefore a narrative article and a commentary that does not include any primary research material. Readers are free to come to their own conclusions on the merit of the case as the main objective of the authors of this article is to generate knowledge for academic discourse. Human Resource practitioners and theoreticians will hopefully find the article stimulating food for thought and pertinent to their work.

Hardship and Renegotiation of Contracts in the Prospective Recodification of Italian Civil Law

The aim of the present essay is to analyse the new normative proposal on change of circumstances and to shed light on its scope of application, its potentialities and its shortcomings. The first part will indicate the reasons why a modification of the existing law is needed, also in consideration of the COVID-19 crisis and the difficulties in finding a fair solution capable of balancing the parties’ interests in ongoing contracts (B.). The contribution will then devote attention to the comparative background, as the problem of supervening events gave rise to several legislative interventions, not only in the European context (C.). A detailed scrutiny of the proposed Italian provision on change of circumstances will follow, with respect to the systematic relationship to other remedies and the requirements for its application (D.). Finally, the paper offers some conclusions (E.).

Debt capacity, debt choice, and underinvestment problem: Evidence from China

This study investigates how short-term debt and debt capacity help firms to make efficient financing decisions and reduce underinvestment problem. The sample includes Chinese nonfinancial firms listed on the Shanghai and Shenzhen Stock Exchanges over the period 2007 to 2017. The findings indicate that short-term debt is positively related to leverage. The results also indicate that growth positively influences leverage. The results further show that short-term debt enhances the positive impact of growth on leverage. These findings reveal that short-term debt makes firms financially flexible, and allows them to obtain more cost-effective debt by repricing and renegotiation of debt contracts in the presence of valuable growth opportunities. Furthermore, the results illustrate that debt capacity is positively associated with leverage, suggesting that debt capacity helps firms to have an easy access to the credit market and reduce liquidity risk. Overall, the findings remain consistent across different types of firms (state-owned [S.O.E.] and non-state-owned enterprises [N.S.O.E.]) and by considering alternative proxy of growth.

The Legal Impact of the Blockade on Qatar as to Contractual Obligations According to International Trade Law (The CISG 1980 and UNIDROIT 2016)

يناقش هذا البحث أثر حصار قطر على عقود البضائع والخدمات المبرمة ما بين تجّارٍ في قطر وآخرين في دول الحصار أو خارج دول الحصار، وذلك وفقًا لأحكام منظومتين من منظومات التشريعات الخاصة بالتجارة الدولية هما اتفاقية الأمم المتحدة في العقود للبيع الدولي للبضائع 1980(اتفاقية فيينا) ومبادئ الينيدروا 2016. وفقًا لاتفاقية فيينا، يُعتبر حصار قطر عائقًا يؤدي إلى استحالة تنفيذ العقد، حيث تتوافر في الحصار جميع شروط العائق المنصوص عليها في المادة 79 من الاتفاقية المذكورة، وتلك الشروط هي: كونه خارجًا عن الإرادة، وعدم التوقع المعقول وقت انعقاد العقد، وعدم القدرة على تجنب أو التغلّب على عواقبه. أما الأثر القانوني المترتب على القول بأن الحصار عائق – وفقًا للمادة 79 من الاتفاقية ذاتها – فهو إعفاء الطرف الذي لم يتمكن من تنفيذ التزامه من التعويض، مع بقاء العقد قائمًا وإمكانية لجوء أي من طرفيه للفسخ إذا توافرت شروطه التي أهمها المخالفة الجوهرية. أما ما يخص مبادئ اليونيدروا في عقود التجارة الدولية 2016، فيعتبر حصار قطر – وفقًا للمادة السادسة منها – ظرفًا شاقًا يخلق حالة من اختلال جوهري في التوازن العقدي، كما تتوفر في الحصار شروط عدم التوقع وخارج عن الإرادة وحدث عام سابق على التعاقد وغير مفترض ضمنًا في العقود السابقة على حدوث الحصار. أما الأثر القانوني المترتب على اعتبار حصار قطر ظرفًا شاقًا فهو حق الطرف الذي أصبح التنفيذ شاقًا بالنسبة له في طلب إعادة التفاوض، وفي حال لم تنجح المفاوضات أو نكل عنها الطرف الآخر، يمكن لأيٍّ من طرفي العقد اللجوء للمحكمة التي قد تعدّل في بنود العقد لإعادة التوازن العقدي، وكذلك للمحكمة أن تحكم بإنهاء العقد.  خرجت الدراسة بجملة من النتائج أهمها: أنه، وبعد رفع الحصار سيصبح تكراره أمرًا متوقعًا، يجب على المتعاقدين أخذه بعين الاعتبار في عقودهم اللاحقة مع ما يترتب على ذلك من آثار قانونية واقتصادية. كذلك فإن الجزاء الذي قررته المادة 79 من اتفاقية فيينا بخصوص العائق هو أمرٌ غير منطقي، إذ قد تبقى عقودًا معلقة بدون فسخ بالرغم من أنها مستحيلة التنفيذ. أما بالنسبة للمبادئ فلم تحدد معيارًا للاختلال الجوهري في العقود يبرر إعادة التفاوض أو اللجوء للمحكمة، مما يجعل العديد من العقود خارج نطاق الحماية القانونية ويظل أطرافها ملزمون بها رغم ازدياد تكلفة الوفاء.

Productivity Shocks and Labour Market Outcomes for Top Earners: Evidence from Italian Serie A

How are top earners affected by productivity shocks? We address this question using a unique longitudinal data set on the universe of professional football players in the Italian Serie A, representing 20% of top earners in Italy. We use traumatic injuries and adopt an IV strategy to provide causal estimates of the impact of productivity shocks on several labour market outcomes. We find that a 30‐day injury substantially affects the probability of contract renegotiation and reduces net wages by around 12%. We show that this large penalty is due to employer's precautionary motives rather than to shock‐induced reduction in current player's performance.

Positionality of women in homeownership: a process of gender contract negotiation

Literature is replete with information indicating that the roles, status and positions of men and women in society have evolved significantly over the years. Yet, there is a little understanding of how such changes have occurred in homeownership attainment in developing countries where there is male dominance. Using Ghana as a case study, this study explores the evolution of women’s role in homeownership. Findings show that although men exercise greater control in terms of investment and ownership, gender contract renegotiations often lead to an increase in women’s participation in homeownership mainly in supportive capacities. Renegotiations have mostly occurred to demystify the normative ideology tying men with the sole responsibility of housing investments. As a consequence, there is evidence of women making financial contributions, supervising construction activities and exploring cost-saving measures to aid the process of family house construction. Generally, findings show that homeownership enhances reproductive roles, uplifts status of men and acknowledges the contributions of women. Similarly, new norms of inheritance supported by statutory and customary law offer ownership stakes to women. In view of this benefit, women tend to be motivated towards providing support for the attainment of family homeownership.

Real Incentive Effects of Soft Information

ABSTRACTBoth soft, noncontractible, and hard, contractible, information are informative about managerial ability and future firm performance. If a manager's future compensation depends on expectations of ability or future performance, then the manager has implicit incentives to affect the information. We examine the real incentive effects of soft information in a dynamic agency with limited commitment. When long‐term contracts are renegotiated, the rewards for future performance inherent in long‐term contracts allow the principal partial control over the implicit incentives. This is because the soft information affects the basis for contract renegotiation. With short‐term contracts, the principal has no control over the basis for contract negotiation, and thus long‐term contracts generally dominate short‐term contracts. With long‐term contracts, the principal's control over implicit incentives is characterized in terms of effective contracting on an implicit aggregation of the soft information that arises from predicting (forming expectations of) future performance. We provide sufficient conditions for soft information to have no real incentive effects. In general, implicit incentives not controllable by the principal include fixed effects, such as career concerns driven by labor markets external to the agency. When controllable incentives span the fixed effects of career concerns, the latter have no real effects with regard to total managerial incentives—they would optimally be the same with or without career concerns. Our analysis suggests empirical tests for estimating career concerns that should explicitly incorporate noncontractible information.

United States Pension Benefit Plan Design Innovation: Labor Unions as Agents of Change

Labor unions played an historic role creating the occupational pension system in the private and public sectors in the post-World War II era. That system, which was dominated by defined benefit pension plans, is in decline. The transition to a new system is economically and socially painful, and has been accelerated by two financial crises in the past decade. This paper uses a case study of a private sector union to demonstrate how labor unions can influence the renegotiation of the pension contract for American workers. The case study describes how one union evaluated the pension crisis from a sustainability viewpoint, and responded pro-actively by developing a hybrid pension plan that attempted to align the interest of all the stakeholders through equitable risk sharing. The hybrid plan developed by this union eventually had a broader influence on the pension community at large and the public policy debate around the pension crisis.

Structural constraints in times of resource nationalism: oil policy and state capacity in post-neoliberal Ecuador

ABSTRACTThis article explores the re-emergence of resource nationalism in Ecuador during Rafael Correa’s government. In 2010, Ecuador pursued a shift in oil contracts from production sharing agreements to service contracts. I argue that resource nationalist policies were intended to maximize rent appropriation and increase state control. Nevertheless, in order to spell out the complexities of natural resource governance in post-neoliberal Ecuador, it is important to integrate the structural constraints of the Ecuadorian state to enact resource nationalist policies. Despite the nationalist sentiments that originated these reforms, the renegotiation of contracts continued to benefit foreign corporations due to the centralized attitude of the Correa government and the perennial limitations of state capacity in the regulation of the industry.

Unicorn Stock Options—Golden Goose or Trojan Horse?

Large privately held startups valued at $1 billion or more (“unicorns”) are grappling with how to deal with employees’ expectations caused by the illiquidity of the shares of stock acquired upon exercise of their options. Until about eight years ago, many talented workers chose to work for a startup company for a lower cash salary combined with a substantial stock option grant and the dream of cashing out for a large sum of money after an initial public offering (“IPO”) of the startup’s stock. Today, unicorns remain private for extended periods of time, in part, because they are often no longer dependent on an IPO or a trade sale to raise sufficient capital. As a result, they are delaying liquidity events for their founders, employees, and investors, thereby causing their employee stock options to lose some of their allure as a hiring and retention device. This Article examines a contemporary puzzle in Silicon Valley: Is there a shift in unicorn employees’ expectations that results in labor contract renegotiations? To answer this question, this Article explores the challenges faced by unicorn firms as repeat players in competitive technology markets and offers the following possible solutions. First, it proposes new equity-based compensation contracts, and critiques them. Second, it suggests alternatives to the traditional liquidity mechanisms, and critiques them. Unfortunately, current securities and tax laws create legal barriers to private ordering, which prevent the parties from solving these issues on their own. This Article concludes with proposals to remove these legal barriers to private ordering to allow for the proposed solutions to take hold, accompanied with new mandatory disclosure requirements to limit the risks.

The impact of leasehold status on apartment price

Based upon cooperative apartments sold in Stockholm, Sweden during the period of 2012 to mid-2014, we find that leasehold status (meaning that the cooperative does not own the land that the apartment building occupies) has a small but statistically significant impact on price of −2.3% when controlling for location and apartment characteristics in a hedonic model. At the time of renegotiation (i.e. a lease duration of 0), leasehold depreciates price with 4.2%. We also apply propensity score matching, which results in slightly larger negative impact on the price being estimated. As current lease payments are covered by monthly fees that are to be paid to the cooperative, a negative effect on price should mostly be attributed to an increased uncertainty of future levels of monthly fees. We therefore extend the existing literature by examining the impact on price by the remaining leasehold term whilst still controlling for monthly fees. Consistent with our hypothesis, apartment prices are found to increase with 0.22% for each additional year that remains until renegotiation of the lease contract.

A Structured-Renegotiation Theory of Corporate Bankruptcy

A fundamental question for corporate bankruptcy law is why it exists in the first place. Why are there special rules that apply only in financial distress? The conventional law-and-economics answer—known as the Creditors’ Bargain Theory—identifies two core purposes of bankruptcy law: recreating a hypothetical ex ante bargain and respecting creditors’ nonbankruptcy entitlements. This Article challenges the Creditors’ Bargain Theory and presents an alternative: The sole purpose of corporate bankruptcy law is to solve the incomplete contracting problem that accompanies financial distress. Because financial distress is difficult to contract over, relationships involving a distressed firm are governed by incomplete contracts that allow parties to hold each other up. All distressed firms face this same value-destroying hold-up problem, and so pressure arises for a uniform solution. The purpose of corporate bankruptcy law is to provide that solution. In the United States, Chapter 11 of the Bankruptcy Code implements this purpose in the form of a framework for ex post renegotiation of incomplete contracts. This framework imposes judicial oversight and allocates bargaining power to minimize hold up among those with interests in a distressed firm. In a sense, it puts in place guardrails that give the parties room to bargain while keeping them from engaging in extreme forms of hold up. While this framework is not based on any hypothetical ex ante bargain and gives no special deference to nonbankruptcy entitlements, it is the fundamental attribute of Chapter 11.

A decision support system (DSS) for facilitating the scenario selection process of the renegotiation of PPP contracts

Purpose Public private partnership contracts tend to have longer contract durations compared to other conventional procurement methods. A contract renegotiation becomes inevitable in most of the cases. The renegotiation process usually develops a number of scenarios in order to regain the contract equilibrium. The purpose of this paper is to facilitate the renegotiation process by offering an automated system to select the optimum renegotiation scenario that preserves the rights and the interests of the project stakeholders. Design/methodology/approach The common renegotiation scenarios used are: increasing the service charges, increasing the concession period or paying a lump sum amount to the party of concern in order to maintain a fixed rate of return and keep the return on equity constant. In this paper, a method of selecting the optimum scenario among the different scenarios is proposed. This is done using a weighted sum model to calculate the weights and ranks of a number of factors influencing the stakeholders’ decisions. A DSS is developed with the aid of Microsoft Excel, VBA programming language, and the Precision Tree 5.5 for Excel add-in. Findings The renegotiation process has been facilitated by using an automated system that maximizes the benefits of both the public sector and the private sector. The optimum renegotiation scenario has been selected for the case of the model. Originality/value The developed framework is of great benefit to project stakeholders, including the private sector, the public sector and the users of the service. It saves time and money invested in lengthy negotiations, and it enforces transparency and mutual trust between the different parties by providing a tool that significantly minimizes conflicts during the renegotiation process and defines clear steps to be followed in order to reach an agreement that will maximize the benefits for both the private and the public sectors.

Immigrant wages and recessions: Evidence from undocumented Mexicans

We study the impact of recessions on the real wages of undocumented immigrants in the US using data from the Mexican Migration Project. Empirical evidence shows that undocumented immigrants experience larger wage drops during recessions than legal immigrants, suggesting that the frequent renegotiation of contracts leads to greater wage flexibility. Because migration decisions also adjust to these wage changes, the observed equilibrium wages are capturing both lowered aggregate productivity and a smaller supply of migrant workers. To separate these effects, we analyze an equilibrium migration model where native wages are rigid while immigrant wages are flexible. In a counterfactual experiment with a fixed supply of immigrant workers, we see a stronger relationship between aggregate negative productivity shocks and immigrant wages. We also find that the flexibility of immigrant wages could reduce the volatility of high-skilled native employment over the business cycles, but magnifies the volatility of low-skilled native employment.

Traffic forecast inaccuracy in transportation: a literature review of roads and railways projects

The inaccuracy of traffic forecasts has long stood as a central research theme in the field of infrastructure and transportation studies. The literature presents several motives for this phenomenon, ranging from a political bias, insufficient technical preparation, changing urban patterns, and economic dynamics. Uncertainty due to the inaccuracy of forecasts can have a profound impact on the infrastructure development process, right through from the preliminary studies up until the operation and re-negotiation of contracts (in cases when projects are developed using a concessions model). This paper provides an extensive systematic review of forecast inaccuracy in roads and railways projects (analyzing trends, causes, and results). The research found that: (1) forecasts in rail projects are generally more optimistic than in road projects; (2) over the last couple of decades the accuracy of forecasts has not improved significantly, and; (3) there has been a generalized ramp-up effect in forecasts.

Contract Enforcement and Productive Efficiency: Evidence from the Bidding and Renegotiation of Power Contracts in India

Weak contract enforcement may reduce the efficiency of investment in developing countries. I study how contract enforcement affects efficiency in procurement auctions for the largest power projects in India. I gather data on bidding and ex post contract renegotiation and find that the renegotiation of contracts in response to cost shocks is widespread, despite that bidders are allowed to index their bids to future costs like the price of coal. Connected firms choose to index less of the value of their bids to coal prices and, through this strategy, expose themselves to cost shocks to induce renegotiation. I use a structural model of bidding in a scoring auction to characterize equilibrium bidding when bidders are heterogeneous both in cost and in the payments they expect after renegotiation. The model estimates show that bidders offer power below cost due to the expected value of later renegotiation. The model is used to simulate bidding and efficiency with strict contract enforcement. Contract enforcement is found to be pro-competitive. With no renegotiation, equilibrium bids would rise to cover cost, but markups relative to total contract value fall sharply. Production costs decline, due to projects being allocated to lower-cost bidders over those who expect larger payments in renegotiation.