Contracts, Negotiation, and Learning: An Examination of Termination Provisions

• Published date: 01 May 2014
• Date: 01 May 2014
• Author: Kyle J. Mayer,Africa Ariño,Juan Jané,Jeffrey J. Reuer
• DOI: http://doi.org/10.1111/joms.12069

Contracts, Negotiation, and Learning: An Examination

of Termination Provisions

Africa Ariño, Jeffrey J. Reuer, Kyle J. Mayer and Juan Jané

University of Navarra, Purdue University, University of Southern California, Hewlett Packard and University

of Navarra

ABSTRACT Taking a temporal view of learning in partnerships, we argue that learning to

contract from prior relationships can be manifested not only in an increase in the level of

contractual detail but also in a decrease in negotiation time for a given level of contractual

detail. We analyse the influence that the length of prior relationships and the detail of

termination provisions have on negotiation time, or the time period that it takes for partners to

reach a mutually acceptable agreement. We find that: (1) the length of prior relationships has a

curvilinear, U-shaped effect on negotiation time, suggesting the possibility of diverse learning

mechanisms as the relationship unfolds; (2) the impact of the detail of termination provisions

on negotiation time varies across different types of termination provisions; and (3) it takes a

shorter time to negotiate certain types of termination provisions when partners have longer

prior relationships. Beyond suggesting the need to investigate the consequences of contractual

provisions for collaborators, our study proposes negotiation time as an additional indicator of a

learning-to-contract effect that complements existing ones.

Keywords: contracts, learning, negotiation time, partnerships, prior relationships,

termination provisions

INTRODUCTION

There has been an increasing focus in the last several years on how firms learn to more

effectively design contracts and use them to manage relationships with other firms

(Argyres and Mayer, 2007; Lumineau et al., 2011; Mayer and Argyres, 2004; Vanneste

and Puranam, 2010). A key element of this literature is the assumption that parties to an

exchange agreement cannot anticipate all possible contingencies in a contract; experi-

ence working with another firm, however, can provide a better picture of what to

anticipate and can help the parties form a better idea of what to expect in trying to

complete a transaction. One potential consequence of learning to work together is an

Address for reprints: Africa Ariño, IESE Business School, University of Navarra, Av. Pearson 21, Barcelona

08034, Spain (afarino@iese.edu).

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© 2013 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 51:3 May 2014

doi: 10.1111/joms.12069

increase in the level of contractual detail (or the complexity of the contract) as the parties

address issues arising from their prior transactions together (Mayer and Argyres, 2004).

However, empirical evidence is mixed regarding the association between prior rela-

tionships and contractual detail of provisions of various types, with some of these

associations found to be positive, others negative, and still others non-significant (Reuer

and Ariño, 2007; Ryall and Sampson, 2009; Vanneste and Puranam, 2010). This

suggests that learning from prior relationships is complex and requires additional exami-

nation (Ryall and Sampson, 2009), and our purpose in this paper is to advance this

stream of research. We do so by considering the consequences of prior relationships and

contractual provisions in partnership negotiations – in particular, their effect on nego-

tiation time – rather than focusing on the antecedents of contractual detail in inter-firm

agreements. Our study therefore responds to calls for research on the implications of

contractual provisions for collaborators (Schepker et al., 2013).

More specifically, by taking a temporal perspective[1] (Ancona et al., 2001; Mitchell

and James, 2001; Shi et al., 2012), this study investigates learning to contract from a

novel perspective by considering that learning-to-contract effects can also be manifested

in quicker negotiations. While Mayer and Argyres (2004) focused on more detailed

contracts (mainly more effective contingency planning and better specified roles and

responsibilities) as the outcome of partners learning to work together, we propose that a

quicker negotiation time for a given level of contractual detail may also be considered an

indicator of learning to contract. Determining whether prior relationships between the

partner companies reduce negotiation time for a given level of contractual detail also

points to a largely unaddressed benefit of learning-to-contract.

We develop arguments relating length of prior relationships and contractual detail of

termination provisions to partnership negotiation time, and we consider the moderating

effect that length of prior relationships has on the association between detail of termi-

nation provisions and negotiation time. To isolate the effect of learning on negotiation

time, one key issue that must be addressed is the difficulty of what the parties are trying

to negotiate. We focus on the detail of termination provisions, as these are often con-

tentious issues for partners that can lead to delays in reaching agreement. For example,

discussing termination of the relationship before it starts risks setting the wrong initial

conditions to begin a partnership (Ariño et al., 2001), and may raise a host of concerns

surrounding opportunism and property rights (Hagedoorn and Hesen, 2007). Moreover,

there are different types of termination provisions – i.e., those related to the triggers,

procedures, and consequences of termination (Campbell and Reuer, 2001; Hewitt, 2005;

Serapio and Cascio, 1996), and they may vary in terms of how long they take to

negotiate, so we examine why these differences may arise. Finally, it is noteworthy that

termination provisions are one type of legal clause, and there is no conclusive evidence

whether prior relationships engender learning regarding legal clauses rather than other

provisions relating to technical matters (Vanneste and Puranam, 2010). Thus, analysing

the interaction effect of prior relationships and the different types of termination provi-

sions may allow us to determine which of these provision types are subject to learning

effects.

We test our hypotheses using data on logistics outsourcing partnerships, in which a

logistics provider offers customized logistics services to a customer firm on a long-term

A. Ariño et al.380

© 2013 John Wiley & Sons Ltd and Society for the Advancement of Management Studies