Bengt Holmström and Bruce Springsteen on contracts

Blogs March 29, 2017


The Sveriges Riksbank’s Prize in Economic Sciences in Memory of Alfred Nobel was in December awarded to the Finnish professor Bengt Holmström together with his British colleague professor Oliver Hart. They were rewarded 'for their contributions to contract theory'. For us lawyers working with contracts the essential message of these Nobel laureates’ work is that contracts should be balanced. The laureates speak about incomplete contracts when obligations and rights are not in balance.

The laureates emphasize allocation of control rights, property rights and decision rights between the contracting parties. In its presentation of the laureates’ work the Royal Swedish Academy of Science writes that contracts help us to be cooperative and trusting when we may otherwise be disobliging and distrusting. You can read more about the Contract Theory here .

Big businesses often take advantage of their negotiating power forcing the weaker party to biased contracts. In these situations, the negotiation process is often dictating rather than negotiating. I have often wondered whether this really is beneficial even for the stronger party. Both parties should benefit from an agreement and it should establish a true partnership.

On the other hand, SMEs should also have the courage to question arrangements imposed on them by big businesses. It is not all that uncommon that SMEs are successful in contract negotiations with big businesses. Success in this respect requires that you are aware of your strengths in relation to your contracting party and that your negotiating skills are sufficient. Even if you do not reach an optimal result in contract negotiations you can by different means strengthen your position and/or control your risk. My advice to weaker parties in contract negotiations is to be brave and innovative and take advantage of good counsel.

I recently read Bruce Springsteen’s rousing auto-biography Born to Run (Simon & Schuster 2016). In this openminded book he among many other interesting things tells about the disastrous contracts he ended up signing in the beginning of his career. Like many other artists before him – and unfortunately after him too – he found himself in a situation when he made it big that he did not own his musical work and was practically broke when he should have been loaded with money. He then decided to take control over his business and with his determination succeeded in regaining the ownership of his music and work – something surprisingly few artists do.

In chapter 55 of the book Bruce tells in a haunting way how he with the help of appropriate counsel organized his E Street Band contractually in a manner that everybody could be happy with and himself remaining The Boss. All this despite him having earlier despised contracts. Appropriate contracts enabled all band members to be trustful and free to just rock on.