I. Introduction
Comparative studies on maker-supplier contracts in the US and Japan pointed out their vivid contrast: long and specific contracts in the US and short and ambiguous contracts in Japan. Such typical characteristics of the contract in both countries had not changed for the last thirty years, even though their deal structures have changed a lot. For instance, in the Japanese electronics industry, the maker-supplier relationship is no longer long enough to prevent opportunistic behavior; and in the US auto industry, makers have tried to introduce Japanese-type cooperative relationships with their suppliers. What makes the characteristics of the contract in each country? Why are contractual provisions so sticky while deal structures flexibly change along with the change of markets? Based on a semi-structured interview on Japanese auto and electronics industries, this article tries to answer these questions.
Maker-supplier transactions are basically sales contracts. But, they are often not simple series of spot sales contracts, but long-term relational contracts, which require relation-specific investments. They are like partners of a joint project, rather than just seller and buyer. If they successfully cooperate, they can create synergy or quasi-rent, as any joint project where its players each need to incentivize each other in order to maximize their own payoff, which I call “incentive bargaining.” Because of their conflicting interests, each player expects the opportunistic behavior of other players and feels worried about providing its capital, either monetary or human, to the joint project unless proactive measures are taken. The major role of master contracts of maker-supplier transactions is to provide such measures for stimulating successful incentive bargaining of long-term repeated deals.
The master contract should reflect the result of incentive bargaining between maker and supplier before entering into the prospective long-term repeated deals. The way of writing the master contract is also the result of their incentive bargaining.
A simple comparison of US maker-supplier master contracts and Japanese ones will not uncover the real practices in both countries. It is necessary to analyze individual contractual provisions. By dividing contractual provisions of maker-supplier contracts in both countries into three types: the contingent contract (CK); the environment contract that provides prerequisites of incentive bargaining (Prerequisite EK); and the environment contract that provides procedures of incentive bargaining (Procedure EK). This article shows that contracting parties choose the degree of specificity/ambiguity, and the degree of enforceability of each specific contractual provision independently. The final choice basically depends on the characteristics of each contractual provision. Although the cost and benefit analysis may also influence the choice, each provision’s characteristics are more determinative.
Because of the characteristics of their roles, CKs and Prerequisite EKs, which relate to sensitive zero-sum type issues, “are basically written specifically and in enforceable terms.” There is not so much difference between these two types of contractual provisions in the US and Japan. The biggest difference between the two countries lies in their Procedure EKs, which serve the purpose of developing cooperative relationships: US ones are generally written in a way that is very unlikely to be enforced and their specificity is various while Japanese ones are almost uniformly ambiguous and enforceable. This article provides a couple of hypothetical reasons for this difference.
Although the superficial contrast of contractual provisions of the two countries i.e., long and specific in the US versus short and ambiguous in Japan, looks unchanged, both are gradually changing in substance. Procedure EKs of the US manufacturing are changing in substance for motivating suppliers to cooperate, which are unlikely to be enforced. Some Prerequisite EKs of the Japanese electronics industry, which used to be written ambiguously, are changing towards outlining specific terms by bilateral negotiations without using a master contract.
Nevertheless, master contracts are changing slowly relative to the change in deal structures in both countries. The reasons for the stickiness are also common to both countries: the cost of multilateral negotiation and the problem of intra-firm incentive bargaining.
Section 2 provides an overview of the preceding literature, which is related to my research questions. Section 3 introduces the results of our semi-structured interview on the Japanese auto and electronics industries. Section 4 shows how the role of an individual contractual provision relates to its specificity and enforceability. Section 5 describes the reasons for the different specificity and enforceability of Procedure EKs in the US and Japan. Section 6 describes the reality of contractual stickiness and its possible reasons. Section 7 is the conclusion.
II. Preceding Literatures
There are many preceding literatures in various genres related to the research questions of this article. The first genre relates to the classic Japanese contracting practices, particularly, their ambiguous contracts. The second genre relates to vertical integration and disintegration, analyzing from the perspective of transaction cost economics and property rights theory. The third genre addresses the interaction of informal and formal contracts from the perspective of relational contract theory. The fourth genre analyzes contractual complexity and the stickiness of contract from the perspective of endogenous incomplete contract theory. Finally, the fifth genre is a series of new papers regarding “governance contracts” or “managing contracts.”
A. The Classic Japanese Contracting Practices and Ambiguous Contracts
This Section shows how the preceding literature analyzes the classic Japanese contracting practices thirty years ago, which is the benchmark of our semi-structured interview on how it has changed, by dividing them into deal structures and contractual provisions.
1. Deal Structures
Banri Asanuma framed the Japanese contracting practices of the automobile industry and the electronics industry around 1990 based on extensive interviews as follows.
a. Automobile Industry
i. The “Non-Switching Practice” and “Two-Vendor Policy”
In the automobile industry, “a full model change [is made] every four years and…. a minor model change [is made] in between.” Each maker seeks to secure more than one supplier for each kind of its part, which is called the two-vendor policy. Its objectives are, first, to ensure protection against a sudden stoppage of delivery from either source due to unforeseen circumstances, and second, to put competitive pressure on suppliers. Each maker usually holds a single supplier responsible for the supply of each particular part during the life of a model, which is called the “nonswitching practice.” A reason behind this practice seems to be the avoidance of duplicate investment in the same kind of specific tooling and jigs. This practice “stabilizes the status of each supplier during the life of a given model.”
ii. Quantity and Price
The quantity needed for a given part “varies from month to month” and is “in proportion to the fluctuation in demand for the car.” The maker “and its suppliers share the effect[] of” market fluctuation. The price, however, is determined before mass production. It is calculated by adding cost and markup, which is determined by the transaction history between the maker and the supplier. The price is “renegotiate[ed] regularly, usually at 6-month intervals.”
iii. Ranking System
The incumbent supplier of a given part is not guaranteed to receive an order for the same kind of part for the new model. The maker selects a suitable supplier for each part based on ratings of a relatively small number of competing suppliers, as well as an assessment of the proposal submitted by each candidate.
Makers continually rate suppliers. The higher the rating a given supplier receives, the higher the probability that the supplier will receive orders continuously.
Specific capabilities, which are required of the supplier to be rated as a superior supplier of customized parts, form the relation-specific skill. This skill is required on the part of the supplier so it can respond efficiently to the specific needs of the maker. The skill consists of two layers: one layer corresponds to accumulated learning through transactions with a given maker, and the other corresponds to general technological capabilities.
b. Electronics Industry
Although the basic deal structures between makers and suppliers in the electronics industry are the same as those in the automobile industry, they demonstrate increasing heterogeneity due to the electronics industry’s production of many types of final products, which diversify the typical scale of production, the duration of a model, and the degree of technological maturity.
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As a whole, various aspects, including competition among potential suppliers, bargaining between makers and suppliers, and cooperation between them, are contained in the deal structure in both industries. A key issue of keeping such a deal structure efficient is the distribution of the relational quasi-rent which is the surplus value generated by the accumulated relation-specific skill. Particularly, makers need to commit to keeping the whole scheme. As commitment schemes, the three elements: equity relationship; exchange of personnel; and supplier associations, have been pointed out as characteristics of Japanese contracting practices.
2. Contractual Provisions
Although the monthly schedule in the automobile industry and each order in the electronics industry is regarded as an individual contract, the master contract, which is exchanged when a maker enters into a business relationship with a supplier, is thin and non-specific. Actual practices should be observed to identify the contractual relationship between a maker and a supplier.
Foreign observers criticize the classic J-form contractual provisions as ambiguous and imprecise, which can work only in the world of a fairy tale without the opportunistic behavior of contracting parties. Professor Daniel Foot enumerates the possible reasons for the Japanese ambiguous contract, such as the non-existence of the parole evidence rule, the prevalence of long-term relational contracts, the sensitivity of reputational risk of raising lawsuits, and the homogeneity of contracting parties.
B. Vertical Integration or Disintegration
Whether vertical integration or disintegration is the first issue to tackle for discussing the incentive bargaining in maker-supplier transactions.
Both transaction cost economics and property rights theory relate to this issue. Transaction cost economics tells that asset specificity creates quasi-rent that increases transaction cost, which can be saved by vertical integration. Property rights theory tells that as the incomplete contract is given, the hold-up problem distorts the incentive of relation-specific investments.
Both economic theories indicate that vertical integration is the right answer for the classic Japanese contracting practices that are inevitably accompanied by asset specificity and heavily rely on relation-specific investments. Therefore, the question is why the Japanese auto industry and electronics industry have not aimed at vertical integration.
When the Japanese auto industry started in the early 1930s, the predecessors of the present Toyota and Nissan manufactured all parts in-house. After the Sino-Japanese war started in 1937, they gradually constructed the system of contracting out parts manufacturing to small and mid-sized companies as an emergency measure to increase production.
In 1940, the Konoe administration started a wartime economy including ‘separation of capital and management, and changing firm purpose from profit to production.’ Specifically, the policy separated ownership and management of subcontractors, and transferred their residual control to the auto maker while leaving their residual claim to their owners for decreasing the “Fisher Body type” inefficiency of “incomplete contracts” between a maker and its suppliers. The basic structure of the classic Japanese contracting practices was created during the war.
Although such a wartime exception of transferring residual control of subcontractors to automakers cannot be maintained after the war, the basic maker-supplier relationship created during the war maintained and the movement to vertical integration cannot be observed both in the auto industry and electronics industry.
On the other hand, vertical disintegrations occurred in the US auto industry since the 1980s due to strong competitive pressure from Japanese automakers. Although auto supply contracts in the United States were traditionally not considered relational contracts, US automakers are now seeking to develop the Japanese type of relational contracts with their suppliers.
C. Interaction of Formal and Informal Contracts
Once a maker does not choose vertical integration but chooses vertical disintegration, long-term relational contracts between the maker and its suppliers will inevitably be incomplete, i.e., not all contractual variables are verifiable. The contracting parties will agree on informal contracts, i.e., legally unenforceable contracts, if there is a circumstance under which informal contracts are self-enforcing.
The relational contract is self-enforcing if the long-term loss by deviation from the informal contract is larger than the short-term benefit by deviation from the informal contract. The surplus created by conforming to the informal contract is called quasi-rent. The source of quasi-rent includes not only asset specificity that is created by relation-specific investments, but also private information, search costs, industry practices, etc.
In the relational contract, the cost of deviation should be agreed ex-ante and the payoff by non-deviation had better be paid ex-post. Based on the repeated game theory, the existence of the potential choice of terminating the long-term relationship is important.
How the informal and the formal contracts interact is a major issue of this article. In previous literature, whether they are complementing or substituting is still an open question.
D. Contractual Complexity and Stickiness of Contracts
While the traditional relational contract theory takes the incomplete contract as given and then considers that the relational contract must be necessary, the endogenous incomplete contract theory views that the incomplete contract could be endogenously chosen even if a complete contract is feasible.
In cases where writing contracts is costly, the easier the condition of self-enforcing of relational contracts, the more incomplete explicit contracts become. Now, the questions are what the costs of writing contracts are, and how the costs of writing contracts relate to the degree of incompleteness.
Besides the costs of writing contracts, strategic ambiguity is another possible reason for the contracting parties endogenously choose incomplete contracts. Non-verifiable explicit contracts could induce preferable reactions of contracting parties by leaving room for choice.
Many empirical studies show that the degree of contractual complexity or ambiguity depends on region and industry and the tendency is sticky Many hypotheses are raised for explaining the reasons not only from an economic point of view but also from a sociological point of view.
As Section I shows, Japanese maker-supplier contracts are short and generally ambiguous, and their repeated deals that make relational mechanisms available. But, contrary to such an intuition, an empirical study on technology development projects in the U.S. shows that contracts between firms with prior deal experience tend to be more detailed and are more likely to invoke penalty clauses than contracts between firms with no such prior deal experience.
Although there are many studies on contractual complexity, the definition of complexity and the measure of complexity are various. As Professors Bob Scott, George Triantis, and Albert Choi argue, contractual complexity does not necessarily decrease the enforcement costs, but contractual specificity decreases the enforcement costs.
E. Governance (Managerial) Contracts
A recent trend in contract theory focuses on contract provisions for developing cooperative relationships between the contracting parties, which are called either governance contracts, managerial contracts, formal relational contracts, or scaffoldings.
These studies point out that written contracts could play important roles independent of court enforcement, particularly, to “provide a common knowledge basis for classification of actions ex-post as breach or not breach,” to help the parties build trust and maintain cooperation, and to align beliefs and objectives. Although these contract provisions are mostly long and specific, they are not necessarily enforceable by the court or not expected to be enforced by the court.
Earlier than these recent literature, Professors Ryall and Sampson pointed out the role of detailed contracts including penalty clauses, “not due to their usefulness in court, but instead, their usefulness in maintaining a smoothly functioning relational contract.”
III. Semi-Structured Interview and Its Results
Based on the hypothesis that Japanese contracting practices between makers and suppliers have changed since around 1990 because of the modularization of product architecture, we conducted semi-structured interviews of the two typical Japanese manufacturing industries’ experts: electronics as a highly modularized industry (four makers / three suppliers) and automobile as a moderately modularized industry (two makers / six suppliers). To supplement the analysis, we also examined the system integration industry (two makers / zero suppliers), of which the degree of modularization falls in between the electronics industry and the automobile industry.
We analyzed Japanese contracting practices by dividing them into deal structures and contractual provisions. The classic Japanese contracting practice is recognized as the following.
Regarding deal structures, the transacting parties pledge their commitment based on long-term relational contracts between mostly fixed parties. Contractual provisions involve largely unspecified ex-ante formal contracting and leave controversial issues to future negotiations.
The characteristics of the classic Japanese contractual provisions can be described as the following. During the bargaining preceding a contract, parties do not try to reach a precise agreement on conflicting issues, but leave them to informal contracts, such as minutes and tacit agreements. As a result, formal contracts are less specific than Anglo-American contracts. In the bargaining following a contract, results of renegotiation are seldom reflected in the formal contract, but rather in the “I owe you, you owe me” relationship. Furthermore, rights that are specified in the formal contract are seldom exercised literally. Parties are very reluctant to sue and do not consider lawsuits as a suitable way to enforce contracts.
We hypothesized that the modularization of product architecture will change both deal structures and contractual provisions: deal structures will be less relational and contractual provisions will be more specific.
In short, the interview results were as follows. Deal structures have changed a lot. The degree of change differs between the auto industry and the electronics industry due to different speeds of modularization. This result is consistent with our hypothesis. Contractual provisions, however, did not change as much. The degree of specificity differs between English-master contracts and Japanese-master contracts. This result is not consistent with our hypothesis.
A. Deal Structures
We confirmed the Asanuma model was basically correct in the classic Japanese contracting practices before 1990s, except in its price determination mechanism. Many answers negate the existence of a mark-up mechanism even before the 1990s and mention the way of providing objective price by makers. The price is renegotiated regularly. Quantity is basically not guaranteed until the last minute before the actual purchase order, except for scarce resources, such as semiconductors.
The deal structure of the electronics industry changed a lot. Makers purchase fewer customized parts and more commodity parts because of rapid modularization and severe global competition. Some makers abolished their supplier associations. But spot transactions are rare and de facto long-term relational contracts continue. The relationship between electronics makers and their suppliers turned out to be an equal partnership.
The deal structure of the automobile industry did not change as much as the electronics industry. Makers in the automobile industry also moved towards modularization and purchased more commodity parts, but not as much as those in electronics industry. The importance of relation-specific investments has not decreased as much and close cooperation across firms remains. Auto makers, however, turned to reshuffle suppliers more frequently than they used to do. We also observed diversification among makers in making changes to their deal structures.
In both industries, we raised questions regarding the changes in the traditional commitment schemes: equity relationships, exchange of personnel, and supplier associations.
First, regarding the exchange of personnel, we did not receive a clear answer affirming nor negating the existence of the practice.
Second, regarding the equity relationship, contrary to our expectation, we received very few affirmative answers as to the role of the equity relationship in keeping long-term relational contracts. Most interviewees in the electronics industry denied the existence of an equity relationship with suppliers, not only now but also before modularization. Many interviewees in the automobile industry responded that even if there are equity relationships, they serve not to maintain good relationships with suppliers, but exist due to path dependent reasons, such as through former subsidiaries’ stock and as a result of rescue financing.
And third, regarding supplier associations, the result of our interviews strongly suggests that there is an interrelationship between the significance of relation-specific investments and the existence of supplier associations. In the electronics industry where the importance of relation-specific investment decreased because of its rapid modularization, supplier associations were either abolished or became inactive. In the auto industry where relation-specific investments are still important given its slow modularization speed, all makers keep their supplier associations. A very symbolic case showed that a maker, which has both an electronics business and a system integration business, once abolished supplier associations in both businesses, but later revived them only for the system integration business, in which some relation-specific investments are still required.
B. Contractual Provisions
Although deal structures have changed, contractual provisions in both industries have generally not changed since 1990s.
Most Japanese master contracts do not have an entire agreement clause but have a future renegotiation clause and individual provisions are generally written ambiguously. This basic structure has not changed. Provisions regarding product warranty and contract termination, however, are exceptionally specific at both points in time.
If the maker finds defects in the product the supplier provided during the warranty period, the supplier must fix or change the product or pay for damages suffered by the maker. In the electronics industry, provisions that strengthen the warranty, such as those stipulating that the maker can require the supplier to pay for damage even after the expiration of the warranty period, have increased.
Each party has a right to terminate a contract due to faults such as breach of contract, gross negligence, and bankruptcy. The effects of termination are precisely stipulated, such as termination of contract without notice and the availability of a damages claim.
The provision regarding the ownership of intellectual property used to be ambiguous, such as stipulating that the ownership of intellectual property should be decided by negotiation between the maker and the supplier. Now, specific provisions are increasing, particularly in the electronics industry, such as stipulating that the patent of discovery, which is made solely by the supplier, will be owned by the supplier, or stipulating that the copyright will be owned by the maker unless it has been owned by the supplier beforehand.
The provision regarding product liability used to be non-existent. Now it is included in all master contracts in both industries and stipulated specifically. Although the limitation of suppliers’ liability is not stipulated in master contracts, it became a very sensitive issue, particularly for semiconductor suppliers in the electronics industry, and is often stipulated in a separate contract or in LOI as a result of the “battle of boilerplate.”
Interestingly, contrary to our prediction, battles of boilerplate between makers and suppliers are not rare, particularly in the electronics industry. On some occasions, makers and suppliers cannot reach an agreement on some sensitive issues, such as how to share the responsibility of product liabilities, and thus cannot utilize a master contract. In that case, there are two possible ways of starting a transaction. First, although contracting parties conclude the master agreement based on the maker’s template, they exchange the LOI to put reservations on the issues they could not reach an agreement. Second, contracting parties conclude an individual contract, which includes all indispensable provisions, such as product warranty, at each transaction, without concluding a master agreement. The practice of writing agreements in LOI or minutes increased.
Another interesting result is that most English-master contracts with foreign suppliers have an “entire agreement” clause and contain more specific provisions.
Japanese FTC’s current aggressive enforcement of the Subcontract Act [against Delay in Payment of Subcontract Proceeds, etc. to Subcontractors] and the abuse of the dominant bargaining position provision of the Anti-Monopoly Act affects Japanese contractual practice as well. It pushes contractual provisions both to be more specific and more ambiguous. Japanese makers have become more conscious of compliance with those laws and try to avoid one-sided contracts, such as provisions that specify who will have the right to make final decisions regarding predictable disputes.
By comparing master contracts, which are used for the electronics industry in Japan and the US, the following differences can be observed. While there are no specific provisions on price, quantity, and damage for delivery delay in Japan, they are specific in the US, and include price calculation models and the most favorable treatment clause. The end-of-life provision and the maintenance parts provision are not used in Japan, while they are popular and specifically stipulated in the US.
C. Bargaining After Contract
Most practices in bargaining after contract have basically not changed, too. Although clauses regarding product warranty and contract termination are specifically stipulated, they are usually not exercised, and parties seek resolution through negotiation. Lawsuits are rarely brought.
Some change, however, is observed. The practice of renegotiating via the “I owe you, you owe me” relationship is likely not to continue mainly because of strengthened compliance.
The existence of self-enforced informal contracts is confirmed. Particularly, makers voluntarily supplement the development cost to suppliers in case the purchase quantity is less than the forecast without any formal contract.
IV. Specificity and Enforceability in Relation to the Role of a Contractual Provision
The formal contract can be conceived as a legally enforceable document, in which the output of incentive bargaining between the contracting parties is fixed. Most models in contract theory premise that the more specific they are, the better formal contracts will work. But all the outcomes of incentive bargaining are not necessarily written into the contract, and only the parts that both parties agree to fix in the formal contract will be written. Also, not all the contractual provisions are written specifically and some of them are not able to be enforced by the court. Both the degrees of specificity and the degree of enforceability of a specific contractual provision are independently chosen by both parties as an output of their incentive bargaining.
In this article, I will categorize contractual provisions that are used for the maker-supplier transaction into three types and demonstrate that contracting parties choose the degree of specificity/ambiguity and the enforceability depending on the role of each contractual provision.
The maker-supplier master contract premises long-term transactions. Therefore, spot contracts, such as fixed price and fixed quantity, cannot be stipulated in the master contract. Price and quantity will be fixed by individual contracts or sourcing orders afterwards. Most provisions in the master contract are related to the rule and procedure of incentive bargaining after the master contract is concluded.
The contingent contract (hereinafter, CK) is written for contracting parties to share an understanding of the cost of deviation from the rule that they agreed on. It is not only a scheme of sharing a common understanding of the rule, but also a scheme of commitment each party makes to decrease the risk that the counterparty may breach the rule. By the characteristic of its role, it is written specifically and in an enforceable way. Its typical examples are provisions of product warranty, product liability, delivery delay, and contract termination.
The environment contract is written for providing contracting parties of the environment to start and proceed with incentive bargaining smoothly. I will call the contract for providing an environment to start incentive bargaining the environment contract that provides prerequisites of incentive bargaining (hereinafter, Prerequisite EK) and the contract for providing an environment to proceed future incentive bargaining smoothly the environment contract that provides the procedure of incentive bargaining (hereinafter, Procedure EK).
Examples of Prerequisite EKs are provisions regarding intellectual property rights and liability caps. They are written to decrease the risk that the contracting parties may suffer huge damages and enable them to start incentive bargaining. Although, in general, they are written specifically and in enforceable terms, sometimes they are written in unenforceable terms, such as LOI, when the bargaining cost is too expensive.
A typical example of Procedure EK is the negotiate in good faith clause of Japanese maker-supplier contracts. The degree of specificity and enforceability of the Procedure EK is various. For example, a provision of the master contract between John Deere and its suppliers stipulates that John Deere evaluates suppliers and reviews scorecards with the supplier at quarterly meetings where the supplier can claim against its ranking. The provision is specific but written in a manner that does not suppose court enforcement or is very unlikely to be enforced. The master contract between Toyota and its suppliers includes provisions that stipulate that both parties will negotiate in good faith if a dispute occurs. They are ambiguous but written in a manner that parties will rely on the court’s dispute resolution in case the parties’ negotiations reach an impasse.
Contract provisions for developing cooperative relationships between the contracting parties, which a series of papers introduced as a change of contracting practices in US manufacturing, are mostly categorized as Procedure EKs, but some are categorized as Prerequisite EKs.
Provisions, which are picked as examples of “scaffoldings” in innovative relationships in Hadfield & Bozovic (2016), include both Prerequisite EKs and Procedure EKs. The former examples are the provision of the agreement to a revenue-sharing formula for successful products produced by the contractual venture and designation of the ownership of a patent, which are specific and enforceable. The latter examples are provisions that state “[The parties] agree that they will conduct the Research and Development Plan on a collaborative basis with the goal of commercializing Products” and “[Parties] shall in good faith use their best efforts to develop jointly a plan to ensure continued Product supply,” which are ambiguous and very unlikely to be enforced.
Provisions, which are introduced as the “formal relational contracts” in Frydlinger, et al., (2019), also include both Prerequisite EKs and Procedure EKs. The former example is a hybrid pricing model with a combination of fixed and variable rates, coupled with incentives to improve efficiencies. Although its specific wording is not cited, the provision must be specific and highly enforceable. The latter examples are “[We need to] conduct ourselves in the spirit of achieving mutual benefit and understanding” and “We are committed to fairness, which does not always mean equality. We will make decisions based on a balanced assessment of needs, risks, and resources.” They are ambiguous and very unlikely to be enforced, although they are intentionally written as enforceable “formal” contracts.
Traditional provisions regarding price, quantity, and specification, are also categorized as both Procedure EKs and Prerequisite EKs. The provision of price in long-term transactions cannot stipulate a fixed price in the master contract and typically provides the way of agreeing on a price calculation model, a most favored status clause, which is categorized as a Prerequisite EK, and duty of supplier to cooperate on decreasing cost, which is categorized as a Procedure EK. They are stipulated specifically in the US but not in Japan.
Both in the US and Japan, makers’ forecast of quantity is not legally binding, which is also recognized by suppliers in both industries. The rule is stipulated in the master contract in the US, but not in Japan. It is categorized as a Prerequisite EK if it is stipulated.
Although written contracts could play important roles independent of court enforcement, certain types of contract provisions keep being written in an enforceable manner. Contingent contracts and Prerequisite EKs are basically written specifically and in an enforceable manner, not only in the US but also in Japan.
The choice of the degree of specificity/ambiguity and enforceability mostly depends on the role of each contractual provision.
Figure 1 Combination of the Degree of Specificity and the Degree of Enforceability
