Efficient Contracting and Alternate Dispute Resolution : Ethical Considerations

This paper uses as its theoretical starting point the concept of the firm as a nexus of contracts. It examines the full range of contracts which go into forming this nexus: those formally negotiated, those adopted by custom or practice, and those imposed as legal defaults. The concept of bargaining power is developed as central to the negotiation of ethical contracts. Such contracts require relatively equal power from both parties. Three Supreme Court decisions, known as the Steelworker trilogy, decided by the Court in 1960 are examined for insights into the nature of relational and incomplete contracts, of which labor contracts are a primary example. Special emphasis is given to the use of arbitration to resolve disputes in labor contracts. Arbitration in labor disputes is compared to arbitration in the financial sector and the advantages of the former and procedural defects of the latter are discussed. It is concluded that the appropriate use of arbitration, with procedural safeguards for both parties, can replace a market with inequities in bargaining power with an efficient and more equitable market in dispute resolution where the bargaining power of both parties is comparable