More on General Motors-Fisher Body

The seemingly never ending debate about the General Motors-Fisher Body vertical integration has taken another step towards not ending with the publication of two new papers on aspects of the issue.

Victor P. Goldberg has a paper in the journal Industrial and Corporate Change, Volume 17, Number 5, pp. 1071–1084 in which he argues that the 1919 General Motors–Fisher Body contract was legally unenforceable. The abstract of his paper, Lawyers asleep at the wheel? The GM–Fisher Body contract, reads

In the analysis of vertical integration by contract versus ownership, one event has dominated the discussion—General Motors’ (GM) merger with Fisher Body in 1926. The debates have all been premised on the assumption that the 10-year contract between the parties signed in 1919 was a legally enforceable agreement.However, it was not. Because Fisher’s promise was illusory the contract lacked consideration. This note suggests that GM’s counsel must have known this. It raises a significant question in transactional engineering: what is the function of an agreement that is not legally enforceable?

In a note on the Goldberg paper, Benjamin Klein argues that even if Goldberg’s contract law conclusion were correct, and Klein argues they are not, it is economically irrelevant. The abstract of the Klein piece, The enforceability of the GM–Fisher Body contract: comment on Goldberg, reads,

Goldberg unconvincingly claims that the General Motors (GM)–Fisher Body contract was in fact legally unenforceable. But even if Goldberg’s contract law conclusion were correct, it is economically irrelevant. It is clear from the actions of Fisher and GM and from the testimonial and other contemporaneous evidence that both transactors considered the contract legally binding and behaved accordingly. Therefore, proper economic analysis of the Fisher–GM case should continue to assume contract enforceability, and the economic determinants of organizational structure illustrated by the case remain fully valid.

(HT: Organizations and Markets)