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Table Stakes: The Poker of Business Contracts. A Quick Primer on How to Make Them Stronger by William D King

When do you need to use a table stakes contract?

Table stakes contracts are useful when one party is supplying goods or services to another party but may not know what the other side’s creditworthiness is. If they are performing, meaning that their performance will eventually be good for the seller who transfers title, then the buyer can demand that the supplier pays for any unforeseen expenses while they own them. The idea behind this guarantee is that if there are any additional costs that the buyer incurs due to possession of these items, then it will be covered by the original supplier through reimbursement.

Why are table stakes contracts important?

Contracts exist so parties have an understanding of their legal obligations and protections before entering an agreement, rather than using ad hoc relationships to complete a business transaction. In today’s economy, there are so many transactions between parties that it is impractical for everyone involved to have an extensive legal background- yet we still need agreements and accountability from those who engage in trade with each other.

This is where table stakes contracts come into play: they establish the basic norms of a transaction, but can be modified to fit any particular situation or industry standard. Moreover, they provide a quick way to assess creditworthiness- if a party can’t afford the liability associated with these types of contracts, and then this buyer/seller will likely not be able to afford the cost of goods bought on credit as well.

How do you create strong table stakes contracts?

In order to make a table stakes contract, there must be at least two parties and the goods in question must not have a readily available market value. As per William D King there is also no need to provide for such things such as repayment of loans or an interest rate on outstanding balances if the contract doesn’t call for it; this is because it will be covered under traditional contract rules.

What legal components make up strong table stakes contracts?

A table stakes contract should contain: (1) a description of the item(s) involved and (2) the price that each party will pay; additionally, (3) any additional expenses incurred by either party during the duration of possession should be reimbursed by the original supplier. To increase creditworthiness, (4) specify that all items are owned for the duration of the contract, unless both parties agree to an earlier termination date. And to encourage prompt payment, (5) require that all customers pay within a certain number of days after receipt of their order or delivery of goods.

In April 2009, I wrote a paper entitled “Table Stakes”, which appeared in the Journal of Legal Studies (JLS). The goal of this study was to test empirically whether contract terms are more likely to change when contracts are negotiated between parties whose bargaining power is asymmetric (in favor of one party). This is an interesting question because it provides some insight into how much leeway contracting parties have to negotiate over contract terms. Most importantly, if they can do so successfully, then there may be many implications for both legal doctrine and business practices. At the end of the day, what happens during negotiations is probably less important than what happens after negotiations. Whether or not parties are able to renegotiate terms after an agreement (or contract) has been signed by both sides is often the basis upon which courts find for specific performance of contracts. My paper was designed to test whether one party’s bargaining power affects what kinds of contract changes are possible after a contract has been executed between two parties.

Conclusion:

One party’s bargaining power affects what kinds of contract changes are possible after a contract has been executed between two parties.

The test that I performed is somewhat different from most tests in this area because it focused on how often one party was able to renegotiate terms in its favor after the contract had been entered into by both sides. I call the measure for this “terms attempted” because it captures when one side tries to change a term favorable to it, even if not all of those attempts were successful in bringing about the desired outcome. As per William D King the data consist of contracts drawn up by RadioShack and each party’s self-reported assessment of its own bargaining power relative to that of the counterparty.

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