Understanding and resolving major contractual ...

J. of the Acad. Mark. Sci. DOI 10.1007/s11747-015-0427-8

ORIGINAL EMPIRICAL RESEARCH

Understanding and resolving major contractual breaches in buyer–seller relationships: a grounded theory approach Jeff S. Johnson & Ravipreet S. Sohi

Received: 30 March 2014 / Accepted: 19 January 2015 # Academy of Marketing Science 2015

Abstract In business-to-business relationships, sellers are often faced with instances of contractual breaches by buyers. In many cases, relationship factors preclude legal enforcement of contract terms, requiring sellers to explore alternate resolution options. Literature on contractual breaches has primarily focused on enforcement options based on terms specified in the contract. However, little is known about how companies deal with contractual breaches by their customers when legal enforcement is not a viable option. The authors use a grounded theory approach to investigate this important issue. Based on in-depth interviews with 40 supplier managers and executives in multiple industries, the authors identify: (a) types of out-ofcontract alternatives for resolving breaches, (b) factors that lead to use of enforcement options outside the terms specified in the contract, (c) contextual influences, and (d) individual and firm-level consequences of outside-ofcontract enforcement. Keywords Contractual breach . Contractual enforcement . Relational contracting . Grounded theory

With few exceptions, buyers and sellers enter into contractual relationships intending to adhere to the prescribed terms. Instances do occur, however, where contracting partners breach the terms of the contract and do not fulfill their J. S. Johnson Henry W. Bloch School of Management, University of Missouri-Kansas City, 5110 Cherry Street, Kansas, MO 64110, USA e-mail: [email protected] R. S. Sohi (*) College of Business Administration, University of Nebraska-Lincoln, 512 N. 12th Street, Lincoln, NE 68588, USA e-mail: [email protected]

obligation. When customers breach a contract, marketers have to decide how to resolve the breach (Gilliland and Bello 2002; Jin et al. 2013; Mooi and Gilliland 2013). While legal enforcement based on the contract terms is an option for dealing with the breach, it can be costly and often is not a viable alternative as it may create conflict and erode productive business associations (Barton 1972; Koeppl et al. 2014). Resolving a contractual breach is not a binary decision between enforcing and not enforcing contract terms. Rather, it lies somewhere on a continuum between these two poles, with enforcement options often governed by relational considerations (Antia and Frazier 2001). For example, in buyer–seller situations when a contract is breached by a buyer, enforcement of the contract terms may not be practical as it could jeopardize the seller’s relationship and future business dealings with the customer (Heide 1994). Conversely, firms have the option of tolerating contractual breaches and forgoing enforcement (Bergen et al. 1998). While this approach may be beneficial in maintaining the relationship, it also impacts the financial interests of the seller and possibly sets an unwanted precedent. Therefore, sellers have to figure out ways of resolving contractual breaches by customers when neither enforcement nor non-enforcement of the contract terms are feasible alternatives. Scholars have examined the intricacies of contractual breach logic and enforcement beyond the purely economic calculations of efficient breach (Macneil 1982). Relational contracting theory (Macaulay 1963; Macneil 1980) espouses the use of non-legal sanctions and relational mechanisms for the fulfillment of commitments, and it explicates a broader set of considerations surrounding contractual breach situations by individuals and organizations. The prospect of future business opportunities and threat of network reputational effects weigh heavily on the decisions made by potential enforcing parties (Antia and Frazier 2001). A relational contracting approach also proposes flexibility in the governance of exchange relationships (Macneil 1982). This flexibility, however, is

J. of the Acad. Mark. Sci.

generally understood as a substitute for formal contracts, incomplete contracting, or forbearance of enforcement rather than as a response to contractual breach. As we discuss subsequently, the existing literature on contracts deals with four broad issues—contracts as governance mechanisms, contract structure, contractual breach enforcement, and contract renegotiation. However, there is a gap in the literature regarding the middle ground between formal and relational contracting when contractual breaches have to be resolved outside the letter of the contract—a situation typical of buyer–seller exchanges where legal contract enforcement is not feasible due to business and relational considerations. The purpose of this study is to examine the resolution of contractual breaches (i.e., failure to adhere to prescribed contractual terms) of formal contracts (i.e., those that are explicit, written, legal documents) by using outside-of-contract breach resolution mechanisms (i.e., resolution approaches outside the prescribed damages in the formal contract). To this end, we sought insight from marketing and sales managers and executives serving as the point people in dealing with customer breaches of multimillion dollar business-to-business (B2B) contracts. This enabled us to examine three underexplored research questions: RQ1: What are the outside-of-contract resolution alternatives for dealing with major contractual breaches? RQ2: What factors and contextual conditions determine the choice of outside-of-contract resolution alternatives? RQ3: What are the individual and firm-level consequences of using outside-of-contract alternatives? Examination of the first research question is important because contractual breaches are prevalent in buyer–seller exchanges, and how they are resolved impacts the relationships between the parties and also has important consequences for suppliers. Current literature on contractual breach resolution has primarily focused on options specified within the contract. These legal contract remedies may not be viable in many situations due to business considerations and relational factors, necessitating the use of outside-of-contract options. Yet we know little about what these options are. Related to the second research question, there is some literature on negotiations that identifies interpersonal and organizational factors affecting negotiation processes and outcomes (Thompson et al. 2010). However, factors and contextual conditions that may determine the choice of out-of-contract options to manage contractual breaches have not been delineated in the literature. Finally, the third research question is important because knowledge is needed regarding the outcomes of outside-ofcontract breach resolution alternatives on firm and individual levels. By expanding the end focus of breach resolution, collaborative and competing interests amongst entities can be explored.

To examine these research questions, we used the grounded theory method (Corbin and Strauss 2008; Strauss and Corbin 1998) and interviewed 40 marketing and sales managers and executives serving as the point people in dealing with explicit breaches of multimillion dollar contracts by B2B customers. This method enabled us to uncover determinants and outcomes of contractual breach resolution alternatives, as well as understand the cognitions that occur when manager are faced with breach situations. This paper contributes to the existing literature in four primary ways. First, we extend relational contracting theory as our findings provide a variety of alternatives for resolving contractual breaches, including integrative options that have the potential to enhance the relationship with the customer and provide greater financial benefit to the enforcing party. The findings also paint a much more detailed picture of the process of resolving contractual breaches in buyer–supplier settings. Second, we contribute to the literature on contractual breach resolution by identifying unique factors that motivate business partners to pursue options beyond the terms stated in the contract. Third, we advance contextual conditions impacting the relationships between these factors and choice of breach resolution option. Fourth, we provide insight into the risks and rewards associated with different breach resolution alternatives and advance resolution-contingent outcomes affecting the breached firm and the breach-resolving manager. Our findings also have significant practical utility for managers as they provide a deeper understanding of the complexities behind contractual breaches, including the potential payoffs and pitfalls associated with different resolution actions. The remainder of the paper is structured as follows. First, we provide an overview of relational contracting theory. Next, we review the literature on contracts and highlight the key gaps and research issues. Following this, we discuss the methodology and findings of the study. Subsequently, we advance the key contributions to theory and applicable managerial implications. Finally, we conclude with the study’s limitations and directions for future research.

Relational contracting theory Relational contracting theory (Macneil 1980), which has its roots in Macaulay (1963) seminal study on non-contractual business relationships, recognizes the fact that business dealings are often characterized by informal agreements and unwritten codes of conduct governing business relationships (Baker et al. 2002). In contrast to classical contracting theory, which espouses the use of formal legal contracts to govern business relationships, the key premise of relational contracting is that there are relational mechanisms available to business partners, which are more expeditious and efficient in ensuring fulfillment of commitments by the


business partners (Macaulay 1963). These relational mechanisms, which have also been referred to as Bliving contracts^ (Macneil 2000), exist outside the legal system’s formal dispute resolution mechanisms. Macneil defines contracts as Brelations among people who have exchanged, are exchanging, or expect to be exchanging in future^ (Macneil 1980, pp. 64), and this opinion is shared by legal scholars (e.g., Macaulay 1963), as well as scholars in other disciplines (e.g., Stinchcombe 1990). Further, Macneill suggests that all exchanges lie, based on their relational intensity, on a spectrum between discrete exchanges and relational exchanges (Macneil 1983). In discrete exchanges, the transactions are assumed to be independent of past and future relationships, and the parties rely on economic and legal sanctions to enforce contractual obligations. Conversely, in relational exchanges, also referred to as a relational contracts, the transactions are embedded in historical and social relational contexts, and enforcement of obligations is based on norms of exchange which serve to guide and regulate behavior of the exchange parties (Heide 1994; Macneil 1980, 1983). The relational contracting approach focuses on flexibility, solidarity, mutuality, harmonization of conflict, and restraint in the use of power to govern relationships (Cannon et al. 2000; Hsieh et al. 2008; Macneil 1980). In relational contracting, contracts are intentionally incomplete and terms are broad (Macaulay 1963). An implicit understanding exists between firms on the amicable resolution of contractual vagaries. In contrast to formal contracting, relational contracting utilizes non-legal sanctions for incenting firms to fulfill commitments. The firm’s reputation, continuity of relationship, and customer trust can all be negatively impacted should this implicit understanding be violated (Carson et al. 2006). Additionally, larger social forces shape the exchange environment and the underlying values of the members. Rather than fear of sanctioning reprisal, members often exercise self-control based on internalized values (Heide 1994).

Literature review The current literature on contracts can be classified into four broad areas: (a) contracts as governance mechanisms, (b) contract structure, (c) contractual breach enforcement, and (d) contract renegotiation. Table 1 highlights the key literature in each of these areas. In the subsequent sections, we provide a review of these areas and discuss the literature gaps and research issues. Contracts as governance mechanisms Contracts play in important role in interfirm relationships (Lusch and Brown 1996; Mooi and Gilliland 2013; Samaha et al. 2011; Wuyts and Geyskens 2005). Within marketing,

literature has highlighted the use of formal contracts as a mechanism for governing exchange (Cannon et al. 2000; Dutta et al. 1994; Ehret and Haase 2012; Ferguson et al. 2005; Gundlach 1996; Gundlach and Murphy 1993). The use of formal contracts as a governance mechanism has also been explored in literature outside of marketing (e.g., Beale and Dugdale 1975; Poppo and Zenger 2002; Williamson 1979). The value in formal contracting is that it Baddresses the moral hazard problems inherent in interfirm deals via explicit terms designed to achieve incentive alignment^ (Ryall and Sampson 2009, p. 906). Formal contracts have been noted as an important alternative to hierarchy in protecting transaction-specific assets and mitigating uncertainty (Williamson 1991, 2002). Additionally, contracts also serve a key signaling function to potential partners (Suchman 2003) and facilitate communication between exchange partners as they delineate the roles of the firms, expected benefits, and how to handle contingencies that may arise (Brown et al. 2006). Moreover, formal contracts can be useful intraorganizational communicative devices within the selling firm as exchange details are more readily understood and accepted across departments (Roxenhall and Ghauri 2004). However, the use of formal contracts can also have deleterious effects on interfirm relationships. Formal contracts can be illustrative of an adversarial relationship (Gundlach and Achrol 1993), create conflict (Brown et al. 2006), and result in negative performance outcomes (Lusch and Brown 1996). Additionally, other forms of governance may be more appropriate for the situation or needed in addition to contracts (Cannon et al. 2000). Classical contract law tends to ignore the salience of the relationships between the parties involved, limiting its application in several situations (Williamson 1979). Further, not all contingencies can be protected through explicit contracts, because of unforeseen circumstances and environmental uncertainty. Due to limitations in formal contracting, firms often use relational contracting as a mechanism to govern exchange relationships (Heide 1994; Macneil 1980). Relational and formal contracting may be perceived in competition with each other, with relational contracts often being preferred to formal ones (Gundlach and Achrol 1993; Lusch and Brown 1996; Macaulay 1963). Consistent with this paradigm, a host of theoretical relationships have been advanced that seek to identify the determinants in the managerial decision between relational and formal contracting (Claro et al. 2003; Genturk and Aulakh 2007; Joshi and Campbell 2003; Lusch and Brown 1996). More recently, focus has been shifted from conceptualizing formal and relational contracting as substitutes and instead examining how they work in tandem (Poppo and Zenger 2002; Seshadri and Mishra 2004). Formal and relational contracts can work as complements and provide joint benefit in the exchange. Increasing relational content in a

J. of the Acad. Mark. Sci. Table 1

Contracts literature: domain areas and illustrative studies

Author(s)

Domain Area

Gundlach and Achrol (1993)

Marketing

Gundlach and Murphy (1993)

Marketing

Heide (1994)

Marketing

Gundlach (1996) Lusch and Brown (1996)

Marketing Marketing

Cannon et al. (2000)

Marketing

Poppo and Zenger (2002) Joshi and Campbell (2003)

Strategy Marketing

Seshadri and Mishra (2004) Ferguson et al. (2005)

Marketing Marketing

Brown et al. (2006)

Marketing

Carson et al. (2006)

Marketing

Ryall and Sampson (2009)

Strategy

Samaha et al. (2011)

Marketing

Krasa and Villamil (2000)

Economics

Wuyts and Geyskens (2005) Mooi and Ghosh (2010) Kashyap et al. (2012)

Marketing Marketing Marketing

Gennaioli (2013)

Economics

Ryu et al. (2013)

Marketing

Farnsworth (1970) Barton (1972) Beale and Dugdale (1975) Telser (1980) Bishop (1985)

Law Law Law Economics Law

Spagat (1991) Noorderhaven (1992)

Economics Management

Shaw (1994)

Economics

Focus of Study Relational and Formal Contracts as Governance Mechanisms Examines the use of contract law and relational social norms in a simulated manufacturer-distributor exchange setting. Outlines the interrelationship of contract law and ethics for building and sustaining marketing exchanges. Develops a typology of three different forms of governance in marketing channels – market governance, unilateral/hierarchical governance, and bilateral governance. Discusses the role of contract law in exchange relationships. Investigates the dependency structure between wholesaler-distributors and the major suppliers, on the type of contract used. Explores performance implications of governance structures involving contractual agreements and relational norms in buyer–supplier exchanges. Examines if formal contracts and relational governance are substitutes or complements. Advances determinants of relational governance in manufacturer-supplier relationships under conditions of environmental dynamism. Espouses the connection between contracts and relationship marketing. Compares the relative importance of contractual and relational governance on exchange performance of boundary spanners. Examines the impact of explicit and normative contracting on conflict and satisfaction within wholesaler-supplier relationships. Illustrates the effectiveness of contractual and relational governance in constraining opportunism in inter-organizational relationships. Examines the extent firms substitute relational mechanisms for formal ones in the presence of repeated interactions. Shows how perceptions of unfairness undermine the benefits of using contracts to manage channel relationships. Contract Structure Develops an econometric model for structuring optimal contracts when enforcement is a decision variable. Examines the effect of organizational culture on the decision to draft a detailed contract. Examines the performance implications of contract specificity. Examines how franchisors’ ex-ante contracts and extra-contractual incentives influence their ex-post monitoring and enforcement efforts. Develops a model for structuring optimal contracts under conditions of enforcement risk. Examines effects of an embedded network on the contractual relationship between exchange parties under conditions of environmental volatility. Contractual Breach Enforcement Proposes legal remedies for breach of contract. Discusses the economic basis of damages for contractual breaches. Espouses considerations pertaining to the use of contractual remedies. Proposes a theory of self-enforcing contracts. Discusses choice of legal remedies for breach of contract.

Bergen et al. (1998)

Marketing

Presents a game theoretic model of contract enforcement in sellers’ markets. Discusses internal contract enforcement (by the parties themselves) and external enforcement (by third parties). Presents a study on the use of resale price maintenance as a contract enforcement mechanism. Examines managing gray markets through tolerance of violations.

Klein and Murphy (1988) Bebchuk and Png (1999)

Economics Economics

Discusses the role of vertical restraints as alternates to contract enforcement. Proposes a model for determining damages when a contract is inadvertently breached.

J. of the Acad. Mark. Sci. Table 1 (continued) Author(s)

Domain Area

Focus of Study

Leeds (2000)

Conflict Management

Tao and Zhu (2000) Rooks and Snijders (2001)

Economics Supply Chain

Antia and Frazier (2001)

Marketing

Gilliland and Bello (2002) Finkelstein and Lifshitz (2010)

Marketing Dispute Resolution

Jin et al. (2013)

Marketing

Mooi and Gilliland (2013)

Marketing

Presents a game-theoretic model that explains and predicts conditions under which selfenforcing contract agreements are possible. Presents a model of the role of agency in the self-enforcement of interfirm contracts. Examines the resolution of problems encountered in the purchase of information technology products. Develops and tests a conceptual framework focusing on the severity of the enforcement response in channel relationships. Examines the effect of commitment on enforcement decisions in distribution channels. Discusses the components of mediation and proposes a theory that focuses on the mediation process and post-mediation contracts. Investigates the impacts of agent consciousness and reciprocity norms on contract enforcement decisions. Examines the influence of contracts on enforcement and the subsequent performance impact of aligned and misaligned enforcement.

Huberman and Kahn (1988) Beaudry and Poitevin (1993)

Economics Economics

Beaudry and Poitevin (1995)

Economics

Dewatripont and Maskin (1995)

Economics

Artz and Norman (2002)

Management

Battaglini (2007) Evans (2008)

Economics Economics

Gagnepain et al. (2013)

Economics

Contract Renegotiation Presents a theory of contract renegotiation. Discusses a model of how the possibility of renegotiation affects contractual outcomes in signaling games. Proposes a framework for studying renegotiation of contracts in the presence of asymmetric information. Presents a dynamic model of asymmetric information between parties and investigates the optimal set of contingencies on which an incentive contract depends when renegotiation is possible. Develops and tests a model of how exchange partners can effectively manage the costs of adjusting and maintaining incomplete contracts after they have been established. Presents a dynamic principal-agent model of an optimal renegotiation-proof contract. Shows that in an efficient equilibrium can exist if renegotiation is modeled as an infinitehorizon, non-cooperative, bargaining game. Highlights the cost of renegotiating a contract using a structural principle-agent model.

formal contractual structure increases performance under high uncertainty (Cannon et al. 2000). Further, formal contracts can facilitate the usage of relational governance (Poppo and Zenger 2002; Ryall and Sampson 2009). Contract structure Beyond the use of contracts as a governance mechanism, literature has also emphasized the importance of appropriately structuring contracts (Gennaioli 2013; Gilo and Porat 2005; Krasa and Villamil 2000; Leeds 2000; Lundmark 2001). This literature, which is predominantly outside of marketing, has offered potential models for contract structuring (Gennaioli 2013), including the design of optimal contracts when enforcement is a major decision variable (e.g., Battaglini 2007; Krasa and Villamil 2000). Within marketing, however, the focus has been more on the types of contracts used, factors that affect the structuring of contracts, and potential outcomes of contract structure. This

literature has shown that dependency structure and network embeddedness determine the type of contract used (Lusch and Brown 1996; Ryu et al. 2013), that organizational culture affects the structure of contracts (Wuyts and Geyskens 2005), and that contract structure and specificity influence monitoring and enforcement efforts as well as have performance implications in the exchange relationship (Kashyap et al. 2012; Mooi and Ghosh 2010). Contractual breach enforcement The primary means conceptualized for responding to a contractual breach is within-contract remedies that are prescribed in the letter of the contract (Bishop 1985; Farnsworth 1970). These remedies hinge strongly on economic decisions, and implicit in this view, enforcement is seen as a noncooperative game rather than a collaborative effort, often resulting in a zero-sum outcome (Krasa and Villamil 2000). Literature has proposed several types of game-theoretic


models of contract enforcement (Spagat 1991; Tao and Zhu 2000), including models that predict conditions under which contracts can be guaranteed without external enforcement (Leeds 2000). Researchers have also discussed the efficacy of using dispute resolution mechanisms such as mediation or arbitration (Finkelstein and Lifshitz 2010; Leeds 2000; Rooks and Snijders 2001), as well as alternatives to enforcement such as vertical restraints and resale price maintenance (Klein and Murphy 1988; Shaw 1994). In the marketing literature, there has been some discussion of the purpose of enforcement, such as to deter gray market incidences (Antia et al. 2006). However, within-contract enforcement options have been examined mostly in a binary fashion: enforced/not enforced (Bergen et al. 1998). Related to this, researchers have examined drivers of contract enforcement such as commitment, agent consciousness, and norms of reciprocity (Antia and Frazier 2001; Gilliland and Bello 2002; Jin et al. 2013), as well as performance outcomes of aligned and misaligned enforcement (Mooi and Gilliland 2013). Contract renegotiation Renegotiation of the contract is also an option that can be employed by companies following a breach. Literature suggests that sub-optimal contracts may be put in place as initial safeguards, but these may be renegotiated subsequently (Huberman and Kahn 1988). Most of the literature in the area has used the modeling approach to examine the issue of contract renegotiation. Scholars have proposed frameworks for examining the renegotiation of contracts in the presence of asymmetric information (Beaudry and Poitevin 1995) and have tried to establish the optimal set of contingencies for determining contracts when renegotiation is possible (Dewatripont and Maskin 1995). Studies have shown that an efficient equilibrium can exist when renegotiation is modeled in a non-cooperative bargaining game (Evans 2008), but the possibility of renegotiation can also affect contractual outcomes (Beaudry and Poitevin 1993). Additionally, renegotiating a contract has costs associated with it, and scholars have tried to model how the exchange partners can effectively manage the costs of adjusting the contracts (Artz and Norman 2002; Gagnepain et al. 2013). Beyond contracts, an examination of the larger body of negotiation literature (see Herbst et al. 2011) reveals work on issues that are important to buyer–seller exchanges. While there are several approaches and schools of thought on negotiations (Druckman 1977; Zartman 1978), literature suggests that in the context of marketing exchanges, negotiation should be viewed as a problem-solving approach (Graham 1986; Mintu-Wimsatt and Gassenheimer 2004). Related to this, researchers have proposed several theories and models of negotiation (Balakrishnan and Eliashberg

1995; Eliashberg et al. 1986; Graham 1987; Iyer and VillasBoas 2003; Rinehart and Page 1992). There is also literature on issues such as negotiation orientation (Brooks and Rose 2004), negotiation style (Perdue et al. 1986), culture (Graham et al. 1988; Mintu-Wimsatt and Gassenheimer 2000), the role of interpersonal communication in marketing negotiations (Alexander et al. 1991), and firm-level factors that impact negotiation behavior of buyers and sellers (Clopton 1984). In addition, research on conflict resolution has identified several types of negotiation strategies (Froman and Cohen 1970; Pruitt 1981; Thomas 1976). The determinants and outcomes of some of these strategies have also been examined in the marketing literature (Ganesan 1993).

Literature gaps and key research issues In buyer–supplier exchange situations, very often resolution of contract breaches through legal means is not a feasible option due to relational and long-term business considerations. While some firms may choose to tolerate contractual breaches rather than address them (Bergen et al. 1998), this approach does not address the underlying issue or provide recompense for the injured firm. In such situations, firms may turn to outside-of-contract remedies. These remedies are options for managing the breach without resorting to contractual recourse and their purpose is to mitigate the negative impact of legal enforcement on the breaching party. There is a gap in the literature pertaining to possible out-ofcontract remedies for resolving contractual breaches when forbearance of the breach or enforcing the contract through legal means are not feasible options. As we have discussed, the contracts literature has shown the importance of using formal contracts for managing exchange relationships. In situations where formal contracts may have limitations, firms resort to the relational contracting approach, where there is an implicit understanding between the exchange parties for an amicable resolution of the problem. However, the literature in the area does not discuss possible out-of-contract remedies for resolving contractual breaches of formal contracts. Neither is this issue addressed in the literatures on contract structure and contractual breach enforcement, where the focus has been on structuring appropriate contracts, examining reasons for their breach, and discussing possible legal remedies for dealing with the breach and determining damages. Renegotiating the contract is a possible solution for dealing with a contractual breach, and while there is a body of work in this area, its focus has primarily been on modeling scenarios and issues related to contractual renegotiations. The broader stream of negotiation literature has identified several kinds of negotiation strategies, but the focus of this literature has been on examining these strategies at an aggregate level, not on the complexities and details that need to be


addressed when resolving situations of contractual breaches by important customers. In this study, we attempt to address these research gaps by investigating the research questions previously outlined, pertaining to resolving contractual breaches when forbearance of enforcing the breach or enforcing the breach through legal means are not feasible options. This resolution process has several complexities and nuances, which are best examined using the grounded theory method as described next.

Method Consistent with work conducted in marketing that examines complex issues (e.g., Flint et al. 2002; Ulaga and Eggert 2006), we use a qualitative approach for this study and employ the grounded theory method to explore the many facets and intricacies inherent to resolving a contractual breach outside of the terms stated in the contract. Outside-of-contract resolution is complex in that an array of external, customer, selling firm, and individual factors coalesce to determine the resolution mechanism. Additionally, these resolutions have a nuanced impact on individual and organizational outcomes. Grounded theory allows for the development of a general explanation, model, or theory, shaped by the views of participants who are familiar with the phenomena (Corbin and Strauss 2008; Strauss and Corbin 1998). It is an appropriate approach for inquiry when a theory is needed to explain how people are conceptualizing and experiencing a phenomenon and existing theories are either unavailable or are lacking sufficient detail (Creswell 2007). As it applies to contractual breach resolution, existing research has provided significant insight; however, this middle ground between formal and relational contracting requires detail regarding the nature of breach resolutions, their determining factors, and outcomes. Accordingly, to build relevant theory in this domain, grounded theory enables the harnessing of respondent perspectives to articulate a theoretical exposition of outside-of-contract contractual breach resolution. This method allowed us to uncover new, emergent themes pertinent to contractual breach resolution. Further, grounded theory allows for the incorporation of the perspectives and insights provided by informants, while maintaining a meticulous qualitative analysis (Stake 2010). Sample and data collection We selected our sample by utilizing a theoretical sampling plan. Theoretical sampling is useful in qualitative examinations as it involves selecting informants with intimate and extensive knowledge pertinent to the research questions (Strauss and Corbin 1998), and it has been established as an effective practice in many marketing contexts (Kohli and Jaworski 1990; Malshe and Sohi 2009; Tuli et al. 2007).

To address our research questions, we needed to interview B2B marketing and sales managers and executives accustomed to dealing with impactful contractual breaches on multimillion dollar contracts with their customers. Impactful contractual breaches were defined to the potential participants as breaches of explicit, formal contracts of a sufficient magnitude to significantly affect the results of their business unit. Though the breach sizes mentioned varied, many were identified as multimillion dollar breaches. Trivial contracts with small-dollar breaches would not necessitate the complex, relational consideration necessary for this examination. Additionally, the breach of implicit, normative contracts would not be appropriate for this examination. Normative contracts are those based on a shared understanding between parties, but specifically do not include formal, explicit contracts (Lusch et al. 2011). Determining if a breach occurred in a normative contract is ambiguous whereas breach of explicit, formal contracts is more salient. Thus, we selected informants from industries and companies typified by large contracts and corresponding large, explicit contractual breaches. Specifically, the transportation and automotive industries have been identified as rich contexts in governance research (Gundlach and Murphy 1993, p. 145). These industries typify the large, formal contractual relationships and common breach situations necessary for examining this topic. Similar to theoretical sampling in other marketing-related examinations (e.g., Malshe and Sohi 2009; Tuli et al. 2007), we recruited our participants through solicitations of professional contacts and built upon this initial sample using a snowball technique to gather further data from referred participants that had led a contractual breach resolution with a B2B customer. Respondents resided in the United States and were from all parts of the nation. Consistent with theoretical sampling, we also interviewed participants from additional industries in both the manufacturing and service sectors to facilitate greater confidence in the robustness of the data (Creswell 2007). Further, we interviewed participants at multiple levels within the organization. This allowed us to explore this topic using perspectives from participants with varying levels of seniority and experience. A key inclusion criterion, however, was that regardless of their hierarchical position, informants had to have been the point person in their organization addressing the breach. This was to ensure the informants’ knowledgeability and involvement with the phenomena being investigated. Table 2 shows the composition of our sample by industry, company size, contract size, respondent level in the organization, and respondent industry experience. We interviewed respondents until we reached theoretical saturation after 40 interviews. Saturation occurs when no new categories or properties surface from the gathering of additional data; the general guideline is B20 to 30 individuals to develop a well saturated theory^ (Creswell 2007, p. 126). The 40 interviews were conducted over a period of 8 months, with

J. of the Acad. Mark. Sci. Table 2

Sample characteristics

Category

Industry Groups Transportation (Commercial Aviation, Rail, Trucking) Manufacturing (Automotive, Computers, Fabrication, Electronics, Heavy Equipment, Pharmaceuticals, Tools) Services (Consulting, Administrative Services, Financial Services) Firm Size (Annual Sales in $) Less than 100 Million 100–999 Million Greater than 1 Billion Range of Breached Contract Size Respondent Level Entry and Mid Marketing and Sales: (Representative, Manager, (Sr.) Business Manager, (Sr.) Product Manager) Upper Marketing and Sales: (Director, (Sr.) Business Director, General Director) Executive Marketing and Sales: (Vice President, Assistant Vice President) Owner Respondent Experience (Years) 5–14 15–24 Greater than 24

Data analysis Number of Participants

21 11

8

10 6 24 $1 mm - $85 mm

14

15 8 3

We conducted the analysis in an iterative fashion to capture key insights and channel the research process. Our first step in coding the data utilized the open coding process. In open coding, we first identified important quotations provided by our respondents and assigned them in vivo codes (i.e., codes based on the participant’s language; Corbin and Strauss 2008). Quotations pertinent to respondent’s conceptualization and determination in contractual breach resolution were assigned specific codes according to their content. These codes were then classified into first-order categories (Strauss and Corbin 1998). Next, we proceeded to organize these categories by axially coding them into higher-level categories. In the axial coding process, researchers use the open codes to identify the central phenomenon that emerges. Then they further examine the data to create categories representing possible causes for the phenomenon, strategies employed to respond to it, contexts that influence the strategies, and the consequences of these strategies (Creswell 2007, pp. 64–65). Based on this process, we examined the first order codes to identify commonalities, and grouped like codes into higher-order axial categories. These categories were then analyzed and formed into a conceptual model. Table 3 shows a sample of first-order categories, second-order themes, and the axial coding categories that emerged from the data. Reliability and validity of analysis

20 15 5

each interview lasting approximately 45 min. This sample size compares favorably to other B2B grounded theory examinations (e.g., Flint et al. 2002). All interviews were conducted by the same researcher for consistency. Informants were asked open-ended questions to allow them to delve deeply into this complex process and provide information relevant to their experiences. They were encouraged to reflect upon instances in which they were the lead supplier representative addressing an impactful breach with a B2B customer and probed to uncover their perspectives in these situations, considerations they entertained, as well as their perspective on the consequences of breach resolution. They were further encouraged to discuss the topic in as much detail as possible and the interviewer inquired with follow-up questions in an iterative manner to expand insight on points raised (Tuli et al. 2007). This process allowed for participants to shape the discovery process and emergent theory. The interviews were all conducted via telephone. They were recorded and transcribed verbatim, resulting in over 250 single-spaced pages of data.

To maintain analytical rigor and establish the trustworthiness of the data, we followed the recommendations that have been made for qualitative inquiry (Lincoln and Guba 1985; Silverman and Marvasti 2008) and used by researchers in marketing (e.g., Malshe and Sohi 2009). First, we used Nvivo 9 qualitative software to facilitate the meticulous structuring and documentation consistent with comprehensive data treatment and thoroughly examined the data. The unabridged transcripts were all stored within the program, and a tree-node structure was created from the in vivo, open, and axial codes, allowing us to examine multiple relevant quotations from different respondents pertaining to the same category. This process facilitated the comparing and contrasting of responses and increased the interpretability based on industry, company, and personal characteristics of the given respondents. Second, we provided refutability by actively seeking cases where our findings were inconsistent and indicative of systematic differences. It could be argued that outside-ofcontract breach resolution is an industry or companyspecific phenomenon and our proposed relationships are not generalizable. While differences in approaches to resolving breaches were discovered and explicated in the model, no industry, company, or individual demographic

J. of the Acad. Mark. Sci. Table 3 First-order, secondorder, and axial coding categories

First-Order Categories

Second-Order Themes

Axial Coding Categories

Acquisition of incremental business

Integrative

Outside-of-

Extending the existing contract

Alternative

Contract

Exempting an unrelated contract from the bid process

Breach

Changing the terms of business

Resolutions

Adjusting the investments specific to the customer Sale of excess capacity Splitting the payment up over time

Compromising

Raise prices on other business not involved in the breach

Alternative

Customer can earn back breach payment over time Quid pro quo in offsetting breaches on both sides Down economic conditions

External

Factors Influencing

Recessionary period

Environment Factors

Breach

Size of the customer

Interfirm Factors

Resolution Type

Industry reputation Prior history as an honest or dishonest partner Extent of customer’s influence Flexibility of the customer Seller prizes the market in which the breach was made

Internal Factors

Liquidity position of the selling company Personal Friendship

Interpersonal

Care for the customer’s welfare

Factors

Customer owning up to the breach Reciprocity in the relationship Length of personal relationship Ambiguity/rep turnover Unforeseeable occurrences

Locus of

Contextual

Deliberate intent to breach

Control

Factors

Didn’t mean to breach Long-term interests

Temporal

Recoup damages

Perspectives

Enhance customer relationship Cost-benefit analysis Be seen as a leader

Individual

Show you can be creative

(Positive)

Resiliency, ability to make the best out of a bad situation Displays a customer-orientation Sign of weakness

Individual

Doesn’t have own company’s best interests in mind

(Negative)

Poor understanding of the situation Positive word of mouth

Organizational

Gained more than the breach amount

(Positive)

Customer satisfaction scores Eliminated legal costs Organizational Risk

Organizational

Lost revenue for customers that do not come through

(Negative)

Customer may be more likely to breach in the future

Outcomes


Interfirm Factors

This procedure indicated that the proportional reduction in loss was 0.95, confirming the reliability of the coding.

Findings Related to the research questions guiding this study, our findings reveal different types of breach resolution alternatives, factors, and contextual conditions that shape the decision process involved in alternative selection, and the impact of the selected alternative on the selling firm and its manager. Figure 1 illustrates the relationships. Breach resolution alternatives Consistent with previous research (Antia and Frazier 2001; Macaulay 1963; Macneil 1980), relationships with exchange partners strongly impacted the decision to enforce contractual breaches. Selling firms, however, were often not willing to walk away from the breach and write its cost off to relationship maintenance. Selling firm managers cited a multitude of alternatives that could be employed to obtain recompense for the breach in a way that was more palatable to the customer. An obvious alternative is to resolve the breach through the legally prescribed measures detailed in the contract. Participants noted, however, that this may be perceived as inflexible and can be detrimental to the buyer-seller relationship. Accordingly, managers noted the value of using outsideof-contract breach resolution alternatives. Outside-of-contract

Locus of Control Economic Conditions

Customer’s Size

Outcomes

Prior History with Customer

Organizational Benefits

Breach Resolution Alternatives

Customer’s Influence

Integrative

Organizational Flexibility

Organizational Drawbacks

Internal Factors

Compromising Market Desirability

Legal

Individual Benefits

Internal Liquidity Individual Drawbacks

Interpersonal Factors

Fig. 1 Conceptual model of contractual breach resolution alternatives, drivers, contingencies, and outcomes

External Environment Factors

patterns were identified in the data. Third, we employed constant comparison to validate emergent themes and findings uncovered in the interviews. Insights leading to new questions and inquiries from previous interviews were included in subsequent ones. We repeated this process until the point of theoretical saturation. Fourth, we engaged in respondent validation (member checking) of the data. Member checking consists of Btaking data and interpretations back to the participants in the study so that they can confirm the credibility of the information^ (Creswell and Miller 2000, p. 127). We shared the findings of the study with several study participants to allow them to react to and influence the interpretation of the data. Additionally, we addressed the issue of reflexivity through the use of peer debriefing (Lincoln and Guba 1985). In peer debriefing, an external party with knowledge of the topic matter being explored critically reviews the project and questions the process and methods (Creswell and Miller 2000). We proceeded consistent with the peer debriefing recommendation that it is best used over time during the process of a study. This process solicited helpful feedback used to refine the study as it progressed. Finally, we sought to further demonstrate the reliability of our analysis by having judges that were not involved in this study, but were experienced in qualitative data analysis, evaluate our coding. Two independent judges were given a codebook with the definitions for each code. The judges then assessed their agreement or disagreement with the researchers’ coding. Based on the judges’ assessments, the proportional reduction in loss as suggested by Rust and Cooil (1994) was calculated.

Friendship Accountability Short-term

Long-term

Reciprocity Temporal Perspective Relational Tenure


alternatives have the benefit of still providing recompense for the breach, however, in a more customer-friendly manner. Two main types of outside-of-contract alternatives emerged from the data: integrative and compromising. Integrative alternatives provided the greatest flexibility but increased risk to the seller in relation to compromising alternatives. In sum, a spectrum of breach resolution alternatives exist with legal enforcement on the low end of flexibility and risk to the seller, compromising alternatives in the middle, and integrative alternatives on the high end. While integrative and compromising alternatives have also been mentioned in the negotiation strategy literature, they have been discussed and examined at an aggregate level (Froman and Cohen 1970; Ganesan 1993; Lewicki et al. 1994). Our findings extend this literature by identifying the specific options that may be used under each of these alternatives in the context of contractual breaches. Integrative alternatives Outside-of-contract alternatives with an integrative orientation are used to facilitate solutions providing benefit to both parties (Lewicki et al. 1994). These alternatives create opportunities for selling firms to potentially capture more value than the liquidated damages amount of a contract, while costing the customer significantly less, or in some cases, nothing. Integrative outside-of-contract alternatives include acquisition of incremental competitive business, extending the existing contract/exempting an unrelated contract, changing the terms of business, dedicated resource adjustment, and sale of excess capacity. The acquisition of incremental competitive business is a common outside-of-contract breach resolution alternative used by selling firm managers; it refers to the resolution of the breach through an increase in market share with the customer. In addition to the business they currently handle, sellers are often cognizant of business given to competitors. They may have bid and failed on said business in the past or simply have asked the customer about their overall book of business. Selling firm managers may seek to substitute this business for that affected in the contractual breach. This alternative was viewed as especially viable when the selling firm manager knows about a particularly lucrative piece of business they have unsuccessfully courted in previous negotiations. Acquisition of incremental competitive business as an alternative to discrete enforcement is an especially potent option since the amount of recompense received may exceed liquidated damages for the selling firm. At the same time, the impact on the breaching customer may be far less than the prescribed damages. The following example illustrates how breach resolution can move beyond the notion of a zero-sum game: A customer breaches a contract requiring a liquidated damages payment of two million dollars. The selling firm has the option to employ legal means of recourse to extract the two million dollars from the customer. This is problematic, however, in that they run the risk of inflicting irreparable damage to the relationship and jeopardizing future transactions.

Additionally, legal resources come at a cost. Regardless of who pays for these costs between the buyer and the seller, the seller will net out less than what the customer puts in. Therefore, the selling firm may utilize an alternative option such as the acquisition of incremental competitive business. In this example, the selling firm may propose the attainment of ten million dollars in incremental competitive business in exchange for non-enforcement of the contract. If the selling firm expects to make five million dollars of profit on this incremental business, they will perceive more benefit than what was prescribed in the contract ($5 mm vs. $2 mm). This may also be beneficial to the customer. Their incremental competitive business may currently be sourced with a competitor of the selling firm at a slightly lower price. As such, the incremental price they pay for the sourcing change may be marginal and have a minimal impact on their aggregate spend ($10 mm vs. $9.9 mm). This presents a fundamental change in the nature of the resolution game. In the liquidated damages scenario, the customer and selling firm fight for a fixed amount of two million dollars. The cost to the customer exceeds the benefit to the seller due to legal friction costs the parties must bear. In the incremental competitive business alternative model, however, both parties realize benefit in excess of the liquidated damages amount. The selling firm perceives a benefit of three million dollars ($5 mm - $2 mm) and incurs minimal friction costs in the negotiation. The customer also benefits by $1.9 mm as their incremental spend is $100,000 rather than the prescribed liquidated damages of two million dollars. Another integrative alternative is extending the existing contract/exempting an unrelated contract from the bid process. In this alternative, the customer forgoes the option to rebid the current or another contract in exchange for non-enforcement of the breach. This option was used in instances where the market was competitive or a superior competitive offering was available, and, consequently, the selling firm viewed their ongoing business as at-risk. Additionally, this alternative was prized if the contract included business that was seen as highly profitable or of strategic to the interests of the selling firm. Raymond explicates how this is a valuable option for resolution: Maybe like an extension of terms. Say, it’s a highly competitive piece of business or, you know, you’re at risk. Say, you had a three-year contract, and they violated it in the second year. You would look to either say, (…) ‘I’ll make a concession if you extend it for another 6 years.’ [Raymond, Sales Manager: Transportation] As with incremental competitive business, this alternative can yield value to the selling firm in excess of the liquidated damages amount by calculation of the probability of loss or the necessary price reductions anticipated for retaining the business. This approach also may be valuable to the customer as they may have had no intention of switching providers as bids are time


consuming and expensive (Storbacka et al. 2009), thus providing a costless solution. Similar to preventing the existing contract from going out to bid, the breach may be resolved by exempting an unrelated contract from the bid process. This option was noted as superior in instances where the breach occurred on a piece of the customer’s business deemed non-essential or lower in strategic importance. Changing the terms of business is another alternative that can be used in lieu of discrete enforcement by amending contractual conditions in the favor of the seller. A part of the existing contract may be onerous for the selling firm, impacting their performance and profitability. Selling firms can offer to forgo enforcement of the customer breach in exchange for more lenient performance requirements. This alternative is especially attractive in instances where the selling firm negotiated a contract with specifications they have difficulty meeting regularly. From the customer’s perspective, if the deliverables are in excess of necessary operational requirements, relaxing the specification may be of limited consequence. As Charles notes, changes need not be solely hinged on the deliverables; rather other terms of exchange (billing cycle, assessorial payments) can be amended in a manner advantageous to the selling firm. There could be different terms, whether its delivery terms, or you know, performance terms or payment terms. You, so you could negotiate terms. [Charles, Owner: Industrial Manufacturing] Requiring customers to accept a dedicated resource adjustment can also be a viable substitute. Dedicated resources refer to the provision of selling firm company assets specific to the use of an individual customer. For example, a common dedicated resource is an on-site, dedicated service or sales representative from the selling firm. A customer may require this form of dedicated resource from the selling firm as a stipulation in a contract negotiation. This may provide benefits for both firms when it is necessary; however, at other times it is an unnecessary perk for the customer and may have limited actual value for either firm. Reallocating this resource to a more productive position within the selling firm removes a full-time equivalent from the cost assigned to the customer and can have a significant impact on profitability. Adam notes the positive impact a dedicated resource adjustment can have on the bottom line: If it turns out that you’re not willing to pay me, but on the other hand, I have a big capital investment in trying to support you, I’ll turn around and say guess what, you know, why don’t we do this. I’m gonna actually take my (investment) down so I maintain the profitability of the deal. [Adam, Vice President: Consumer Goods Manufacturing] Finally, the selling firm can offer the sale of excess capacity as an alternative to enforcement. In contrast to the acquisition of

incremental competitive business alternative, the sale of excess capacity is seller-driven and refers to the proposal by the seller to the customer to utilize some of the seller’s unused capacity. The selling firm may be overstocked on a certain product and the customer can agree to take on this excess capacity. This can be a particularly attractive option in instances the customer believes they will have minimal difficulty converting this excess capacity into productive use or sale. Alex shows how a relatively small contractual breach can be converted into a large opportunity. In this example, Alex’s firm has excess capacity in transportation moving from east to west. Rather than enforce the breach, Alex proposes the seller utilize this equipment. The one we’re working on now, I mean, there’s a customer that, you know, they’ve got some facilities, you know, in the south, and we have plenty of (equipment). You know, they’re empty out there and we want to get them back to the west coast. We’re trying to motivate them to say, you know, how about you ship some product from Texas back, you know, and we’d look at this and we’d total up the contribution and, you know, reduce the empty return rate and we’re getting more contribution, the heck with this fifty thousand dollars because, you know, I see a half million dollars over here. [Alex, Sales Director: Transportation] Compromising alternatives Outside-of-contract alternatives with a compromising orientation have some similarities to the concession exchange approach in negotiation theory (Zartman 1978), in that they offer the customer an option that is more palatable than liquidated damages. They are limited however, in that the maximum value they can yield the selling firm is less than or equal to the amount of prescribed damages. Conversely, for the customer, these alternatives may be preferable to the liquidated damages solution, but they require some form of outlay to the selling firm. The compromising approach entails a zero-sum supposition (Lewicki et al. 1994). Many alternatives to managing contractual breaches through such methods are available for selling-firm managers. The simplest way a selling firm may propose to recoup damages through an alternative to discrete enforcement is by splitting the payment up over an extended period of time. In this alternative, the customer is allowed to pay off the damages in multiple payments instead of as a one-time hit. While this still requires payment from the breaching customer, the extended time frame can be more manageable than a one-time payment. In the case of a negligent breach, this can offer some protection for responsible parties as, especially in breaches involving millions of dollars, it is less visible to senior management or outside investors. As Frederick notes below, instead of requiring a customer to pay five million dollars in breach damages as a lump sum, a multiyear payback period can be offered to mitigate the impact on the customer.


You’d want a lump sum initially. But many companies find that to be onerous, you know, especially in the large dollar, so would (company name) be willing to accept installments and the answer to that is yes. We’ve done annual installment payments for breach of contract. Depending upon the amount, say it was a five million dollar bill I think we would be willing to do a million and a quarter say for a four-year period. You would try to limit your period, but my experience here is (company name) is quite gracious and they’ve extended kind of long periods for payback. [Frederick, Senior Business Manager: Transportation] Another option is to raise prices on other business not involved in the breach. For example, to provide recompense for $1 million in breach damages, the customer may agree to take a ten percent increase on $10 million in other business. This also allows the customer to spread the cost over a large volume of purchases over an extended period of time. This option is beneficial beyond the benefits of splitting up the payment, because it incorporates the payback under purchase price rather than a special line-item for the breach. This can further serve to protect the breaching customer’s management from adverse reactions. Lance illustrates this alternative: The other option was split the business of mid-range (product) between us and (our competitor) and raise our price of the low-end (product) a bit to account for the loss in margin that we would lose for giving up half the mid-range business… And so what we did is we came back with a proposal that said ok we’ll back off and we will allow you to cancel the PO’s which were non-cancellable. But, we’re going to raise the price of the low-end (product) to help us accommodate for the margin that we would lose for the mid-range (product) business. [Lance, Strategic Account Manager: Consumer Goods Manufacturing] In instances where the selling firm has reason to doubt the breaching customer’s intent or ability to compensate them for the breach amount, they may require the customer to pay the liquidated damages up front. To mitigate the negative effect on the relationship, however, customers are allowed to earn it back through incentives. Customers are issued a form of credit with which they can accrue back at least a portion of the breach amount. This approach is preferable in situations where legitimate concern in the customer’s propensity to perform compensatory actions is doubtful. Dominic states the value of addressing a breach by receiving the money upfront, then allowing the customer to use it towards future purchases. We’re going to be the good guys. You’re going to look like the good guy to your boss by us taking this stuff

back. But, what are you going to do for me type situation. And that’s kind of the lead-in with this in-store credit option. Here’s this $1,000,000 and we know you buy something else. So, more than likely they would push those sales over to you if you’re holding a bunch of their money. [Dominic, Sales Manager: Consumer Goods Manufacturing] Finally, another interesting alternative available is quid pro quo in offsetting breaches, which refers to the forbearance of enforcement of a seller breach in exchange for the forbearance of enforcement of the customer breach. Large, complex contracts between firms can have instances of breach by both parties. Francis shows how this approach can nullify concurrent breaches by both parties: So, I think it’s a give and take, you know. It doesn’t have to particularly be related to that specific term of breach. It could be, okay, you violated Item 7.6 and, in return for that, we need relief on Item 20 in the contract. [Francis, General Director: Services] The companies agree to use the breaches as offsets and move forward. Beyond the benefit of resolving two potentially contentious situations, in instances of negligent breach, this allows both companies to save face. Instead of both companies showing a negative financial impact due to contractual breach, neither must do so and both companies benefit. Factors influencing choice of breach resolution alternative Managers have an important decision when determining the optimal manner in which to resolve customer-committed contractual breaches. As noted, they may choose to enforce at various points along the flexibility/risk spectra through legal, compromising, or integrative alternatives. It is of particular importance to gain an understanding of the factors that determine which of these approaches is employed for resolution. Our analysis of the data reveals four primary categories of pertinent factors affecting this decision: (a) external environment consideration, (b) interfirm considerations, (c) internal considerations, and (d) interpersonal considerations. When factors are largely favorable, managers are prone to use integrative alternatives, while when factors are unfavorable, legal enforcement is preferred. When the valences of the factors are low or factors are offsetting, compromising alternatives are employed given their middle position in this flexibility/risk spectra. External environment factors The status of the overall economy factored into managers’ decisions in the flexibility they considered and the amount of risk they were willing to bear in resolving the contractual breach. Participants noted


that in a down economy, selling firms are Bhungrier,^ and the potential to use a contractual breach as a conduit to revenueenhancing outcomes is attractive. Additionally, they note a down economy places stress on the breaching customer and can provide greater leverage to advance desirable integrative resolution options. The requisite payout the customer must yield through legal enforcement and to a lesser extent, compromising alternatives is particularly distasteful to them when economic conditions are poor. In a down economy you would be much more willing to use creative options. Companies are hungrier in a down marketplace. So, to me it becomes about leverage. In a down marketplace, it might hold a little bit more leverage for companies because (customers) are not going to want to pay out money that they were not expecting to pay, and we may be more interested in having stability of known (volume) going forward or perhaps additional business in some way. [Brenda, Senior Business Director: Transportation]

Interfirm factors Interfirm factors are those identified by participants about the customer organization. Organizational relationships proved an important consideration in enforcement choice and the use of outside-of-contract alternatives on a business level. As expected from the extant literature, customer’s size had a positive influence on the use of outsideof-contract alternatives. Consistent with the tenets of relational contracting (Macneil 1980), finding an amicable solution to a short-term issue was preferred when dealing with a large, strategic partner. The selling firm perception of the breaching company also had a pronounced effect on outside-ofcontract alternative usage. While industry reputation impacted the perceptions of the selling firm, the primary influence was prior history with the customer. Length of relationship was a component of this; however, a customer’s history as either an honest or dishonest partner appeared to be a principle determinant, as illustrated in Douglas’ following quote: If it’s been a good customer (is) number one. You know, if they’ve been a line customer for a long time, and it’s been a good product, and it’s been, you know, I would try to find a way to take care of that customer and meet the needs of that department as best I could. If, it’s a department where you’ve had issues, and there’s been contractual… you know, they don’t meet the contractual obligations, I probably wouldn’t push it too hard. [Douglas, Regional Sales Manager: Industrial Manufacturing] A customer’s influence also positively influenced the use of outside-of-contract alternatives. Both political connections

and interfirm connections such as interlocking directorates (Barringer and Harrison 2000) were cited as influencing factors. The selling firm’s managers recognized the importance of these relationships and their potential impact within their organization. Finally, respondents recognized the need to assess the organizational flexibility of the breaching organization in the determination of the breach resolution alternative. Organizational flexibility refers to the organization’s ability to Brespond continuously to unanticipated changes and to adjust to unexpected consequences^ (Nadkarni and Herrmann 2010, p. 1051). Organizations that were unable or unwilling to modify their resolution procedure and to think outside the box were considered poor candidates for outside-of-contract resolution. As these types of resolution require flexibility by the customer to rectify the breach, customers deemed open to creative ideas were more likely to be considered for outsideof-contract resolutions. Edward, a senior sales manager in transportation illustrates this consideration. You know, I guess it just is what’s the flexibility or the capability of that particular enterprise to flex. You know what I mean? And be able to do something that may be considered out of the box or, you know what I mean, it would all be about flexibility. You know, there’s certainly organizations out there that are more flexible than others, right, so I think that would probably be the biggest factor to take into consideration. [Edward, Senior Sales Manager: Transportation]

Internal factors Internal factors are those identified by respondents as pertaining to their own firm’s (i.e., the selling firm’s) position and goals. Market desirability played an important role in the use of outside-of-contract alternatives. If the breach was transgressed by a customer with presence in a market particularly desirable to the selling firm, and one that the firm was interested in expanding into, outside-of-contract options were seen as strategic moves to maintain and grow business. Robert illuminates further: Internal liquidity refers to the selling firm’s short-term asset and cash position. Regardless of how attractive a longer-term, outside-of-contract alternative may be, a firm in a precarious cash position may elect to enforce by seeking liquidated damages. A breach of sufficient magnitude may jeopardize the selling firm’s solvency and necessitate enforcement through the prescribed contractual terms. We’ve got a list of areas that we’re looking to expand into, so whether that’s different retailers or different categories, if somebody was playing within that space, we might be a little bit more lenient or willing to look at creative ideas to keep those relationships that are


probably in the more early stages. [Robert, Director of Marketing: Consumer Goods Manufacturing]

Interpersonal factors Consistent with the extant literature espousing the existence of relationships on both organizational and personal levels (e.g., Doney and Cannon 1997; Friman et al. 2002; Wilson 1995), factors on an interpersonal level also impact the enforcement decision. The friendship between the selling firm manager and their counterpart had a significant impact on the use of outside-of-contract alternatives. In their business dealings, customer and supplier managers can develop a personal connection and care about the well-being of their counterpart. Sellers were cognizant of the fact a contractual breach can represent a career-threatening issue for the breaching buyer manager, as Bruce illustrates below. So, if it’s a manager that’s responsible for these decisions, if they breached our contract and we go after them for X amount of dollars of liquidated damages, we have to think about what would that do to them within their own management chain. And is it going to potentially impact them. Will they be reprimanded? Will there be disciplinary action? You really have to think about that because, you know, everybody has somebody they report to. And, you really, on your own conscience, you don’t want to have somebody lose their job over a situation. [Bruce, Director of Sales: Transportation] Additionally, selling firm managers were more likely to be flexible in their enforcement and entertain outside-of-contract alternatives when their counterpart took ownership for the breach. Accountability for the breach by the customer and honesty increased the propensity to use outside-of-contract alternatives. Customers that admitted the breach were much more likely to be considered for outside-of-contract options than were those who denied or obfuscated the breach. Another important facet was individual-level reciprocity. Reciprocity refers to the notion that individuals often seek to pay other individuals back for benefits imbued at an earlier date. Some customers had brought forth opportunities in the past or had been flexible in instances where the seller had been in breach. Finally, the individual relational tenure between the selling firm manager and their counterpart also affected the enforcement decision. In instances where the individuals who negotiated the contract are no longer in the same position and different individuals are resolving the breach, selling firm managers noted the need for resolving the breach outside of the terms specified in the contract. These managers were unsure about what the informal understanding was at the time of the formal contract signing. As participants noted, there is a difference between the spirit and letter of the contract and that is difficult to ascertain in the face of turnover. Contracts can be

long, cumbersome, and difficult for non-legal signatories to comprehend (Lundmark 2001). Additionally, language in boilerplates is seldom read (Gilo and Porat 2005). Accordingly, selling firm representatives were inclined to use outside-of-contract alternatives when they were not certain what dialogue had transpired. As Brenda notes, contractual vagaries make the usage of outside-of-contract alternatives much more attractive. You know, I feel a little bit less confident that, you know, everything was completely understood and that there wasn’t anything like, hey, you know, yeah, sometimes you put something in the contract but people that negotiated it say, you know, gosh, we never enforce these or I have to put this in here, but we’ll never enforce it. And then, you know, 3 years later someone else is in there. You know, now I’m in here and that’s the first thing they said is, well geez, I would have never signed this but I was assured that this was a standard boilerplate. [Brenda, Senior Business Director: Transportation]

Contextual factors Locus of control One factor that was frequently mentioned by the participants as an important contextual condition was the underlying cause of the breach and its level of controllability. In the context of contractual breaches, locus of control reflects the extent to which the breaching customer had control over the circumstances leading to the breach. Breaches were classified into two main groups based on locus of control. Reasons outside the control of the breaching firm enhanced the selling firm’s consideration of positively-valenced enforcement factors. Unforeseeable occurrences, such as unpredictable lower production levels, were particularly impactful on the decision calculus participants engaged in. Reasons for breaches deemed controllable, however, were met with intense negative reactions. The most polarizing reason stated was malicious intent. In situations where customers breached the contract in order to act in a dishonest fashion (such as securing better volume pricing with competitors), consideration at the various other levels was unimportant. The selling firm managers reacted intensely to breaches where the customer had a high locus of control for the breach. Brian, a General Director in the transportation industry, identifies pertinent facets of locus of breach control below: Typically act of God provisions are in most contracts but if there wasn’t act of God, some dynamic global change, some governmental change, those would probably be on the higher end of flexibility. Lower end of flexibility would be poor planning, misintents, or malintents from the beginning, purposeful withholding of information, those types of things. [Brian, General Director: Transportation]


Temporal perspective Another factor that was identified as a contextual condition was the temporal perspective of the selling firm manager. Selling firm managers did not exhibit a homogenous approach in how they interpreted the breach resolution-influencing factors. Some viewed the consideration as a short-term, internal exercise, often eschewing other impacting factors as their alternative generation process was strictly a function of what they perceived was in the best interest for them and their firm. Accordingly, managers employing this perspective generally focused on the selling firm–related factors and paid less regard to the environmental, customer, and individual-level factors. William’s quote below provides an example of a short-term temporal perspective. Typically, what I’ve done is I always kind of call them scenario A, B, C. And, really, frankly, do a simple costbenefit analysis, pros, cons, costs, benefits. And, internally, I’d probably make a recommendation on the one that I thought made the most sense for the company. [William, Senior Business Manager: Transportation] Others, however, displayed a more long-term, customercentric view and strongly considered the external, customer, and individual-level impacting factors in making their decision. In this perspective, they considered a longer relational horizon, considered the needs of the customer first, and then juxtaposed these needs onto their own organizational needs as illustrated below. The managers sought to maximize the longrun outcome of the relationship. It’s more important in my opinion to help customers make good decisions. If you’re sitting and putting their interests on the table in addition to your own, it changes the game. It’s no longer just about you trying to make a piece of me. It’s about trying to foster a relationship. When that happens, I guarantee you don’t have issues. [Harold, Owner: Services]

Individual and firm-level consequences of outside-of-contract breach resolution Selling firms were concerned with two primary outcomes on an organizational level when using outside-of-contract breach resolution alternatives: relational impact with their customer and financial impact to their organization. As evident in the example of an incremental competitive business alternative enforcement, a tradeoff of these objectives was not requisite. Selling firms evaluated these outcomes in light of the relative risk that recompense will be provided. Individually, the managers of the selling firm who recommended and implemented the outside-of-contract options also had a concern for their

standing and reputation within their organization. They were cognizant of the message about their individual performance that was transmitted to senior management when outside-ofcontract alternatives were used. Organizational outcomes From a relational perspective, the customer’s responses to outside-of-contract alternatives to contractual breach resolution were perceived as extremely positive. Ted notes the positive feeling experienced by customers offered such alternatives: In general, I think most customers appreciate the creative alternatives because even if they don’t come out ahead, there’s a natural tendency for people to feel like, they appreciate it, they like it, they’re thankful. It works to build a longer term relationship. Everyone goes away happy. [Ted, Sales Manager: Transportation] Compromising alternatives were appreciated by customers since they lessened the impact of the breach. However, compromising alternatives are limited in that they require an outlay, though mitigated, to the selling firm, consistent with their zero-sum nature. Integrative alternatives were especially valuable due to the fact that in many instances, the customer was not negatively impacted by this form of resolution. Using integrative alternatives conveyed a more modern, collaborative relationship. From a financial perspective, selling firms evaluated success by how much financial value their organization realized. It was noted that legal recourse provides a lower amount of value as legal costs may at times be subtracted from the amount obtained in a judgment. Some managers wished to recoup the amount of damages in the breach with compromising alternatives. Compromising alternatives, however, are limited in that the maximum value they can provide the selling firm is less than or equal to the amount of prescribed damages. However, many sought to exceed the prescribed damages amount by using an integrative resolution strategy. Integrative options provided the highest potential for financial gain. Of course, integrative options also carry a higher associated risk and failure of the customer to follow through on the integrative agreement results in lost revenue for the supplier and can set a precedence for opportunistic customers to breach future contracts with less fear of reprisal. Individual outcomes On an individual level, there were both benefits and drawbacks to for the selling firm manager when using integrative or compromising approaches to resolving contractual breaches with their customers. Using integrative alternatives can showcase a strong customer focus, leadership, creativity, intelligence, communication skills, and relationship-building ability in the involved


manager. As Lance states, the use of integrative alternatives has positive connotations and communicates a desirable message to upper management: I think by coming up with creative solutions and not having to lose the customer gives you a very positive image. Well, it communicates first of all intelligence, second of all an understanding of the sales process and customer relations and customer relationships. And it proves that you have the potential to be a solid decision maker. [Lance, Strategic Account Manager: Consumer Goods Manufacturing] These are important perceptions to cultivate in a marketing and sales organization as they are prized by upper management and may lead to advancement (Mathews and Redman 2001). Using compromising alternatives can also improve the enforcing manager’s status, however, though to a lesser extent than using integrative alternatives, as compromising alternatives can only recoup damages, whereas integrative alternatives can exceed them. While the benefits of using outside-of-contract alternatives were attractive to managers, they recognized that their use was also associated with risk. Perceptions of strength entered into the decision process for using outside-of-contract alternatives. The usage of these alternatives was seen by some executives as a sign that the manager does not have the fortitude to confront a customer on tough issues. When proposing an alternative agreement, the selling manager takes a risk for the customer by vouching for their credibility in coming through on the alternative agreement. If the customer does not come through, the selling manager’s credibility and decisionmaking ability are undermined. The breaching manager’s risk is especially high for integrative alternatives (e.g., will the customer come through on a future, longterm agreement to provide incremental business?) relative to compromising alternatives (e.g., require the customer to pay and allow them to earn it back through incentives). Henry stresses caution in the use of integrative resolution alternatives: If you’re always trying to back a customer out, you know, if you’re trying to always have their back, and look at what they need, and not look at our company’s standpoint, that could negatively affect it. If there’s something in the contract, and every time your customers don’t hit it, you’re trying to find ways to creatively make it better, you know, that could come over as you’re not a company person, you’re more for the customer than for the company. [Henry, Sales Manager: Transportation]

Discussion Theoretical contributions Previous research has provided a strong foundation of knowledge pertaining to the structure and usage of contracts. A limitation, however, is the absence of understanding of the complex relational process for resolving formal contractual breaches. Contractual breach enforcement has traditionally been conceptualized by the two primary foci of in-contract enforcement or avoidance. Examination of outside-ofcontract alternatives significantly expands how contractual breaches are considered by supplier firms and their managers. Of particular relevance is avoiding conceptualizing contractual breaches as zero-sum situations and incorporating integrative thinking (Dant and Schul 1992). The importance of winwin outcomes in channel relationships has been noted as a key determinant in creating strong, long-term exchanges (Brown et al. 2000; Clopton 1984; Morgan and Hunt 1994; Nevin 1995). The need for such benefit is especially relevant to the application of contractual breach resolution. As breach situations can cause severe damage to the relationship, the need to transform this conflict into a benefit is essential. Our findings advance integrative alternatives that may allow selling firms to enhance the relationship and obtain more value than the amount detailed in the contract. The participants interviewed explicated the factors facilitating outside-of-contract alternative usage, contextual factors, types of options, and outcomes from their usage. For determining factors, participants noted the impact of external environmental, interfirm, internal, and interpersonal factors. While existing research has explicated impacting variables in contractual enforcement decisions (e.g., Antia and Frazier 2001) and relational governance choice (e.g., Joshi and Campbell 2003), we show that there are additional determinants of the usage of outside-of-contract breach resolution. Specifically, we note the external environmental (economic conditions), interfirm (customer’s size, prior history, influence, and organizational flexibility), internal (competitive position in the market, overall economy, internal liquidity), and interpersonal (friendship, accountability, reciprocity, relational tenure) factors impacting this decision. These factors are indicative of the complex considerations managers must contemplate in breach situations. For example, when the economy is in a down cycle at the time of breach resolution, propensity to use outside-of-contract resolution options increases. Further, the interpersonal factors influencing the resolution decision proved illuminating. As we noted, relational tenure between the selling firm manager and their counterpart is a factor in the enforcement equation. However, some informants indicated that a difference can exist between the spirit and the letter of formal contracts (especially for long, verbose contracts with extensive legal boilerplates). When turnover


occurs and individuals who are responsible for resolving the breach are the ones that were not involved in the contract negotiation, legal enforcement is less likely. Additionally, contextual factors emerged that affect the relationships between the influencing factors and choice of resolution alternative. In contrast to the strong focus in the literature on the relational aspects of B2B interactions, of particular interest in this examination was the locus of breach control. The reaction of participants to breaches that were deemed controllable by the customer were particularly intense and impactful. Even if the external environmental, interfirm, internal, and interpersonal determinants were favorable, a high locus of breach control muted their impact on enforcement choice. Further, the differing perspectives held by managers in alternative formulation also provide insight and extend relational contracting theory. How the manager conceptualizes the breach reconciliation process is impactful on their consideration of influencing factors. Relational and contractual governance researchers often adopt a firm-level perspective in contractual resolution and adjustment. Our findings add to the decision process pertaining to the role of the individual manager. Different managers have different perspectives in resolving contractual breaches. Some managers develop their resolution options by employing a more short-term focus, typically prioritizing selling firm–level factors, while others look to the future and consider needs of the customer first and then look to find the most palatable solution that will still provide benefit to their firm, considering external, interfirm, and individual factors. The integrative and compromising alternatives that emerged from our findings provide additional insight into relational contracting theory. The array of options available to managers offers many alternatives that must be evaluated on their risk and return in the specific context of the customer breach. Firms have the potential to gain both financially and relationally with their breaching customer to varying degrees, contingent on their willingness to accept future performance risk. Selecting an inappropriate alternative is detrimental to both the selling firm and the manager proposing the alternative. Finally, we advance a comprehensive understanding of the process and outcomes on organizational and individual levels for both the selling firm and its managers. While B2B contractual breaches are most often conceptualized on a firm level, the resolution process is inherently an individuallevel activity with repercussions for the managers involved. We explicate an often overlooked element in contractual enforcement: the individual. Organizational factors impact managers’ enforcement decisions; however, they are also very cognizant of the message alternative breach resolutions convey within their company. This research illustrates the complex interplay between personal and organizational goals.

Managerial implications The results of this inquiry provide managers a wide assortment of options to resolve a potentially destructive situation in a way that may benefit both organizations. Managers involved in customer contractual breach situations may only conceptualize zero-sum options in their resolution alternative set. The findings illustrate to managers the value of a customer-centric approach and the associated integrative alternatives. Cognizance of alternatives that may allow them to extract benefit in excess of that of the breach amount for their organization is of significant strategic value. Understanding customers’ responses to outside-of-contract alternatives is also important to managers. In-depth knowledge of the customer’s business can allow managers to select an option with minimal negative impact. Additionally, managers can accrue substantial relational capital with the customer manager responsible for the breach. Utilization of an outside-of-contract alternative may provide them with a way to capitalize on a difficult situation. We provide managers an understanding of key considerations in the breach resolution process, as well as highlight the different types of compromising and integrative alternatives at their disposal. We also illustrate how these alternatives are tied to individual and organizational outcomes. Managers must also consider their own personal goals within their organization. Few high-dollar contractual breach decisions are made without some form of involvement from senior management; rather, they must be sold internally. As such, managers must know the benefits and risks associated with using an outside-of-contract breach management strategy. Implementation of outside-of-contract alternatives can have valuable personal benefits for managers. Customer satisfaction scores are often a component of a manager’s performance evaluation, and outside-of-contract alternative usage is a way to maintain this metric. Managers also may feel a reduction in role conflict as the goals between the customer and their own organization become more convergent. As many of the respondents note, contractual breaches represent a fundamental incompatibility of expectations between roles. Managers, however, must enter into these considerations with an understanding of the potentially-harmful effects that could result. If the customer does not follow through on the outside-of-contract alternative, the manager may be perceived as weak and incompetent in the face of conflict. As such, solid understanding of the alternatives available and the conditions in which they are relevant is essential. Limitations and future research directions Certain limitations with the present study must be addressed prior to concluding. While our participants represented a wide


variety of industries, future work may be targeted at examining additional industries. We attempted to both find relevant industries in our sample and assure multiple different industries were represented; however, our sample does not represent all existing industries. Additionally, the present examination employs qualitative methodology. While a qualitative approach was necessary to gain robust, theoretical insight into this domain of inquiry, the proposed relationships are not empirically tested. Testing the linkages between enforcement perspectives and type of resolution option utilized would provide quantitative support to the proposed model. Our examination focuses on the perspective of the seller in customer-committed contractual breach situations. Accordingly, the perspective of the customer is not incorporated in this study. Since these perspectives can differ, this is a limitation of the study. Future research could extend our findings by incorporating the customers’ viewpoints. Future researchers could further explore this topic using longitudinal examinations to assess the appropriateness of resolution options and their impact on outcomes over a longer time period. Examining instances of conflict between a customer manager and their own organizational goals may also be interesting. As noted, outside-of-contract alternatives may allow the responsible manager to obfuscate the breach from internal inquiry and punishment. In instances where the customer’s organizational goals are consistent with outside-ofcontract alternatives, there should be little ethical conflict. Instances, however, where outside-of-contract alternatives are not in the best interest of the customer’s organization present a dilemma for managers. Managers may be tempted to take a suboptimal outside-of-contract alternative for self-protection. Finally, the present examination explores the resolution of contractual breaches. However, future research may explore the prevention of the occurrence of breaches. Changing contractual factors identified in this examination (e.g., length, boilerplate) may benefit both parties by reducing the incidence of these situations. Acknowledgment The authors would like to thank the editor and three anonymous reviewers for their helpful comments and suggestions.

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