Complete and Incomplete Contracts

A contract contains the terms of a relationship between two parties. The contract can be a formal, written agreement or implicit and unwritten. It can be structured in a highly standardized manner, like off-the-shelf computer software, or it can be tailored to meet specific needs, like a custom-designed computer program. A contract can specify delivery on a particular date or describe it in more general terms. Contracts can be for products, for services, or for both.

Contractual relationships are of two basic types—complete and incomplete. Complete contracts are typically drawn up for the supply of a well-defined product or service to be delivered within a clearly prescribed time frame. Such contracts usually involve limited interaction between the contracting parties in an “arm’s length” relationship that is often legalistically defined. The written contract delineates all the pertinent obligations and rights of the parties involved. Markets for such products and services are often well established and associated with conventional contracting terms. The contractual relationship is therefore shaped and disciplined largely by the marketplace. If the supplier does not perform as set forth in the contract, the buyer can opt for another supplier. Because of the routine nature of the transaction and the high volume of exchanges, the product or service usually has multiple buyers and sellers. If a contractual conflict cannot be resolved through market mechanisms, the parties can seek relief through the courts.

A contract is incomplete when it is impractical to specify all of the supplier’s responsibilities under all contingencies. It may be incomplete because aspects of the deliverable, such as the quality of service to be provided, cannot be defined or measured precisely. Likewise, there may be uncertainty about other pertinent factors during the period of the contract. In such situations, the parties often recognize at the outset that the contract terms will be incomplete, so they do not try to delineate all the issues and conditions that may arise. To avoid an unwieldy and expensive contract, they instead stipulate a means of settling unanticipated disputes arising from contingencies, such as a method of arbitration.

Public transit agencies are parties to both complete and incomplete contracts. They usually contract for equipment, parts, fuel, and other commodity-like products using complete contracts that specify the deliverable and a specific time of delivery. When they contract for transit services, however, the contracts often entail a certain amount of incompleteness and ambiguity. Some aspects of the service, such as safety performance and customer service, can be difficult to define

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