Enforcement most sublime: Part 3, do’s and don’ts
[Continued from Part 1 and Part 2 in previous posts]
In reviewing the topical and entertaining case study of Terrell Owens, I have sought to demonstrate that:
When capital pays an entrepreneur before the entrepreneur performs,
capital must be prepared to enforce its contractual provisions to the letter.
The
Did the Eagles “win”? In the short run, clearly not: the team is struggling, its season in chaos, its championship dreams gone for this year.
“But,” asks the Watsonian reader,
“Don’t bring me into this, young man, I only ask Socratic questions of Holmes.”
“shouldn’t the capital source have shown more forbearance? Shouldn’t the entrepreneur have been given a chance to redeem its performance?”
The answer hinges on the nature of the parties’ financial and contractual bargain. Contracts may be PAYGO, pay later, or pay before.
- PAYGO. Many contracts — the one you make with a cab driver, for instance — are Pay As You Go (sometimes abbreviated PAYGO). For each increment of performance, the entrepreneur receives a matching increment of pay. The bargain is reaffirmed at each step.
- Pay later. Other contracts (e.g. the tip bargain you make with a waiter) are perform first, pay later. Here the capital has the leverage, and the entrepreneurial vendor is motivated right through the finale. (The same principle, albeit somewhat bowdlerized, motivates real estate brokers.)
- Pay before performance (PBP). Some contracts (e.g. NFL multi-year deals with signing bonuses) have the entrepreneur paid before all the critical services are delivered.
Affordable rental housing development contracts are pay-before-performance (PBP). Developers receive most if not all of their cash development fee by the time the property has been completed and occupied, even though there is a long risk tail (interval where the capital source is still substantially at risk). PBP contracts require the capital source/ long-term investor to have effective monitoring, compliance, asset management, and enforcement.
In PBP situations, capital surrenders its inherent pay-later leverage. Why might it do this? Mainly in two cases:
- Auction marketplaces, where the object or service is rare. Hence Vegas signs performers for long-term deals just as football clubs do.
- Commodity creation investments. In many cases the entrepreneur lacks the vast capital sums necessary to create the property, enterprise, or business (what did it cost to start up Google?). The result is that capital exposes itself to extra risk, for which it demands extra compensation.
Taking an undue risk in the marketplace.
In our case, the capital had paid a very large up-front bonus ($10 million) for a short-interval contract (notionally seven years, in economic practicality probably 4-5). Once it had done this, the club’s choices were constrained. Since they could not economically recoup the full signing bonus, nor replace the lost-opportunity cost of quickly finding another receiver who could approximate Mr. Owens’ talents, they had to have Mr. Owens perform. Paying him the huge bonus was thus the ultimate sign of trust: the dollar sign of trust.
Having trusted Mr. Owens and seen him gleefully betray that trust, why did the Eagles pursue the course they did? What do the Eagles get out this?
In this country [England. — Ed.] it is good to kill an admiral from time to time, to encourage the others.
“And I know something about contract enforcement, too.”
In dealing with Mr. Owens as they have, the Eagles have demonstrated they intend contract provisions to be respected. Any other party who deals with them now knows this. Further, they chose — in my view, rightly — to insist on adherence to contractual provisions as the price they sought from Mr. Owens before he could receive grace or favor. They also demonstrated, in reverse, that any other party who seeks to contract for Mr. Owens’ services must know it will be receiving an employee who has demonstrated his contractual unreliability.
Having absorbed the pain of Mr. Owens’ behavior and absence this year, the Eagles are now in a position where his future is theirs to determine. He can return and play for his contract, or he can be — most probably — unemployed.
My satisfaction in this is not particularly the adjudication of Mr. Owens’ case, although that is indeed piquant, but more that it so beautifully demonstrates the do’s and don’ts of enforcement:
Rule enforcement: do’s and don’ts
|
Do’s |
Don’ts |
|
Within the rules as written |
Based on a loose interpretation or memory |
|
In writing |
Solely verbally |
|
Quickly |
Slowly and irregularly |
|
After each occurrence |
Inconsistently |
|
Proportionately |
Unconnected to offense severity |
|
In a measured escalation |
Abruptly |
|
To the letter of the documents |
Whimsically |
|
With forewarning |
Out of the blue |
|
Allowing chances to reform |
Once and for all
|
Thank you, Mr. Owens, for demonstrating Voltaire’s pour encourager les autres:
¯ So Mister Owens pent
Has helped us to present
A blog-o-spheric precedent.
Enlightening merriment. ¯
The Lord High NFL Arbitrartor
