Good Faith Provisions in Strategic Alliance Contracts: The Role of Alliance Partners’ Cognitive Frame Similarity

Strategic alliances are pivotal in industries like biopharmaceuticals, where collaboration can make or break innovation and market success. A key yet underexplored element in these alliances is the use of good faith provisions in contracts—clauses that require parties to act with good intentions and fairness but that are often ambiguous and unpredictable in their enforcement.

Good faith provisions are clauses rooted in the principle of ‘honesty in fact and the observance of reasonable commercial standards of fair dealing’” (United States Uniform Commercial Code, §1-201(20)). They allow parties to maintain flexibility in contracts—and make such easier, faster, and cheaper to draft—while navigating future uncertainties. However, their vagueness can lead to interpretative challenges, potentially resulting in costly disputes, as seen in the prolonged legal battle between pharmaceutical companies SIGA Technologies and PharmAthene from 2006 to 2015, which would ultimately lead to SIGA’s bankruptcy. Despite their prevalence, these provisions have not been systematically empirically studied in the context of strategic alliances, leaving a gap in our understanding of when and why they are used.

Our study introduces a novel perspective by examining the role of cognitive frame similarity—the degree to which organizations share similar schemas of interpretation, such as values, beliefs, and cognitive orientations—in the inclusion of good faith provisions in alliance contracts.

Our central hypothesis is that partners with greater cognitive frame similarity are more likely to incorporate good faith provisions into their contracts. This similarity provides a social cue that the partners will likely align in their interpretations of contingencies, reducing the need for detailed, explicit contractual terms.

Technological Uncertainty and Alliance Experience

Our study also explores two contextual conditions that influence the relationship between cognitive frame similarity and the use of good faith provisions:

1. Technological Uncertainty: In cases of high technological uncertainty, such as early phases of drug development in the biopharmaceutical industry, the reliance on cognitive shortcuts—like social cues—increases. Consequently, alliance partners are more impacted by the social cue of cognitive frame similarity and the relationship between cognitive frame similarity and the use of good faith provisions is amplified when explicit foresight is challenging.
2. Alliance Experience: Conversely, as alliance partners accumulate more experience, they tend to rely on established routines and templates, reducing the influence of cognitive frame similarity. Experienced partners are less likely to let the degree of cognitive frame similarity affect their use of good faith provisions, as their negotiations are more structured and less dependent on ad hoc sensemaking.

Methodology and Results

We analyzed 1,225 biopharmaceutical alliance contracts to reveal that cognitive frame similarity significantly influences the inclusion of good faith provisions. This effect is amplified under conditions of high technological uncertainty but diminishes with increased alliance experience. Our study also introduced a novel, text-based measure of cognitive frame similarity, using the language of organizations’ ‘About Us’ web pages to quantify this similarity.

Genuine vs. Guarded Good Faith Provisions

Our study further distinguishes between what we term genuine and guarded good faith provisions. Genuine good faith provisions rely entirely on the partners’ ability to resolve issues in good faith, while guarded provisions include fallback options if good faith negotiations fail. Our results suggest that cognitive frame similarity has a stronger impact on the use of genuine good faith provisions, where interpretative alignment is critical, compared to guarded provisions, which provide more interpretative certainty.

Implications for Practice and Future Research

Our study offers important implications for both theory and practice. First, it contributes to the understanding of interorganizational governance by highlighting good faith provisions as an intermediate form between relational and contractual governance. Second, it offers a sociocognitive perspective on strategic alliances by introducing cognitive frame similarity as a key factor in governance decisions.

For practitioners, our findings underscore the importance of understanding the cognitive dynamics at play in contract negotiations. Negotiators should be aware of the subtle influences of cognitive frame similarity and its potential impact on contract design. While good faith provisions offer flexibility, they also carry the risk of misaligned expectations, which could lead to expensive—or even fatal—disputes.

Conclusion

As strategic alliances become increasingly crucial in innovation-driven industries, understanding the cognitive underpinnings of contract negotiations becomes essential. By focusing on cognitive frame similarity, our study provides insights into how organizations can navigate the complexities of good faith provisions, potentially leading to more effective alliances.

The full paper can be accessed here.

Lorenz Graf-Vlachy is Professor of Corporate Management at TU Dortmund University and Senior Research Fellow at ESCP Research Institute of Management.