When a contract falls silent — and every contract falls silent somewhere — someone must decide what it failed to say. That someone is whoever holds what the lawyers call residual control: the right to determine the questions the contract left open. And residual control is power, the plainest kind there is, for the party who decides the unwritten remainder can bend the relationship to its advantage in every case the words did not foresee. The terms a contract sets down, then, are only half the agreement; the other half is the remainder, unwritten and governed by power — by who owns what, who can walk away, who holds the discretion the gaps confer. The written deal looks complete and settled because it is written; but its completeness is a surface, and beneath it the remainder is contested still.
The preceding plate established that every contract is incomplete; this one asks what governs the incompleteness. Begin with a distinction the economics of contracts has made its own: between the specific rights a contract confers — the particular things it names each party may do or demand — and the residual rights, which are everything else, the whole open field of decisions the contract did not address. A lease may specify the rent, the term, the permitted use; it cannot specify what is to be done about a contingency no one imagined, and someone must decide such things as they arise. Whoever holds the residual rights is that someone. In the theory of Sanford Grossman, Oliver Hart, and John Moore, this is the meaning of ownership itself: to own an asset is to hold the residual right to control it — to decide its use in every circumstance some contract has not already assigned. The specific rights are a short and definite list; the residual rights are an open and indefinite one, and in a world where the unforeseen is certain, the open list is the longer.
And the open list is where the power lies. The explicit terms of a contract bind only the contingencies the parties foresaw and provided for; but in every contingency they did not — and there are always such contingencies, arriving without end — the party who holds the residual control decides what shall be done, and decides, naturally, to his own advantage. His counterpart, holding no such right, must accept what is decided or quarrel, and quarreling avails little against a right the contract itself conferred. So the real power in a relationship is not written in the terms at all; it is held by whoever governs the gap. This is why, in the theory of the firm that Grossman, Hart, and Moore constructed, the allocation of residual control is everything: it determines not only who prevails when the unforeseen arrives, but who, anticipating that he will prevail, dares to invest in the relationship, and who, fearing he will not, holds back. The power to decide the unforeseen casts its shadow backward over every choice made before it.
The seat of residual control is ownership, and the law has always known it. Centuries before the economists, Blackstone defined property as that sole and despotic dominion a man claims over a thing, to the exclusion of all the world — and despotic is the word, for to own a thing is to hold the right to decide its every use that no law or contract has taken away. The modern theory only gives this ancient dominion a sharper point: to own the asset on which a relationship depends — the factory, the machine, the press, the name — is to hold the residual control over the relationship, because whoever can withhold the asset can dictate the terms on which it is used in every case the contract left open. This is why the question of who owns what is not a dry matter of title but the central fact of power, and why the decision to integrate two firms into one, or to keep them separate and dealing at arm's length, is at bottom a decision about who shall hold the dominion when the contract runs out. Ownership is residual control; residual control is power; and so the boundary of ownership is the boundary of power.
Nowhere is this clearer, or more fraught, than in the contract by which one person agrees to work for another. The wage does not buy a defined and finished task; it buys, as Herbert Simon saw, the right to direct — the employer's authority to tell the worker, within a zone the contract and the law leave open, what to do as the work unfolds and the unforeseen arises. The employment contract is residual control over a person's labor, and that is a great power, the power to govern another's working hours in all the particulars no agreement could fix in advance. Yet it is a bounded power, and bounded in a revealing way: one cannot own a person as one owns a machine, so the worker's residual submission is limited by what the law forbids the employer to command, by custom, and above all by the worker's own freedom to leave. The authority of the employer reaches exactly as far as the worker's lack of alternatives allows — which returns us to the lesson of another volume, that the power to walk away is the power that bounds all others, and that residual control over a person is only ever as despotic as that person's options are poor.
And so the contract, which the law describes as a meeting of minds — an agreement freely reached, its every term the issue of mutual consent — is in its greater part no such thing. A price is a verdict on a hidden contest, mistaken for a fact of nature; and the terms a contract sets down, the price among them, are a verdict on a contest over residual control: over who owns the assets the relationship turns upon, who can walk away from it, who will decide the unforeseen. Consent governs the foreseen, which is the smaller part; power governs the remainder, which is the larger. What the parties wrote, they may indeed have agreed; but what they did not write — the vast open field of the unaddressed — is settled not by their agreement, which is silent there, but by the distribution of control between them, exercised case by case as the gaps come open. The meeting of minds is the surface of the contract. Beneath it lies a meeting of powers, and the remainder is the ground on which they meet.
Two objections will be pressed, and both have force. The first is that residual control is itself bargained for, and so dissolves back into consent: if I sell you my business, with all the dominion that ownership confers, I have agreed to give you that power, and the authority you now hold over our future dealings is authority I freely ceded — so to call it power rather than agreement is to forget that the allocation of control was itself a term of the deal. The second is that residual control is not domination but design: the very point of the property-rights theory is that assigning control to the party whose investment matters most increases the total value created, putting the power where it will do the most good, so that the allocation of residual rights is an engine of efficiency, not an instrument of extraction. On this view the language of a contest over power misreads a mechanism whose purpose is to enlarge the pie, not to divide a fixed one — and a relationship in which control is well placed is one in which both parties, not merely the controller, are made better off.
Both objections are answered not by denying them but by following them through. Grant that the initial allocation of residual control is bargained: that bargain is itself struck under a prior distribution of power — of who already owned the assets, who commanded the wealth to buy control, who held the alternatives that made his consent dear and the other's cheap — so that to say the allocation was agreed is only to push the power back a step, not to spirit it away. The worker consents to the employer's authority because his options are poor; the consent is real, and so is the powerlessness it expresses. And grant that control, once allocated, raises total value: it does so precisely because it is power — the power to capture the gains from the unforeseen — which is why parties contend for it, why its placement governs who invests, and why "putting the power where it does the most good" conceals, in its innocent phrasing, the question the whole inquiry turns upon: the most good for whom? Efficiency can tell us how to allocate control to enlarge the total; it cannot tell us that what is allocated is anything other than power, nor who shall enjoy the enlargement. The pie may grow, and the division of the larger pie is still settled by the dominion the contract could not name.
The remainder, then, is the true seat of a contract's power, and residual control its proper name. A price is a verdict on a hidden contest, mistaken for a fact of nature; and the terms a contract records, the price included, are the visible verdict of an invisible contest over who shall govern all that the contract could not say. To learn the real distribution of power in any agreement, one must look past the terms to the remainder — to who owns the assets, who holds the discretion, who can walk away — for the party who governs the gap governs the relationship in every case the words did not foresee, which is to say in every case that finally matters. The completeness of the written deal was the first illusion the study of contracts had to dispel; that its gaps are filled by agreement, rather than by power, is the second. The meeting of minds is the first thing a contract shows and the last thing it is. Beneath it lies the meeting of powers — and the remainder is where they meet, unwritten, and decisive.
The terms of a contract are what the parties agreed. The remainder is who decides when the words run out — and the remainder is the greater part.
What remains of the volume is the working-out of this single fact through the forms the governed gap can take. For residual control is the crude solution, the power to decide by fiat; and much of the art of contracting lies in the gentler instruments that supplement or soften it. The deputy must be governed though his task cannot be specified; the spur of incentive is tried where command will not serve; the pledge binds where the law cannot reach; the holdup is the threat that residual control makes possible, and the relational word the trust that restrains it; the law supplies its defaults, and the court its judgment, where the parties have left the page blank. Each is a way of governing the remainder — by power, by incentive, by trust, by law. But beneath them all lies the fact this plate has named: that the deal is a sketch, the gap is the rest, and whoever holds the gap holds the deal. The argument remains open.