Law Commons^™

Rethinking Mac Clauses In The Time Of Akorn, Boston Scientific, And Covid-19, Samuel Shapiro

Michigan Business & Entrepreneurial Law Review

The MAC clause is perhaps the most important clause in contract law, giving acquirers the ability to terminate even the largest agreements in the face of an often vaguely defined “Material Adverse Change.” For decades, even though MAC clauses have been present in nearly every merger agreement, courts have almost universally refused to enforce them. But the Delaware Chancery Court’s 2018 decision in Akorn may finally change that. As the world deals with the economic uncertainty caused by COVID-19, courts may soon get more opportunities to decide whether or not they will follow Akorn’s lead and begin to allow …

Arbitration Waiver And Prejudice, Timothy Leake

Michigan Law Review

Arbitration agreements are common in commercial and consumer contracts. But two parties can litigate an arbitrable dispute in court if neither party seeks arbitration. That presents a problem if one party changes its mind and invokes its arbitration rights months or years after the lawsuit was filed and substantial litigation activity has taken place. Federal and state courts agree that a party can waive its arbitration rights by engaging in sufficient litigation activity without seeking arbitration, but they take different approaches to deciding how much litigation is too much. Two basic methods exist. Some courts say waiver requires the party …

Making Employment Arbitration Fair And Accessible, Theodore J. St. Antoine

Articles

Mandatory arbitration agreements require employees, as a condition of employment, to agree to arbitrate all employment disputes instead of filing court suits. The Supreme Court has approved such agreements but many labor experts oppose them. The U.S. House of Representatives has passed a bill to prohibit pre-dispute agreements, the common form for mandatory arbitrations. This article argues that the House bill would have the practical effect of virtually eliminating employment arbitration. Instead, proposals are presented for either legislative or judicial steps to ensure that employment arbitration is fair and accessible. Requirements would include: (1) voluntary agreements on the part of …

Designing And Enforcing Preliminary Agreements, Albert H. Choi, George Triantis

Articles

Preliminary agreements—variously labeled as memoranda of understanding, letters of intent, term sheets, commitment letters, or agreements in principle—are common in complex business transactions. They document an incomplete set of terms that the parties have agreed upon, while anticipating further negotiation of the remaining provisions. They often create legal obligations, particularly a duty to negotiate in good faith. This duty has been the subject of a substantial number of judicial opinions over the past few decades and yet continues to be regarded as a confusing and unpredictable issue in contract law. Legal scholarship is hamstrung in its analysis of the case …

The Best Of Times And The Worst Of Times: The Current Landscape Of Mandatory Arbitration Clause Enforcement In Domestic Arbitration, Virginia Neisler

Law Librarian Scholarship

There is nothing new about arbi­tration, a method of alternative dispute resolution designed to settle disputes more efficiently, cheaper, and faster than litigation. Today, mandatory arbitration clauses are ubiquitous in commercial contracts, social media terms and conditions, employment contracts, and more. These contracts, where one party in the weaker position (often a consumer or an employee) must either accept or reject the terms as written with no power to negotiate, are known as contracts of adhesion. The widespread use of arbitration clauses—specifically, pre­dispute, forced arbitration agreements, often including class­action waiv ers found in adhesion contracts—has come under pressure.

Moral Diversity And Efficient Breach, Matthew A. Seligman

Michigan Law Review

Most people think it is morally wrong to breach a contract. But sophisticated commercial parties, like large corporations, have no objection to breaching contracts and paying the price in damages when doing so is in their self-interest. The literature has ignored the profound legal, economic, and normative implications of that asymmetry between individuals’ and firms’ approaches to breach. To individuals, a contract is a promise that cannot be broken regardless of the financial stakes. For example, millions of homeowners refused to breach their mortgage contracts in the aftermath of the housing crisis even though doing so could have saved them …

Contracts Ex Machina, Kevin Werbach, Nicolas Cornell

Articles

Smart contracts are self-executing digital transactions using decentralized cryptographic mechanisms for enforcement. They were theorized more than twenty years ago, but the recent development of Bitcoin and blockchain technologies has rekindled excitement about their potential among technologists and industry. Startup companies and major enterprises alike are now developing smart contract solutions for an array of markets, purporting to offer a digital bypass around traditional contract law. For legal scholars, smart contracts pose a significant question: Do smart contracts offer a superior solution to the problems that contract law addresses? In this article, we aim to understand both the potential and …

Mandatory Arbitration In Consumer Finance And Investor Contracts, Michael S. Barr

Book Chapters

This chapter focuses on the use of mandatory pre-dispute arbitration clauses in a subset of consumer contracts – those involving consumer finance and investor products and services. Arbitration clauses are pervasive in financial contracts – for credit cards, bank accounts, auto loans, broker-dealer services, and many others. In the wake of the recent financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). Dodd-Frank authorises the new Consumer Financial Protection Bureau (CFPB) and the Securities and Exchange Commission (SEC) to prohibit or condition the use of arbitration clauses in consumer finance and investment contracts, …

Consumer Preferences For Performance Defaults, Franklin G. Snyder, Ann M. Mirabito

Michigan Business & Entrepreneurial Law Review

Commercial law in the United States is designed to facilitate private transactions, and thus to enforce the presumed intent of the parties, who generally are free to negotiate the terms they choose. But these contracts inevitably have gaps, both because the parties cannot anticipate every situation that might arise from their relationship, and because negotiation is not costless. When courts are faced with these gaps in a litigation context, they supply default terms to fill them. These defaults usually are set to reflect what courts believe similar parties would have agreed to if they had addressed the issue. These “majoritarian” …

Understanding Noncompetition Agreements: The 2014 Noncompete Survey Project, J. J. Prescott, Norman D. Bishara, Evan Starr

Articles

In recent years, scholars and policymakers have devoted considerable attention to the potential consequences of employment noncompetition agreements and to whether legislatures ought to reform the laws that govern the enforcement of these controversial contractual provisions. Unfortunately, much of this interest—and the content of proposed reforms—derives from anecdotal tales of burdensome noncompetes among low-wage workers and from scholarship that is either limited to slivers of the population (across all studies, less than 1%) or relies on strong assumptions about the incidence of noncompetition agreements. Better understanding of the use of noncompetes and effective noncompetition law reform requires a more complete …

Mandatory Arbitration In Consumer Finance And Investor Contracts, Michael S. Barr

Articles

Mandatory pre-dispute arbitration clauses are pervasive in consumer financial and investor contracts—for credit cards, bank accounts, auto loans, broker-dealer services, and many others. These clauses often ill serve households. Consumers are typically presented with contracts on a “take it or leave it” basis, with no ability to negotiate over terms. Arbitration provisions are often not clearly disclosed, and in any event are not salient for consumers, who do not focus on the importance of the provision in the event that a dispute over the contract later arises, and who may misforecast the likelihood of being in such a dispute. The …

Regulation Through Boilerplate: An Apologia, Omri Ben-Shahar

Michigan Law Review

You have to salute Peggy Radin. She has said what others who agree with her have for so long been hesitant to utter out loud: the fine print is not a contract. There is no agreement to it, no real consent, not even “blanket assent.” It is nothing but paperwork and should have the legal fortune of junk mail. Those lengthy, unreadable pages with terms and conditions that come prepacked with consumer products or that demand to be clicked (“We Accept”) on computer screens — does anyone really think that they contain arrangements that people knowingly agreed to? How is …

Rationality's Reach, Adam B. Badawi

Michigan Law Review

Economic analysis and the rational actor model have dominated contracts scholarship for at least a generation. In the past fifteen years or so, however, a group of behaviorists has challenged the ability of the rational choice model to account for consumer behavior. These behaviorists are not trying to dismantle the entire enterprise. They generally accept the fundamentals of economic analysis but argue that the rational actor model can be improved by incorporating evidence of decisionmaking flaws that people exhibit. Oren Bar-Gill has been one of the foremost and influential proponents of a behaviorist take on contracts, and his recent book, …

Personalizing Default Rules And Disclosure With Big Data, Ariel Porat, Lior Jacob Strahilevitz

Michigan Law Review

This Article provides the first comprehensive account of personalized default rules and personalized disclosure in the law. Under a personalized approach to default rules, individuals are assigned default terms in contracts or wills that are tailored to their own personalities, characteristics, and past behaviors. Similarly, disclosures by firms or the state can be tailored so that only information likely to be relevant to an individual is disclosed and information likely to be irrelevant to her is omitted. The Article explains how the rise of Big Data makes the effective personalization of default rules and disclosure far easier than it would …

Legal Entities As Transferable Bundles Of Contracts, Kenneth Ayotte, Henry Hansmann

Michigan Law Review

The large, modern business corporation is frequently organized as a complex cluster of hundreds of corporate subsidiaries under the common control of a single corporate parent. Our Article provides new theory and supportive evidence to help explain this structure. We focus, in particular on the advantages of subsidiary entities in providing the option to transfer some or all of the firm's contractual rights and obligations in the future. The theory not only sheds light on corporate subsidiaries but also illuminates a basic function of all types of legal entities, from partnerships to nonprofit corporations. We show that when, as is …

A "Fair Contracts" Approval Mechanism: Reconciling Consumer Contracts And Conventional Contract Law, Shmuel I. Becher

University of Michigan Journal of Law Reform

Consumer contracts diverge from the traditional paradigm of contract law in various conspicuous ways. They are pre-drafted by one party; they cannot be altered or negotiated; they are executed between unfamiliar contracting parties unequal in their market power and sophistication; they are offered frequently by agents who act on behalf of the seller; and promisees (i.e., consumers) do not read or understand them. Consumer contracts are thus useful in modern markets of mass production, but they cast doubt on some fundamental notions of contract law.

To reframe the long-lasting debate over consumer contracts, this Article develops a superior legal regime …

Arbitration Costs And Forum Accessibility: Empirical Evidence, Christopher R. Drahozal

University of Michigan Journal of Law Reform

In this Article, written for this symposium issue on "Empirical Studies of Mandatory Arbitration," I examine the available empirical evidence on these two questions. I take "mandatory arbitration" to refer to pre-dispute arbitration clauses in consumer and employment (and maybe franchise) contracts. Accordingly, I limit my consideration of the empirical evidence to those types of contracts. I do not discuss empirical studies of international arbitrations, which almost always arise out of agreements between commercial entities. Nor do I discuss empirical studies of court-annexed arbitrations, which may not derive from party agreement and do not ordinarily proceed to a binding award.

Arbitration's Summer Soldiers: An Empirical Study Of Arbitration Clauses In Consumer And Nonconsumer Contracts, Theodore Eisenberg, Geoffrey P. Miller, Emily Sherwin

University of Michigan Journal of Law Reform

We provide the first study of varying use of arbitration clauses across contracts within the same firms. Using a sample of 26 consumer contracts and 164 nonconsumer contracts from large public corporations, we compared the use of arbitration clauses in firms' consumer and nonconsumer contracts. Over three-quarters of the consumer agreements provided for mandatory arbitration but less than 10% of the firms' material nonconsumer, nonemployment contracts included arbitration clauses. The absence of arbitration provisions in the vast majority of material contracts suggests that, ex ante, many firms value, even prefer, litigation over arbitration to resolve disputes with peers. Our data …

How Bad Are Mandatory Arbitration Terms?, Omri Ben-Shahar

University of Michigan Journal of Law Reform

This symposium was presented in the 2008 Annual Meeting of the Contracts Section of the American Association of Law Schools. Indeed, studying the unconscionability of arbitration terms has become a standard feature of first-year contracts courses. This is perhaps one of the hotter topics in today's contract law and policy. Contractual rights, as they are enforced by contract law, might have substantially different values depending on the venue through which they can be vindicated. It is hard to predict how these values differ, but hopefully this symposium will inform some of these predictions.

E-Contract Doctrine 2.0: Standard Form Contracting In The Age Of Online User Participation , Shmuel I. Becher, Tal Z. Zarsky

Michigan Telecommunications & Technology Law Review

The growing popularity of e-commerce transactions revives the perennial question of consumer contract law: should non-salient provisions of consumer standard form contracts be enforced? With the focus presently on an ex-ante analysis, scholars debate whether consumers can and should read standardized terms at the time of contracting. In today's information age, such a focus might be misguided. The online realm furnishes various tools, so-called "Web 2.0" applications, which encourage the flow of information from experienced to prospective consumers. This Article, therefore, reframes the analysis of online consumer contracts while taking into account this new flow of information. In doing so, …

Is A Burrito A Sandwich? Exploring Race, Class, And Culture In Contracts, Marjorie Florestal

Michigan Journal of Race and Law

A superior court in Worcester, Massachusetts, recently determined that a burrito is not a sandwich. Surprisingly, the decision sparked a firestorm of media attention. Worcester, Massachusetts, is hardly the pinnacle of the culinary arts-so why all the interest in the musings of one lone judge on the nature of burritos and sandwiches? Closer inspection revealed the allure of this otherwise peculiar case: Potentially thousands of dollars turned on the interpretation of a single word in a single clause of a commercial contract. Judge Locke based his decision on "common sense" and a single definition of sandwich-"two thin pieces of bread, …

Tactics And Terms In The Negotiation Of Electronic Resource Licenses, Kincaid C. Brown

Law Librarian Scholarship

This chapter introduces the reader to the realm of electronic resource license agreements. It provides the reader with an overview of basic contract law as it relates to electronic resource licensing. The chapter then discusses the electronic resource license negotiation process as well as license agreement term clauses. The aim of this chapter is to provide librarians with an understanding of basic licensing concepts and language in order to aid librarians in the review and negotiation of their own license agreements. The author hopes to impart lessons and tips he has learned in reviewing and negotiating license agreements with a …

Boilerplate And Economic Power In Auto-Manufacturing Contracts, Omri Ben-Shahar, James J. White

Book Chapters

This chapter examines the boilerplate contracts used by auto makers to procure parts from suppliers. It identifies drafting and negotiation techniques that are used to secure advantageous terms. It also explores some prominent specific arrangements as evidence that firms with bargaining power are exploiting their position to dictate self-serving but inefficient terms. Finally, it shows how standard contractual clauses solve the problem of ex-post hold-up by suppliers.

Preface: Or: A Boilerplate Introduction, Omri Ben-Shahar

Book Chapters

It is tempting to open this volume with yet another "boilerplate" salute to the challenge that standard-form contracts pose for contract law doctrine. You may have seen many tributes to this fundamental problem. Ifi were to offer my own variation on this familiar introduction, I would have perhaps tried to come up with an original spin to induce you to read forward another paragraph or two. I would probably have talked about a major divide within contract law between the "law of negotiations" and "product regulation." The former is the body of doctrines that determine the legal consequences of bargaining …

Boilerplate And Economic Power In Auto Manufacturing Contracts, Omri Ben-Shahar, James J. White

Articles

This Article is structured as follows. Part I compares the terms and conditions in the purchase orders of the Original Equipment Manufacturers (OEMs) and highlights important differences in the substance of these boilerplate provisions. It argues that these differences cannot be easily reconciled with the prediction that sophisticated parties draft the most efficient boilerplate terms. Part II examines how these forms are drafted, how their terms are negotiated, and how the OEMs guard their terms from erosion. It provides some insight on how tailoring occurs and how the internal organization of a party to a deal affects the terms that …

Foreword [To Boilerplate: Foundations Of Market Contracts Symposium], Omri Ben-Shahar

Articles

It is tempting to open this symposium with yet another "boilerplate" salute to the challenge that standard-form contracts pose for contract law doctrine. You may have seen many tributes to this fundamental problem. If I were to offer my own variation on this familiar introduction, I would have perhaps tried to come up with an original spin to induce you to read forward another paragraph or two. I would probably have talked about a major divide within contract law between the "law of negotiations" and "product regulation." The former is the body of doctrines that determine the legal consequences of …

On The Stickiness Of Default Rules, Omri Ben-Shahar, John A. E. Pottow

Articles

It was once perceived, and still is commonly taught, that default rules in contract law must mimic efficient arrangements. Otherwise, these rules impose needless transaction costs upon parties who seek to opt out of them to reach more efficient positions. In settings where these costs are high, parties might find themselves "stuck" in a default, unable to reach the outcome that they prefer. The strong version of this account-that the only factor that can make an inefficient default rule stick is the direct cost of drafting a tailored provision-has been gradually reappraised. It is by now recognized that factors beyond …

Contracts Without Consent: Exploring A New Basis For Contractual Liability, Omri Ben-Shahar

Articles

This Essay explores an alternative to one of the pillars of contract law, that obligations arise only when there is "mutual assent "--when the parties reach consensus over the terms of the transaction. It explores a principle of "no-retraction," under which each party is obligated to terms it manifested and can retract only with some liability. In contrast to the all-or-nothing nature of the mutual assent regime, where preliminary forms of consent are either full-blown contracts or create no obligation, under the no-retraction regime, obligations emerge gradually, as the positions of the negotiating parties draw closer. Further, the no-retraction liability …

Forward [To Freedom From Contract Symposium], Omri Ben-Shahar

Articles

This Symposium explores freedom from contract. When I was preparing to travel from my home in Ann Arbor to the University of Wisconsin where this Symposium was to be held, my 9-year-old son asked where I was headed. I explained that a bunch of people and I were going to meet and talk about freedom from contract, but the boy seemed unsure what this exchange was going to be about. I tried to translate: "It is about making promises that you don't really have to keep." This sounded surprising to him. He raised an inquisitive brow, and I knew he …

Contracting Under Amended 2-207 (Freedom From Contract Symposium), James J. White

Articles

Amended Section 2-207 of the Uniform Commercial Code1 (the Code) states new contract rules. I call these "contract rules" to avoid the labels of contract formation and contract interpretation. These new rules cure many of the problems presented by current Section 2-2072 and remind courts that the purpose of Section 2-207 is to interpret a contract that has been made, not to see if a contract exists. One is tempted to label current Section 2-207 as a contract formation provision-and to some extent that would be right-but most of this Section's work has been in contract interpretation, not in contract …