Contracts Commons^™

Covid-19 Risk Factors And Boilerplate Disclosure, Stephen J. Choi, Mitu Gulati, Xuan Liu, Adam C. Pritchard

Law & Economics Working Papers

The SEC mandates that public companies assess new information that changes the risks that they face and disclose these if there has been a “material” change. Does that theory work in practice? Or are companies copying and repeating the same generic disclosures? Using the shock of the COVID-19 pandemic, we explore these questions. Overall, we find considerable rote copying of boilerplate disclosures. Further, the factors that correlate with deviations from the boilerplate seem related more to the resources that companies have (large companies change updated disclosures more) and litigation risks (companies vulnerable to shareholder litigation update more) rather than general …

After Ftx: Can The Original Bitcoin Use Case Be Saved?, Mark Burge

Faculty Scholarship

Bitcoin and the other cryptocurrencies spawned by the innovation of blockchain programming have exploded in prominence, both in gains of massive market value and in dramatic market losses, the latter most notably seen in connection with the failure of the FTX cryptocurrency exchange in November 2022. After years of investment and speculation, however, something crucial has faded: the original use case for Bitcoin as a system of payment. Can cryptocurrency-as-a-payment-system be saved, or are day traders and speculators the actual cryptocurrency future? This article suggests that cryptocurrency has been hobbled by a lack of foundational commercial and consumer-protection law that …

Integrating Doctrine And Diversity Speaker Series: How Does Diversity, Equity, Inclusion And Belonging Pedagogy Fit In Business Issues And Financial Affairs Classes? Leading With Deib In Wills, Trusts, Estates, Insurance, Contracts, And Taxation Law Classes, Roger Williams University School Of Law

School of Law Conferences, Lectures & Events

No abstract provided.

Stopping Runs In The Digital Era, Luís C. Calderón Gómez

Faculty Articles

Bank runs, and the financial crises they catalyze and amplify, are incredibly costly-to individuals, families, society, and the economy writ large. Banking regulation has, for the most part, protected us from traditional bank runs for the last ninety years. However, as we saw in the devastating 2008 financial crisis, bank runs can still occur in lightly regulated or opaque segments of the financial sector.

The recent crypto market downturn dramatically forewarned regulators of the potential and significant risks that novel assets could pose to our financial system's stability. In particular, a novel, systemically important asset (stablecoins) revealed its vulnerability to …

The Intersection Of Nfts And Structured Finance, Christopher K. Odinet, Andrea Tosato

Faculty Scholarship

Blockchain technology, cryptocurrencies, stablecoins and non-fungible tokens (NFTs) continue to invade financial markets. Whether through partnerships between financial institutions and tech firms or through in-house initiatives at some of the nation’s largest banks, blockchain-based products, services, and transactional structures are a major point of interest. In a recent work by Professor Steven Schwarcz, the growing NFT market is analyzed using the traditional tools of structured finance. Creating a new conceptual model called non-cash-flow monetizations, Professor Schwarcz reveals the risks to investors and markets, if the tokenization of non-traditional and largely illiquid assets proliferates. Having identified the potential harms, he offers …

The Failure Of Market Efficiency, William Magnuson

Faculty Scholarship

Recent years have witnessed the near total triumph of market efficiency as a regulatory goal. Policymakers regularly proclaim their devotion to ensuring efficient capital markets. Courts use market efficiency as a guiding light for crafting legal doctrine. And scholars have explored in great depth the mechanisms of market efficiency and the role of law in promoting it. There is strong evidence that, at least on some metrics, our capital markets are indeed more efficient than they have ever been. But the pursuit of efficiency has come at a cost. By focusing our attention narrowly on economic efficiency concerns—such as competition, …

Floating Liens Over Crypto-In-Commerce, Christopher K. Odinet, Andrea Tosato

Faculty Scholarship

Commercial law and crypto are colliding. Against the backdrop of explosive growth (and discord) in the digital asset market, there has been a series of recent revisions to American commercial law aimed at addressing new and emerging technologies. These changes to the Uniform Commercial Code (UCC) are designed to facilitate the buying and selling of digital assets as well as their use as collateral. However, to date, the literature exploring these changes has mainly focused on understanding the basics of the new regime. This Essay moves beyond that baseline by showing how the UCC amendments can be used to structure …

Total Return Meltdown: The Case For Treating Total Return Swaps As Disguised Secured Transactions, Colin P. Marks

Faculty Articles

Archegos Capital Management, at its height, had $35 billion in assets. But in the spring of 2021, in part through its use of total return swaps, Archegos sparked a $30 billion dollar sell-off that left many of the world's largest banks footing the bill. Mitsubishi UFJ Group estimated a loss of $300 million; UBS, Switzerland's biggest bank, lost $861 million; Morgan Stanley lost $911 million; Japan's Nomura lost $2.85 billion; but the biggest hit came to Credit Suisse Group AG, which lost $5.5 billion. Archegos itself lost $20 billion over two days. The unique characteristics of total return swaps and …

The Private Law Of Stablecoins, Kara J. Bruce, Christopher K. Odinet, Andrea Tosato

Faculty Scholarship

Stablecoins are one of the cornerstones of the crypto world. They’ve attracted significant attention over the past few years, ranging from Wall Street to kitchen table investors, and even the White House. As a less volatile alternative to crypto-assets like bitcoin, stablecoins have the potential to change the way we make payments, unlock the groundwork needed for more blockchain-based applications, and even reorient the economy toward private money. But how stable are these stablecoins, really? Can they be relied upon in the way their many proponents claim? And how much of the popular beliefs about stablecoins match their realities? That’s …

The Property Law Of Tokens, Juliet M. Moringiello, Christopher K. Odinet

Faculty Scholarship

Non-fungible tokens—or NFTs, as they are better known—have taken the world by storm. The idea behind an NFT is that by owning a certain thing (specifically, a digital token that is tracked on a blockchain), one can hold property rights in something else (either a real or intangible asset). In the early part of 2021, NFTs for items ranging from a gif of a pop-tart cat with a rainbow tail, to Twitter CEO Jack Dorsey’s first tweet, to a New York Times column (about NFTs!) have sold for millions of dollars over the internet. Promoters assert that NFTs are the …

Is Bitcoin Prudent? Is Art Diversified? Offering Alternative Investments To 401(K) Participants, Edward A. Zelinsky

Faculty Articles

Whether 401(k) plans’ investment menus should feature “alternative” investments is a fact-driven inquiry applying ERISA’s fiduciary standards of prudence, loyalty, and diversification. Central to this fact-driven inquiry is whether the alternative investment class in question is broadly accepted by investors in general and by professional defined benefit trustees in particular. A similarly salient concern when making this inquiry is the financial unsophistication of many, perhaps most, 401(k) participants. Accounting for these considerations, this Article concludes that REITs, private equity funds, and hedge funds can, with limits, today be offered as investment choices to 401(k) participants, but that cryptocurrencies (including Bitcoin), …

#Fintok And Financial Regulation, Nikita Aggarwal, D. Bondy Valdovinos Kaye, Christopher K. Odinet

Faculty Scholarship

Social media platforms are becoming an increasingly important site for consumer finance. This phenomenon is referred to as “FinTok,” a reference to the “#fintok” hashtag that identifies financial content on TikTok, a popular social media platform. This Essay examines the new methodological possibilities for consumer financial regulation due to FinTok. It argues that FinTok content offers a novel and valuable source of data for identifying emerging fintech trends and associated consumer risks. As such, financial regulators should use FinTok content analysis—and social media content analysis more broadly—as an additional method for the supervision and regulation of consumer financial markets. The …

A Process For Politics, Anna Gelpern

Georgetown Law Faculty Publications and Other Works

I argue that consistent and public process observance has a distinctly valuable function in sovereign debt restructuring, with no precise equivalent in national insolvency regimes. National regimes reflect the distribution bargains of their enactment, presumptively legitimate and binding. Debtors and creditors allocate insolvency losses in their shadow, with liquidation as a backstop and politics just outside the frame. All else equal, the restructuring process has a harder job with sovereign debt. There is no liquidation backstop and no default distribution scenario. Each crisis resolution episode must allocate losses from scratch among the country’s citizens, foreign and domestic creditors, and other …

Modernizing Mortgage Law, Christopher K. Odinet

Faculty Scholarship

Modern mortgage law is designed for a world that no longer exists. The residential mortgage transaction of today looks nothing like it did during the formative period when the property laws governing mortgages were developed. What was once a local dealing between two individuals and largely for commercial or quasi-commercial purposes has now become a housing- centric financial transaction-turned-asset between multiple distant and often invisible parties that operate as part ofa national market. Yet, although the mortgage transaction has changed, mortgage law has not. Property law rules that once balanced the rights of mortgagors and mortgagees now completely fail to …

Understanding University Fee Litigation: A Few Lessons About The Perils Of Imprudence For Higher Ed Plan Sponsors, Maria O'Brien, Calvin Utter

Faculty Scholarship

Beginning in August 2016, a series of class action lawsuits were filed on behalf of participants and beneficiaries of 403(b) employee retirement plans sponsored by major American colleges and universities. These plans are regulated by the 1974 Employee Retirement Income Security Act (“ERISA”), which sets minimum standards to protect the participants and beneficiaries of voluntarily established retirement and health plans. The allegations in the several lawsuits have centered primarily around breaches of fiduciary duties by those charged with administering the plan.

These cases are all class action lawsuits brought on behalf of the participants and beneficiaries of the plans in …

Commercial Law Intersections, Giuliano Castellano, Andrea Tosato

All Faculty Scholarship

Commercial law is not a single, monolithic entity. It has grown into a dense thicket of subject-specific branches that govern a broad range of transactions and corporate actions. When one of these events falls concurrently within the purview of two or more of these commercial law branches - such as corporate law, intellectual property law, secured transactions law, conduct and prudential regulation - an overlap materializes. We refer to this legal phenomenon as a commercial law intersection (CLI). Some notable examples of transactions that feature CLIs include bank loans secured by shares, supply chain financing arrangements, patent cross-licensing, and blockchain-based …

Revising Boilerplate: A Comparison Of Private And Public Company Transactions, Stephen J. Choi, Robert E. Scott, G. Mitu Gulati

Faculty Scholarship

The textbook model of commercial contracts between sophisticated parties holds that terms are proposed, negotiated and ultimately priced by the parties. Parties reach agreement on contract provisions that best suit their transaction with the goal of maximizing the joint surplus from the contract. The reality, of course, is that the majority of the provisions in contemporary commercial contracts are boilerplate terms derived from prior transactions and even the most sophisticated contracting parties pay little attention to these standard terms, focusing instead on the price of the transaction. With standard-form or boilerplate contracts, this dynamic of replicating by rote the terms …

Bringing Rule Of Law And Fairness To The Dysfunctional World Of Sovereign Debt: A Role For Canada?, Maziar Peihani, Mark Jewett Qc

All Faculty Publications

Restructuring sovereign debt has long proved challenging: There is no formal regime for sovereign insolvencies similar to those that that govern domestic bankruptcy and insolvency and attempts to create one by international treaty have been met with political resistance. Currently, sovereign debt restructuring is governed by the debt contracts themselves along with the background law in the jurisdiction in which the debt is issued. Sovereign immunity also protects most state assets from seizure. These ad hoc restructuring processes are plagued by unpredictability, however, and there are incentives for individual creditors to “hold out,” demanding full repayment of their claims and …

Innovation Versus Encrustation: Agency Costs In Contract Reproduction, Stephen J. Choi, Mitu Gulati, Robert E. Scott

Faculty Scholarship

This article studies the impact of exogenous legal change on whether and how lawyers across four different deal types revise their contracts’ governing law clauses in order to solve the problem that the legal change created. The governing law clause is present in practically every contract across a wide range of industries and, in particular, it appears in deals as disparate as private equity M&A transactions and sovereign bond issuances. Properly drafted, the clause increases the ex ante economic value of the contract to both parties by reducing uncertainty and litigation risk. We posit that different levels of agency costs …

Transactional Scripts In Contract Stacks, Shaanan Cohney, David A. Hoffman

All Faculty Scholarship

Deals accomplished through software persistently residing on computer networks—sometimes called smart contracts, but better termed transactional scripts—embody a potentially revolutionary contracting innovation. Ours is the first precise account in the legal literature of how such scripts are created, and when they produce errors of legal significance.

Scripts’ most celebrated use case is for transactions operating exclusively on public, permissionless, blockchains: such exchanges eliminate the need for trusted intermediaries and seem to permit parties to commit ex ante to automated performance. But public transactional scripts are costly both to develop and execute, with significant fees imposed for data storage. Worse, bugs …

Anticipating Venezuela’S Debt Crisis: Hidden Holdouts And The Problem Of Pricing Collective Action Clauses, Robert E. Scott, Stephen J. Choi, Mitu Gulati

Faculty Scholarship

A creditor who asks for stronger enforcement rights upon its debtor’s default will rationally accept a lower interest rate reflecting the greater expected recovery the exercise of those rights provides. Over a dozen studies, however, have failed to document this basic relationship in the context of the collective action clause, a key provision in sovereign bonds. We conjecture that this failure is because enforcing the rights in question requires collective decision-making among anonymous creditors with different interests, impeding market predictions regarding future price effects. The pricing of rights that require collective enforcement thus turns on whether the market observes an …

Revising Boilerplate: A Comparison Of Private And Public Company Transactions, Robert E. Scott, Stephen J. Choi, Mitu Gulati

Faculty Scholarship

The phenomenon of “sticky boilerplate” causing inefficient contract terms to persist exists across a variety of commercial contract types. One explanation for this failure to revise suboptimal terms is that the key agents on these transactions, including attorneys and investment bankers, are short sighted; their incentives are to get the deal done rather than ensure that they are using the best terms possible for their clients. Moreover, these agents face a first mover disadvantage that deters unilateral revisions to inefficient terms. If agency costs are indeed driving the stickiness phenomenon, we expect that the pace of revision will vary across …

Cacs And Doorknobs, Anna Gelpern, Jeromin Zettelmeyer

Georgetown Law Faculty Publications and Other Works

In response to debt crises, policy makers often feature Collective Action Clauses (CACs) in sovereign bonds among the pillars of international financial architecture. However, the content of official pronouncements about CACs suggests that CACs are more like doorknobs: a process tool with limited impact on the incidence or ultimate outcome of a debt restructuring. We ask whether CACs are welfare improving and, if so, whether they are pillars or doorknobs. The history of CACs in corporate debt suggests that CACs can be good, bad or unimportant depending on their vulnerability to abuse and the available alternatives, including bankruptcy and debt …

Split Derivatives: Inside The World's Most Misunderstood Contract, Dan Awrey

Cornell Law Faculty Publications

Derivatives are the "bad boys" of modern finance: exciting, dangerous, and fundamentally misunderstood. These misunderstandings stem from the failure of scholars and policymakers to fully appreciate the unique legal and economic structure of derivative contracts, along with the important differences between these contracts and conventional equity and debt securities. This Article seeks to correct these misunderstandings by splitting derivative contracts open, identifying their constituent elements, and observing how these elements interact with one another. These elements include some of the world's most sophisticated state-contingent contracting, the allocation of property and decision-making rights, and relational mechanisms such as reputation and the …

Law And The Blockchain, Usha Rodrigues

Scholarly Works

All contracts are necessarily incomplete. The inefficiencies of bargaining over every contingency, coupled with humans’ innate bounded rationality, mean that contracts cannot anticipate and address every potential eventuality. One role of law is to fill gaps in incomplete contracts with default rules. The blockchain is a distributed ledger that allows the cryptographic recording of transactions and permits “smart” contracts that self-execute automatically if their conditions are met. Because humans code the contracts of the blockchain, gaps in these contracts will arise. Yet in the world of “smart contracting” on the blockchain, there is no place for the law to step …

The Cisg: Applicable Law And Applicable Forums, Ronald A. Brand

Articles

Despite being in effect for over thirty years, a debate continues on whether the United Nations Convention on Contracts for the International Sale of Goods (CISG) has been a success. With 89 Contracting States, it clearly is widely accepted. At the same time, empirical studies show that private parties regularly opt out of its application. It has served as a model for domestic sales law, and as an important educational tool. But has it been a success? In this article I consider that question, and suggests that the scorecard is not yet complete; and that it will perhaps take significantly …

Harry Flechtner--A True Teacher/Scholar, With Rhythm, Ronald A. Brand

Articles

This is a tribute to Professor Emeritus Harry Flechtner upon his retirement from the University of Pittsburgh School of Law. Professor Flechtner was a leading scholar on the United Nations Convention on Contracts for the International Sale of Goods (CISG), a stellar teacher, a musician who used that skill in the classroom as well as the Vienna Konzerthaus, and a genuinely nice person.

Central Clearing Of Financial Contracts: Theory And Regulatory Implications, Steven L. Schwarcz

Faculty Scholarship

To protect economic stability, post-crisis regulation requires financial institutions to clear and settle most of their derivatives contracts through central counterparties, such as clearinghouses associated with securities exchanges. This Article asks whether regulators should expand the central clearing requirement to non-derivative financial contracts, such as loan agreements. The Article begins by theorizing how and why central clearing can reduce systemic risk. It then examines the theory’s regulatory and economic efficiency implications, first for current requirements to centrally clear derivatives contracts and thereafter for deciding whether to extend those requirements to non-derivative contracts. The inquiry has real practical importance because the …

The Evolution Of Entrepreneurial Finance: A New Typology, J. Brad Bernthal

Publications

There has been an explosion in new types of startup finance instruments. Whereas twenty years ago preferred stock dominated the field, startup companies and investors now use at least eight different instruments—six of which have only become widely used in the last decade. Legal scholars have yet to reflect upon the proliferation of instrument types in the aggregate. Notably missing is a way to organize instruments into a common framework that highlights their similarities and differences.

This Article makes four contributions. First, it catalogues the variety of startup investment forms. I describe novel instruments, such as revenue-based financing, which remain …

The Price Of Law: The Case Of The Eurozone's Collective Action Clauses, Elena Carletti, Paolo Colla, Mitu Gulati, Steven Ongena

Faculty Scholarship

Do markets value contract protections? And does the quality of a legal system affect such valuations? To answer these questions we exploit a unique experiment whereby, after January 1, 2013, newly issued sovereign bonds of Eurozone countries under domestic law had to include Collective Action Clauses (CACs) specifying the minimum vote needed to modify payment terms. We find that CAC bonds trade at lower yields than otherwise similar no-CAC bonds; and that the quality of the legal system matters for this differential. Hence, markets appear to see CACs as providing protection against the legal risk embedded in domestic-law sovereign bonds.