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Full-Text Articles in Law and Economics
Investigating The Contract Production Process, Stephen J. Choi, Robert E. Scott, G. Mitu Gulati
Investigating The Contract Production Process, Stephen J. Choi, Robert E. Scott, G. Mitu Gulati
Faculty Scholarship
Contract law and theory have traditionally paid little attention to the processes by which contracts are made. Instead, contracts among sophisticated parties are assumed to be full articulations of the desires of the parties; whatever the process, the outcome is the same. This article compares sovereign debt contracts from US and UK firms, with different production processes, that are trying to do the same thing under very similar legal regimes. We find that that the production process likely matters quite a bit to the final form that contracts take.
Innovation Versus Encrustation: Agency Costs In Contract Reproduction, Stephen J. Choi, Mitu Gulati, Robert E. Scott
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 …
Contractual Arbitrage, Stephen J. Choi, G. Mitu Gulati, Robert E. Scott
Contractual Arbitrage, Stephen J. Choi, G. Mitu Gulati, Robert E. Scott
Faculty Scholarship
Standard-form contracts are likely to be incomplete because they are not tailored to the needs of particular deals. In an attempt to reduce incompleteness, standard-form contracts often contain clauses with vague or ambiguous terms. Terms with indeterminate meaning present opportunities for strategic behavior well after a contract has been executed. This linguistic uncertainty in standard-form commercial contracts creates an opportunity for “contractual arbitrage”: parties may argue ex post that the uncertainties in expression mean something that the contracting parties did not contemplate ex ante. This chapter argues that the scope for contractual arbitrage is a direct function of the techniques …
The Black Hole Problem In Commercial Boilerplate, Stephen J. Choi, G. Mitu Gulati, Robert E. Scott
The Black Hole Problem In Commercial Boilerplate, Stephen J. Choi, G. Mitu Gulati, Robert E. Scott
Faculty Scholarship
Rote use of a standard form contract term can erode its meaning, a phenomenon made worse when the process of encrustation introduces various formulations of the term. The foregoing process, when it occurs, weakens the communicative properties of boilerplate terms, leading some terms to lose much, if not all, meaning. In theory, if a clause is completely emptied of meaning through this process it can create a contractual “black hole.” The more frequent and thus potentially more pervasive problem arises when, as the term loses meaning, random variations in language appear and persist, resulting in what we term a “grey …
Variation In Boilerplate: Rational Design Or Random Mutation?, Stephen J. Choi, G. Mitu Gulati, Robert E. Scott
Variation In Boilerplate: Rational Design Or Random Mutation?, Stephen J. Choi, G. Mitu Gulati, Robert E. Scott
Faculty Scholarship
Standard contract doctrine presumes that sophisticated parties choose their terminology carefully because they want courts or counterparts to understand what they intended. The implication of this “Rational Design” model of rational behavior is that courts should pay careful attention to the precise phrasing of contracts. Using a study of the sovereign bond market, we examine the Rational Design model as applied to standard-form contracting. In NML v. Argentina, federal courts in New York attached importance to the precise phrasing of the boilerplate contracts at issue. The industry promptly condemned the decision for a supposedly erroneous interpretation of a variant of …
Boilerplate And Economic Power In Auto Manufacturing Contracts, Omri Ben-Shahar, James J. White
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 …