Sophisticated Parties Research Articles

Commercial Boilerplate: A Review and Research Agenda

Boilerplate contracts have long fascinated legal scholars. But the focus has been largely on consumer contracts, with the debate centered on the question of whether take-it-or-leave-it mass-produced forms imposed on consumers by large corporations should be treated as contracts or as a problem in regulation. By contrast, commercial boilerplate—the standard forms used in transactions for corporate or sovereign bonds or merger agreements—has traditionally received little attention. The assumption has been that form contracts among sophisticated parties may differ in form but not in substance from bespoke contracts between business entities. Yet a growing body of scholarship is questioning that assumption. This article reviews the complexities of contract production in these large markets and provides a window into an exciting new area of contracts research.

Contractual Howlers: A Russian Bond Case Study

Both theorists and courts commonly assume that high-dollar financial contracts between sophisticated parties are free of linguistic errors: sophisticated parties, the thinking goes, will carefully express their shared intentions and eliminate any troublesome gaps and glitches. Consistent with this assumption, most courts interpret the language of commercial contracts literally according to the plain or ordinary meaning of the words in the agreement. An examination of contracts governing Russian bonds outstanding in 2022, however, reveals a large number of potentially troublesome contractual gaps and glitches. We refer to these linguistic irregularities as ‘howlers’ in order to highlight the significant litigation risks they create. In this article, we use interviews with market participants to assess the causes of the contractual howlers we observe in the Russian bonds. The presence of howlers undermines the core assumption that justifies the literal interpretive approach used by courts for contracts between sophisticated parties.

Whose opinion matters when insiders disagree with short sellers?

AbstractThis study investigates the credibility of conflicting trading signals from two well‐informed and sophisticated parties: corporate insiders and short sellers. Our results suggest that insiders’ information is dominant when short sellers trade in the opposite direction. We attribute the positive price reaction following a disagreement to insiders’ superior information that is not available to short sellers. Our results do not support the managerial short‐termism argument. Two additional tests show that insider buying credibility enhances when information asymmetry is high and that short sellers reverse their shorting position after the disclosure of insider buying. Both findings support the idea that short sellers may experience a previously unacknowledged barrier in accessing private information.

Intelligent Legal Tech to Empower Self-Represented Litigants

Legal technologies, or “legal tech,” are disrupting the practice of law and providing efficiencies for businesses around the globe. Indeed, legal tech often conjures up notions of billion-dollar businesses and highly sophisticated parties. However, one branch of legal tech that holds particular promise for less sophisticated parties is access to justice (“A2J”) through the use of online dispute resolution (“ODR”). This is because ODR uses technology to enable online claim diagnosis, negotiation, and mediation without the time, money, and stress of traditional court processes. Indeed, courts are now moving traffic ticket, landlord-tenant, personal injury, debt collection, and even divorce claims online. The hope is that legal tech such as online triage and dispute resolution systems will provide means for obtaining remedies for self- represented litigants (“SRLs”) and those who cannot otherwise afford traditional litigation. Meanwhile, the COVID-19 pandemic has accelerated the growth of online processes, including court and administrative processes that traditionally occurred in person. Nonetheless, these online processes seem focused mainly on case management and communication, neglecting the need for more imaginative and innovative uses of technology. Accordingly, this Article proposes a six-module system for ODR programs and identifies gaps in development where new technologies are needed to advance A2J. Indeed, there is great room for the development of Artificial Intelligence (“AI”) and data analytics to assist SRLs and others in pursuit of remedies and justice.

Contractual Inequality

Most individuals strive to satisfy every obligation laid out in standard form contracts such as mortgages, insurance plans, or credit agreements. Sophisticated parties, however, adapt and modify their obligations during contract performance by negotiating for lenient treatment and taking advantage of unclear terms. The common law explicitly authorizes variance from standardized contract terms during performance. When the same standard terms create value for sophisticated individuals and destroy value for others, the result is contractual inequality. Contractual inequality has grown without scrutiny by courts or scholars, enabling regressive redistribution of resources and creating economic inefficiency by sowing distrust in markets for consumer contracts. To document the magnitude of contractual inequality, this Article provides novel empirical evidence from a case study of residential mortgage contracts. Data from a large nationwide sample show that many mortgage servicers choose not to utilize their power to foreclose on a borrower in default, with more than one-third of nonpaying borrowers avoiding foreclosure. Servicers disproportionately foreclose on borrowers in poor neighborhoods, regressively redistributing over $500 million in wealth to high-income communities each year. Moreover, servicers’ unfettered freedom to choose who undergoes foreclosure may have reduced the value of mortgages to consumers, increasing market inefficiency. Courts and regulators need not turn a blind eye to contractual inequality, allowing private market forces to determine the exercise of contract rights. This Article argues that lawmakers should gather information about inequalities in contract performance and disseminate such data to private and public enforcement authorities. By bringing these inequalities to light, lawmakers can take a first step toward more efficient contract markets and a more equal society.

Intelligent Legal Tech to Empower Self-Represented Litigants

Legal technologies, or “legal tech,” are disrupting the practice of law and providing efficiencies for businesses around the globe. Indeed, legal tech often conjures up notions around billion-dollar businesses and highly sophisticated parties. However, one branch of legal tech that holds particular promise for less sophisticated parties is expanding access to justice (A2J) through the use of online dispute resolution (ODR). This is because ODR uses technology to allow for online claim diagnosis, negotiation, and mediation without the time, money, and stress of traditional court processes. Indeed, courts are now moving traffic ticket, condominium, landlord/tenant, personal injury, debt collection, and even divorce claims online. The hope is that legal tech such as online triage and dispute resolution systems will provide means for obtaining remedies for self-represented litigants (SRLs) and those who cannot otherwise afford traditional litigation. Meanwhile, the Covid-19 pandemic has accelerated the growth of online processes, including court and administrative processes that traditionally occurred in person. Nonetheless, these online processes seem focused on mainly case management and communication, neglecting the need for more imaginative and innovative uses of technology. Accordingly, this Article proposes a six-module process framework for ODR programs and identify gaps in development – where new technologies are needed to advance A2J. Indeed, there is great room for development of Artificial Intelligence (AI) and data analytics to assist SRLs and others in pursuit of remedies, and justice. This is a DRAFT of a working paper that will be edited and published in the Columbia Science and Technology Law Review.

The Value of Accuracy in Contract Interpretation

The economic argument for textualism rests on two tenants: that rules of interpretation are majoritarian defaults and that risk-neutral and sophisticated parties do not care about the courts’ accuracy in interpreting their agreement. In this Essay, we challenge this second tenant. Risk-neutrality, we show, implies indifference to accuracy when it comes to the parties’ ultimate objective of maximization, namely their joint surplus. But this does not mean that parties are also indifferent to accuracy in interpretation. On the contrary, whenever accuracy can affect their joint-surplus risk-neutral parties seek to maximize accuracy in interpretation. There are two additional reasons sophisticated parties care about accuracy. Accuracy, or the lack thereof, may entice parties to adopt inefficient terms, and it may also affect the contractual price. Both suggest that accuracy affects the preferences of sophisticated commercial parties. Showing the value of accuracy is the first significant contribution of this Essay. Its second contribution is to harmonize the other considerations affecting the parties' preferences. Where rules of interpretation are considered majoritarian defaults and accuracy is believed to be unimportant, finding the factors that determine the parties' preferences became a fertile ground for research. Drafting costs, litigation costs, settlement costs, contractual uncertainty, market thickness, and types of terms were all offered as factors controlling the parties' preferences. This myriad of sometimes conflicting and often seemingly unrelated factors makes an eventual determination of majoritarian preferences challenging to achieve. We argue that appreciating the value of accuracy can create order in this fragmented picture. A preference for accuracy in interpretation, we show, can also account for existing contracting practices. We illustrate this by using examples of MAC clauses in merger and acquisition contracts, force majeure clauses, acceleration rights in loan agreements, and alternative dispute resolution clauses.

Contracts of Inattention

The standard paradigm of contracting assumes that parties will revise subsequent contracts if a court interpretation of a clause does not reflect their intent. This assumption, however, often does not match behavior—particularly, in boilerplate contracts. We examine the aftermath of an (in)famous 2016 case, Wilmington Savings Fund v. Cash America, to unpack possible reasons for this mismatch between theory and practice. We find evidence of a phenomenon in contracts that involves sophisticated parties who are nevertheless not represented by their own lawyers, lack full awareness of the fine print of the contractual terms, and, having devoted little attention to them, may be eclectic as to their meaning when they enter into these contracts. In these contracts, which we call contracts of inattention, a gap between lawyers’ understanding of a provision and the understanding of market participants is prone to emerge. The potential for such gaps has implications for how courts should interpret contracts of inattention and for how market participants will react to court rulings.

Contracts in the Age of Smart Readers

What does it mean to have machines that can read, explain, and evaluate contracts? Recent advances in machine learning have led to a fundamental breakthrough in machine language models, portending a profound shift in the ability of machines to process text. Such a shift has far-reaching consequences for diverse areas of law, which are predicated on, and justified by, the existence of information barriers. Our object here is to provide a general framework for evaluating the legal and policy implications of employing language models as ‘Smart Readers’—tools that read, analyze, and assess contracts, disclosures, and privacy policies. Synthesizing state-of-the-art developments, we identify four core capabilities of smart readers. Based on real-world examples produced by new machine-learning models, we demonstrate that smart readers can: simplify complex legal language; personalize the contractual presentation to the user’s specific socio-cultural identity; interpret the meaning of contractual terms; and benchmark and rank contracts based on their quality. Nevertheless, the implications of smart readers are more complex than initially meets the eye. While smart readers can overcome traditional information barriers and empower parties, they rely on black-box models that sophisticated parties can exploit. Smart readers can close some of the gaps in access to justice, but they also introduce concerns about contractual bias and discrimination. And even though smart readers can improve term transparency, they might lead judges and policymakers to relax their guard prematurely. The current body of doctrine and scholarship is ill-equipped to address both the prospects and risks of smart reader technology. This Article narrows this gap. It maps the necessary theoretical, policy, and doctrinal adaptations to the age when machines can automate the reading of contracts.

Dealmaking Disrupted: The Unexplored Power of Social Media in Negotiation

AbstractWhile social media has had profound effects in many realms, the theory and practice of negotiation have remained relatively untouched by this potent phenomenon. In this article, we survey existing research in this area and develop a broader framework for understanding the wider roles and effects of social media on negotiation. Through a series of detailed case studies, we explore how social media can drive important negotiations either off the rails or toward beneficial outcomes—and how savvy practitioners can harness this often‐neglected factor to their advantage, or else find themselves outmaneuvered by more digitally sophisticated parties. Applying the lens of the “3D negotiation” approach developed by Lax and Sebenius, we describe a number of potentially decisive roles that social media can play to enhance actions by negotiators “at the table,” with respect to deal design, and “away from the table.” In this 3D context, we show how social media can help negotiators learn about their counterparts (interests, perceptions, relationships, and networks), directly and indirectly influence the parties, mobilize supporters, and neutralize potential opponents. We show that being proactive—both in cultivating digital influence or allies and in building resilience to threats across online information ecosystems—can provide critical advantages for negotiators navigating a hyperconnected world. We develop a preliminary framework to help identify the full range of platforms, tools, and methodologies appropriate for the use of social media in negotiations, including network mapping software and open‐source intelligence techniques. Throughout our analysis, we stress the importance of ethical and privacy considerations.

Unpacking Entire Agreement Clauses: On the (Elusive) Search for Contractually Induced Formalism in Contractual Adjudication

This article examines the extent to which entire agreement clauses (EACs) are enforceable under the Canadian common law of contracts and the extent to which these contractual provisions are effective in promoting contractual certainty. EACs are generally found in commercial agreements between legally sophisticated parties and in contracts of adhesion with inequality of bargaining power between parties. Their purpose is to promote contractual certainty by establishing that the full terms of the contracts are to be found in the document containing the clause. Although the goal of EACs is to promote contractual certainty, their legal significance is far from definitive and their effectiveness is subject to several limitations. On some occasions, courts have given effect to EACs to prevent pre-contractual statements from being legally operative; in others, they have disregarded them and recognized the validity of claims based on statements external to the contract. This paper aims to examine the relevant case law relating to the enforcement of EACs and to assess the overall effectiveness of such clauses as a contractual device for promoting contractual certainty. It is suggested that courts could incrementally improve legal certainty, by more markedly differentiating the legal treatment of EACs found in fully negotiated contracts between sophisticated parties and contracts of adhesion.

Material Adverse Effect Clauses and the COVID-19 Pandemic: How Sophisticated Parties Allocate Risk Contractually

Currently pending in the Delaware Court of Chancery and other courts around the country are numerous cases in which the parties to a public-company merger agreement are disputing whether the target (the company being sold) has suffered a "material adverse effect" (an MAE) because of the COVID-19 pandemic. Tremendous amounts of money are at stake in such cases. In the LVHM-Tiffany transaction, for example, if Tiffany has suffered an MAE, LVHM may terminate the agreement and walk away from the deal; otherwise, it will likely have to close and pay the full $16.6 billion purchase price for a company that, it says, is no longer worth anywhere near that amount. Sophisticated commercial parties allocate between them risks that may materialize during the pendency of the merger through MAE clauses, extremely elaborate contractual provisions that have given rise to more litigation than any other standard provision in public-company merger agreements. This short essay considers how courts will construe MAE clauses in connection with the COVID-19 pandemic and, in so doing, explains more generally how sophisticated parties allocate risks efficiently in order to create value in business combination transactions.

Enforcement in Indonesia: Obtaining a Power of Attorney for Registration of the Award

Indonesia is forecast to become one of the world’s top ten economies by 2030, which will lead to an increase in arbitrations with an Indonesian element. Sophisticated commercial parties and arbitration specialists alike are often unaware of a peculiarity of Indonesian arbitration law which requires that the arbitral tribunal must apply for, and obtain, registration of an arbitral award with the Indonesian courts before the award can be enforced. If a tribunal is not aware of this peculiarity, and becomes functus officio without having obtained registration, the parties risk having an award that cannot be enforced in Indonesia. In this article, we examine the registration requirement and set out steps that an arbitral tribunal must take in order to register an award with the Indonesian courts. We then consider the circumstances in which a tribunal can satisfy the registration requirement by providing parties’ counsel with a Power of Attorney, so that they can register the award on its behalf. We analyse some of the key features that the Power of Attorney should have, as well as the pitfalls parties should be aware of, drawing on aspects of Indonesian law as well as our practical experience. Indonesia, registration, power of attorney, proxy, mandate, mandator, mandatory, tribunal, legalization, notarization

Cybersecurity Regulation in Singapore’s Financial Sector: Protecting FinTech ‘ants’ in a Jungle Full of ‘Elephants’

The financial services sector is a prime target for cyber attackers: for four years in a row, it has been the single most attacked industry globally. It is thus only logical that Singapore’s regulators have identified cybersecurity as the ‘first priority’ on the way towards a Smart Financial Centre and developed bespoke cybersecurity rules. This paper analyses the implications of Singapore’s cybersecurity regulation for domestic FinTech firms and the impact of prospective international legal harmonisation in cyberspace. It argues that the increasing complexity and interconnectedness of the financial services ecosystem increases the risks of contagion and creates new entry points for cyber-attackers. This calls for additional measures to ensure cybersecurity of smaller and less sophisticated parties – FinTech innovators that may lack the resources and expertise to competently implement the ‘default’ cybersecurity rules and fend off advanced cyber-attacks. Internationally, Singapore is in an excellent spot to lead by example in the Asia-Pacific region, through developing and implementing novel regulatory approaches to cybersecurity – but true international harmonisation in this area remains only a distant possibility.

Beyond Notice-and-Comment: The Making of the § 199A Regulations

In 2017, Congress passed major tax legislation at warp speed. After enactment, it fell to the Treasury Department to write regulations clarifying and implementing the new law. To assure democratic legitimacy in making regulations, administrative law provides that an agency must issue a notice of proposed rulemaking, followed by an opportunity for the public to comment (so called “notice and comment”). But, after the 2017 tax overhaul, many sophisticated actors did not wait until the issuance of a notice of proposed rulemaking to comment, instead going to Treasury immediately with comments designed to influence the regulations. In this Article, we examine empirically this phenomenon of post-enactment commenting by studying the making of the Code Section 199A regulations—some of the most important regulations implementing the 2017 tax reform. We examined the inputs into the regulatory process from legislative enactment through the regulations’ finalization. We find extensive engagement by sophisticated parties and industry groups prior to the official notice-and-comment period, which helped shape and anchor rulemaking outcomes. Subsequent comments submitted in the official notice-and-comment period led to technical and other discrete changes, but did not fundamentally change the initial rulemaking approach. Throughout the rulemaking process, there was little direct, public-interested engagement. Our study underscores how unorthodoxies in the legislative process bleed into the rulemaking process. Hasty legislation puts pressure on administrative law notice-and-comment procedures, exacerbating problems of unequal access and transparency already endemic to rulemaking, and potentially compromising democratic legitimacy. We propose solutions that may help ameliorate these problems and improve governance.

Stickiness and Incomplete Contracts

Both economic and legal theory assumes that sophisticated parties routinely write agreements that maximize their joint surplus. But more recent studies analyzing covenants in corporate and government bond agreements have suggested that some contract provisions are highly path dependent and “sticky,” with future covenants only rarely improving upon previous ones. This Article demonstrates that the stickiness hypothesis explains the striking lack of choice-of-forum provisions in commercial contracts, which are absent in the majority of half a million material agreements reported to the SEC. When drafting these contracts, external counsel relies heavily on templates and whether or not a contract includes a forum selection clause is almost exclusively driven by the template that is used to supply the first draft. There is no evidence to suggest that counsel negotiates over the inclusion of choice-of-forum provisions, nor that law firm templates are revised in response to changes in the costs and benefits of incomplete contracting. Together, the findings reveal a distinct apathy with respect to forum choice among transactional lawyers that perpetuates contractual gaps. The persistence of these gaps suggests that default rules can have significantly greater implications for the final allocation of the contractual surplus than is assumed under traditional theory.

Sleeping Giant Contracts

The standard paradigm of contracting assumes that parties will revise subsequent contracts if a court interpretation of a clause does not reflect their intent. This assumption, however, often does not match behavior –- particularly in boilerplate contracts. We examine the aftermath of an (in)famous 2016 case, Wilmington Savings Fund v. Cash America, to unpack possible reasons for this mismatch between theory and practice. We find evidence of a phenomenon in contracts that involve sophisticated parties who are nevertheless not represented by their own lawyers. In these contracts, which we call contracts of inattention, a gap between lawyers’ understanding of a provision and the understanding of market participants is prone to emerge. The potential for such gaps has implications for how courts should interpret contracts of inattention and for how market participants will react to court rulings.

We’ll See You in . . . Court! The lack of arbitration clauses in international commercial contracts

It is a widely held assumption that sophisticated parties prefer arbitration over litigation in international agreements for three reasons. First, the flexibility granted by arbitration would allow parties to write dispute settlement clauses that are tailored to their individual preferences. Second, concerns for home biases would provide incentives to remove the dispute settlement process from either parties’ domestic judicial system. And third, a greater ease of enforcement would cause parties to prefer arbitration over litigation.This study examines the validity of these theoretical claims relying on over half a million contracts filed with the SEC between 2000 and 2016. The results suggest that arbitration clauses are less frequently adopted than clauses referring parties to the domestic court system. If they are included, arbitration clauses serve the specific purpose of strategically reducing the discretion granted to the courts enforcing the decision. Absent serious threats to enforcement, parties prefer courts over arbitration, making arbitration a second-best-alternative to a well-functioning domestic judiciary.

Forum Shopping on the Market for Contracts: When Corporations Arbitrate

It is a widely held assumption that sophisticated parties prefer arbitration over litigation in international agreements for three reasons. First, the flexibility granted by arbitration would allow parties to write dispute settlement clauses that are tailored to their individual preferences. Second, concerns for home biases would provide incentives to remove the dispute settlement process from either parties' domestic judicial system. And third, a greater ease of enforcement would cause parties to prefer arbitration over litigation. This study examines the validity of these theoretical claims, relying on over half a million contracts filed with the SEC between 2000 and 2016. The results suggest that arbitration clauses are less frequently adopted than clauses referring parties to the domestic court system. If they are included, arbitration clauses serve the specific purpose of strategically reducing the discretion granted to the courts enforcing the decision. Absent serious threats to enforcement, parties prefer courts over arbitration, making arbitration a second-best-alternative to a well-functioning domestic judiciary.

Pseudo-Contract & Shared Meaning Analysis

Over the last several decades, courts and legal scholars have struggled with whether or when to consider boilerplate text as contract. Recent attempts to draw all boilerplate text into “contract” seek to end that struggle but have shifted contract law away from its traditional focus on enforcing parties’ actual agreements and common understandings. This has required a series of ad hoc “fixes” to contract law reminiscent of the medieval use of “epicycles” to try to square geocentric theories of planetary motion with recalcitrant observations of a nongeocentric universe. This shift has been transforming the meanings of contract law’s central concepts. We view the shift as an undiagnosed paradigm slip, resulting in a generalized theory of “contract” as a mere assumption of risk that allows private obligations to be created unilaterally without reaching the actual agreements required by core contract law principles. Some now call this new sort of obligation “contract.” But it is pseudo-contract, resembling contract without fulfilling its necessary conditions of validity. The recent paradigm slip into pseudo-contract raises a complex blend of linguistic, factual, conceptual, practical, normative, and doctrinal problems. Under the mantle of “contract,” the problems of pseudo-contract have remained largely hidden. In this Article we expose these problems and develop a more nuanced and coherent method of analysis — shared meaning analysis — that courts and other legal analysts can use to determine when any particular piece of boilerplate text does, or does not, contribute an actual term to a contract. Because facts about language have received insufficient attention in discussions of how boilerplate text may (or may not) contribute to contract meaning, we launch our analysis by developing several seminal insights into the dependence of meaning on social cooperation from the language philosopher Paul Grice. Drawing on his insights into language, we develop a contemporary definition of the shared meaning of a contract (or the “common meaning of the parties”) as that meaning that is most consistent with the presupposition that both parties were using language cooperatively to contract. We then offer a simple conceptual test that courts can use to discern this shared meaning, distinguish contractual from noncontractual uses of boilerplate text, and prevent contract from slipping into pseudo-contract. We pay particular attention to diagnosing deceptive or misleading uses of boilerplate text. Using examples ranging widely from clickwrap consumer contracts to high-end boilerplate contracts between sophisticated parties, we show how shared meaning analysis applies generally to many varieties of contract.