January 22, 2018 (Monday) 4:20 PM - 6:10 PM
- Harry A. Bigelow Distinguished Service Professor of Law, The University of Chicago, The Law School
The environment in which parties negotiate matters, and contract law, in conjunction with commercial norms, contributes to it. The substantive default rules of contract law set the stage for the bargaining that follows. So too do the various background rules about the obligations each party owes the other about sharing information. In addition, commercial actors can take advantage of legal rules to shape a bargaining environment that suits their needs. Master agreements between parties, even when they are not legally enforceable, often serve as the starting place for negotiations. When an unexpected event appears and the relationship needs to be reforged, existing terms and conditions affect the dynamics of negotiations, again even if, at the time, there is no legally enforceable contract between the parties. This review essay takes stock of what is known about terms of engagement. It focuses first on the legal rules that help create the environment in which the parties bargain with each other. It goes on to explore how parties create their own terms of engagement.
February 5, 2018 (Monday) 4:20 PM - 6:10 PM
- Associate Professor of Law, DePaul University College of Law
Market-based health reform solutions dominate the post-Affordable Care Act landscape. Under these plans, competition is supposed to bring down ballooning prices, and patients are to act more like consumers, refusing lowvalue, medically unnecessary care. Whether one embraces these solutions, one thing is clear: they cannot work absent price transparency—which the U.S. system lacks. To the contrary, the law explicitly enforces open price term contracts between patients and providers.
This Article is the first to synthesize theories of incomplete contracts from traditional law and economics and recent work in the behavioral sciences and to apply these theories to the price transparency problem. It argues that doctrine is out of step with theory, and proposes a contract law solution: an information-forcing penalty default rule. Courts should impose an undesirable default to force the parties to contract around the default. When providers fail to include a price, and it would have been reasonable to do so, courts should fill the gap with a price of $0. Rather than risk not being paid, providers will include a price in the patient contract. Legislative action has been both slow and ineffective in fixing the crucial price transparency problem. At no other time in recent memory has the importance of contract theory been put into such sharp relief and, remarkably, in an area of law that is at the very core of the emerging political economy.
February 19, 2018 (Monday) 4:20 PM - 6:10 PM
- Professor of Law, The George Washington University Law School
“Boilerplate” consists of standardized terms whose meaning is intended to be consistent from one transaction to the next, and these provisions are ubiquitous in contracts and related transactional documents. In their recent Duke Law Journal article, The Black Hole Problem in Commercial Boilerplate, Stephen Choi, Mitu Gulati, and Robert Scott have highlighted the potentially corrosive effect of the legal drafting process on boilerplate provisions. They show how incremental edits to boilerplate pari passu clauses for sovereign debt agreements have led to textual “black holes,” which potentially undercut the standardization purpose, wording, and substantive meaning of these boilerplate provisions. In this article we offer preliminary evidence of a similar textual “black hole” phenomenon taking place in the mergers and acquisitions context.
We show that the mergers and acquisition context epitomizes the problem of unreflective copying of precedent provisions combined with ad hoc edits to individual clauses, which erode the textual integrity and meaning of boilerplate provisions. Each agreement is based on a prior deal precedent, and drafters frequently incorporate sections of the prior deal without sufficient scrutiny about the degree to which idiosyncratic novelties have been introduced in the precedent document that may be inapplicable to the new deal. At the same time, high levels of “editorial churning” take place in the process of transforming each precedent into the current acquisition agreement. The result is a problem of “drafting drift.” Boilerplate provisions live on from deal to deal, yet gradually shed their textual integrity and potentially lose their clear meaning as ad hoc edits are copied from deal to deal and new ad hoc edits are added at each stage.
We show how it is possible to identify the paragraphs of acquisition agreements which serve as boilerplate and to document both the degree and type of textual “drift” of these provisions over multiple generations. We construct “family trees” for boilerplate provisions by tracing the ancestors of each provision backwards in a linear way to each prior precedent. Then we reverse the process to show how ancestor provisions have progeny extending out in multiple directions which become increasingly dissimilar to their original ancestor and to each other over a few generations of acquisition agreements.
Our study shows that incremental changes in boilerplate from one generation to the next foster rapid “speciation” of the terms. Small additions and deletions from boilerplate text lead to significant cumulative effects over multiple generations. We demonstrate that this textual “drift” takes place both within boilerplate that falls within a given chain of precedent, but also even more broadly for boilerplate provisions that have a common ancestor precedent, but evolve separately along different lineages of precedents. Like the Big Bang, the heterogeneity of boilerplate text appears to increase in all directions, which supports an “expanding universe” theory for boilerplate that undermines the textual integrity and the meaning of boilerplate terms. While we will expand on the quantitative and qualitative analysis of the evolution of boilerplate in a future work, the preliminary evidence presented in this paper reinforces the case for the textual “black hole” theory.
March 8, 2018 (Thursday) 12:00 PM - 1:10 PM
- Professor of Law, New York University School of Law
We explore learning and change in standard form contracts. We hypothesize that drafters (sellers) are more likely to revise the terms they offer when they have an opportunity to learn about their value. These opportunities arise only for those types of terms that allow drafters to experience the relative costs and benefits of offering them. Consider a warranty. Sellers offering a warranty in an initial period will be exposed to claims about malfunction by purchasers and will learn whether it is desirable to offer it going forward. When drafters are unable to learn, either because they fail to offer such learning-enabling terms initially, or because the term in question is one where there is no increased opportunity to learn, we expect that such terms will be revised less frequently. Indeed, a reduced opportunity to learn might create contractual “black holes,” where terms that are less likely to be revised and might lose their meaning over time or appear less related to the rest of the contract. Our results support this hypothesis. Using a large sample of changes in consumer standard form contracts over a period of seven years, we find that sellers are more likely to revise terms that offer an opportunity to learn than those that do not. The results suggest that standard form contract terms evolve over time as sellers learn about their benefits, costs, and risks. Our results have normative implications for the design of default rules.
March 26, 2018 (Monday) 4:20 PM - 6:10 PM
- Walter M. Upchurch, Jr. Professor, Fuqua School of Business at Duke University
- Sterling Professor Law, Yale University Law School
This paper considers an understudied contract form: the contract to sell contracts. This contract is used when an “originator” creates a set of contracts with individual obligors, bundles the contracts into a portfolio and sells the portfolio – the contract to sell contracts – to a financial intermediary. Securitization is our principal example. A bank originates consumer mortgages, aggregates them into a portfolio and sells the portfolio to a financial buyer. The portfolio is ultimately traded to public investors. We exhibit the special features of the contract to sell contracts and the consequences of neglecting those features. In particular, damages often scale for a contract to sell goods but seldom scale for a contract to sell contracts. Damages for breach of a quality warranty for one unit thus are the difference between the value of a compliant unit and the value of the delivered unit. Because a warranty breach often reduces the value of every unit in a goods bundle to the same extent, the promisee/buyer of N units can prove its expectation by multiplying the one unit damages by N. In contrast, if the originating bank warrants the quality of individual loans in a loan portfolio, a breach, say by making careless appraisals, may cause some homes in the portfolio to have values that are lower than represented values but not cause other homes to have lower values. Also, buyers in the low value homes may repay or may default at different times in the repayment schedule. Hence, the portfolio buyer – the promisee of the contract to sell contracts – must establish breach, causation and damages individual contract by contract. It would be too costly for the promisee to meet this burden when it buys portfolios with several thousand loans. Nevertheless, the originating banks sold portfolios to the initial financial intermediary buyers under contracts that warranted the quality of each loan in the portfolio. These buyers remade the individuated warranties when they resold the portfolios so that, ultimately, the spvs and trusts purchased large portfolios under contracts that were enforceable as written. The originating banks recognized that they would not be liable for breach (and were not in the event) and so slighted the pre-loan screening of potential borrowers. We identify the reasons why sophisticated parties wrote, and continue to write, inefficient contracts to sell contracts and suggest novel law reforms that respond to those reasons. For example, contract law remedies are individuated; they implicitly assume that damages scale. Hence, contract law does not contain defaults that could regulate the contract to sell contracts. We suggest, among other reforms, that contract law should expand to contain a portfolio default that would permit a buyer to recover the difference between the value a compliant contract portfolio would have had and the value of the portfolio the parties traded.
April 9, 2018 (Monday) 4:20 PM - 6:10 PM
- Professor of Strategic Manaagement and Jeffrey S. Skoll Chair of Technical Innovation and Entrepreneurship, Rotman School of Management, University of Toronto
We interpret recent developments in the field of artificial intelligence (AI) as improvements in prediction technology. In this paper, we explore the consequences of improved prediction in decision-making. To do so, we adapt existing models of decision-making under uncertainty to account for the process of determining payoffs. We label this process of determining the payoffs ‘judgment.’ There is a risky action, whose payoff depends on the state, and a safe action with the same payoff in every state. Judgment is costly; for each potential state, it requires thought on what the payoff might be. Prediction and judgment are complements as long as judgment is not too difficult. We show that in complex environments with a large number of potential states, the effect of improvements in prediction on the importance of judgment depend a great deal on whether the improvements in prediction enable automated decision-making. We discuss the implications of improved prediction in the face of complexity for automation, contracts, and firm boundaries.
April 23, 2018 (Monday) 4:20 PM - 6:10 PM, Jerome Greene Annex
- Assistant Professor of Finance, Graduate School of Business, Stanford University
We model the widespread failure of contracts to share risk using available indices. A borrower and lender can share risk by conditioning repayments on an index. The lender has private information about the ability of this index to measure the true state the borrower would like to hedge. The lender is risk-averse, and thus requires a premium to insure the borrower. The borrower, however, might be paying something for nothing, if the index is a poor measure of the true state. We provide sufficient conditions for this effect to cause the borrower to choose a non-indexed contract instead.