119 Yale L.J. 848 (2010).
The unprecedented and unanticipated economic and financial shocks of the past couple of years have led parties to look for contractual escapes from deals. As the current crisis works its way through our economic system, however, attention will be shifted from the collapsed deals to the design of future transactions. The vague language of past agreements has fueled disputes and threatened costly and uncertain litigation. Should future parties, in corporate acquisition deals and other commercial contracts, inject greater precision in their agreements? There are many proponents of this advice. However, we lack a theoretical framework for setting out the costs and benefits of vague and precise provisions. In this Article, we provide such a framework in order to improve awareness of the strategic use of vagueness in contracting.
The conventional rules-standards analysis suggests that vague terms are justified when the expected larger litigation costs in enforcing standards are outweighed by the lower costs of drafting. In acquisition agreements, this would suggest that vague MAC clauses yield benefits only by reducing front-end drafting costs. Yet, some proxies for material adverse change, such as quantitative thresholds in stock price, revenues, or accounting earnings, are easy to draft and can be verified at low cost. They are usually noisy proxies, however, and therefore are not perfect.
We demonstrate that litigation costs, when properly harnessed, can in fact improve contracting by operating as a screen on the seller’s decision to sue. We review three possible goals of MAC clauses: (a) to provide efficient incentives for investment and precautions against future contingencies by the seller between the time of the agreement and closing; (b) to allow the seller to better signal its private information to the acquirer at the time of contracting; and (c) to enable the seller to better signal private information at the time of closing, in order to promote ex post efficiency in terminating or executing the acquisition. We show that, in achieving these goals, vague provisions may work better than more precise and less costly proxies.
119 Yale L.J. 926 (2010).
Contract interpretation remains the largest single source of contract litigation between business firms. In part this is because contract interpretation issues are difficult, but it also reflects a deep divide between textualist and contextualist theories of interpretation. While a strong majority of U.S. courts continue to follow the traditional, “formalist” approach to contract interpretation, some courts and most commentators prefer the “contextualist” interpretive principles that are reflected in the Uniform Commercial Code and the Second Restatement. In 2003, we published an article that set out a formalist theory of contract interpretation to govern agreements between business firms. We argued that, although accurate judicial interpretations are desirable, accurate interpretations are costly for parties and courts to obtain. Thus, any socially desirable interpretive rule would trade off accuracy against contract-writing and adjudication cost. This tradeoff implies that risk neutral business parties will commonly prefer judicial interpretations to be made on a limited evidentiary base, the most important element of which is the contract itself. But importantly, we also argued that commercial parties’ preferences along this dimension will be heterogeneous. Thus, any interpretation rules the state adopts should be defaults and the state should defer to the expressed preferences of particular parties regarding interpretation. This Review clarifies and extends these arguments, which have prompted a number of antiformalist responses. We respond to our critics and summarize empirical data that support our theory. Although much academic commentary suggests otherwise, both the available evidence and prevailing judicial practice support the claim that sophisticated parties prefer textualist interpretation. Sophisticated commercial parties incur costs to cast obligations expressly in written and unconditional forms to permit a party to stand on its rights under the written contract, to improve party incentives to invest in the deal, and to reduce litigation costs. Contextualist courts and commentators prefer to withdraw from parties the ability to use these instruments for contract design. The contextualists, however, cannot justify rules that so significantly restrict contractual freedom in the name of contractual freedom.
119 Yale L.J. 966 (2010).
The signing of the U.S. Constitution is traditionally understood as the closing act of the Constitutional Convention. This Note provides an alternative account, one that understands the Constitution’s signing as the opening act of the ratification campaign that followed in the Convention’s wake. To begin, the Note explains the signatures’ ambiguous form as the product of political maneuvering designed to win support for the Constitution during ratification. The Note then hypothesizes two ways in which the signatures may have helped to secure this support: (1) by highlighting pro-Constitution selling-points likely to resonate with the ratifying public; and (2) by limiting the ability of the signers to distance themselves from the Constitution once ratification battles had begun. Finally, the Note identifies a few respects in which this ratification-centered account of the Constitution’s signing may influence our modern-day understanding of the document.
119 Yale L.J. 1012 (2010).
This Note argues that immigration courts have served and continue to serve as important sites for the perpetuation of national identity myths. By focusing on a subset of cases called “cancellation of removal,” I examine the functional criteria by which immigrants are granted exemption from deportation. Despite ostensibly neutral statutory standards, immigration courts give legal sanction and shape to nostalgic, idealized, and exclusionary images of American identity. I connect this modern trend to the historical role of immigration law in constructing and amplifying narratives of identity and subordination—a pattern which has been obscured in scholarship by an overemphasis on the civil rights achievements of mid-twentieth-century immigration reforms.
119 Yale L.J. 1060 (2010).
This Note attempts to reroute a burgeoning area of campaign finance scholarship and reform. Though many previous proposals have enshrined liberty or equality as the sole animating value to pursue through doctrinal and political means, few have considered the impact of campaign finance regulation on citizen participation. Those that have proposed participation as a goal often remain tied to unworkable or self-defeating notions of equality. In building an alternative model of maximizing participation, this Note rejects the premise that direct political action such as volunteering embodies a superior form of participation to contributions, but recognizes the externalities that the latter form may produce. It proposes a new mechanism for reform: a cap and trade policy in which citizens can increase their rights to contribute to political candidates or parties by purchasing permits from other contributors. Derived from proposals to regulate pollution in environmental economics, this mechanism serves as a helpful alternative to ineffective and inefficient contribution limits.