Thursday, May 17, 2018
Deal Structure, a new paper by Cathy Hwang and Matthew Jennejohn, explains how sophisticated parties now structure increasingly complex contracts to achieve contracting’s various goals. The article does an excellent job of explaining how today's corporate contracts differ from the relatively straightforward contracts encountered in most contracts casebooks.
Hwang and Jennejohn explain that parties may be able to structure their deals to nudge courts toward adopting a preferred interpretative approach. Courts facing lengthy, complex contracts must decide whether they want to adopt a textual or contextual approach. Prior research has noted that when parties use standards, they nudge a court toward contextualism—looking outside of the four corners of the contract for interpretive clues. In contrast, rules signal to courts to use a textual approach to interpretation. That pairing—of standards with contextualism and rules with textualism—allows Hwang and Jennejohn to make a further argument: that for this pairing to work, parties need to pay attention to how they structure the provisions within their complex agreements. For instance, if parties intend to circumscribe judicial intervention in an issue with a rule-like provision, they must take care to isolate that provision from others in the agreement using a modular design. In that sense, the structure of a complex agreement can be used to strategically toggle between rules and standards to encourage courts to take a textual or contextual perspective on a dispute depending on the issue.
The article shines by focusing on how parties now structure these sophisticated contracts and how contract structure informs whether a court will take a particular approach. It’s also fun to see the integration of Hwang’s work (which focuses on overlooked aspects of real-world deal contracting, like ancillary agreements and term sheets) and Jennejohn’s work (empirical work on relational contracts, such as alliance agreements). Both have focused, in their individual work, on the front-end stage of contract design, and this collaboration has them taking a step in thinking about contract interpretation.