ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Friday, September 4, 2009

Contract Law, Party Sophistication and the New Formalism [File this under: Self-Promotion]

While I took a little break from blogging about the contract foibles of faded celebrities, I managed to get out a draft of "Contract Law, Party Sophistication and the New Formalism."  Coming to a theater near you, courtesy of the Missouri Law Review.  For now, I welcome your thoughts and feedback.  Here's the abstract:

With increasing frequency, courts are mentioning party sophistication as relevant to whether a contract has been formed, whether a contract is enforceable, how the contract should be interpreted, and even, in some instances, the determination of an appropriate remedy.  Sophisticated parties are held to a different set of rules, grounded in freedom of contract.  It is presumed that a sophisticated party was aware of what to bargain for and read (or should have read) and understood (or should have understood) the terms of a written agreement. 

But, just what do courts mean when they call a contracting party “sophisticated”?

"Sophistication” is a slippery word.  Courts and scholars have not established instructive criteria, and often presume that parties to a commercial transaction are sophisticated.  Widely cited and highly regarded works in the area of contract law have stated that their theories only apply to sophisticated parties, without a serious attempt to explain who falls into that category.  Likewise, all too often, courts label parties “sophisticated” without any analysis.


Part I of this Article positions the discussion in theoretical context, and describes the significance of party sophistication as a compromise between formalist and realist concerns.  Part II collects examples of contexts in which courts have used party sophistication as a tool to organize the world of contracting parties and, with that, the applicable legal principles.  For sophisticated parties, in answering a wide array of contracts questions, courts employ a formalist approach.  Part III begins descriptively and addresses the general lack of meaningful assessment of party sophistication.  Drawing upon review of hundreds of cases, Part III details the attributes common among parties that courts have deemed sophisticated, and begins to draw the contours of a standard for sophistication.

Finally, Part IV presents the central normative claim of this Article: courts should take a more deliberate and thoughtful approach in addressing party sophistication.  Drawing upon the extensive review of case law, Part IV provides a definition of sophistication that asks whether the contracting parties are repeat players in the relevant market for the transaction.  The proposed standard would require courts to do a contextual, factual assessment of the comparative knowledge and experience of the parties as it relates to the nature of the transaction.  As it stands now, however, in the absence of a meaningful definition of sophistication, courts are not actually addressing the context of the deal.  Rather, they are simply reciting well-worn clichés about “sophisticated parties dealing at arms’ length.”

You can download the paper here.

[Meredith R. Miller]

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