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Bargaining in the Shadow of the Lawsuit: A Social Norms Theory of Incomplete Contracts


Claire A. Hill


University of Minnesota, Twin Cities - School of Law

October 23, 2008

Deleware Journal of Corporate Law (DJCL), Vol. 34, No. 1, 2009
Minnesota Legal Studies Research Paper No. 08-46

Abstract:     
Complex business contracts are notoriously difficult to write and read. Certainly, when litigation arises, courts scarcely have an easy time interpreting them. Indeed, contracts don't look at all as though they are written to tell a court what the parties want. Why can't smart, well-motivated lawyers do a better job? My article argues that they rationally don't try. I argue for a view of contracting in which parties aren't principally trying to set forth an agreement for a court to enforce. Rather, by leaving inartful language and ambiguity in the agreement, parties are bonding themselves not to seek precipitous recourse to litigation. The agreement entered into provides each party with grounds to bring a lawsuit if it so desires. Thus, if one party sues, the other party will virtually always have grounds to countersue. The complex transacting community has a norm against litigation in any event; bonding encourages and bolsters this norm, as well as norms of appropriate conduct throughout the contracting relationship. The contracting process, and the contract that results, thus serves importantly to create the parties' relationship and to set the stage for dispute-resolution consistent with preserving the relationship, as well as to keep available the backstop of enforcement if needed.

Number of Pages in PDF File: 41

Keywords: incomplete contracts, norms, Delaware, Journal, Corporate, Law, complex, business, contract, contracts

JEL Classification: G34, K12, K41, L14

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Date posted: October 28, 2008 ; Last revised: April 30, 2009

Suggested Citation

Hill, Claire A., Bargaining in the Shadow of the Lawsuit: A Social Norms Theory of Incomplete Contracts (October 23, 2008). Deleware Journal of Corporate Law (DJCL), Vol. 34, No. 1, 2009; Minnesota Legal Studies Research Paper No. 08-46. Available at SSRN: http://ssrn.com/abstract=1288689

Contact Information

Claire Ariane Hill (Contact Author)
University of Minnesota, Twin Cities - School of Law ( email )
229 19th Avenue South
Minneapolis, MN 55455
United States
612-624-6521 (Phone)
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