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

41 Pages Posted: 28 Oct 2008 Last revised: 30 Apr 2009

See all articles by Claire A. Hill

Claire A. Hill

University of Minnesota Law School

Date Written: October 23, 2008

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.

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

JEL Classification: G34, K12, K41, L14

Suggested Citation

Hill, Claire Ariane, 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: https://ssrn.com/abstract=1288689

Claire Ariane Hill (Contact Author)

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-624-6521 (Phone)

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