The Moral Hazard of Contract Drafting

Abstract

This Article identifies and examines the principal-agent problem as it arises in the context of contract preparation. Contracts exist in part to help constrain the opportunistic behavior of an economic agent (the promissor) by alleviating information and control asymmetries that manifest between the agent and the principal (the promissee) after promises have been made. The preliminary task of preparing the contract, however, is not viewed as part of the economic agency analysis. This Article suggests that the drafting party should be understood and examined as an economic agent of the non-drafting party with respect to the particular task of preparing the written contract. While preparing the contract on behalf or for the benefit of both parties, the drafting party faces the same moral hazard confronted by all agents, with potentially devastating results. “Repeat players” or parties with superior bargaining power may prepare contracts utilizing the same information and control asymmetries to take advantage of the non-drafting party. The economic agency relationship that exists with respect to contract drafting provides a superior framework for understanding not only the inability of the non-drafting party to control the drafting party but also the differing interests between the parties that motivate the drafting party to act opportunistically in the first place.

Keywords: moral hazard, contract drafting, contract, principal-agent problem, agency costs, monitoring costs, opportunistic behavior