Contract Review: Cognitive Bias, Moral Hazard, and Situational Pressure

9 Ohio St. Entrepren. Bus. L.J. 379 (2015)

Wayne State University Law School Research Paper No. 2014-08

50 Pages Posted: 25 Jul 2014 Last revised: 24 Nov 2015

Eric A. Zacks

Wayne State University Law School

Date Written: July 23, 2014

Abstract

This Article explores the contract drafting and review process of attorneys from a cognitive and social science perspective. Based on an understanding of the behavioral tendencies of individual attorneys as impacted by cognitive bias, moral hazard, and situational pressure, the drafting attorney may be able to secure particular transactional advantages for her client. For example, the anchoring effect, which suggests that individuals are affected by the presence by an initial value position, may explain why drafters should and do include extreme positions in their initial draft. Similarly, time pressure may affect an attorney’s review of a contract, which a drafting attorney can anticipate and exploit to her advantage by increasing contract length and complexity. The drafting attorney can also seek to take advantage of particular moral hazards that the reviewing attorney faces when representing clients, such as when the reviewing attorney is compensated on a per-transaction basis or would like to appease the client and avoid disrupting a transaction. Understanding the cognitive processes and situational influences helps explain or predict particular patterns of contracting behavior. These factors suggest significant limitations in the attorney as an effective tool in checking opportunistic behavior, both prior to and after contract formation, and undermine a positive model of the transactional attorney as a value-adding transaction cost engineer.

Keywords: Contract, Contract Drafting, Contract Review, Cognitive Bias, Moral Hazard, Principal Agent Problem, Situationism

Suggested Citation

Zacks, Eric A., Contract Review: Cognitive Bias, Moral Hazard, and Situational Pressure (July 23, 2014). 9 Ohio St. Entrepren. Bus. L.J. 379 (2015); Wayne State University Law School Research Paper No. 2014-08. Available at SSRN: https://ssrn.com/abstract=2470625

Eric A. Zacks (Contact Author)

Wayne State University Law School ( email )

471 West Palmer
Office 3261
Detroit, MI 48202
United States

HOME PAGE: http://www.law.wayne.edu/faculty/bio.php?id=74920

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