Other People's Contracts

51 Pages Posted: 29 Mar 2015

See all articles by Aditi Bagchi

Aditi Bagchi

Fordham University School of Law

Date Written: March 27, 2015

Abstract

Contract law does not adequately account for the harms that we can inflict on third parties by joint agreement. Some terms are prohibited, and some third party interests are protected by independent causes of action. But a wide variety of legal interests may be burdened by other people’s contracts. This Article proposes that ambiguous contracts be construed to avoid harming third parties.

In some contexts, courts already protect third party losers in this way. The formal rule that ambiguous terms are to be construed “reasonably” accommodates this practice but does not invite it. Prevailing contract theory is affirmatively hostile to it. This Article locates the role of contract law in mitigating concentrated negative externalities within a broader institutional division of labor. Identifying the function of contract law helps justify an explicit interpretive principle that disfavors terms injurious to third parties. The Article applies the proposed principle to merger agreements in light of their effects on shareholders, creditors, employees and consumers.

Keywords: negative externalities, contract interpretation, ambiguity, concentrated externalities

JEL Classification: K12

Suggested Citation

Bagchi, Aditi, Other People's Contracts (March 27, 2015). Yale Journal on Regulation, Forthcoming; Fordham Law Legal Studies Research Paper No. 2586136. Available at SSRN: https://ssrn.com/abstract=2586136

Aditi Bagchi (Contact Author)

Fordham University School of Law ( email )

140 West 62nd Street
New York, NY 10023
United States

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