Other People's Contracts
51 Pages Posted: 29 Mar 2015
Date Written: March 27, 2015
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: Suggested Citation