Contractual Arbitrage

30 Pages Posted: 14 Jun 2016 Last revised: 9 Jan 2017

See all articles by Stephen J. Choi

Stephen J. Choi

New York University School of Law

G. Mitu Gulati

Duke University School of Law

Robert E. Scott

Columbia University - Law School

Multiple version iconThere are 2 versions of this paper

Date Written: January 7, 2017

Abstract

Contracts are inevitably incomplete. And standard-form or boilerplate commercial contracts are especially likely to be incomplete because they are approximations; they are not tailored to the needs of particular deals. Not only do these contracts contain gaps but, in an attempt to reduce incompleteness, they often contain clauses with vague or ambiguous terms. Terms with indeterminate meaning present opportunities for strategic behavior well after a contract has been concluded. This linguistic uncertainty in standard form commercial contracts creates an opportunity for “contractual arbitrage”: parties may argue, ex post, that the uncertainties in expression mean something that the contracting parties, ex ante, didn’t contemplate. We argue that the scope for contractual arbitrage is a direct function of the techniques that courts use to resolve ambiguities in boilerplate language. Using the much discussed case of NML v. Argentina, we show how traditional contract doctrine, which uses a model of interpretation that essentially treats all contracts as finely tailored, can produce a fertile setting for the growth of contractual arbitrage in standard form commercial contracting when courts give indeterminate terms idiosyncratic meaning. When this practice occurs in contexts where individual parties are reluctant due to collective action problems to revise boilerplate terms that are given idiosyncratic meaning, the continued use of the terms can lead to a dramatic increase in social costs.

Keywords: contracts, contractual arbitrage, contract doctrine

Suggested Citation

Choi, Stephen J. and Gulati, Gaurang Mitu and Scott, Robert E., Contractual Arbitrage (January 7, 2017). Oxford Handbook of International Governance (2017); Columbia Public Law Research Paper No. 14-515; Columbia Law and Economics Working Paper No. 537. Available at SSRN: https://ssrn.com/abstract=2795264

Stephen J. Choi (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Gaurang Mitu Gulati

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Robert E. Scott

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-0072 (Phone)

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