The Architecture of Contract Innovation

74 Pages Posted: 8 Dec 2017 Last revised: 10 Jan 2018

See all articles by Matthew Jennejohn

Matthew Jennejohn

Brigham Young University - J. Reuben Clark Law School

Date Written: December 3, 2017

Abstract

Contract law and the formal models of contract economics assume that agreements are fully customized. On the other hand, recent legal research highlights the role standardized terms play in contract design. Those lines of research overlook an important class of contracts between those extremes. Many contracts, such as the merger agreements studied here, are complex combinations of customized and standardized terms, and thereby achieve economies of both scale and scope. Such contracts are “mass customized,” to borrow a term from engineering research.

This Article introduces a theoretical framework for understanding how mass customization of such complex agreements is achieved. It adds to recent scholarship that applies modularity theory to the design of complex agreements by introducing an alternative approach — flexible specialization. It then introduces empirical methods for studying the structure of complex agreements. Using hand-collected data from samples of public company merger agreements and of the teams of deal lawyers that designed them, this Article presents the results of a preliminary empirical study that finds that the architecture of mass customized contracts reflects the logic of flexible specialization rather than modular design. The picture of contract design that emerges is of agreements built upon a flexible architecture provided by a dynamic cluster of experts, more similar to the industrial districts of Emilia-Romagna in Italy than Ford Motor Company’s fabled Highland Park assembly line.

Those preliminary results suggest important implications for doctrine, policy, and research. In regard to doctrine, this Article adds a missing dimension to recent attempts to articulate a non-unitary theory of American contract law. With respect to policy, evidence that flexible specialization underpins the infrastructure of the M&A market challenges deterministic accounts of the legal industry’s transformation, and illuminates the overlooked trade-offs presented by recent arguments to further standardize complex contracting. Finally, in regard to research, this Article provides a basis for much needed theoretical and empirical work on the interaction effects between governance mechanisms within an agreement.

Suggested Citation

Jennejohn, Matthew, The Architecture of Contract Innovation (December 3, 2017). Boston College Law Review, Forthcoming; BYU Law Research Paper No. 17-33. Available at SSRN: https://ssrn.com/abstract=3081946

Matthew Jennejohn (Contact Author)

Brigham Young University - J. Reuben Clark Law School ( email )

436 JRCB
Brigham Young University
Provo, UT 84602
United States
9175093028 (Phone)

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