Sleeping Giant Contracts
28 Pages Posted: 25 Aug 2019 Last revised: 7 Oct 2019
Date Written: August 25, 2019
The standard model of contracting assumes that parties agree to the terms optimal for them. Furthermore, if courts misinterpret this language, parties will correct it in subsequent contracts to ensure that future courts don’t make the same error. Scholars have observed, however, that the foregoing assumptions often do not match behavior–particularly in the world of boilerplate contracts. Why not? We examine the aftermath of a 2017 case, Wilmington Saving v. Cash America, to unpack some of the possible reasons for contract stickiness.
We find evidence of a phenomenon that has not previously been identified as a cause of contract stickiness. Certain contracts involve, on one side, sophisticated actors who are nevertheless not represented by their own lawyers. In these contracts, which we term “sleeping giant contracts,” there is sometimes a gap between lawyers’ understanding of a provision, which is based on their legal expertise and the fine print of a contract, and the understanding of market participants, which can be vague and impressionistic. Interviews with lawyers and investors suggest the presence of such a gap with respect to the provisions at issue in Wilmington Saving v. Cash America. The potential for such gaps in “sleeping giant contract” has implications for the effect and function of courts’ interpretations of boilerplate contract terms.
Keywords: corporate bonds, contract stickiness, Wilmington v. Cash America, make-whole, boilerplate
JEL Classification: K12, K22, G32, Z13
Suggested Citation: Suggested Citation