Contracts of Inattention

43 Pages Posted: 25 Aug 2019 Last revised: 11 May 2020

See all articles by G. Mitu Gulati

G. Mitu Gulati

Duke University School of Law

Marcel Kahan

New York University School of Law; European Corporate Governance Institute

Date Written: May 10, 2020

Abstract

The standard paradigm of contracting assumes that parties will revise subsequent contracts if a court interpretation of a clause does not reflect their intent. This assumption, however, often does not match behavior –- particularly in boilerplate contracts. We examine the aftermath of an (in)famous 2016 case, Wilmington Savings Fund v. Cash America, to unpack possible reasons for this mismatch between theory and practice. We find evidence of a phenomenon in contracts that involve sophisticated parties who are nevertheless not represented by their own lawyers. In these contracts, which we call contracts of inattention, a gap between lawyers’ understanding of a provision and the understanding of market participants is prone to emerge. The potential for such gaps has implications for how courts should interpret contracts of inattention and for how market participants will react to court rulings.

Keywords: corporate bonds, contract stickiness, Wilmington v. Cash America, make-whole, boilerplate

JEL Classification: K12, K22, G32, Z13

Suggested Citation

Gulati, Gaurang Mitu and Kahan, Marcel, Contracts of Inattention (May 10, 2020). Duke Law School Public Law & Legal Theory Series No. 2019-62; NYU Law and Economics Research Paper No. 19-35. Available at SSRN: https://ssrn.com/abstract=3442355 or http://dx.doi.org/10.2139/ssrn.3442355

Gaurang Mitu Gulati (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Marcel Kahan

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
212-998-6268 (Phone)
212-995-4341 (Fax)

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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