Contracts of Inattention
43 Pages Posted: 25 Aug 2019 Last revised: 11 May 2020
Date Written: May 10, 2020
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: Suggested Citation