Contract Hazards

"There is a paradox in commercial contracting: Standardization makes possible production efficiencies but at the cost of contracts that contain "landmines" - loopholes that can be used strategically to gain litigation advantage when the transaction collapses. When standard contracts are traded in large liquid markets, the landmines in these contracts can become exponentially difficult to modify in order to keep the contract "market" and allow for a quick resale - producing a phenomenon the book labels "contract as artifact." Supported by interviews with over 200 market experts and empirical examination of multiple commercial markets, the book's claim is that landmines are ubiquitous in all markets in which transactions use standardized terms. Yet all markets are not the same. In the M&A market, there is no active secondary market to transform standard form contracts into artifacts. Here, problem contracts are more readily identified and repaired by landmine entrepreneurs. Landmines are more persistent and costly in large liquid markets such as sovereign debt and leveraged loans. The result is substantial costs incurred in disputes over the restructuring of bonds and creditor priorities, costs that could be avoided by the ex ante repair of landmine-infected contracts. Here, we see the main themes in the book realized: guru lawyers propose new ways of exploiting landmines in the standard contract while novice drafters can only insert marginal provisions that fail to deter these efforts. In the absence of dramatic shocks to the market, deeply embedded terms in the artifact contract repel major changes to the documentation"-- Provided by publisher.