Journal Article

Systemic Risk of Contract

Kastner, Tal

2022

Overview

Complexity and uncertainty define our world, now more than ever. Scholars and practitioners have celebrated modular contract design as an especially effective tool to manage these challenges. Modularity divides complex structures into relatively discrete, independent components with simple connections. The benefits of this fundamental drafting approach are intuitive. Lawyers divide contracts into sections and provisions to make them easier to understand and reduce uncertainty. Dealmakers constructing complex transactions use portable agreements as building blocks to reduce drafting costs and enable innovation. Little attention, however, has been paid to the risks introduced by modularity in contracts. This Article demonstrates how this touted and now-ingrained drafting approach introduces new forms of the very costs it seeks to minimize. The Article is the first to identify the types of risks introduced by modularity at the intra-contract level, among provisions, and the inter-contract level, among agreements that constitute deals. The Article groups these risks into three categories: First, \"intertextualism,\" which occurs when the operation of a discrete, or even standard, provision seems clear in isolation but is made uncertain by the presence of other discrete terms. Second, \"modular drift,\" which occurs when drafters transplant provisions specific to one transactional context into another transactional context, introducing uncertainty. Third, \"latent triggers,\" which occur when compartmentalization invites error or obscures a nuance in the interaction among discrete provisions. The Article urges courts to articulate distinctions between contract types and offers tools to contract drafters to mitigate uncertainty. It also makes a theoretical contribution with implications for contract doctrine and contract innovation. It shows how modularity can disrupt seemingly stable, standardized provisions, diminishing their certainty and imposing information costs on future drafters who seek to rely on precedent provisions or agreements. It thereby identifies a critical dimension of contract risk that complicates the balancing of standardization and private choice in contracts.

• Publisher: Brigham Young University, Reuben Clark Law School
• Subject: Agreements / Employment / Law / Modularity / Provisions / System theory