What a Form Knows

Last year, we posted about Consequential Damages: Alien Vomit or Intelligent Design (Alien Vomit), by Tara Chowdhury, Faith Chudkowski, Amanda Dixon, Rishabh Sharma, Madison Sherrill, Hadar Tanne, Stephen J. Choi, and Mitu Gulati (the Authors) now published in the Washington Law Review. One of the most intelligent of intelligent designers, Glenn D. West, wrote a Response, also published in the Washington Law Review. There has now been a second exchange, forthcoming in the Miami Law Review, and so I would like to help readers catch up on the conversation.

Image by DALL-E

To recap, in Alien Vomit, the Authors address practitioners’ confusion over the meaning of “consequential damages.” The confusion might be the product of boilerplate language borrowed from a different contractual context. While the language might have made sense with respect to the original transaction, its application is unclear in the new context. This is the dread “alien vomit.” The Authors also present an alternative view. Skilled practitioners draft bespoke damages provisions because they do not like the default allocation of risk provided by Hadley v. Baxandale and its progeny. This is the “intelligent design” approach. As discussed here and here, Victor Goldberg has identified additional problems that arise when courts ignore such careful allocations of risk in favor of default rules that the parties sought to evade.

Mr. West’s Response to Alien Vomit begins with a lovely explanation for why “alien vomit,” a term used to describe the brainless remnants of sea squirts, is such a great analogy. Alien vomit is originally a product of intelligent design, but transactional lawyers follow the herd and make use of boilerplate language in ways that deviate from both design and intelligence. And there you have Mr. West’s critique: the Authors introduce a false dichotomy. Boilerplate provisions are both alien vomit and intelligent design. Transactional lawyers don’t have time to reinvent the wheel, and so they tinker quite intelligently with boilerplate language. Some borrowings render the clause unworkable and some tinkering can also go awry. Both processes can produce defects akin to alien vomit.

The Authors thus mistake language that is the product of negotiations among sophisticated parties for alien vomit. Mr. West (left) then parses some language that the Authors treated as alien vomit and explains what it was, however inartfully, trying to achieve. Mr. West agrees with the Authors, however, that things have improved since he started writing about the problem of excluded loss provisions in 2008. Others have now taken up Mr. West’s call for more care and precision in the drafting of such provisions. At Mr. West’s level, the world of M&A lawyers is a small clerisy, and it seems that a small group of evangelists can really move mountains. In Mr. West’s review of 58 recent M&A deals, he finds some alien vomit, but a great deal more simplicity and clarity. Many deals get by without excluded loss provisions. Many others exclude only punitive or exemplary damages. So progress is being made. It has been slow, and Mr. West closes with a plea to accelerate the process by offering courses in M&A drafting that specifically address the dangers attendant to careless adoption of boilerplate language.

Continuing the exchange, Tara Chowdhury, Faith Chudkowski, and Mitu Gulati (CC&G) have posted The Form Knows Best, as of this writing a rising star on both Top Ten lists, and forthcoming in the Miami Law Review. It draws on the research that informs a book that Mitu Gulati has co-authored with Robert Scott and Stephen Choi, forthcoming from Oxford University Press, “The Hazardous World of Contract: Lawyers and Their Landmines.” Tara Chowdhury and Faith Chudkowski provided research assistance for parts of the book as well.

I summarize CC&G’s points in the new article as follows:

• We teach student to think that precise drafting matters more than it does in the transactional world, where deals seldom turn on legal niceties and lawyers’ time is better devoted to things more likely to have an impact than a missing Oxford comma;
• Transactional lawyers do not consult case law, preferring instead to model contractual language on prior contracts;
• Contracts provisions have a history, and knowing that history can matter, because each tweak of an oft-used provision has a story to tell about some anticipated or actual harm that the tweak is designed to avoid;
• Contract terms are rarely bargained for; they are generated, often with the assistance of programs;
• Deal terms can be a product of custom and inertia;
• Because of the time pressure under which deals are negotiated, there is no time to customize standard contractual language.

Glenn West’s response, The Form Doesn’t Know Anything, will also appear in the Miami Law Review. Mr. West does not regard any of the “myths” that CC&G have identified as myths within the world of M&A lawyering. This is no surprise, as the CC&G are contrasting the transactional world from the world of the legal academy. Mr. West is attuned to differences between transactional lawyers who do M&A and those who handle sovereign bonds or leveraged loans. M&A lawyers, he argues, pay more attention to case law that might expose standard language to challenge, as they can be more flexible in their approach. Unlike bonds and loans, M&A transactions do not require absolute uniformity.

It is somewhat cheering to have the experienced transactional lawyer responding to the academic by stressing the need for lawyers to know the relevant caselaw. Mr. West concedes that transactional lawyers may not take the time to read the cases. It’s not an efficient way for them to get the information they need, but they do need to be up-to-date on developments in the relevant caselaw. They just get the information from CLEs or secondary sources. “After all,” Mr. West chides, “the form doesn’t know anything, but the transactional lawyer must.”

M&A lawyers use boilerplate forms, but they do so because the deal conditions (e.g., the partner running the deal or opposing counsel or a client) dictate that a particular form be used. The lawyers may have the opportunity to make up a form contract, but in an auction context, they may do so selectively so as to avoid giving the impression that the deal will be difficult to negotiate. Mr. West acknowledges the pull of forms containing “market terms” — that is, terms that are unlikely to be challenged.  Yet he cautions that because each deal is different, what is “market” with respect to one transaction might be problematic in another. He emphasizes the need for transactional attorneys to learn the market and also the limitations of the market.

The exchange is intriguing and illuminating. I shared the following thoughts with Mitu Gulati (right) when he shared a draft of The Form Knows Best with me.

Because contracts are about private legislation, it makes perfect sense that transactional lawyers are more interested in precedential forms than in precedential cases. But one theme I took from Vic Goldberg’s work (noted above) is that courts may well ignore the niceties of such private legislation. Even if the parties carefully draft around default damages schemes, the courts may impose the defaults. As Mr. West notes, transactional lawyers thus operate in ignorance of case law at their peril. 

It may be that the distance between the official story and the unofficial story is not as stark as CC&G paint it to be. I teach Judge Posner’s opinion in Morin Building Products Company, Inc. v. Baystone Construction, Inc.  There, the parties used a boilerplate provision with a condition of satisfaction that spoke of “artistic effects” when the construction in question had to do with a utilitarian wall. Judge Posner reasoned, correctly in my view, that he need not leave the construction company at the mercy of its counterparty’s aesthetic whims. The parties had just unthinkingly imported some “alien vomit” from a different kind of contract. The language about “artistic effect” did not reflect their actual intentions. So I think the official story and the unofficial story may converge. History can matter, at least if the judge is someone of Judge Posner’s discernment.

More generally, the exchange set me thinking about the movement for plain-language contracting. We have entertained guest posts on the subject here before, e.g. here and here. Advocates for plain-language contracting complain about the naïve belief that “magic words” will protect a provision from legal challenge and blame the attorneys for their attachment to boilerplate language. I am no advocate of complexity for complexity’s sake, but I don’t regard plain language as a solution to the most important problems that arise from form contracting, as I discuss here. I was happy to read similar thoughts from the estimable Shawn Bayern, commenting on the work of Yonathan Arbel. But the exchange under discussion here suggests that it is often clients, not lawyers, who insist on retaining “magic words.” They do so not because they believe in magic but because they just want to get the deal done. The language has never caused them problems before, so it seems a safer bet than trying to come up with new language, which might cause a deal-cratering fight.

CC&G also strikes me as making a unique contribution to relational contracts theory. Traditionally, relational contracts theory focuses on the relations between or among the parties. The exchange discussed here suggests that there is also an important relationship involving the transactional attorneys and the drafting norms and practices of their jurisdiction. In my litigation career and in my teaching, I have mostly avoided working with the sorts of highly complex transactions that arise in the M&A, sovereign debt, or leveraged lending contexts. Still, there is common ground in the disconnect between the law on the books and the law in action in both types of contracts. Most situations are handled through business norms rather than through litigation. The odds of any particular deal leading to litigation are small enough that it is not always worth people’s time to scrutinize a contract’s provisions. It seems odd, given the size of the transactions at issue here, but I imagine the risk ratio of litigation versus costs of cratering the deal through over-lawyering end up the same as they are in the sorts of face-to-face transactions that I mostly litigated and now teach.

Thanks to the multiple authors on the one side and to Glenn West on the other for this highly engaging and edifying exchange!