The strategy of boilerplate.

• Author: Ahdieh, Robert B.
• Position: Boilerplate: Foundations of Market Contracts Symposium

TABLE OF CONTENTS INTRODUCTION I. CONFLICT, COORDINATION, AND COMMUNICATION IN BARGAINING II. THE SIGNALING FUNCTIONS OF BOILERPLATE A. Signaling Character 1. Affirmative Signals 2. Responsive Signals B. Signaling Group Identity III. THE COORDINATION FUNCTIONS OF BOILERPLATE A. Conflict and Coordination in Bargaining B. The Focal Point of Boilerplate C. Boilerplate in Explicit Bargaining D. Boilerplate in Tacit Bargaining IV. THE IMPLICATIONS OF STRATEGIC BOILERPLATE A. Boilerplate and Change B. Rethinking Bargaining Skill C. The Tyranny of Big Concessions D. Bargaining and Adhesion in a Strategic World E. The Missing Focal Points in Law CONCLUSION INTRODUCTION

Precedent seems to exercise an influence that greatly exceeds its logical importance or legal force.... Sometimes, to be sure, there is a reason for a measure of uniformity, and sometimes there is enough similarity in the circumstances to explain similar outcomes; but more often it seems that there is simply no heart left in the bargaining when it takes place under the shadow of some dramatic and conspicuous precedent. (1)

That boilerplate is pervasive is hardly surprising. In a variety of ways, standardized terms in day-to-day contracts serve an essential cost-saving function. By this measure, one might expect less frequent reliance on boilerplate in high-value contracts among sophisticated parties. Yet standard terms would appear to be no less widespread in contracts among the sophisticated. Notwithstanding their representation by able counsel, charged to craft comprehensive and detailed, but also particularized, contracts, such parties will commonly conclude agreements comprised heavily of traditional terms--contracting norms of a sort--rather than terms tailored to the distinct features of their particular bargain. (2)

Examples of seemingly suboptimal but persistent contracting norms--the choice of standard contract terms over Pareto preferred tailored ones--are abundant. Several scholars have highlighted the longstanding inclusion of unanimous action clauses in sovereign debt contracts, notwithstanding the widespread perception of such terms as inefficient. (3) To similar effect, Michael Klausner and Marcel Kahan have pointed to the standard put-at-par remedy offered in event risk covenants, as well as the use of a standardized rating decline trigger, as suboptimal technologies. (4) Bill Bratton, finally, has noted the curious absence of business covenants restricting the creation and offering of certain new classes of preferred stock. (5)

Why do such standard terms--a species of boilerplate--persist notwithstanding the ready opportunity of sophisticated parties to abandon them in favor of tailored terms more suited to their particular circumstances? Two explanations have most commonly been offered. To begin with, reliance on standard terms may minimize the transaction costs of drafting and negotiating contract terms. Yet the representation of sophisticated parties by sophisticated counsel arguably limits the significance of additional drafting or negotiation costs and potentially enhances the returns on tailoring. (6) When a sophisticated party is engaged in complex contracting with another sophisticated party, thus, the transaction costs of tailoring any given term may be quite small as measured against the cost of contracting generally. Complex contracts among such parties, meanwhile, are more likely to constitute particularized transactions, maximizing the return on additional negotiation and draftsmanship.

An alternative model, developed by Michael Klausner and others, (7) posits that network effects in the choice of contract terms may favor reliance on widespread norms. Among sophisticated parties, however, potential network inefficiencies may be readily remedied through internalization of the positive externalities at work. Such parties have the resources necessary to finance the introduction of alternative networks of contract terms or shifts to available alternatives. (8) Perhaps for this reason, competing networks of boilerplate terms can be found within markets populated by sophisticated parties. (9) With the availability of such an alternative, in turn, network effects necessarily constitute a more limited barrier to deviations from the prevailing standard. (10)

While transaction-cost and network-effect theories surely offer some explanation for sophisticated parties' reliance on conventional usages or terms, further attention to this pattern is in order. (11) Boilerplate may serve additional functions in bargaining among sophisticated parties--and perhaps even in contracting generally--than the above models suggest. (12) Specifically, I would supplement existing transaction-cost and network-effect theories with what I will term a "strategic" theory of boilerplate.

A strategic conception of boilerplate begins with a sense of bargaining as characterized by both coordination and conflict. Thinking about bargaining--whether in contracts or elsewhere--is often oriented to the dimensions of conflict between the parties. This is hardly surprising, given how much of what is interesting about the interaction of bargaining parties hinges on the divergences in their preferences, payoffs, and resulting strategies. In point of fact, however, the essential dynamic in bargaining is one of coordination. Contrary to the rhetoric sometimes used to describe bargaining, the ultimate goal is not to win but to agree. Agree on one's preferred terms, no doubt, but agree nonetheless. (13)

Given the resulting mix of coordination and conflict in bargaining, it is necessary to think carefully about the nature of communication in contract negotiations. Although bargaining is--at some level--synonymous with communication, direct communication may not be the most effective tool in bargaining. Given a dimension of conflict, negotiating parties may rarely mean what they say or say what they mean. In the pursuit of coordination, then, alternative means of communication may be necessary. (14)

Adherence to (or deviation from) the contracting norms of a given industry--which I construe as a form of boilerplate (15)--may serve just such communicative functions. Specifically, I consider two related but distinct functions that boilerplate may serve in contract bargaining, particularly among sophisticated parties but perhaps more generally as well. The first is a signaling function. In the case of boilerplate, however, the signal of interest derives not from the substance of the relevant term but from its character as a standard rather than tailored term. Additionally, I consider potential coordination functions of boilerplate that rest on the nature of boilerplate as a focal point in bargaining. (16) In this pair of signaling and coordination functions, one might find the foundations of a strategic theory of boilerplate.

What do I mean to capture with a strategic approach to boilerplate? In broad terms, the language of strategy calls attention to the potential use of boilerplate as a mechanism for parties to seek affirmative advantage in bargaining. (17) In this vein, I invoke recent Nobel laureate Thomas Schelling's seminal--if perhaps still inadequately appreciated--Strategy of Conflict, which explored strategic conduct as "conscious, intelligent, sophisticated conflict behavior [in contests the] participants ... try to 'win.'" (18)

In emphasizing a sharply instrumental intent behind the use of boilerplate, I highlight strategy in a further sense. When boilerplate is used for strategic reasons, it concerns ends beyond the particular choice of terms. The intent of the party pressing boilerplate terms is divorced, at least in a direct sense, from the content of those terms. The strategic use of boilerplate is about something more than the content of the relevant term.

Finally, the strategic analysis of boilerplate herein serves to call attention to an affirmative role for focal points in law. Focal points have been widely referenced in the legal literature but predominantly in what might be characterized as a passive form. In Schelling's terms, legal scholars have focused on the role of focal points in "tacit coordination"--situations in which conflict (as well as communication) is lacking. (19) But the most significant role of focal points--including boilerplate terms--is strategic. Focal points do not simply exist; they can be created to help parties secure advantage in conflict and bargaining. In its attention to focal points, then, a strategic analysis of boilerplate may have implications for legal analysis more generally.

My analysis begins with an acknowledgement of the mixed-motive character of bargaining and suggestion of the resulting distortion of direct communication in contract negotiation. Parts II and III explore the pair of strategic functions noted above. The former considers the potential signaling functions of boilerplate in bargaining, exploring both more conventional signals of character and potential signals of group identity. The latter turns to the coordination functions of boilerplate. After further describing the nature of bargaining as a coordination game and suggesting the resulting applicability of Schelling's focal point paradigm, I successively consider the potential role of boilerplate in both the presence and the absence of communication--cases of "explicit" and "tacit" bargaining.

Part IV concludes by considering various implications of a strategic theory of boilerplate. Among other implications, I posit that notions of bargaining power are necessarily altered within such a theory. Additionally, the approach I propose offers both descriptive and prescriptive lessons for the evolution of boilerplate and for expected bargaining patterns around boilerplate. Finally, if boilerplate has the focal effects I describe, I suggest that the concerns associated with adhesion contracts may arise even in the presence of bargaining parity.

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