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University of Chicago Law Review

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901

Abstract

Conventional wisdom portrays contracts as static distillations of parties’ shared intent at some discrete point in time. In reality, however, contract terms evolve in response to their environments, including new laws, legal interpretations, and economic shocks. While several legal scholars have offered stylized accounts of this evolutionary process, we still lack a coherent, general theory that broadly captures the dynamics of real-world contracting practice. This paper advances such a theory, in which the evolution of contract terms is a byproduct of several key features, including efficiency concerns, information, and sequential learning by attorneys who negotiate several deals over time. Each of these factors contributes to the underlying evolutionary process, and their relative prominence bears directly on the speed, direction, and desirability of how contractual innovations diffuse. Using a formal model of bargaining in a sequence of similar transactions, we demonstrate how different evolutionary patterns can manifest over time, in both desirable and undesirable directions. We then take these insights to a real-world data set of over two thousand merger agreements negotiated over the last two decades, tracking the adoption of several contractual clauses, including pandemic-related terms, #MeToo provisions, Committee on Foreign Investment in the United States (CFIUS) conditions, and reverse termination fees. Our analysis suggests that there is not a one-size-fits all paradigm for contractual evolution. Rather, the constituent forces affecting term evolution manifest in varying strengths across differing circumstances. We highlight several constructive applications of our framework, including how the study of contract negotiation unfolds when price cannot easily be adjusted and how to incorporate other forms of cognitive and behavioral biases into our general framework.

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