Deal Structure

Cathy Hwang,Matthew Jennejohn | October 1, 2018

Modern commercial contracts—those governing mergers and acquisitions and financial derivatives, for instance—have become structurally complex and interconnected. Yet contract law largely ignores structural complexity. This Article develops a theory of “contractual structuralism” to explain the important role of structure in every aspect of contract law, from the design of a contract to courts’ interpretation and enforcement. For generations, scholars have debated whether a court should consider only the text of a contract or also consider broader context to determine parties’ intent. More recently, scholars have shown that parties can choose between textual and contextual interpretation by drafting a contract provision as a rule or a standard. Rules signal that parties have fully thought through the issues and a court should interpret textually, and standards signal the need for further contextual exploration. This Article builds upon that pioneering work to make two contributions to the literature. First, it provides the first comprehensive account of structural complexity in modern contracting, and explains how modern contract designers use structure to advance their goals. Second, it shows how the design of contract structure can influence interpretation. Contracts have grown—in scope, length, and complexity—and provisions are no longer strictly rules or strictly standards. Rather, they bleed into and interact with one another, complicating parties’ ability to always pair textualist enforcement with a rule and contextualist enforcement with a standard. Tweaking deal structure provides contract designers with another way, beyond using a rule or standard, to nudge courts toward a particular interpretive mode. Specifically, structural isolation of provisions—a modular contract structure—is required for the kind of toggling between textualism and contextualism that other scholars have envisioned. Understanding how a contract’s parts are put together—the structure of the contract—is important to understanding how to design contracts and can greatly influence how courts interpret contracts.