Bargaining on the Red-Eye: New Light on Contract Theory

Abstract

Recent research has shown that large companies select New York law and New York courts to govern disputes under commercial contracts. Because these parties make choice-of-law and forum selection decisions before conflicts arise, there is reason to believe that their preference for New York reflects an effort to select efficient terms. This paper compares New York's contract law with that of its most natural competitor, California. It turns out that New York strictly enforces bargains and displays little tolerance for efforts to rewrite deals ex post. California, in contrast, is more willing to reform contracts for reasons of fairness, equity, morality or public policy. The revealed preferences of sophisticated parties support arguments by Schwartz, Scott and others that formalistic rules offer superior value for the interpretation and enforcement of commercial contracts.