The Business Lawyer as Terrorist Transaction Cost Engineer

Abstract

It is well known that, to deter strategic behavior, parties to contracts can create contractual "hostages", e.g., grant a lender a security interest. Yet many transactions provide no natural hostage. This Article argues that lawyers take "hostages" by drafting provisions that provide latent, unreasonable contractual rights exercisable in remote contingencies, which facilitate cooperative contract performance. By formulating arrangements that decrease the potential for opportunism, these lawyers are acting, in Gilson's phrase, as "transaction cost engineers." Because the hostages are seized without the express consent of the parties providing the hostages, one might characterize lawyers who act this way as "terrorists"--the term typically applied to those who unilaterally seize hostages.

This perspective first provides a rationale for conduct that can cause lawyers acting reasonably in contract negotiations to acquire reputations for being unreasonable and second challenges the underpinnings of some customary rules of contract construction.