Leaving Money on the Table: Contract Practice in a Low-Trust Environment

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Why are certain contract practices considered standard, practical or fair? This Essay argues that the practices so identified will reflect, among other things, the level of trust inherent in a given society: its store of social capital. Those practices in turn will help determine how parties to a commercial transaction will approach their negotiation, how they will communicate, and on what terms they will eventually agree. In a low-trust environment, those terms may be comparatively inefficient, but may nonetheless be compelled by prevailing contract practices. This is true not only for the small transaction, but also for large and complex deals. As a result, when operating in a low-trust environment, even sophisticated parties, who can bear the costs of tailoring an agreement to their particular case, will be prone to relinquish or to sacrifice value. This Essay contrasts alternative *716 practices in merger and acquisition transactions, comparing the “standard“model that is generally encountered in the United States with an alternative often found in Latin America. The relationship between trust, social capital, and contract is then outlined. Finally, some preliminary observations are made comparing the normative and behavioral presuppositions of different legal traditions and how they may reinforce or help rationalize alternative contract practices.