The Architecture of Contract Innovation

Abstract: Many contracts, such as the merger agreements studied here, are complex combinations of customized and standardized terms, and thereby achieve economies of both scale and scope. Such contracts are “mass customized,” to borrow a term from engineering research. This Article introduces a theoretical framework and methodological toolkit for studying such complex agreements. With respect to theory, it adds to recent scholarship that applies modularity theory to the design of complex agreements by introducing an alternative approach to harnessing contractual complexity—flexible specialization. Whereas modularity attempts to manage systemic complexity by isolating discrete subsystems from one another and ensuring their interoperability through a set of static interface rules, flexible specialization allows for tightly coupled connections between subsystems, and interoperability is achieved through a suite of explicit and tacit organizational routines that reduce the design team’s communication and learning costs, allowing them to quickly process adjustments across the interlocking sub-systems. Using hand-collected data from samples of public company merger agreements and of the teams of deal lawyers that designed them, this Article presents the results of a preliminary empirical study testing whether the architecture of mass customized contracts reflects either modularity theory or the logic of flexible specialization. Methods developed in systems engineering, organizational theory, and network analysis are used to map the structural topology of the sampled agreements and deal teams. Results of the merger agreement analysis suggest that the contracts are integrated to a material extent, rather than being purely modular systems. Similarly, analysis of the internal organization of the corporate law firms designing those agreements suggests thickly interwoven organizational structures, consistent with flexible specialization’s rich information-sharing routines.