Legal Environment and Contractual Choice

This paper considers contractual choice under imperfect legal systems, in particular, contracts with different timing of payment. Ex-ante payment contracts are risky for the buyer, because the seller may shirk. Ex-post payment contracts are risky for the seller, as the buyer may default. Optimal contract is solved for any given legal environment. Exchanges with lower gains from trade tend to adopt ex-post payment contracts. The seller is a better proposer than the buyer in terms of the efficiency of the proposed contract. Surprisingly, offering ex-ante payment contracts is not strictly better for the seller under any legal environment. Moreover, mixed payment contracts are also analyzed and shown to never be optimal.

Would Reasonable People Endorse a ‘Content-Neutral’ Law of Contract?

This essay raises two challenges to Peter Benson’s compelling new account of contract law. First, I argue that Benson’s use of the concept of reasonableness goes beyond the Rawlsian account to require that we impute to others a capacity to transcend their contingent circumstances in the context of contractual choice. In fact, our choices in contract are driven by external contingencies and it is only reasonable to take those constrains on other people’s choices into account. Second, I contest Benson’s related claim that contract law should be, and largely is, content-neutral. I argue to the contrary that the justice of a society depends on the cumulative outcomes from market transactions, and the justice of transactions depends on the justice of the institutional matrix of which transactional law is one part.

Part 2 National and Regional Reports, Part 2.2 Asia: Coordinated by Yuko Nishitani and Béligh Elbalti, 31 Macau: Macau Perspectives on the Hague Principles

This chapter focuses on Macau perspectives on the Hague Principles. It clarifies a few points before examining the contractual choice of law rules in Macau in detail. First, the Macau Civil Code that is the most important source for conflict of laws rules was derived from the 1966 Portuguese Civil Code. Second, due to the fact that Macau is a jurisdiction belonging to the civil law family, court decisions in Macau, theoretically, are not a source of law and do not formally have binding legal effects. Third, while legal doctrine developed by scholars in Macau is not a formal source of law, it may have influence on legislation and provide guidance for court decisions. Fourth, although some revision has been made for the Macau Civil Code since its entry into force in 1999, so far there has not been any initiative to revise its conflicts system, let alone its contractual conflicts rules. Unfortunately, the Hague Principles as a whole or any part therein cannot be incorporated into Macau’s legislation in the near future. Nevertheless, theoretically speaking, broadly accepted international customs and usages could be resorted to as ‘persuasive authority’ by Macau judges in judicial practice. The chapter then provides a comparison between the Hague Principles and Macau law.

Acquirers’ Cultural Background and the Use of Earnouts

This study investigates the effects of culture on the design of merger and acquisition (M&A) contracts. Specifically, we empirically analyze how the acquirer’s cultural background influences the contractual choice to implement an earnout. We operationalize the acquirer’s cultural background by using Hofstede’s country-level indices for individualism, power distance, uncertainty avoidance, masculinity, and long-term orientation. Using a comprehensive sample of 9,669 M&As, we find that earnout use is significantly positively associated with the acquirer’s masculinity level. Furthermore, we provide evidence that earnout use is significantly negatively associated with the acquirer’s power distance and uncertainty avoidance scores. Our study contributes to the literature by demonstrating that, in addition to economic theories, cultural differences are important in understanding the heterogeneity of earnout use.