The Mad Mad World of "No Contest" Provisions in Wills

06/28/19

What are you looking for?

It has been almost twenty-five years since I got hooked on the puzzle of why boilerplate financial contracts, even among the most sophisticated parties, have inefficient terms. Steve Choi and I were taking Marcel Kahan’s Corporate Bond class and we couldn’t understand why the classical model with its highly informed repeat players (with everyone hiring expensive lawyers) wasn’t working to produce the optimal package of contract terms. Marcel presented a very coherent set of explanations for this phenomenon of contract stickiness having to do primarily with network and learning externalities.  And under that model, it was plausible to have equilibria where sophisticated commercial parties and their lawyers could know that they had suboptimal contract terms and yet be somehow unable to change them easily (thereby creating the phenomenon of “sticky” contracts).  Marcel though repeatedly emphasized to us that he had but scratched the surface of a topic worthy of much more investigation (for the classic Kahan & Klausner (1997) paper and its equally wonderful predecessor by Goetz & Scott (1985), see hereand here).

Over the past two decades, since the publication of Kahan & Klausner’s sticky boilerplate paper, there have been a number of advances to our thinking about the phenomenon of sticky boilerplate. Most of them, however, have been focused on the worlds of mass market contracts of sophisticated finance or transactions where one of the sides to the transaction is a big repeat player (corporate bonds, sovereign bonds, M&A contracts, insurance). 

A wonderful new boilerplate paper though takes on an altogether unexpected area where I had always thought of the contract-type instruments as being highly tailored: that of Wills. The paper is “Boilerplate No Contest Clauses” posted about a month ago by David Horton (UC Davis) and Reid Weisbord (Rutgers). 

The paper identifies a persistent inefficiency in Wills – an area that I suspect most contract boilerplate scholars are utterly unaware to. That itself is interesting. But this paper goes beyond the traditional boilerplate contract scholarship which, as noted, identified the stickiness problem in mass market contracts.  Wills, as I understand the story that David and Reid tell, tend to always have both an element of tailoring for the individual client and an element of blind unthinking cutting and pasting from prior standard forms. What David and Reid show beautifully in their paper is that the boilerplate portion of the contract (and specifically, the “No Contest” provision) can often undermine the tailored portion that more specifically reflects the intent of the party making the Will.

For those not familiar with these clauses, the following is typical:

If any beneficiary under this Will in any manner, directly or indirectly, contests or attacks this Will or any of its provisions, any share of interest in my estate given to that contesting beneficiary under this Will is revoked . . . . “

Basically, this says: Don’t you dare challenge this Will. If you do, you might lose everything.

Problem is, as David and Reid explain, that there can often be situations where complications arise with the Will and someone has to go to court to get the complications resolved. That then presents the risk that some dastardly beneficiary will claim that the No Contest clause has been triggered vis-à-vis the innocent beneficiary who is just trying to solve a problem with the Will that the testator didn’t take into account. End result: The intentions of the testator can be completely undermined. Even if the court ultimately tosses the challenges being made on the basis of the No Contest clause, lots of time and money gets wasted.

Why does this clause persist?  The answer given by Reid and David is straightforward: These clauses are cut and paste from prior Wills without much thought. They are part of the boilerplate and neither the lawyers nor their clients pay any attention to.  But why not?  The standard explanations such as network/learning externalities, first mover disadvantages, negative signaling, status quo bias, inadequate litigation, etc., do not seem to apply here particularly well.  Nor do explanations about big firms who are repeat players exploiting innocent customers who are one shot players.  So, given that the standard explanations do not work, why is the market for legal services not working?  Are the lawyers not being paid enough to read the boilerplate portions of the Will and think through the contingencies?  (Best I can tell, the lawyers do actually understand the problem, since there has been lots of litigation).

Reid and David do a wonderful job of documenting a phenomenon that is not supposed to exist as a matter of theory.  I found the paper an absolute delight to read not only because the phenomenon is question is so very puzzling and because the authors have an intriguing solution to the problem (“sticky” interpretation), but because the authors write beautifully. This is the rare law review article that is witty. There were places where I laughed out loud. And that made me think that Reid and David must have had a lot of fun writing the piece.

The article is piece of a volume on standard-form contracts and the butterfly effect that John Coyle of the University of North Carolina is putting together for Law and Contemporary Problems. I cannot wait to see the other pieces that will go into this volume.

p.s.  My apologies to experts in the area of Wills. I know next to nothing about this field, other than what I've learned from talking to my dear friend Al Brophy and from reading this wonderful No Contest clause paper. I'm hoping to learn more though.

 

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