On Uncertainty, Ambiguity, and Contractual Conditions

This article uses the recent Delaware Chancery Court case ofHexion v. Huntsman as a template for motivating thoughts about how contract law should interpret contractual conditions in general--and "material adverse event"provisions in particular-within environments of extreme ambiguity (as opposed to risk). Although ambiguity and aversion thereto bear some facial similarities to risk and risk aversion, an optimal contractual allocation of uncertainty does not always track the optimal allocation of risk. After establishing these intuitions as a conceptual proposition, I endeavor to test them empirically, using a unique data set of528 actual material adverse event provisions in corporate acquisitions transactions between 2007 and 2008. My results are consistent with my conceptual account distinguishing risk from uncertainty. Although intuitive, the idea that material adverse event provisions can be a means for allocating uncertainty contrasts with the received wisdom in corporate law scholarship about the nature and purpose of such terms. Using MA C/MAE provisions as an animating narrative, this article concludes that the behavioral economics concept of ambiguity aversion is a helpful device for understanding contractual conditions and excuses.