This introduction introduces three articles in a Symposium by Richard Craswell, Avery Katz, Robert Scott and George Triantis on the topic of incomplete contracts. The Symposium appears in 56 CASE WES. L. REV. 135 (2005).
The recognition that parties will often fail to achieve completely contingent contracts that provide for an optimal outcome in any future state of the world raises the important question of what role courts could or should play in such contracts.
Scholars working in the law-and-economics tradition have suggested that courts should use a hypothetical bargain approach to incompleteness, filling in terms that are optimal (efficient) and that the parties themselves would have achieved were it not for the transaction costs. While the authors in this Symposium draw on this traditional economic analysis of contracts, they explore new insights from economics that complicate the analysis of incompleteness in contracts. Relying on economists' theories of incomplete contracts, the Symposium authors identify uncertainty and the cost of and limited access to information as key problems affecting parties both ex ante when contracts are being drafted and ex post when they are being enforced. Uncertainty is a factor that makes it difficult to negotiate contracts that can simultaneously protect specific investments and also promote efficiency ex post.
The Symposium authors sort out what economists and lawyers mean when they reference an "incomplete contract" and identify two key assumptions of the new economic literature. These two assumptions are (1) courts are imperfect and may be unable to verify certain facts, and (2) parties can renegotiate the terms of their contracts. Using these insights, the three authors address the implications of the verifiability problem and possibility of renegotiating contractual terms for (1) parties designing complete and contingent efficient contracts, (2) scholars designing theoretical solutions to the verifiability problem, (3) courts searching for rules that will best promote optimal investment beforehand and ex post efficiency once the future has resolved the prior uncertainty, and (4) contracts scholars attempting to decide what issues should be further explored.
Contracts, Law-and-Economics, Incomplete Contracts
Place of Original Publication
Case Western Reserve Law Review
56 Case Western Reserve Law Review 135 (2005)
Kostritsky, Juliet P., "Symposium - Incomplete Contracts: Judicial Responses, Transactional Planning, and Litigation Strategies - Introduction" (2005). Faculty Publications. 132.