This Article recommends an economic methodology of contract interpretation that enables the court to maximize the benefits of exchange for the parties and thereby enhance the institution of contracting. We recommend a methodology that asks the parties to identify the determinants of a surplus maximizing interpretation so that the court can determine whether the determinants raise issues that need to be tried. We thus avoid the false choice between textualist and contextualist methodologies, while allowing the parties and the court to avoid costly litigation. For textualist courts, our methodology helps the judge determine when the terms the parties used are ambiguous enough to require the court to consider context. For contextualist courts, it streamlines the interpretive inquiry by identifying which contextual facts are important and why, which allows courts to avoid or streamline trials. Our method therefore allows courts to avoid the problems of textualism (which can make easy cases difficult) and anything-goes-contextualism (which can make difficult cases unmanageable).

Our methodology reflects a model of bargaining that emphasizes the divergent interests and preferences of the parties. Although both parties seek to minimize the costs of contracting, the parties have divergent views about those costs and about the tradeoffs each must make to minimize those costs. Accordingly, we deny that courts can find the meaning of a disputed term in the intent of the parties. Instead, we believe that courts must identify (a) the set of obligations that, in the context of the parties’ private projects and undisputed terms, increase contractual surplus and (b) the party who is in the best position to avoid the dispute (and thus lower the cost of contracting) by identifying the terms on which the parties disagree ex ante.

We present a structured analytical framework that courts and other enforcers should use to determine which interpretation offered by the parties maximizes the surplus, given the undisputed terms of the contract and the bargaining position of the parties. Courts and other enforcers should not try to influence how other contractors act, except by faithfully determining the surplus maximizing interpretation; nor should they seek to determine what obligations other contracting parties might have undertaken, nor on how hypothetical bargainers might have bargained.


Formalism, Contextualism, Efficiency, Courts, Contracts, Contract Interpretation, Economic Methodology, Maximizing Surplus, Bargaining Relationships

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76 Pittsburgh Law Review 509 (2015)

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Contracts Commons