This paper addresses the fundamental methodological issue of when courts should intervene in incomplete contracts by interpreting them, filling in gaps and imposing liability on parties who have not yet reached a bargain. It addresses whether such intervention poses a threat to the parties' freedom from contract, the subject of the Wisconsin Symposium on Freedom from Contract. It uses an instrumental approach to determine the circumstances in which courts can outperform parties in improving welfare by intervention. It assesses the two dominant strands of scholarship for addressing the legal intervention question. One strand emphasizes the costs of parties achieving complete contracts and justified legal intervention as a means to reduce such transaction costs. The other strand of scholarship, represented by the new formalists, emphasizes the difficulty of supplying terms that depend on unverifiable or unobservable information. While both strands of the literature contain valid insights, this paper suggests that neither strand of scholarship provides an analysis of how intervention would advance or hinder the parties' welfare when certain factors such as uncertainty, sunk costs and opportunism are taken into account. Therefore, they cannot assess whether intervention in the form of a precontractual liability rule, with its apparent reduction in freedom from contract, advances welfare or not. This paper develops a taxonomy for legal intervention that focuses on the structural barriers that interfere with the parties' ability to solve a key problem in contracting: the tendency of parties to behave opportunistically. To date, the full implications of this behavioral uncertainty have not been sufficiently incorporated into models assessing legal intervention nor into models demarcating the appropriate boundaries realm for freedom from contract. This paper suggests that legal intervention may be called for when sunk costs and uncertainty about the likelihood of opportunistic behavior are present and the parties' costs of dealing with the recurring problem on their own are most costly than judicial intervention. It specifically explores the taxonomy of legal intervention in the specific context of precontractual liability and the implied limits on revocation in Drennan and unilateral contracts.
Incomplete Contracts, Informational Deficits, Judicial Intervention, Freedom, Behavioral Uncertainty
Place of Original Publication
Wisconsin Law Review
2004 Wis. L. Rev. 323
Kostritsky, Juliet P., "Taxonomy for Justifying Legal Intervention In An Imperfect World: What To Do When Parties Have Not Achieved Bargains Or Have Drafted Incomplete Contracts" (2006). Faculty Publications. 198.