Skip to main content
Unpublished Paper
ExpressO (2011)
  • Juliet P Kostritsky, Case Western Reserve
JUDICIAL INTERVENTION AS RISK REDUCTION J. P. Kostritsky Employing an economics-based consequentialist approach to contract interpretation (focusing on the prospective effect and the factors that might justify intervention) this Article attempts to identify the precise parameters of an optimal framework for contract interpretation. Such a framework would seek to maximize gains from trade. The issue in such cases is always, given the words the parties used, what is the best (surplus maximizing) interpretation of the bargain. Courts can achieve that interpretation by, in part, minimizing the interpretive risk that parties face when they draft an express contract but fail to completely resolve all possible issues. This Article uses a framework in which cost considerations predominate. It identifies realistic models of how parties bargain and plan for disputes in drafting their contracts. The model will use the probabilistic thinking of the parties, with respect to 1) implicit assumptions about underlying meaning, that might affect the choice of certain words (drawing on Professor Listokin’s application of Bayes’s theory), 2) to the parties’ likely goals for contracting and the 3) set of implicit assumptions about various states of the world. These probabilistic mechanisms are crucial in interpreting contracting because our brains are hard wired to use these tools and it is the only way courts can form a basis for deciding on meaning in a contract. The court must weigh all of these in deciding what meaning would best achieve the parties’ intended meaning and overall goals. These goals include the minimization of opportunism and other similar risks that might chill future contracting and the parties’ views on an expected judicial role in interpretation. Based on conclusions from these cost-conscious models, this Article argues for a more expansive interpretive rule than textualism or formalism. This Article argues that by suggesting a test which requires parties to expressly delegate interpretive authority in order for the court to exercise broad interpretive authority, the textualists and formalists are embracing a system that will result in the radical result of parties being foreclosed from having courts act as ordinary courts customarily do in adjudicating cases. It would thereby constrain the parties from relying on courts as the least cost option for maximizing the gains from trade. The parties ought to be able to bargain over the existence and scope of review but not against a default rule that says that language will be interpreted literally unless a different scope of the review is provided for. Because the textualist/formalist approach deprives courts of the ability to consider evidence of the written contract against the background of the probabilities of intended meaning, curbs the ability of courts to adjust the interpretation of the contract to account for changes in the implicit assumptions on which the parties drafted the contract, and limits the discretion of courts to craft an interpretive strategy that will achieve the parties’ overall goals, it will not maximize overall wealth.
Publication Date
August 21, 2011
Citation Information
Available at: