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On the Writing and the Interpretation of Contracts

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  • Steven Shavell

Abstract

The major theme of this article is that the interpretation of contracts is in the interests of contracting parties. The general reasons are (a) that interpretation may improve on otherwise imperfect contracts; and (b) that the prospect of interpretation allows parties to write simpler contracts and thus to conserve on contracting effort. A method of interpretation is defined as a function whose argument is the written contract and whose value is another contract, the interpreted contract, which is what actually governs the parties' joint enterprise. It is shown that interpretation is superior to enforcement of contracts as written, and the optimal method of interpretation is analyzed. Copyright 2006, Oxford University Press.

Suggested Citation

  • Steven Shavell, 2006. "On the Writing and the Interpretation of Contracts," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 22(2), pages 289-314, October.
    • Handle: RePEc:oup:jleorg:v:22:y:2006:i:2:p:289-314
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    File URL: http://hdl.handle.net/10.1093/jleo/ewj017
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    Citations

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    Cited by:

    1. Ola Kvaløy & Trond E. Olsen, 2009. "Endogenous Verifiability and Relational Contracting," American Economic Review, American Economic Association, vol. 99(5), pages 2193-2208, December.
    2. Toru Suzuki, 2020. "Efficiently Imprecise Contracts," Working Paper Series 2020/07, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Nicola Gennaioli & Giacomo A. M. Ponzetto, 2015. "Optimally vague contracts and the law," Economics Working Papers 1410, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2017.
    4. Anderlini Luca & Felli Leonardo & Postlewaite Andrew, 2011. "Should Courts Always Enforce What Contracting Parties Write?," Review of Law & Economics, De Gruyter, vol. 7(1), pages 14-28, February.
    5. Blume, Andreas & Deimen, Inga & Inoue, Sean, 2022. "Incomplete contracts versus communication," Journal of Economic Theory, Elsevier, vol. 205(C).
    6. Hideshi Itoh, 2023. "What do contracts do to facilitate relationships?," The Japanese Economic Review, Springer, vol. 74(3), pages 333-354, July.
    7. Zhao, Xiaojian, 2011. "Framing contingencies in contracts," Mathematical Social Sciences, Elsevier, vol. 61(1), pages 31-40, January.
    8. Yair Listokin, 2010. "Bayesian Contractual Interpretation," The Journal of Legal Studies, University of Chicago Press, vol. 39(2), pages 359-374.
    9. Lando Henrik, 2020. "Two Advantages of the Negligence Rule Over Strict Liability when the Parties are Risk Averse," Review of Law & Economics, De Gruyter, vol. 16(3), pages 1-18, November.
    10. Marian Moszoro & Pablo T. Spiller & Sebastian Stolorz, 2016. "Rigidity of Public Contracts," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 13(3), pages 396-427, September.
    11. Kvaløy, Ola & Olsen, Trond E., 2015. "The tenuous relationship between effort and performance pay," Journal of Public Economics, Elsevier, vol. 121(C), pages 32-39.
    12. Ola Kvaløy & Trond E. Olsen, 2016. "Incentive Provision when Contracting is Costly," Economica, London School of Economics and Political Science, vol. 83(332), pages 741-767, October.
    13. Giovanni Maggi & Robert W. Staiger, 2008. "On the Role and Design of Dispute Settlement Procedures in International Trade Agreements," NBER Working Papers 14067, National Bureau of Economic Research, Inc.
    14. A. Mitchell Polinsky & Steven Shavell, 2005. "Economic Analysis of Law," Discussion Papers 05-005, Stanford Institute for Economic Policy Research.
    15. Dana Heller & Ran Spiegler, 2008. "Contradiction as a form of Contractual Incompleteness," Economic Journal, Royal Economic Society, vol. 118(530), pages 875-888, July.
    16. Daniel Danau, 2019. "Contract law and Contract theory. A survey and some considerations," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 2019-04, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    17. Anderlini, Luca & Postlewaite, Andrew & Felli, Leonardo, 2006. "Should courts always enforce what contracting parties write? this paper replaces TE/2003/464," LSE Research Online Documents on Economics 58189, London School of Economics and Political Science, LSE Library.
    18. Christmann Robin, 2015. "Tipping the Scales – Settlement, Appeal and the Relevance of Judicial Ambition," Review of Law & Economics, De Gruyter, vol. 11(2), pages 171-207, July.
    19. Benjamin Bental & Bruno Deffains & Dominique Demougin, 2020. "Interpreting contracts: the purposive approach and non-comprehensive incentive contracts," European Journal of Law and Economics, Springer, vol. 50(2), pages 241-265, October.
    20. Joel Watson, 2021. "Theoretical Foundations of Relational Incentive Contracts," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 631-659, August.
    21. Robin Christmann, 2014. "No Judge, No Job! Court errors and the contingent labor contract," European Journal of Law and Economics, Springer, vol. 38(3), pages 409-429, December.

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