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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 -- their possible amplification, correction, and modification by adjudicators -- 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10094.

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Date of creation: Nov 2003
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Publication status: published as Shavell, Steven. "On The Writing and The Interpretation Of Contracts," Journal of Law, Economics and Organization, 2006, v22(2,Oct), 289-314.
Handle: RePEc:nbr:nberwo:10094

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  1. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2003. "Courts of Law and Unforeseen Contingencies," STICERD - Theoretical Economics Paper Series, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE 447, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. Oliver Hart & John Moore, 1998. "Foundations of Incomplete Contracts," NBER Working Papers 6726, National Bureau of Economic Research, Inc.
  3. Schwartz, Alan, 1992. "Relational Contracts in the Courts: An Analysis of Incomplete Agreements and Judicial Strategies," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 21(2), pages 271-318, June.
  4. Schwartz, Alan & Watson, Joel, 2001. "The Law and Economics of Costly Contracting," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt2wh8m7bv, Department of Economics, UC San Diego.
  5. Alan Schwartz, 2004. "The Law and Economics of Costly Contracting," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 20(1), pages 2-31, April.
  6. Anderlini, Luca & Felli, Leonardo, 1998. "Incomplete Contracts and Complexity Costs," MPRA Paper 28483, University Library of Munich, Germany.
  7. Kathryn E. Spier, 1992. "Incomplete Contracts and Signalling," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 432-443, Autumn.
  8. Hadfield, Gillian K, 1994. "Judicial Competence and the Interpretation of Incomplete Contracts," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 23(1), pages 159-84, January.
  9. Lucian Arye Bebchuk & Steven Shavell, 1991. "Information and the Scope of Liability for Breach of Contract: The Rule of Hadley V. Baxendale," NBER Working Papers 3696, National Bureau of Economic Research, Inc.
  10. William P. Rogerson, 1984. "Efficient Reliance and Damage Measures for Breach of Contract," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 39-53, Spring.
  11. Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 418, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Dye, Ronald A, 1985. "Costly Contract Contingencies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 233-50, February.
  13. Pierpaolo Battigalli & Giovanni Maggi, 2002. "Rigidity, Discretion, and the Costs of Writing Contracts," American Economic Review, American Economic Association, American Economic Association, vol. 92(4), pages 798-817, September.
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Cited by:
  1. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2006. "Should courts always enforce what contracting parties write?," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 4677, London School of Economics and Political Science, LSE Library.
  2. Mitchell Berlin & Yaron Leitner, 2005. "Courts and contractual innovation: a preliminary analysis," Working Papers 05-27, Federal Reserve Bank of Philadelphia.

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