Facilitating Incomplete Contracts

Citation data:

Case Western Reserve Law Review, Page: 297-340

Publication Year:
2014

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Repository URL:
https://via.library.depaul.edu/lawfacpubs/41
Author(s):
Epstein, Wendy
Tags:
contract incomplete; behavioral economics; cognitive psychology; Law
article description
Contract law abhors incompleteness. Although no contract can be entirely complete, the idea of a purposefully incomplete or underspecified contract is antithetical to lawyers’ ideals of certainty for the parties and for the law. Indeed, contract law is designed to incentivize parties to specifically articulate their intentions. Yet there is a growing body of interdisciplinary work in economics and cognitive psychology demonstrating that highly specified contracts tend to stifle intrinsic motivation and innovation, whereas less-specified contracts — particularly in public-private contracting, IP, and contracting for innovation — can induce higher effort levels and a more cooperative principal-agent relationship than the traditional approach. Nevertheless, there remain both entrenched doctrinal and sociolegal deterrents to drafting less-specified contracts.This Article argues that the existing doctrinal roadblocks to incomplete contracts are out of step with the normative goals of commercial contracting — promoting efficiency and incentivizing commercial activity. The indefiniteness doctrine and current approaches to contract interpretation, for instance, over-deter the use of incomplete contracting even when it would be efficient. Ultimately, this Article suggests a new doctrinal approach for those contracts where the law should incentivize incomplete contracting, borrowing from principles of constitutional interpretation: dynamic contextualist interpretation. Courts should look not only to party intent at the moment when the contract was formed but should consider how intentions developed during contract performance. Rather than punishing incompleteness, flexibility should guide determinations of validity and questions of interpretation.