LAW & ECONOMICS WORKSHOP
presents
Professor Alan Schwartz
Yale University Law School and Management School
Conceptualizing Contractual Interpretation
Tuesday, January 17, 2012
4:10 – 6:00
Solarium (room FA2) – Falconer Hall
84 Queen’s Park
Contract interpretation is an important subject for lawyers but there are few rigorous economic analyses. We use a formal model to derive the interpretive rule that an “ideal” legal enforcer would adopt. Commercial parties make contracts to maximize gains from trade. Our enforcer is ideal, in the sense that he interprets contracts to maximize welfare over the set of contracting relationships. We then compare how actual interpretation matches the ideal. We derive the following results, among others: (a) An optimal interpretive rule induces parties to make efficient tradeoffs between the gain from accurate interpretation and the costs of (i) writing contracts; (ii) investing in the deal, which also conveys intent; and (iii) trials; (b) The optimal rule induces inefficient relationships not to form and permits the enforcer sometimes to exclude trial evidence and decide on reduced evidentiary bases; (c) Expertise in interpretation comes in several forms, including the ability to infer party intent from a performance and from the written words; (d) Parties choose between arbitrators and courts on the bases of their respective competencies and the cost of writing a contract meant for a court and the cost of writing a contract meant for an arbitrator; (e) Courts maximize accuracy in interpretation rather than welfare, which creates a number of inefficiencies; (f) Party attempts to constrain the evidence courts use would cause courts to act more as the ideal enforcer acts, so courts should obey party interpretive instructions. We also test several of the model’s predictions on a data set of almost 43,000 actual contracts. The data appear to be consistent with the theory.
Alan Schwartz is a Sterling Professor at Yale University. His appointments are in the Yale Law School and the Yale School of Management. Professor Schwartz’s academic specialties include corporate finance and corporate governance, mergers and acquisitions, bankruptcy, contracts and commercial transactions. He has published numerous articles and books in these fields. He has been identified, by the Institute of Scientific Information, as being in the top one half of one percent of social scientists worldwide in total citations, and by Heinlineonline as one of the fifty most cited law professors of all time. Professor Schwartz has been President of the American Law and Economics Association and Editor of The Journal of Law, Economics and Organization. He is currently a member of the American Academy of Arts and Sciences. Profoessor Schwartz also is a Director of Cliffs Natural Resources Co. and Furniture Brands International, both of which are traded on the New York Stock Exchange. Professor Schwartz consults as an expert in corporate governance, mergers and acquisitions, bankruptcy, contracts and commercial law.
For more workshop information, please contact Nadia Gulezko at n.gulezko@utoronto.ca
