The case for formalism in relational contract

Northwestern University Law Review

Volumn 94, Issue 3, 2000, Pages 847-875

  Scott, Robert E ^a  

^a NONE

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EID: 0038016314     PISSN: 00293571     EISSN: None     Source Type: Journal    
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References (155)

1. The revival of interest in contract theory among academic lawyers most likely began in the 1960s with Stewart Macaulay's foundational study of the sociology of contract and Robert Birmingham's classic work on the law and economics of contract. See Stewart Macaulay, Non-Contractual Relations in Business, 28 AM. SOC. REV. 555 (1963) [hereinafter Macaulay, Non-Contractual Relations]; Robert Birmingham, Damage Measures and Economic Rationality: The Geometry of Contract Law, 1969 DUKE L. J. 50. But as this Symposium is a tribute to the contributions of Ian Macneil, it seems most appropriate to date contemporary contract theory from Macneil's own classic work. See Ian R. Macneil, The Many Futures of Contracts, 47 S. CAL. L. REV. 691 (1974). Dick Speidel also helped to turn the tide. See Richard E. Speidel, An Essay on the Reported Death and Continued Vitality of Contract, 27 STAN. L. REV. 1161 (1975).
2. The revival of interest in contract theory among academic lawyers most likely began in the 1960s with Stewart Macaulay's foundational study of the sociology of contract and Robert Birmingham's classic work on the law and economics of contract. See Stewart Macaulay, Non-Contractual Relations in Business, 28 AM. SOC. REV. 555 (1963) [hereinafter Macaulay, Non-Contractual Relations]; Robert Birmingham, Damage Measures and Economic Rationality: The Geometry of Contract Law, 1969 DUKE L. J. 50. But as this Symposium is a tribute to the contributions of Ian Macneil, it seems most appropriate to date contemporary contract theory from Macneil's own classic work. See Ian R. Macneil, The Many Futures of Contracts, 47 S. CAL. L. REV. 691 (1974). Dick Speidel also helped to turn the tide. See Richard E. Speidel, An Essay on the Reported Death and Continued Vitality of Contract, 27 STAN. L. REV. 1161 (1975).
3. The revival of interest in contract theory among academic lawyers most likely began in the 1960s with Stewart Macaulay's foundational study of the sociology of contract and Robert Birmingham's classic work on the law and economics of contract. See Stewart Macaulay, Non-Contractual Relations in Business, 28 AM. SOC. REV. 555 (1963) [hereinafter Macaulay, Non-Contractual Relations]; Robert Birmingham, Damage Measures and Economic Rationality: The Geometry of Contract Law, 1969 DUKE L. J. 50. But as this Symposium is a tribute to the contributions of Ian Macneil, it seems most appropriate to date contemporary contract theory from Macneil's own classic work. See Ian R. Macneil, The Many Futures of Contracts, 47 S. CAL. L. REV. 691 (1974). Dick Speidel also helped to turn the tide. See Richard E. Speidel, An Essay on the Reported Death and Continued Vitality of Contract, 27 STAN. L. REV. 1161 (1975).
4. The revival of interest in contract theory among academic lawyers most likely began in the 1960s with Stewart Macaulay's foundational study of the sociology of contract and Robert Birmingham's classic work on the law and economics of contract. See Stewart Macaulay, Non-Contractual Relations in Business, 28 AM. SOC. REV. 555 (1963) [hereinafter Macaulay, Non-Contractual Relations]; Robert Birmingham, Damage Measures and Economic Rationality: The Geometry of Contract Law, 1969 DUKE L. J. 50. But as this Symposium is a tribute to the contributions of Ian Macneil, it seems most appropriate to date contemporary contract theory from Macneil's own classic work. See Ian R. Macneil, The Many Futures of Contracts, 47 S. CAL. L. REV. 691 (1974). Dick Speidel also helped to turn the tide. See Richard E. Speidel, An Essay on the Reported Death and Continued Vitality of Contract, 27 STAN. L. REV. 1161 (1975).
5. The revival of interest in contract theory among academic lawyers most likely began in the 1960s with Stewart Macaulay's foundational study of the sociology of contract and Robert Birmingham's classic work on the law and economics of contract. See Stewart Macaulay, Non-Contractual Relations in Business, 28 AM. SOC. REV. 555 (1963) [hereinafter Macaulay, Non-Contractual Relations]; Robert Birmingham, Damage Measures and Economic Rationality: The Geometry of Contract Law, 1969 DUKE L. J. 50. But as this Symposium is a tribute to the contributions of Ian Macneil, it seems most appropriate to date contemporary contract theory from Macneil's own classic work. See Ian R. Macneil, The Many Futures of Contracts, 47 S. CAL. L. REV. 691 (1974). Dick Speidel also helped to turn the tide. See Richard E. Speidel, An Essay on the Reported Death and Continued Vitality of Contract, 27 STAN. L. REV. 1161 (1975).
6. The state's general rules of contract provide a set of standard gap-filling assumptions or default terms. But every contract requires the parties to provide some additional individualized content. These combinations of express terms and default terms operate on two distinct levels. On one level, they serve as an attempted interparty communication of the risks and entitlements being exchanged. On another level, express terms and default terms communicate evidence of the contractual understanding to the state. Thus, they also signal the legal relationship between the parties. Unfortunately, these signals are inherently error-prone. Much of the risk of error derives from the inherent tensions between the express terms that the parties supply and the state-supplied default terms. See generally, Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 CAL. L. REV. 261 (1985) [hereinafter Goetz & Scott, Limits of Expanded Choice].
7. The state's general rules of contract provide a set of standard gap-filling assumptions or default terms. But every contract requires the parties to provide some additional individualized content. These combinations of express terms and default terms operate on two distinct levels. On one level, they serve as an attempted interparty communication of the risks and entitlements being exchanged. On another level, express terms and default terms communicate evidence of the contractual understanding to the state. Thus, they also signal the legal relationship between the parties. Unfortunately, these signals are inherently error-prone. Much of the risk of error derives from the inherent tensions between the express terms that the parties supply and the state-supplied default terms. See generally, Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 CAL. L. REV. 261 (1985) [hereinafter Goetz & Scott, Limits of Expanded Choice].
8. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
9. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
10. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
11. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
12. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
13. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
14. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
15. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
16. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
17. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
18. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
19. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
20. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
21. For a representative sample of the default rule literature, see Charles J. Goetz & Robert E. Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69 VA. L. REV. 967 (1983); Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L. J. 87 (1989) [hereinafter Ayres & Gertner, Filling Gaps]; Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 YALE L. J. 729 (1992) [hereinafter Ayres & Gertner, Contractual Inefficiency]; Lucian A. Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. ECON. & ORG. 284 (1991); Jules L. Coleman et al., A Bargaining Theory Approach to Default Provisions and Disclosure Rules in Contract Law, 12 HARV. J. L. & PUB. POL. 639 (1989); Richard Craswell, Contract Law, Default Rules and the Philosophy of Promising, 88 MICH. L. REV. 489 (1989); Jason Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 YALE L. J. 615 (1990); Alan Schwartz, A Theory of Loan Priorities, 18 J. LEGAL. STUD. 209 (1989); Robert E. Scott, A Relational Theory of Default Rules for Commercial Contracts, 19 J. LEGAL STUD. 597 (1990) [hereinafter Scott, Theory of Default Rules]; Alan Schwartz, The Default Rule Paradigm and the Limits of Contract Law, 3 S. CAL. INTERDISCIPLINARY L. J. 389 (1994), Barry E. Adler, The Questionable Ascent of Hadley v. Baxendale, 51 STAN. L. REV. 1547 (1999).
22. See Robert E. Scott, The Case for Market Damages: Revisiting the Lost Profits Puzzle, 57 U. CHI. L. REV. 1155, 1172-73 (1990). The norm of expanded choice justifies this preference for majoritarian default rules. Implied contract terms expand parties' choices by providing standardized and widely suitable contract terms to cover risk contingencies. This norm implicitly presumes a neutral policy toward individualized agreements; the state has no desire to impose its default rules on unwilling parties. Viewed ex ante, therefore, individual contracting parties lose nothing from the specification of default rules as they remain free to design alternatives to the state's terms. Id. at 1173.
23. See Scott, Theory of Default Rules, supra note 3, at 606-13 (1990). This preference for "majoritarian" default rules does not undermine the selection of default rules designed to stimulate further negotiation. Certain "information-forcing" default rules are set, not because they represent the ultimate allocation preferred by most bargainers, but rather because they are best suited to inducing one party to share information with the other. See generally, Ayres & Gertner, Filling Gaps, supra note 3; Johnston, supra note 3.
24. See Scott, Theory of Default Rules, supra note 3, at 606-13 (1990). This preference for "majoritarian" default rules does not undermine the selection of default rules designed to stimulate further negotiation. Certain "information-forcing" default rules are set, not because they represent the ultimate allocation preferred by most bargainers, but rather because they are best suited to inducing one party to share information with the other. See generally, Ayres & Gertner, Filling Gaps, supra note 3; Johnston, supra note 3.
25. See Scott, Theory of Default Rules, supra note 3, at 606-13 (1990). This preference for "majoritarian" default rules does not undermine the selection of default rules designed to stimulate further negotiation. Certain "information-forcing" default rules are set, not because they represent the ultimate allocation preferred by most bargainers, but rather because they are best suited to inducing one party to share information with the other. See generally, Ayres & Gertner, Filling Gaps, supra note 3; Johnston, supra note 3.
26. See generally Ian Macneil, Contracts: Adjustment of Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract Law, 72 NW. U. L. REV. 854 (1978); Macneil, The Many Futures of Contracts, supra note 1;
27. See generally Ian Macneil, Contracts: Adjustment of Long-Term Economic Relations Under Classical, Neoclassical, and Relational Contract Law, 72 NW. U. L. REV. 854 (1978); Macneil, The Many Futures of Contracts, supra note 1;
28. Macaulay, Non-Contractual Relations, supra note 1.
29. Robert Hillman, Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law, 1987 DUKE L. J. 1.
30. Richard E. Speidel, Court-Imposed Price Adjustments Under Long-Term Supply Contracts, 76 NW. U. L. REV. 369 (1981).
31. Richard E. Speidel, The New Spirit of Contract, 2 J. LAW & COMM. 193 (1983).
32. Eric Posner, A Theory of Contract Law Under Conditions of Radical Judicial Error, 94 NW. U. L. REV. 749 (2000). Posner poses a mind experiment in which he assumes that courts are "radically incompetent" and asks what legal arrangements can be justified in those circumstances. The formalist strategy discussed in this Article does not assume radical incompetence, but only that courts are poorly equipped to pursue either of the two previous strategies.
33. Formalism in contract interpretation is not new, of course. But the "new formalism" rejects the categorical imperative to deduce rules from first principles that characterized classical formalism as practiced by the late-19th-century Langdellians. See Thomas C. Grey, Langdell's Orthodoxy, 45 U. PITT. L. REV. 1 (1983). The new formalism is pragmatic at its core, emphasizing the instrumental value of formalist modes of analysis. Grey identifies three elements that offer a useful taxonomy of the new formalist approach to interpretation: objectivism (a general preference for rules over standards), common-law conceptualism (a preference for treating common-law categories like contract as coherent structures of concepts and principles), and statutory textualism (a preference for text-based over purposive interpretation. This pragmatic, formalist approach to interpretation in contract law was first suggested in the legal literature by Alan Schwartz. See Alan Schwartz, Incomplete Contracts, 2 NEW PALGRAVE DICTIONARY OF ECONOMICS AND LAW 277 (1997).
34. Formalism in contract interpretation is not new, of course. But the "new formalism" rejects the categorical imperative to deduce rules from first principles that characterized classical formalism as practiced by the late-19th-century Langdellians. See Thomas C. Grey, Langdell's Orthodoxy, 45 U. PITT. L. REV. 1 (1983). The new formalism is pragmatic at its core, emphasizing the instrumental value of formalist modes of analysis. Grey identifies three elements that offer a useful taxonomy of the new formalist approach to interpretation: objectivism (a general preference for rules over standards), common-law conceptualism (a preference for treating common-law categories like contract as coherent structures of concepts and principles), and statutory textualism (a preference for text-based over purposive interpretation. This pragmatic, formalist approach to interpretation in contract law was first suggested in the legal literature by Alan Schwartz. See Alan Schwartz, Incomplete Contracts, 2 NEW PALGRAVE DICTIONARY OF ECONOMICS AND LAW 277 (1997).
35. Since formalist interpretation asks that the court respect the literal and explicit terms of the contract, it logically follows that individual parties can (and should be permitted to) opt out by agreeing ex ante to an express term in the contract that instructs courts to look to the contractual context in specific circumstances. Common examples of such terms are the "gross inequities" or "good faith adjustment" provisions commonly observed in long-term supply contracts. See generally, Robert E. Scott, Conflict and Cooperation in Long-Term Contracts, 75 CALIF. L. REV. 2005, 2051-53 (1987) [hereinafter Scott, Conflict and Cooperation]. Along the same general lines, the formalist approach would embrace the right of parties to expressly choose to have any subsequent contractual dispute adjudicated by courts using more functional or contextual modes of interpretation generally. Treating the interpretive methodology as a default rule rather than a mandatory or immutable rule is a logical corollary to one of the instrumental justifications for adopting a formalist methodology for interpretation: that most parties prefer inflexible legal rules deployed in concert with flexible social norms, but that reasons may exist for atypical parties to opt for a more aggressive approach to interpretation. See infra text accompanying notes 83, 84. In sum, literalist modes of interpretation are preferable strategies for the state because (and only because) they better reflect majoritarian preferences than the alternative, functional approaches. To be sure, part of the argument for formalist interpretation is the claim that it is a superior mechanism for generating useful standardized terms over time. On this basis, making formalist interpretation a mandatory rule would be one way to produce a greater supply of standardized terms and clauses that might not otherwise emerge if modes of interpretation are regarded as a matter of party choice. I analyze these questions more completely below; see infra Part III.
36. Since formalist interpretation asks that the court respect the literal and explicit terms of the contract, it logically follows that individual parties can (and should be permitted to) opt out by agreeing ex ante to an express term in the contract that instructs courts to look to the contractual context in specific circumstances. Common examples of such terms are the "gross inequities" or "good faith adjustment" provisions commonly observed in long-term supply contracts. See generally, Robert E. Scott, Conflict and Cooperation in Long-Term Contracts, 75 CALIF. L. REV. 2005, 2051-53 (1987) [hereinafter Scott, Conflict and Cooperation]. Along the same general lines, the formalist approach would embrace the right of parties to expressly choose to have any subsequent contractual dispute adjudicated by courts using more functional or contextual modes of interpretation generally. Treating the interpretive methodology as a default rule rather than a mandatory or immutable rule is a logical corollary to one of the instrumental justifications for adopting a formalist methodology for interpretation: that most parties prefer inflexible legal rules deployed in concert with flexible social norms, but that reasons may exist for atypical parties to opt for a more aggressive approach to interpretation. See infra text accompanying notes 83, 84. In sum, literalist modes of interpretation are preferable strategies for the state because (and only because) they better reflect majoritarian preferences than the alternative, functional approaches. To be sure, part of the argument for formalist interpretation is the claim that it is a superior mechanism for generating useful standardized terms over time. On this basis, making formalist interpretation a mandatory rule would be one way to produce a greater supply of standardized terms and clauses that might not otherwise emerge if modes of interpretation are regarded as a matter of party choice. I analyze these questions more completely below; see infra Part III.
37. See Macaulay, Non-Contractual Relations, supra note 1.
38. Scott, Theory of Default Rules, supra note 3 at 615. Lisa Bernstein has subsequently developed this argument in much greater detail. See Lisa Bernstein, Merchant Law in a Merchant Court: Rethinking the Code's Search for Immanent Business Norms, 144 U. PA. L. REV. 1765 (1996).
39. Scott, Theory of Default Rules, supra note 3 at 615. Lisa Bernstein has subsequently developed this argument in much greater detail. See Lisa Bernstein, Merchant Law in a Merchant Court: Rethinking the Code's Search for Immanent Business Norms, 144 U. PA. L. REV. 1765 (1996).
40. Scott, Theory of Default Rules, supra note 3, at 615.
41. Melvin A. Eisenberg, Why There Is No Law of Relational Contracts, 94 NW. U. L. REV. 805 (2000).
42. Transparency and predictability, in turn, support the so-called "objective theory" of contract interpretation. See ROBERT E. SCOTT & DOUGLAS L. LESLIE, CONTRACT LAW AND THEORY 21-23 (2d ed. 1993). This principle is famously illustrated in Judge Learned Hand's dictum: A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. If it were proved by twenty bishops that either party, when he used the words, intended something else than the usual meaning which the law imposed upon them, he would still be held . . . . Hotchkiss v. National City Bank, 200 F. 287, 293 (S.D.N.Y. 1911), aff'd 201 F.2d 664 (2d Cir. 1912), aff'd 231U.S. 50 (1913). See also the court's statement in Cernohorsky v. Northern Liquid Gas Co.: The language of a contract must be understood to mean what it clearly expresses. A court may not depart from the plain meaning of a contract where it is free from ambiguity. In construing the terms of a contract, where the terms are plain and unambiguous, it is the duty of the court to construe it as it stands, even though the parties may have placed a different construction on it. Cernohorsky v. Northern Liquid Gas Co., 68 N.W. 2d 429, 433 (1955).
43. The terms of an executory contract communicate the content of the exchange to the state. Thus, they constitute the principal legal definition of the parties' commitments. If the state fails to interpret correctly the content of the parties' promises or to specify accurately the rights being exchanged, the reliability of the contractual process is threatened. See Goetz & Scott, Limits of Expanded Choice, supra note 2, at 261-62, 264-65. The problem of "incompleteness" poses a particular problem for courts intent on minimizing interpretation errors. The risk of interpretation error increases if the decisionmaker must rationalize explicit contractual language with customary contractual norms.
44. For discussions of the efficiency value of standardization in contract and commercial law, see Goetz & Scott, Limits of Expanded Choice, supra note 2, at 286-288; Marcel Kahan & Michael Klausner, Standardization and Innovation in Corporate Contracting (Or "the Economics of Boilerplate"), 83 VA. L. REV. 713 (1997).
45. For discussions of the efficiency value of standardization in contract and commercial law, see Goetz & Scott, Limits of Expanded Choice, supra note 2, at 286-288; Marcel Kahan & Michael Klausner, Standardization and Innovation in Corporate Contracting (Or "the Economics of Boilerplate"), 83 VA. L. REV. 713 (1997).
46. Explicit contract terms that have a customary meaning include standard-form terms and clauses as well as other talismanic words and phrases. Definitional recognition of these terms by courts confers on them a status as "invocations," that is, terms that will have a legally circumscribed meaning once invoked. For example, expressions such as "F.O.B.," "F.A.S.," "C.I.F.," and "as is" carry predefined legal meanings that permit parties to predict ex ante the nature of their respective obligations under the contract. Invocations thus serve as legally unambiguous contractual signals. See Goetz & Scott, Limits of Expanded Choice, supra note 2, at 281-83.
47. Courts typically interpret the meaning of express terms in an agreement by looking to precisely the same commercial and legal context they use to identify and incorporate default terms. Unfortunately, by giving custom and usages of trade interpretive priority over the express terms in the contract, courts may unwittingly misinterpret the meaning of the express terms the parties have used. Thus, if the law treats the words used to opt out of an otherwise applicable custom or usage as themselves highly elastic and context-relative, attempts to escape those default understandings become problematic. See SCOTT & LESLIE, supra note 17, at 534-35. See also Goetz & Scott, Limits of Expanded Choice, supra note 2, at 283-86.
48. Courts typically interpret the meaning of express terms in an agreement by looking to precisely the same commercial and legal context they use to identify and incorporate default terms. Unfortunately, by giving custom and usages of trade interpretive priority over the express terms in the contract, courts may unwittingly misinterpret the meaning of the express terms the parties have used. Thus, if the law treats the words used to opt out of an otherwise applicable custom or usage as themselves highly elastic and context-relative, attempts to escape those default understandings become problematic. See SCOTT & LESLIE, supra note 17, at 534-35. See also Goetz & Scott, Limits of Expanded Choice, supra note 2, at 283-86.
49. See, e.g., Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (4th Cir. 1971) (course of dealing and usage of trade admitted into evidence to show that express price and quantity terms in written contract were only fair estimates); Modine Mfg. Co. v. North E. Indep. School Dist., 503 S.W. 2d 833, 837-38 (Tex. Civ. App. 1973) (trade usage admitted into evidence to show that express terms should be interpreted as permitting reasonable variations).
50. Jody S. Kraus & Steven D. Walt, In Defense of The Incorporation Strategy, in THE JURISPRUDENTIAL FOUNDATIONS OF CORPORATE AND COMMERCIAL LAW (Jody S. Kraus & Steven D. Walt eds., forthcoming 2000).
51. Majoritarian default rules are those that apply to the largest set of heterogeneous contractors. Tailored defaults, by contrast, apply to smaller subsets of homogeneous parties (such as merchants in a particular trade or business). See Robert E. Scott, The Uniformity Norm in Commercial Law: A Comparative Analysis of Common Law and Code Methodologies, in THE JURISPRUDENTIAL FOUNDATIONS OF CORPORATE AND COMMERCIAL LAW, supra note 23 [hereinafter Scott, Uniformity Norm].
52. Majoritarian default rules are those that apply to the largest set of heterogeneous contractors. Tailored defaults, by contrast, apply to smaller subsets of homogeneous parties (such as merchants in a particular trade or business). See Robert E. Scott, The Uniformity Norm in Commercial Law: A Comparative Analysis of Common Law and Code Methodologies, in THE JURISPRUDENTIAL FOUNDATIONS OF CORPORATE AND COMMERCIAL LAW, supra note 23 [hereinafter Scott, Uniformity Norm].
53. The classic example of this problem is the celebrated "chicken" case, Frigaliment Importing Co. v. B.N.S. Int'l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960) ("chicken" is stewing chicken, as seller contends, rather than broiler or fryer chicken). The Frigaliment case illustrates the use of words that are vague in the sense that they can apply to a wide spectrum of referents that cluster.
54. In addition to interpretive errors precipitated by the parties themselves, the state may, in effect, superimpose a new and thus erroneous interpretation on a contractual term that was well understood by the parties but is subsequently disputed for strategic motives.
55. See infra note 35.
56. See Goetz & Scott, Limits of Expanded Choice, supra note 2, at 286-87. This process functions in much the same way as the Food and Drug Administration's regime for testing new drugs. The FDA tests drugs well beyond the level of precautions that an individual would deploy for any particular product. This level of care explicitly recognizes the public benefits of guarding against low-probability but high-impact events. Similarly, contract terms may contain latent design defects that cannot be avoided by the simple expedient of urging individuals to exercise greater care in the contracting process. But over time these standard terms mature and are validated by accumulated experience. In that sense, they are "safer" than new, untested terms or combinations of terms. Id.
57. Activist incorporation of the commercial context is the hallmark of Article 2 of the U.C.C. The Code reverses the common-law presumption that the definitive elements of a contractual agreement are parties' writings and any legally supplied default rules (the "law of contract"). Under the Code, contextual evidence derived from experience and practice can trigger the incorporation of additional, implied terms. Thus, the Code defines "agreement" as the bargain of the parties in fact as found in their language or by implication from other circumstances, including course of dealing, usage of trade, or course of performance. U.C.C. § 1-201(3) (1995). See also U.C.C. §§ 1-205, 2-202, 2-208.
58. See, e.g., Brunswick Box Co. v. Coutinho, Caro & Co., 617 F.2d 355 (4th Cir. 1980) (course of performance and surrounding context suggest that standard meaning of F.A.S. term might not be applicable); Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (4th Cir. 1971) (course of dealing and usage of trade, if admitted in evidence, demonstrate that express price and quantity terms in written contract were only "fair estimates"); Modine Mfg., 503 S.W. 2d at 837-38 (trade usage admissible to show that express term "capacities shall not be less than indicated" should be interpreted as permitting "reasonable variations in cooling capacity").
59. For a representative sampling of the literature that argues for ex post adjustment, see, e.g., Stewart Macaulay, Elegant Models, Empirical Pictures, and the Complexities of Contract, 11 LAW & SOC'Y REV. 507 (1977); Leon Trakman, Winner Take Some: Loss Sharing and Commercial Impracticability, 69 Minn. L. Rev. 471 (1985); Hillman, supra note 7; Speidel, The New Spirit of Contract, 2 J. LAW & COMM. 193 (1982); Speidel, supra note 9. The summary in the text does not, of course, do justice to the differences in approach of the various ex post analysts. Thus, for example, the claim by Robert Hillman that courts should enforce the long term "relational duties" that are created by relational contracts could also be understood as directing courts to find and enforce the ex ante "reasonable expectations" of the parties rather than seek to adjust the contract equitably in order to reach a "fair" result ex post. But this interpretation of Hillman's argument seems inconsistent with the notion that enforcement of the contract should not be ordered where it would impose unforeseeable harms on the promisor. If the parties were aware of these relational duties when they signed the contract, then the duties would be part of the contract and the contract would allocate the risk optimally (or else the parties would not have agreed to it). Thus, this version of the argument collapses to the directive that courts should seek to achieve ex ante efficiency. The other way to understand Hillman's relational argument is that these relational duties direct courts simply to implement "fair" outcomes. This collapses Hillman's relational view into the argument for ex post adjustment advanced by Speidel and others.
60. For a representative sampling of the literature that argues for ex post adjustment, see, e.g., Stewart Macaulay, Elegant Models, Empirical Pictures, and the Complexities of Contract, 11 LAW & SOC'Y REV. 507 (1977); Leon Trakman, Winner Take Some: Loss Sharing and Commercial Impracticability, 69 Minn. L. Rev. 471 (1985); Hillman, supra note 7; Speidel, The New Spirit of Contract, 2 J. LAW & COMM. 193 (1982); Speidel, supra note 9. The summary in the text does not, of course, do justice to the differences in approach of the various ex post analysts. Thus, for example, the claim by Robert Hillman that courts should enforce the long term "relational duties" that are created by relational contracts could also be understood as directing courts to find and enforce the ex ante "reasonable expectations" of the parties rather than seek to adjust the contract equitably in order to reach a "fair" result ex post. But this interpretation of Hillman's argument seems inconsistent with the notion that enforcement of the contract should not be ordered where it would impose unforeseeable harms on the promisor. If the parties were aware of these relational duties when they signed the contract, then the duties would be part of the contract and the contract would allocate the risk optimally (or else the parties would not have agreed to it). Thus, this version of the argument collapses to the directive that courts should seek to achieve ex ante efficiency. The other way to understand Hillman's relational argument is that these relational duties direct courts simply to implement "fair" outcomes. This collapses Hillman's relational view into the argument for ex post adjustment advanced by Speidel and others.
61. For a representative sampling of the literature that argues for ex post adjustment, see, e.g., Stewart Macaulay, Elegant Models, Empirical Pictures, and the Complexities of Contract, 11 LAW & SOC'Y REV. 507 (1977); Leon Trakman, Winner Take Some: Loss Sharing and Commercial Impracticability, 69 Minn. L. Rev. 471 (1985); Hillman, supra note 7; Speidel, The New Spirit of Contract, 2 J. LAW & COMM. 193 (1982); Speidel, supra note 9. The summary in the text does not, of course, do justice to the differences in approach of the various ex post analysts. Thus, for example, the claim by Robert Hillman that courts should enforce the long term "relational duties" that are created by relational contracts could also be understood as directing courts to find and enforce the ex ante "reasonable expectations" of the parties rather than seek to adjust the contract equitably in order to reach a "fair" result ex post. But this interpretation of Hillman's argument seems inconsistent with the notion that enforcement of the contract should not be ordered where it would impose unforeseeable harms on the promisor. If the parties were aware of these relational duties when they signed the contract, then the duties would be part of the contract and the contract would allocate the risk optimally (or else the parties would not have agreed to it). Thus, this version of the argument collapses to the directive that courts should seek to achieve ex ante efficiency. The other way to understand Hillman's relational argument is that these relational duties direct courts simply to implement "fair" outcomes. This collapses Hillman's relational view into the argument for ex post adjustment advanced by Speidel and others.
62. For a representative sampling of the literature that argues for ex post adjustment, see, e.g., Stewart Macaulay, Elegant Models, Empirical Pictures, and the Complexities of Contract, 11 LAW & SOC'Y REV. 507 (1977); Leon Trakman, Winner Take Some: Loss Sharing and Commercial Impracticability, 69 Minn. L. Rev. 471 (1985); Hillman, supra note 7; Speidel, The New Spirit of Contract, 2 J. LAW & COMM. 193 (1982); Speidel, supra note 9. The summary in the text does not, of course, do justice to the differences in approach of the various ex post analysts. Thus, for example, the claim by Robert Hillman that courts should enforce the long term "relational duties" that are created by relational contracts could also be understood as directing courts to find and enforce the ex ante "reasonable expectations" of the parties rather than seek to adjust the contract equitably in order to reach a "fair" result ex post. But this interpretation of Hillman's argument seems inconsistent with the notion that enforcement of the contract should not be ordered where it would impose unforeseeable harms on the promisor. If the parties were aware of these relational duties when they signed the contract, then the duties would be part of the contract and the contract would allocate the risk optimally (or else the parties would not have agreed to it). Thus, this version of the argument collapses to the directive that courts should seek to achieve ex ante efficiency. The other way to understand Hillman's relational argument is that these relational duties direct courts simply to implement "fair" outcomes. This collapses Hillman's relational view into the argument for ex post adjustment advanced by Speidel and others.
63. For a representative sampling of the literature that argues for ex post adjustment, see, e.g., Stewart Macaulay, Elegant Models, Empirical Pictures, and the Complexities of Contract, 11 LAW & SOC'Y REV. 507 (1977); Leon Trakman, Winner Take Some: Loss Sharing and Commercial Impracticability, 69 Minn. L. Rev. 471 (1985); Hillman, supra note 7; Speidel, The New Spirit of Contract, 2 J. LAW & COMM. 193 (1982); Speidel, supra note 9. The summary in the text does not, of course, do justice to the differences in approach of the various ex post analysts. Thus, for example, the claim by Robert Hillman that courts should enforce the long term "relational duties" that are created by relational contracts could also be understood as directing courts to find and enforce the ex ante "reasonable expectations" of the parties rather than seek to adjust the contract equitably in order to reach a "fair" result ex post. But this interpretation of Hillman's argument seems inconsistent with the notion that enforcement of the contract should not be ordered where it would impose unforeseeable harms on the promisor. If the parties were aware of these relational duties when they signed the contract, then the duties would be part of the contract and the contract would allocate the risk optimally (or else the parties would not have agreed to it). Thus, this version of the argument collapses to the directive that courts should seek to achieve ex ante efficiency. The other way to understand Hillman's relational argument is that these relational duties direct courts simply to implement "fair" outcomes. This collapses Hillman's relational view into the argument for ex post adjustment advanced by Speidel and others.
64. See ALAN SCHWARTZ & ROBERT E. SCOTT, SALES LAW AND THE CONTRACTING PROCESS 436-86 (2d ed. 1991) (citing cases and secondary sources).
65. Id. at 482-83. For a view that implicit contractual agreements exist and should be encouraged, see Scott, Conflict and Cooperation, supra note 12.
66. Id. at 482-83. For a view that implicit contractual agreements exist and should be encouraged, see Scott, Conflict and Cooperation, supra note 12.
67. This is the same argument that textualists in other areas of law, such as statutory interpretation, have used to reject the use of contextual evidence such as legislative history to illuminate the text. Under this formalist approach to contract interpretation, a court would enforce a contract - say, one in which the seller expressly undertakes to deliver x quantity of goods at y price over z months - even though changed circumstances in fact caused one of the parties to face considerable losses. The argument is that the parties are as familiar as anyone with the risk of changed circumstances, and this literal method of interpretation avoids the error that results when courts fill gaps incorrectly. To be sure, this method of interpretation will also generate error, in that courts will not complete contracts in ways that maximize the joint value of the contract to the parties. But this error is predictable, and thus the parties can anticipate it and use the predicted and predictable legal outcome as the basis for renegotiating the contract once conditions change. This is a benefit to the parties, one that may outweigh the costs of not trying to fill contractual gaps, especially if the courts lack the competence to engage in socially beneficial gap filling. See Eric Posner, supra note 10.
68. The federal copyright statute offers a seemingly broad and expansive protection for all "original works of authorship." 17 U.S.C. 102 (1982). Nonetheless, it is unclear whether a contract form or term is copyrightable at all. Where, for example, an uncopyrightable idea is so straightforward or narrow that there are necessarily only a limited number of ways to express it, any particular form of expressing that idea will also be uncopyrightable. The rationale for this limitation is to prevent the underlying idea from being monopolized. See Morrissey v. Proctor & Gamble Co., 379 F.2d 675 (1967). Moreover, even if copyright protection is available for a particular innovative contractual clause, the substantive ideas that it expresses remain public goods. Thus, other parties are free to embody similar contractual provisions in their agreements and may use suitable words to express such provisions. See. e.g., Dorsey v. Old Surety Life Ins. Co., 98 F.2d 872 (10th Cir. 1938). Trade secret rules offer no alternative protection for innovative contract terms since it is the breach of confidence by unauthorized disclosure, rather than infringement of a property right, that is the gravamen of trade
69. This point is a central element in the claim by Jody Kraus and Steve Walt that critics of the incorporation "strategy" have ignored the "specification cost" of alternative interpretive strategies. See Kraus & Walt, supra note 23. To the contrary, however, I have argued in an earlier paper, and argue again in this Article, that notwithstanding the evident specification costs of a return to formal modes of interpretation, available theory and experience both suggest that the incorporation approach may well be more costly than the more formal, common-law alternative. See Scott, Uniformity Norm, supra note 24 at 153-64; see also infra text accompanying notes 50-69.
70. This point is a central element in the claim by Jody Kraus and Steve Walt that critics of the incorporation "strategy" have ignored the "specification cost" of alternative interpretive strategies. See Kraus & Walt, supra note 23. To the contrary, however, I have argued in an earlier paper, and argue again in this Article, that notwithstanding the evident specification costs of a return to formal modes of interpretation, available theory and experience both suggest that the incorporation approach may well be more costly than the more formal, common-law alternative. See Scott, Uniformity Norm, supra note 24 at 153-64; see also infra text accompanying notes 50-69.
71. See Scott, Conflict and Cooperation, supra note 12, at 2039-42. Scholars have long recognized that group-generated norms, systems of individual ethics, and other extralegal mechanisms play important roles in regulating contractual relationships. While we are a long way from an accepted theory of social control, few would quarrel with the claim that social and relational norms serve functional purposes. See, e.g., Krebs & Miller, Altruism and Aggression, in 2 THE HANDBOOK OF SOCIAL PSYCHOLOGY 18-19 (G. Lindzey & E. Aronson eds., 3d ed. 1985); Gouldner, The Norm of Reciprocity: A Preliminary Statement, 25 AM. SOCIOLOGICAL REVIEW 161, 172-176 (1960) (norm of reciprocity functions as a stabilizing force, cementing social relationships and discouraging exploitation); Elaine Hatfield Walster et al., EQUITY: THEORY AND RESEARCH 6-8, 15-16 (1978) (socially generated norms of equity serve to prevent individuals from following their natural inclinations to maximize their own outcomes at others' expense); ROBERT ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES (1991) (absent social imperfections, such as the lack of any prospect of a future relationship, the norms that govern relations among members of a group will tend to maximize the aggregate wealth of group members).
72. See Scott, Conflict and Cooperation, supra note 12, at 2039-42. Scholars have long recognized that group-generated norms, systems of individual ethics, and other extralegal mechanisms play important roles in regulating contractual relationships. While we are a long way from an accepted theory of social control, few would quarrel with the claim that social and relational norms serve functional purposes. See, e.g., Krebs & Miller, Altruism and Aggression, in 2 THE HANDBOOK OF SOCIAL PSYCHOLOGY 18-19 (G. Lindzey & E. Aronson eds., 3d ed. 1985); Gouldner, The Norm of Reciprocity: A Preliminary Statement, 25 AM. SOCIOLOGICAL REVIEW 161, 172-176 (1960) (norm of reciprocity functions as a stabilizing force, cementing social relationships and discouraging exploitation); Elaine Hatfield Walster et al., EQUITY: THEORY AND RESEARCH 6-8, 15-16 (1978) (socially generated norms of equity serve to prevent individuals from following their natural inclinations to maximize their own outcomes at others' expense); ROBERT ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES (1991) (absent social imperfections, such as the lack of any prospect of a future relationship, the norms that govern relations among members of a group will tend to maximize the aggregate wealth of group members).
73. See Scott, Conflict and Cooperation, supra note 12, at 2039-42. Scholars have long recognized that group-generated norms, systems of individual ethics, and other extralegal mechanisms play important roles in regulating contractual relationships. While we are a long way from an accepted theory of social control, few would quarrel with the claim that social and relational norms serve functional purposes. See, e.g., Krebs & Miller, Altruism and Aggression, in 2 THE HANDBOOK OF SOCIAL PSYCHOLOGY 18-19 (G. Lindzey & E. Aronson eds., 3d ed. 1985); Gouldner, The Norm of Reciprocity: A Preliminary Statement, 25 AM. SOCIOLOGICAL REVIEW 161, 172-176 (1960) (norm of reciprocity functions as a stabilizing force, cementing social relationships and discouraging exploitation); Elaine Hatfield Walster et al., EQUITY: THEORY AND RESEARCH 6-8, 15-16 (1978) (socially generated norms of equity serve to prevent individuals from following their natural inclinations to maximize their own outcomes at others' expense); ROBERT ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES (1991) (absent social imperfections, such as the lack of any prospect of a future relationship, the norms that govern relations among members of a group will tend to maximize the aggregate wealth of group members).
74. See Scott, Conflict and Cooperation, supra note 12, at 2039-42. Scholars have long recognized that group-generated norms, systems of individual ethics, and other extralegal mechanisms play important roles in regulating contractual relationships. While we are a long way from an accepted theory of social control, few would quarrel with the claim that social and relational norms serve functional purposes. See, e.g., Krebs & Miller, Altruism and Aggression, in 2 THE HANDBOOK OF SOCIAL PSYCHOLOGY 18-19 (G. Lindzey & E. Aronson eds., 3d ed. 1985); Gouldner, The Norm of Reciprocity: A Preliminary Statement, 25 AM. SOCIOLOGICAL REVIEW 161, 172-176 (1960) (norm of reciprocity functions as a stabilizing force, cementing social relationships and discouraging exploitation); Elaine Hatfield Walster et al., EQUITY: THEORY AND RESEARCH 6-8, 15-16 (1978) (socially generated norms of equity serve to prevent individuals from following their natural inclinations to maximize their own outcomes at others' expense); ROBERT ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES (1991) (absent social imperfections, such as the lack of any prospect of a future relationship, the norms that govern relations among members of a group will tend to maximize the aggregate wealth of group members).
75. See Scott, Conflict and Cooperation, supra note 12, at 2039-42. Scholars have long recognized that group-generated norms, systems of individual ethics, and other extralegal mechanisms play important roles in regulating contractual relationships. While we are a long way from an accepted theory of social control, few would quarrel with the claim that social and relational norms serve functional purposes. See, e.g., Krebs & Miller, Altruism and Aggression, in 2 THE HANDBOOK OF SOCIAL PSYCHOLOGY 18-19 (G. Lindzey & E. Aronson eds., 3d ed. 1985); Gouldner, The Norm of Reciprocity: A Preliminary Statement, 25 AM. SOCIOLOGICAL REVIEW 161, 172-176 (1960) (norm of reciprocity functions as a stabilizing force, cementing social relationships and discouraging exploitation); Elaine Hatfield Walster et al., EQUITY: THEORY AND RESEARCH 6-8, 15-16 (1978) (socially generated norms of equity serve to prevent individuals from following their natural inclinations to maximize their own outcomes at others' expense); ROBERT ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES (1991) (absent social imperfections, such as the lack of any prospect of a future relationship, the norms that govern relations among members of a group will tend to maximize the aggregate wealth of group members).
76. One explanation for the norms that emerge from business contexts is their utility as supplemental methods of regulating commercial relationships. See generally Richard D. Alexander, Evolution and Culture, in EVOLUTIONARY BIOLOGICAL AND HUMAN SOCIAL BEHAVIOR 59, 68-69 (Napoleon A. Chagnon & William Irons eds., 1979); William H. Durham, Toward a Coevolutionary Theory of Human Biology and Culture, in EVOLUTIONARY BIOLOGY AND HUMAN SOCIAL BEHAVIOR 39, 52 (because the well-being of individuals depends on the success of their groups, it is in most individuals' self-interest to accept and obey "norms, rules and cultural controls on excessively selfish individual behaviors").
77. One explanation for the norms that emerge from business contexts is their utility as supplemental methods of regulating commercial relationships. See generally Richard D. Alexander, Evolution and Culture, in EVOLUTIONARY BIOLOGICAL AND HUMAN SOCIAL BEHAVIOR 59, 68-69 (Napoleon A. Chagnon & William Irons eds., 1979); William H. Durham, Toward a Coevolutionary Theory of Human Biology and Culture, in EVOLUTIONARY BIOLOGY AND HUMAN SOCIAL BEHAVIOR 39, 52 (because the well-being of individuals depends on the success of their groups, it is in most individuals' self-interest to accept and obey "norms, rules and cultural controls on excessively selfish individual behaviors").
78. See generally Elizabeth S. Scott & Robert E. Scott, Marriage as Relational Contract, 84 VA. L. REV. 1225, 1288-1300 (1998) (discussing the benefits of not judicializing social and relational norms in the marital context).
79. For a representative sampling of the economics literature on incomplete contracting, see Sharon Gifford, Limited Attention and the Optimal Incompleteness of Contracts, 15 J. L. ECON. & ORG. 468 (1999); Jonathan Thomas & Tim Worrall, Income Fluctuations and Asymmetric Information, 51 J. ECON.THEORY 367 (1991); M. Dewatripont & E. Maskin, Contractual Contingencies and Renegotiation, 26 RAND J. ECON 704 (1995); B. Bernheim & M. Whinston, Incomplete Contracts and Strategic Ambiguity, 88 AM. ECON. REV. 432 (1998); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart, Incomplete Contracts and the Theory of the Firm, 4 J. L. ECON. & ORG. 119 (1988); G. Huberman & C. Kahn, Limited Contract Enforcement and Strategic Renegotiation, 78 AM. ECON. REV. 471 (1988); K. E. Spier, Incomplete Contracts and Signaling, 23 RAND J. ECON. 432 (1992); Ilya Segal, Complexity and Renegotiation: A Foundation for Incomplete Contracts, 66 REV. ECON. STUDIES 57 (1999); Benjamin E. Hermalin & Michael L. Katz, Moral Hazard and Verifiability: The Effects of Renegotiation in Agency, 59 ECONOMETRICA 1735 (1991).
80. For a representative sampling of the economics literature on incomplete contracting, see Sharon Gifford, Limited Attention and the Optimal Incompleteness of Contracts, 15 J. L. ECON. & ORG. 468 (1999); Jonathan Thomas & Tim Worrall, Income Fluctuations and Asymmetric Information, 51 J. ECON.THEORY 367 (1991); M. Dewatripont & E. Maskin, Contractual Contingencies and Renegotiation, 26 RAND J. ECON 704 (1995); B. Bernheim & M. Whinston, Incomplete Contracts and Strategic Ambiguity, 88 AM. ECON. REV. 432 (1998); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart, Incomplete Contracts and the Theory of the Firm, 4 J. L. ECON. & ORG. 119 (1988); G. Huberman & C. Kahn, Limited Contract Enforcement and Strategic Renegotiation, 78 AM. ECON. REV. 471 (1988); K. E. Spier, Incomplete Contracts and Signaling, 23 RAND J. ECON. 432 (1992); Ilya Segal, Complexity and Renegotiation: A Foundation for Incomplete Contracts, 66 REV. ECON. STUDIES 57 (1999); Benjamin E. Hermalin & Michael L. Katz, Moral Hazard and Verifiability: The Effects of Renegotiation in Agency, 59 ECONOMETRICA 1735 (1991).
81. For a representative sampling of the economics literature on incomplete contracting, see Sharon Gifford, Limited Attention and the Optimal Incompleteness of Contracts, 15 J. L. ECON. & ORG. 468 (1999); Jonathan Thomas & Tim Worrall, Income Fluctuations and Asymmetric Information, 51 J. ECON.THEORY 367 (1991); M. Dewatripont & E. Maskin, Contractual Contingencies and Renegotiation, 26 RAND J. ECON 704 (1995); B. Bernheim & M. Whinston, Incomplete Contracts and Strategic Ambiguity, 88 AM. ECON. REV. 432 (1998); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart, Incomplete Contracts and the Theory of the Firm, 4 J. L. ECON. & ORG. 119 (1988); G. Huberman & C. Kahn, Limited Contract Enforcement and Strategic Renegotiation, 78 AM. ECON. REV. 471 (1988); K. E. Spier, Incomplete Contracts and Signaling, 23 RAND J. ECON. 432 (1992); Ilya Segal, Complexity and Renegotiation: A Foundation for Incomplete Contracts, 66 REV. ECON. STUDIES 57 (1999); Benjamin E. Hermalin & Michael L. Katz, Moral Hazard and Verifiability: The Effects of Renegotiation in Agency, 59 ECONOMETRICA 1735 (1991).
82. For a representative sampling of the economics literature on incomplete contracting, see Sharon Gifford, Limited Attention and the Optimal Incompleteness of Contracts, 15 J. L. ECON. & ORG. 468 (1999); Jonathan Thomas & Tim Worrall, Income Fluctuations and Asymmetric Information, 51 J. ECON.THEORY 367 (1991); M. Dewatripont & E. Maskin, Contractual Contingencies and Renegotiation, 26 RAND J. ECON 704 (1995); B. Bernheim & M. Whinston, Incomplete Contracts and Strategic Ambiguity, 88 AM. ECON. REV. 432 (1998); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart, Incomplete Contracts and the Theory of the Firm, 4 J. L. ECON. & ORG. 119 (1988); G. Huberman & C. Kahn, Limited Contract Enforcement and Strategic Renegotiation, 78 AM. ECON. REV. 471 (1988); K. E. Spier, Incomplete Contracts and Signaling, 23 RAND J. ECON. 432 (1992); Ilya Segal, Complexity and Renegotiation: A Foundation for Incomplete Contracts, 66 REV. ECON. STUDIES 57 (1999); Benjamin E. Hermalin & Michael L. Katz, Moral Hazard and Verifiability: The Effects of Renegotiation in Agency, 59 ECONOMETRICA 1735 (1991).
83. For a representative sampling of the economics literature on incomplete contracting, see Sharon Gifford, Limited Attention and the Optimal Incompleteness of Contracts, 15 J. L. ECON. & ORG. 468 (1999); Jonathan Thomas & Tim Worrall, Income Fluctuations and Asymmetric Information, 51 J. ECON.THEORY 367 (1991); M. Dewatripont & E. Maskin, Contractual Contingencies and Renegotiation, 26 RAND J. ECON 704 (1995); B. Bernheim & M. Whinston, Incomplete Contracts and Strategic Ambiguity, 88 AM. ECON. REV. 432 (1998); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart, Incomplete Contracts and the Theory of the Firm, 4 J. L. ECON. & ORG. 119 (1988); G. Huberman & C. Kahn, Limited Contract Enforcement and Strategic Renegotiation, 78 AM. ECON. REV. 471 (1988); K. E. Spier, Incomplete Contracts and Signaling, 23 RAND J. ECON. 432 (1992); Ilya Segal, Complexity and Renegotiation: A Foundation for Incomplete Contracts, 66 REV. ECON. STUDIES 57 (1999); Benjamin E. Hermalin & Michael L. Katz, Moral Hazard and Verifiability: The Effects of Renegotiation in Agency, 59 ECONOMETRICA 1735 (1991).
84. For a representative sampling of the economics literature on incomplete contracting, see Sharon Gifford, Limited Attention and the Optimal Incompleteness of Contracts, 15 J. L. ECON. & ORG. 468 (1999); Jonathan Thomas & Tim Worrall, Income Fluctuations and Asymmetric Information, 51 J. ECON.THEORY 367 (1991); M. Dewatripont & E. Maskin, Contractual Contingencies and Renegotiation, 26 RAND J. ECON 704 (1995); B. Bernheim & M. Whinston, Incomplete Contracts and Strategic Ambiguity, 88 AM. ECON. REV. 432 (1998); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart, Incomplete Contracts and the Theory of the Firm, 4 J. L. ECON. & ORG. 119 (1988); G. Huberman & C. Kahn, Limited Contract Enforcement and Strategic Renegotiation, 78 AM. ECON. REV. 471 (1988); K. E. Spier, Incomplete Contracts and Signaling, 23 RAND J. ECON. 432 (1992); Ilya Segal, Complexity and Renegotiation: A Foundation for Incomplete Contracts, 66 REV. ECON. STUDIES 57 (1999); Benjamin E. Hermalin & Michael L. Katz, Moral Hazard and Verifiability: The Effects of Renegotiation in Agency, 59 ECONOMETRICA 1735 (1991).
85. For a representative sampling of the economics literature on incomplete contracting, see Sharon Gifford, Limited Attention and the Optimal Incompleteness of Contracts, 15 J. L. ECON. & ORG. 468 (1999); Jonathan Thomas & Tim Worrall, Income Fluctuations and Asymmetric Information, 51 J. ECON.THEORY 367 (1991); M. Dewatripont & E. Maskin, Contractual Contingencies and Renegotiation, 26 RAND J. ECON 704 (1995); B. Bernheim & M. Whinston, Incomplete Contracts and Strategic Ambiguity, 88 AM. ECON. REV. 432 (1998); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart, Incomplete Contracts and the Theory of the Firm, 4 J. L. ECON. & ORG. 119 (1988); G. Huberman & C. Kahn, Limited Contract Enforcement and Strategic Renegotiation, 78 AM. ECON. REV. 471 (1988); K. E. Spier, Incomplete Contracts and Signaling, 23 RAND J. ECON. 432 (1992); Ilya Segal, Complexity and Renegotiation: A Foundation for Incomplete Contracts, 66 REV. ECON. STUDIES 57 (1999); Benjamin E. Hermalin & Michael L. Katz, Moral Hazard and Verifiability: The Effects of Renegotiation in Agency, 59 ECONOMETRICA 1735 (1991).
86. For a representative sampling of the economics literature on incomplete contracting, see Sharon Gifford, Limited Attention and the Optimal Incompleteness of Contracts, 15 J. L. ECON. & ORG. 468 (1999); Jonathan Thomas & Tim Worrall, Income Fluctuations and Asymmetric Information, 51 J. ECON.THEORY 367 (1991); M. Dewatripont & E. Maskin, Contractual Contingencies and Renegotiation, 26 RAND J. ECON 704 (1995); B. Bernheim & M. Whinston, Incomplete Contracts and Strategic Ambiguity, 88 AM. ECON. REV. 432 (1998); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart, Incomplete Contracts and the Theory of the Firm, 4 J. L. ECON. & ORG. 119 (1988); G. Huberman & C. Kahn, Limited Contract Enforcement and Strategic Renegotiation, 78 AM. ECON. REV. 471 (1988); K. E. Spier, Incomplete Contracts and Signaling, 23 RAND J. ECON. 432 (1992); Ilya Segal, Complexity and Renegotiation: A Foundation for Incomplete Contracts, 66 REV. ECON. STUDIES 57 (1999); Benjamin E. Hermalin & Michael L. Katz, Moral Hazard and Verifiability: The Effects of Renegotiation in Agency, 59 ECONOMETRICA 1735 (1991).
87. For a representative sampling of the economics literature on incomplete contracting, see Sharon Gifford, Limited Attention and the Optimal Incompleteness of Contracts, 15 J. L. ECON. & ORG. 468 (1999); Jonathan Thomas & Tim Worrall, Income Fluctuations and Asymmetric Information, 51 J. ECON.THEORY 367 (1991); M. Dewatripont & E. Maskin, Contractual Contingencies and Renegotiation, 26 RAND J. ECON 704 (1995); B. Bernheim & M. Whinston, Incomplete Contracts and Strategic Ambiguity, 88 AM. ECON. REV. 432 (1998); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart, Incomplete Contracts and the Theory of the Firm, 4 J. L. ECON. & ORG. 119 (1988); G. Huberman & C. Kahn, Limited Contract Enforcement and Strategic Renegotiation, 78 AM. ECON. REV. 471 (1988); K. E. Spier, Incomplete Contracts and Signaling, 23 RAND J. ECON. 432 (1992); Ilya Segal, Complexity and Renegotiation: A Foundation for Incomplete Contracts, 66 REV. ECON. STUDIES 57 (1999); Benjamin E. Hermalin & Michael L. Katz, Moral Hazard and Verifiability: The Effects of Renegotiation in Agency, 59 ECONOMETRICA 1735 (1991).
88. For a representative sampling of the economics literature on incomplete contracting, see Sharon Gifford, Limited Attention and the Optimal Incompleteness of Contracts, 15 J. L. ECON. & ORG. 468 (1999); Jonathan Thomas & Tim Worrall, Income Fluctuations and Asymmetric Information, 51 J. ECON.THEORY 367 (1991); M. Dewatripont & E. Maskin, Contractual Contingencies and Renegotiation, 26 RAND J. ECON 704 (1995); B. Bernheim & M. Whinston, Incomplete Contracts and Strategic Ambiguity, 88 AM. ECON. REV. 432 (1998); Oliver Hart & John Moore, Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988); Oliver Hart, Incomplete Contracts and the Theory of the Firm, 4 J. L. ECON. & ORG. 119 (1988); G. Huberman & C. Kahn, Limited Contract Enforcement and Strategic Renegotiation, 78 AM. ECON. REV. 471 (1988); K. E. Spier, Incomplete Contracts and Signaling, 23 RAND J. ECON. 432 (1992); Ilya Segal, Complexity and Renegotiation: A Foundation for Incomplete Contracts, 66 REV. ECON. STUDIES 57 (1999); Benjamin E. Hermalin & Michael L. Katz, Moral Hazard and Verifiability: The Effects of Renegotiation in Agency, 59 ECONOMETRICA 1735 (1991).
89. For a discussion in the legal literature, see Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on a Theory of Efficient Breach, 77 COLUM. L. REV. 554 (1977). For formal analyses that appeal to exogenous transactions costs to explain or justify incomplete contracts, see Huberman & Kahn, supra note 40; Spier, supra note 40.
90. For a discussion in the legal literature, see Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on a Theory of Efficient Breach, 77 COLUM. L. REV. 554 (1977). For formal analyses that appeal to exogenous transactions costs to explain or justify incomplete contracts, see Huberman & Kahn, supra note 40; Spier, supra note 40.
91. For a discussion in the legal literature, see Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on a Theory of Efficient Breach, 77 COLUM. L. REV. 554 (1977). For formal analyses that appeal to exogenous transactions costs to explain or justify incomplete contracts, see Huberman & Kahn, supra note 40; Spier, supra note 40.
92. See Charles J. Goetz & Robert E. Scott, Principles of Relational Contracts, 67 VA. L. REV. 1089, 1092-102 (1981). For formal analyses of the effects of uncertainty and complexity, see W. B. MacLeod, Decision, Contract, and Emotion: Some Economics for a Complex and Confusing World, 29 CANADIAN J. ECON. 788 (1996); Segal, supra note 40.
93. See Charles J. Goetz & Robert E. Scott, Principles of Relational Contracts, 67 VA. L. REV. 1089, 1092-102 (1981). For formal analyses of the effects of uncertainty and complexity, see W. B. MacLeod, Decision, Contract, and Emotion: Some Economics for a Complex and Confusing World, 29 CANADIAN J. ECON. 788 (1996); Segal, supra note 40.
94. See Charles J. Goetz & Robert E. Scott, Principles of Relational Contracts, 67 VA. L. REV. 1089, 1092-102 (1981). For formal analyses of the effects of uncertainty and complexity, see W. B. MacLeod, Decision, Contract, and Emotion: Some Economics for a Complex and Confusing World, 29 CANADIAN J. ECON. 788 (1996); Segal, supra note 40.
95. See Schwartz, supra note 3 and sources cited therein; MacLeod, supra note 42.
96. See Schwartz, supra note 3 and sources cited therein; MacLeod, supra note 42.
97. Scott, Uniformity Norm, supra note 24; Schwartz, Incomplete Contracts, supra note 11; Ayres & Gertner, Contractual Inefficiency, supra note 3. For formal analyses of the effects of asymmetric information on incomplete contracting, see Benjamin E. Hermalin & Michael L. Katz, Judicial Modification of Contracts Between Sophisticated Parties: A More Complete View of Incomplete Contracts and their Breach, 9 J. L. ECON. & ORG. 98 (1993); Thomas & Worrall, supra note 40; Bernheim & Whinston, supra note 40.
98. Scott, Uniformity Norm, supra note 24; Schwartz, Incomplete Contracts, supra note 11; Ayres & Gertner, Contractual Inefficiency, supra note 3. For formal analyses of the effects of asymmetric information on incomplete contracting, see Benjamin E. Hermalin & Michael L. Katz, Judicial Modification of Contracts Between Sophisticated Parties: A More Complete View of Incomplete Contracts and their Breach, 9 J. L. ECON. & ORG. 98 (1993); Thomas & Worrall, supra note 40; Bernheim & Whinston, supra note 40.
99. Scott, Uniformity Norm, supra note 24; Schwartz, Incomplete Contracts, supra note 11; Ayres & Gertner, Contractual Inefficiency, supra note 3. For formal analyses of the effects of asymmetric information on incomplete contracting, see Benjamin E. Hermalin & Michael L. Katz, Judicial Modification of Contracts Between Sophisticated Parties: A More Complete View of Incomplete Contracts and their Breach, 9 J. L. ECON. & ORG. 98 (1993); Thomas & Worrall, supra note 40; Bernheim & Whinston, supra note 40.
100. Scott, Uniformity Norm, supra note 24; Schwartz, Incomplete Contracts, supra note 11; Ayres & Gertner, Contractual Inefficiency, supra note 3. For formal analyses of the effects of asymmetric information on incomplete contracting, see Benjamin E. Hermalin & Michael L. Katz, Judicial Modification of Contracts Between Sophisticated Parties: A More Complete View of Incomplete Contracts and their Breach, 9 J. L. ECON. & ORG. 98 (1993); Thomas & Worrall, supra note 40; Bernheim & Whinston, supra note 40.
101. Scott, Uniformity Norm, supra note 24; Schwartz, Incomplete Contracts, supra note 11; Ayres & Gertner, Contractual Inefficiency, supra note 3. For formal analyses of the effects of asymmetric information on incomplete contracting, see Benjamin E. Hermalin & Michael L. Katz, Judicial Modification of Contracts Between Sophisticated Parties: A More Complete View of Incomplete Contracts and their Breach, 9 J. L. ECON. & ORG. 98 (1993); Thomas & Worrall, supra note 40; Bernheim & Whinston, supra note 40.
102. Scott, Uniformity Norm, supra note 24; Schwartz, Incomplete Contracts, supra note 11; Ayres & Gertner, Contractual Inefficiency, supra note 3. For formal analyses of the effects of asymmetric information on incomplete contracting, see Benjamin E. Hermalin & Michael L. Katz, Judicial Modification of Contracts Between Sophisticated Parties: A More Complete View of Incomplete Contracts and their Breach, 9 J. L. ECON. & ORG. 98 (1993); Thomas & Worrall, supra note 40; Bernheim & Whinston, supra note 40.
103. Schwartz, Incomplete Contracts, supra note 11, at 11. The problems caused by asymmetric information will preclude courts from creating "problem-solving" defaults but do not, by themselves, preclude efforts to stimulate information exchange between the parties. The rule of Hadley v. Baxendale is the most salient illustration of such information-forcing defaults. However, crafting such defaults so as to induce efficient exchange of private information requires that courts have specific information about the relative market power and strategic position of the parties. See Adler, supra note 3; Ian Ayers & Robert Gertner, Majoritarian v. Minoritarian Defaults, 51 STAN. L. REV. 1591 (1999). See also Scott, Theory of Default Rules, supra note 3; Ayres & Gertner, Filling Gaps, supra note 3; Johnston, Strategic Bargaining, supra note 3; Bebchuk & Shavell, Information and the Scope of Liability, supra note 3.
104. Schwartz, Incomplete Contracts, supra note 11, at 11. The problems caused by asymmetric information will preclude courts from creating "problem-solving" defaults but do not, by themselves, preclude efforts to stimulate information exchange between the parties. The rule of Hadley v. Baxendale is the most salient illustration of such information-forcing defaults. However, crafting such defaults so as to induce efficient exchange of private information requires that courts have specific information about the relative market power and strategic position of the parties. See Adler, supra note 3; Ian Ayers & Robert Gertner, Majoritarian v. Minoritarian Defaults, 51 STAN. L. REV. 1591 (1999). See also Scott, Theory of Default Rules, supra note 3; Ayres & Gertner, Filling Gaps, supra note 3; Johnston, Strategic Bargaining, supra note 3; Bebchuk & Shavell, Information and the Scope of Liability, supra note 3.
105. Schwartz, Incomplete Contracts, supra note 11, at 11. The problems caused by asymmetric information will preclude courts from creating "problem-solving" defaults but do not, by themselves, preclude efforts to stimulate information exchange between the parties. The rule of Hadley v. Baxendale is the most salient illustration of such information-forcing defaults. However, crafting such defaults so as to induce efficient exchange of private information requires that courts have specific information about the relative market power and strategic position of the parties. See Adler, supra note 3; Ian Ayers & Robert Gertner, Majoritarian v. Minoritarian Defaults, 51 STAN. L. REV. 1591 (1999). See also Scott, Theory of Default Rules, supra note 3; Ayres & Gertner, Filling Gaps, supra note 3; Johnston, Strategic Bargaining, supra note 3; Bebchuk & Shavell, Information and the Scope of Liability, supra note 3.
106. Schwartz, Incomplete Contracts, supra note 11, at 11. The problems caused by asymmetric information will preclude courts from creating "problem-solving" defaults but do not, by themselves, preclude efforts to stimulate information exchange between the parties. The rule of Hadley v. Baxendale is the most salient illustration of such information-forcing defaults. However, crafting such defaults so as to induce efficient exchange of private information requires that courts have specific information about the relative market power and strategic position of the parties. See Adler, supra note 3; Ian Ayers & Robert Gertner, Majoritarian v. Minoritarian Defaults, 51 STAN. L. REV. 1591 (1999). See also Scott, Theory of Default Rules, supra note 3; Ayres & Gertner, Filling Gaps, supra note 3; Johnston, Strategic Bargaining, supra note 3; Bebchuk & Shavell, Information and the Scope of Liability, supra note 3.
107. Schwartz, Incomplete Contracts, supra note 11, at 11. The problems caused by asymmetric information will preclude courts from creating "problem-solving" defaults but do not, by themselves, preclude efforts to stimulate information exchange between the parties. The rule of Hadley v. Baxendale is the most salient illustration of such information-forcing defaults. However, crafting such defaults so as to induce efficient exchange of private information requires that courts have specific information about the relative market power and strategic position of the parties. See Adler, supra note 3; Ian Ayers & Robert Gertner, Majoritarian v. Minoritarian Defaults, 51 STAN. L. REV. 1591 (1999). See also Scott, Theory of Default Rules, supra note 3; Ayres & Gertner, Filling Gaps, supra note 3; Johnston, Strategic Bargaining, supra note 3; Bebchuk & Shavell, Information and the Scope of Liability, supra note 3.
108. Schwartz, Incomplete Contracts, supra note 11, at 11. The problems caused by asymmetric information will preclude courts from creating "problem-solving" defaults but do not, by themselves, preclude efforts to stimulate information exchange between the parties. The rule of Hadley v. Baxendale is the most salient illustration of such information-forcing defaults. However, crafting such defaults so as to induce efficient exchange of private information requires that courts have specific information about the relative market power and strategic position of the parties. See Adler, supra note 3; Ian Ayers & Robert Gertner, Majoritarian v. Minoritarian Defaults, 51 STAN. L. REV. 1591 (1999). See also Scott, Theory of Default Rules, supra note 3; Ayres & Gertner, Filling Gaps, supra note 3; Johnston, Strategic Bargaining, supra note 3; Bebchuk & Shavell, Information and the Scope of Liability, supra note 3.
109. Schwartz, Incomplete Contracts, supra note 11, at 11. The problems caused by asymmetric information will preclude courts from creating "problem-solving" defaults but do not, by themselves, preclude efforts to stimulate information exchange between the parties. The rule of Hadley v. Baxendale is the most salient illustration of such information-forcing defaults. However, crafting such defaults so as to induce efficient exchange of private information requires that courts have specific information about the relative market power and strategic position of the parties. See Adler, supra note 3; Ian Ayers & Robert Gertner, Majoritarian v. Minoritarian Defaults, 51 STAN. L. REV. 1591 (1999). See also Scott, Theory of Default Rules, supra note 3; Ayres & Gertner, Filling Gaps, supra note 3; Johnston, Strategic Bargaining, supra note 3; Bebchuk & Shavell, Information and the Scope of Liability, supra note 3.
110. Schwartz, Incomplete Contracts, supra note 11, at 8.
111. Id.
112. The risk that judicial incorporation of context may inadvertently undermine the parties ex ante risk allocation may explain the well-documented anomaly of the well-developed legal doctrines of mistake, commercial impracticability, and frustration of purpose and the courts' simultaneous reluctance to excuse nonperformance in particular cases. See Scott, Conflict and Cooperation, supra note 12, at 2050.
113. Goetz & Scott, Limits of Expanded Choice, supra note 2, at 287-88.
114. The following discussion draws upon the analysis in Scott, Uniformity Norm, supra note 24. That paper focuses on an analysis of litigated cases under both Article 2 and the common law over the thirty-year period from 1969 to 1999 and compares the relative success of both regimes in achieving the substantive values that inhere in the norm of uniformity in commercial law.
115. See, e.g., Brunswick Box Co. v. Coutinho, Caro & Co., 617 F2d. 355 (4th Cir. 1980); Steuber C. v. Hercules, Inc. 646 F2d. 1093 (5th Cir. 1981); Nanakuli Paving & Rock Co. v. Shell Oil Co., 9th Cir. 1981); Columbia Nitrogen Corp. v. Royster, 451 F2d. 3 (4th Cir. 1971); Modine Mfg. Co. v. North E. Independent School Dist., 503 S.W. 2d. 833 (Tex. Civ. App. 1975).
116. U.C.C. § 2-202 and cmts.1, 2 (1978). The Code (now joined by the Restatement (Second) of Contracts) reverses the common-law presumption that the parties' writing and the official law of contracts are the definitive elements of the agreement. Evidence derived from context, including commercial experience and practice, will, under the Code scheme, trigger the incorporation of additional, implied terms. The parol evidence rule under the Code admits inferences from trade usage, prior dealings, and course of performance, even if the express terms of the contract seem perfectly clear and are apparently "integrated." U.C.C. § 2-202 cmts. 1, 2; see Goetz & Scott, Limits of Expanded Choice, supra note 2, at 273-76.
117. U.C.C. § 2-202 cmt. 1 (1995): "This section definitely rejects . . . [t]he premise that the language used has the meaning attributable to such language by rules of construction existing in the law rather than the meaning which arises out of the commercial context in which it was used." See also U.C.C. § 1-205 cmt. 1 (1995): "This Act rejects both the 'lay dictionary' and the 'conveyancer's' reading of a commercial agreement."
118. U.C.C. § 1-205(4) (1995).
119. Goetz & Scott, Limits of Expanded Choice, supra note 2, at 285-86. Professors White and Summers assert that usage and course of dealings "may not only supplement or qualify express terms, but in appropriate circumstances, may even override express terms." They go on to say that "the provision that express terms control inconsistent course of dealing and its cohorts really cannot be taken at face value." JAMES J. WHITE & ROBERT S. SUMMERS, HANDBOOK OF THE LAW UNDER THE UNIFORM COMMERCIAL CODE 101 (2d ed. 1980).
120. Goetz & Scott, Limits of Expanded Choice, supra note 2, at 285-86. Professors White and Summers assert that usage and course of dealings "may not only supplement or qualify express terms, but in appropriate circumstances, may even override express terms." They go on to say that "the provision that express terms control inconsistent course of dealing and its cohorts really cannot be taken at face value." JAMES J. WHITE & ROBERT S. SUMMERS, HANDBOOK OF THE LAW UNDER THE UNIFORM COMMERCIAL CODE 101 (2d ed. 1980).
121. U.C.C. § 1-201 (3) defines "agreement" as "the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance as provided in the Act."
122. See supra note 51.
123. Scott, Uniformity Norm, supra note 24 at 158-61.
124. Id.
125. See supra note 51 (citing cases); Scott, Uniformity Norm, supra note 24, at 159-61.
126. See supra note 51 (citing cases); Scott, Uniformity Norm, supra note 24, at 159-61.
127. See ALAN SCHWARTZ & ROBERT E. SCOTT, COMMERCIAL TRANSACTIONS: PRINCIPLES AND POLICIES (2d ed. 1991). Many of the specific provisions of Article 2 require the parties to obey directives or perform obligations "in good faith" or in a "commercially reasonable" manner. The vague form in which these admonitions are cast works to delegate to the courts the function of announcing the relevant commercial rule. Commercial reasonableness is perhaps the most significant and innovative of these admonitory concepts. Commercial reasonableness is not defined in the Code, but it appears prominently in numerous contexts. For example, the Code requires that all "contracts made by a merchant have incorporated in them the explicit standard not only of honesty in fact (§ 1-201), but also of observance by the merchant of reasonable commercial standards of fair dealing in the trade" (§ 1-203 cmt.). The notion of commercial reasonableness, inspired by Llewellyn, reflects the legal realists' belief that the law can be (and is) revealed by the behavior and practices of commercial parties. Thus, the admonition to act in a commercially reasonable manner functions for courts as an empirical directive: to decide if the parties have acted in a commercially reasonable manner, the decisionmaker is asked to look to the marketplace and observe relevant commercial behavior to determine the legal norm. Thus, for example, § 2-609 directs that "commercial rather than legal standards" govern whether grounds for insecurity are "reasonable" or assurances of due performance are "adequate" within the meaning of that section. U.C.C. § 2-609 cmt. 3 (1995).
128. See cases and search strategies discussed in Scott, Uniformity Norm, supra note 24, at 160-61 and n.68.
129. See cases cited in Goetz & Scott, Limits of Expanded Choice, supra note 2, at 307-08 n.124.
130. Id.
131. The legal recognition of standardized terms and combinations of terms greatly facilitates the contracting process. Such definitional recognition does not change the optional character of these terms. However, it does confer on them the status of what I have termed "invocations", terms that, once deliberately agreed to, will have a legally circumscribed meaning that will be heavily, perhaps even irrebuttably, presumed. Official recognition of such standardized terms has much the same effect as the seal at common law and the use of standardized terms in corporate indentures. See. e.g., Broad v. Rockwell Int'l Corp., 642 F.2d 929 (5th Cir. 1981): "A large degree of uniformity in the language of debenture indentures is essential to the effective functioning of the financial markets; uniformity of the indentures that govern competing debenture issues is what makes it possible meaningfully to compare one debenture issue with another . . . ." Id. at 943. Another familiar example is the widely accepted recognition by courts of the standardized meanings attributable to "Incoterms," the international rules for the interpretation of trade terms. See International Chamber of Commerce, Incoterms 2000 (visited April 17, 2000) 〈http://www.iccwbo.org〉. See also Kahan & Klausner, supra note 19.
132. The legal recognition of standardized terms and combinations of terms greatly facilitates the contracting process. Such definitional recognition does not change the optional character of these terms. However, it does confer on them the status of what I have termed "invocations", terms that, once deliberately agreed to, will have a legally circumscribed meaning that will be heavily, perhaps even irrebuttably, presumed. Official recognition of such standardized terms has much the same effect as the seal at common law and the use of standardized terms in corporate indentures. See. e.g., Broad v. Rockwell Int'l Corp., 642 F.2d 929 (5th Cir. 1981): "A large degree of uniformity in the language of debenture indentures is essential to the effective functioning of the financial markets; uniformity of the indentures that govern competing debenture issues is what makes it possible meaningfully to compare one debenture issue with another . . . ." Id. at 943. Another familiar example is the widely accepted recognition by courts of the standardized meanings attributable to "Incoterms," the international rules for the interpretation of trade terms. See International Chamber of Commerce, Incoterms 2000 (visited April 17, 2000) 〈http://www.iccwbo.org〉. See also Kahan & Klausner, supra note 19.
133. The legal recognition of standardized terms and combinations of terms greatly facilitates the contracting process. Such definitional recognition does not change the optional character of these terms. However, it does confer on them the status of what I have termed "invocations", terms that, once deliberately agreed to, will have a legally circumscribed meaning that will be heavily, perhaps even irrebuttably, presumed. Official recognition of such standardized terms has much the same effect as the seal at common law and the use of standardized terms in corporate indentures. See. e.g., Broad v. Rockwell Int'l Corp., 642 F.2d 929 (5th Cir. 1981): "A large degree of uniformity in the language of debenture indentures is essential to the effective functioning of the financial markets; uniformity of the indentures that govern competing debenture issues is what makes it possible meaningfully to compare one debenture issue with another . . . ." Id. at 943. Another familiar example is the widely accepted recognition by courts of the standardized meanings attributable to "Incoterms," the international rules for the interpretation of trade terms. See International Chamber of Commerce, Incoterms 2000 (visited April 17, 2000) 〈http://www.iccwbo.org〉. See also Kahan & Klausner, supra note 19.
134. The fast-track method of phased construction has emerged in recent years in response to the combination of high interest rates and rapid cost inflation. Under this method, many construction tasks are initiated before overall design is complete. The economic motive for this accelerated procedure is to minimize both financing costs and inflation of labor and material costs during the construction period. The consolidation of the design and building process is typically combined with the use of a construction manager (CM). The CM combines functions traditionally performed separately by the design architect and the contractor. Thus, the CM participates in the design process by reviewing designs during development, recommending cost efficiencies and design alternatives and proposing construction schedules. Thereafter, the CM serves as a "super general contractor" who coordinates the other contractors' work, reviews change orders, super vises contract bids and prepares and revises project budgets. Using the CM, with its hybrid characteristics, poses difficult contracting problems for the parties. Most importantly, it departs from the traditional owner/architect/contractor structure in which the mutual relationships and obligations have been thoroughly worked out and defined over time. Furthermore, the fast-track procedure is often unusually contentious, placing stress on the legally defined terms of the agreement. The procedure is thus inherently susceptible to contractual disputes over change orders and whether they represent true alterations in the scope of the original work or are merely the finalization of the original plans. See City Stores Co. v. Gervais F. Favrot Co., 359 So. 2d 1031 (La. Ct. App. 1978); Daugherty Co. v. Kimberly-Clark Corp., 14 Cal. App. 3d 151, 92 Cal. Rptr. 120 (1971).
135. American Inst. of Architects, General Conditions of the Contract for Construction, Doc. Nos A101/CM, A201/CM,B141/CM, B801; Associated Gen. Contractors, Standard Form of Agreement Between Owner and Construction Manager, Doc. Nos. 8a (1977), 8d (1979), 8 (1980), and 520 (1980).
136. For an example of this testing process in litigation, see, e.g., Bolton Corp. v. T.A. Loving Co., 94 N.C. App. 392, 380 S.E. 2d 796 (N.C. Court of Appeals 1989). For a review of the testing of contract terms through arbitration, see Thomas J. Stipanowich, Beyond Arbitration: Innovation and Evolution in the United States Construction Industry, 31 WAKE FOREST L. REV. 65 (1996). Out of this testing process a set of standardized "official" terms emerges that collectively reduces the risks of writing construction contracts. See Victor G. Trepasso, The Lawyer's Use of AIA Construction Contracts, PRAC. LAW. May 1973, at 37.
137. For an example of this testing process in litigation, see, e.g., Bolton Corp. v. T.A. Loving Co., 94 N.C. App. 392, 380 S.E. 2d 796 (N.C. Court of Appeals 1989). For a review of the testing of contract terms through arbitration, see Thomas J. Stipanowich, Beyond Arbitration: Innovation and Evolution in the United States Construction Industry, 31 WAKE FOREST L. REV. 65 (1996). Out of this testing process a set of standardized "official" terms emerges that collectively reduces the risks of writing construction contracts. See Victor G. Trepasso, The Lawyer's Use of AIA Construction Contracts, PRAC. LAW. May 1973, at 37.
138. For an example of this testing process in litigation, see, e.g., Bolton Corp. v. T.A. Loving Co., 94 N.C. App. 392, 380 S.E. 2d 796 (N.C. Court of Appeals 1989). For a review of the testing of contract terms through arbitration, see Thomas J. Stipanowich, Beyond Arbitration: Innovation and Evolution in the United States Construction Industry, 31 WAKE FOREST L. REV. 65 (1996). Out of this testing process a set of standardized "official" terms emerges that collectively reduces the risks of writing construction contracts. See Victor G. Trepasso, The Lawyer's Use of AIA Construction Contracts, PRAC. LAW. May 1973, at 37.
139. See Bernstein, supra note 14.
140. For a discussion of these and other explanations for the apparent failure of the Code to live up to the aspirations of the "incorporation" project, see Scott, Uniformity Norm, supra note 24, at 164-68.
141. Id. at 149-51.
142. A central difference between the uniform commercial statutes that preceded the U.C.C. and the new Code lay in the uniquely different interpretive methodologies dictated by a code. A code is a preemptive, systematic and comprehensive enactment of a whole field of law. It presumes to carry within it the answers to all possible questions. Thus, when a court confronts a gap in an incomplete contract, its duty in interpreting a code is to find by extrapolation and analogy a solution consistent with the purposes and policy of the codifying law. The net effect of this institutional design is a highly contextualized interpretive methodology, one that seeks to embed the explicit terms of a contract within the larger jurisprudential context of the code as well as within the specific commercial context being regulated. Thus, one reason for the unwillingness of the courts to embrace incorporation may be the peculiar distortions created by code methodology: courts are required to interpret the U.C.C.'s default rules with reference to the hermetic regulatory framework of the U.C.C. itself. Code methodology thus stimulates a static equilibrium that impedes the dynamic process by which novel default rules and contract terms evolve. See Scott, Uniformity Norm, supra note 24.
143. U.C.C. § 1-102(2)(b) (1995).
144. U.C.C. § 1-102(2)(c) (1995).
145. Bernstein, supra note 14, at 1796-1802.
146. Scott, Uniformity Norm, supra note 24.
147. David Charny, The New Formalism in Contract, 66 U. CHI. L. REV. 842, 846 (1999) (declaring that "Llewellyn's antiformalism is a flop").
148. Id. at 846-47. It is important to concede Charny's principal point: the failure of Llewellyn's version of the incorporation strategy does not prove the superiority of a formalist alternative. Moreover, the fact that intermediaries prefer formal mechanisms for resolving disputes within an industry does not, by itself, suggest that the law should copy those forms. The case for formalism must rest, at bottom, on the efficiencies that inhere in formalist contractual interpretation and on the relative inability of courts in complex environments to craft tailored default rules and/or resolve disputes ex post more efficiently than the parties themselves.
149. For a detailed analysis of the historic willingness of contract law to embrace arguments for limiting itself, see Robert E. Scott & William J. Stuntz, Plea Bargaining as Contract, 101 YALE L. J. 1909, 1918-35 (1992).
150. Charny, supra note 77, at 856.
151. See e.g., Macaulay, Non-Contractual Relations, supra note 1.
152. See. e.g., U.C.C. § 2-316(2) ("to exclude or modify the implied warranty of merchantability . . . the language must mention merchantability . . . ") (emphasis added).
153. See Karen Eggleston, Eric A. Posner, and Richard Zeckhauser, The Design and Interpretation of Contracts: Why Complexity Matters, 95 NW. U. L. REV. (forthcoming 2000).
154. It is an open question whether the formalist interpretive rules of a particular common-law court or the functionalist rules of the U.C.C. are mandatory rules or default rules. In form, the parol evidence rule and the plain meaning rules are background norms that apply to all contract disputes, and, in that sense, are mandatory. Functionally, however, parties can, by appropriate specification, signal how they wish their agreement to be interpretation. See David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 MICH. L. REV. 1815 (1991). Thus, the question reduces to the ease with which individual parties can opt out of the interpretive norm.
155. See Kraus & Walt, supra note 23.