Contract and Innovation: The Limited Role of Generalist Courts in the Evolution of Novel Contractual Terms

Abstract:     
In developing a contractual response to changes in the economic environment, parties choose the method by which their innovation will be adapted to the particulars of their context. These choices are driven centrally by the thickness of the relevant market and the uncertainty related to that market. In turn, the parties’ choice of method will shape how generalist courts can best support the parties’ innovation and the novel regimes they envision. In this essay, we argue that contractual innovation does not comes to courts incrementally, but instead reaches the courts later in the innovation’s evolution and more fully fledged than the standard picture contemplates. Highly stylized, the trajectory of innovation in contract we find is this: Private actors respond to exogenous shocks in their economic environment by changing existing structures or procedures to make them efficient under the new circumstances. The innovating parties stabilize their newly emergent practices through a variety of regimes, both bilateral and multilateral, whose goal is to establish the context through which the innovation is implemented. It is only at this point that courts step in when a dispute is presented to them. If contract innovation does indeed reach generalist courts through the mediating institution of these contextualizing regimes, then our argument follows directly: If a central goal of contract adjudication is to enforce the context the parties have provided, then the courts’ willingness to defer to the context the parties give them will put the law more directly in the service of innovation.

Number of Pages in PDF File: 40

Accepted Paper Series