A Lesson on Some Limits of Economic Analysis: Schwartz and Scott on Contract Interpretation

Abstract

Contract interpretation has been a hot topic of scholarly debate since 2003, when Professors Alan Schwartz and Robert E. Scott published their provocative article, Contract Theory and the Limits of Contract Law, much of which develops an efficiency theory of contract interpretation. In 2010, they published a restatement of this theory and reply to critics, which has not yet drawn much commentary. This Article suggests that, even as revised, their theory offers an object lesson on the limits of economic analyses of the law. The Article assumes that their central argument is mathematically and economically impeccable. But, it suggests, the theory nonetheless fails. The central argument rests on a naïve understanding of the nature of language and the context of interpretation in contract law. Their efficiency claim neglects an alternative theory that does not rest on economics, but that probably would support a more efficient law. And their basic premise — that efficiency should be the sole goal of a law for business contracts — makes the theory strikingly vulnerable.

Keywords: Contracts, Law and Economics, Legal Theory