14 Pages Posted: 26 Jan 2010 Last revised: 19 Feb 2010
Courts seeking the most likely intent of contracting parties should interpret contracts according to Bayes’ Rule. The best interpretation of a contract reflects both the prior likelihood (base rate) of a pair of contracting parties having a given intention as well as the probability that the contract would be written as it is given that intention. If the base rate of the intention associated with the simplest reading of the contract is low, then Bayes’ Rule implies that the simplest reading is not necessarily the interpretation of the contract that most likely captures the parties’ intentions. The Bayesian framework explains when default rules should be more or less “sticky” and helps define the appropriate role of boilerplate language in contractual interpretation.
Keywords: contract interpretation, default rules, gap filling
JEL Classification: K12
Suggested Citation: Suggested Citation
Listokin, Yair, Bayesian Contractual Interpretation. Journal of Legal Studies, Forthcoming; Yale Law School, Public Law Working Paper No. 202; Yale Law & Economics Research Paper No. 401. Available at SSRN: https://ssrn.com/abstract=1540018