NewYorkUniversity
LawReview

Issues

Author

Robert E. Scott

Results

Contract Design and the Structure of Contractual Intent

Jody S. Kraus, Robert E. Scott

Modern contract law is governed by a two-stage adjudicative regime—an inheritance of the centuries-old conflict between law and equity. Under this regime, formal contract terms are treated as prima facie provisions that courts can override by invoking equitable doctrines so as to substantially “correct” the parties’ contract by realigning it with their contractual intent. This ex post judicial determination of the contractual obligation serves as a fallback mechanism for vindicating the parties’ contractual intent whenever the formal contract terms fall short of achieving the parties’ purposes. Honoring the contractual intent of the parties is thus the central objective of contract law. Yet little scholarly attention has been given to the structure of contractual intent. Courts naturally equate contractual intent with the parties’ contractual objectives, which we call the “contractual ends” of their collaboration. But reaching agreement on a shared objective is only the first step to designing an enforceable contract. Thereafter, the parties must create the particular rights and duties that will serve as their “contractual means” for achieving their shared ends. The thesis of this Article argues that the current regime of contract adjudication conflates the parties’ contractual means with their contractual ends. In so doing, it reduces the range of contractual arrangements to which contract law gives effect, thereby potentially depriving commercially sophisticated parties of essential tools for contract design. Sophisticated actors engage in ex ante determinations of their means of enforcement, choosing whether enforcement is to be either legal or relational and whether legal enforcement should rely on either rules or standards. Both theory and available evidence suggest that such parties would prefer a default rule that strictly enforces formal contract doctrine unless they have expressly indicated their intent to delegate hindsight authority to a court. By eliminating the risk that courts will erroneously infer the parties’ preference for ex post judicial intervention, such a regime increases the reliability of formal contract terms and enhances the parties’ control over the content of their contract.

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

Ronald J. Gilson, Charles F. Sabel, Robert E. Scott

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—the number of actors who see themselves as facing similar circumstances— 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 Article, we argue that contractual innovation does not come to courts incrementally, but instead reaches courts later in the innovation’s evolution and more fully developed 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 environments 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—with the goal of establishing the context through which the innovation is implemented. It is only at this point, and when a dispute is presented to them, that courts step in. If contract innovation does indeed reach generalist courts through the mediating institution of these contextualizing regimes, then our argument follows directly: Because a central goal of contract adjudication is to enforce the agreement in the context the parties intended, the courts’ willingness to defer to the context provided by the parties will put the law more directly in the service of innovation.