4400 Implied Terms and Interpretation in Contract Law

This chapter examines the economic arguments for textualism and contextualism, the two primary methodologies used by courts to determine the intentions of contracting parties with respect to their performance obligations. Textualism, which is rooted in the idea of complete contracting, calls for a more restrictive approach to implied terms and interpretation than contextualism, which is rooted in the idea of incomplete contracts. The primary conclusions are that, as in other areas of contract law, the choice between the two interpretive methodologies depends on the transaction costs of drafting, the relative likelihood of court error, and the risks of opportunistic behavior. Neither methodology dominates so much that it should be uniformly employed, which is consistent with how courts actually behave. JEL classification: K12