Hypothetical Bargains: The Normative Structure of Contract Interpretation

In the interpretation of contracts, the courts generally resolve ambiguities and fill in missing terms by asking what the parties would have agreed to had they specifically addressed the issue before the court. However, this hypothetical bargain formulation conceals a complex set of issues. The 3 justificatory principles that are generally accepted for enforcing contracts are: 1. fostering individual autonomy, 2. promoting fair allocation of social benefits, and 3. minimizing the costs of transacting. An alternative approach to the problem of interpretation is presented: 1. The interpreter must consider whether subsequent transactors will be in a position to bargain around the interpretation that it will proffer. 2. If transactors are in a position to bargain around the court's interpretation, then the court should interpret by a strictly instrumental calculation. 3. If some future transactors would not bargain around the court's interpretation, then the court faces a more complex inquiry.