Kyle Chen, ‘The Grand Unified Theory – Methods of Contract Interpretation and Result Oriented Surplus Maximization’

This article proposes a unified theory to reconcile different contractual interpretation methods. Traditionally, three methods are widely accepted: the conventional hierarchy, the commercial context approach, and the “inverted hierarchy”. This article combines these methods and offers an explanation as to why the jurisprudence of contract interpretation is so unduly convoluted. The explanation is shockingly simple: Instead of focusing on the different methods, decisionmakers are result oriented. Different methods merely aid decisionmakers to determine parties’ ex-ante bargains. We propose that decisionmakers interpret contracts aiming to achieve surplus maximization among the contractual parties; this paradigm drives decisionmakers to choose a method best suited for surplus maximization. The article first presents the interpretive challenges that decisionmakers face and examines decisionmakers’ role in contractual disputes. We then offer a brief overview of the three methods professed by previous literatures, and propose the thesis of the article: decisionmakers are result oriented, and select interpretive methods as appropriate. We next test the thesis through several case studies. By comparing the method adopted in these cases with alternative interpretations, we analyze the economic benefits and determine whether the method chosen maximized surplus for parties involved. Conclusions are drawn according to the finding. The article contributes to the existing jurisprudence by demonstrating that the debate among different interpretive methods is unwarranted; decisionmakers are result oriented and choose the method that achieves surplus maximization.

Chen, Kyle, The Grand Unified Theory — Methods of Contract Interpretation and Result Oriented Surplus Maximization (April 29, 2014).

First posted 2014-09-11 07:12:04

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