Interim Contract Interpretation

Abstract

This Article makes two basic contributions to the literature on contract renegotiation and interpretation. First, we introduce a cause of renegotiation failure that has remained unexplored in the interpretation literature: uncertainty regarding “court types” rather than party types. This uncertainty can include (i) the evidence a court will admit (and the weight the court will give to the evidence), (ii) the inferences a court will draw from the evidence, and (iii) how a court will apply contract law to the evidence. Parties may be uncertain regarding the court’s type because how a court will behave regarding these three issues is partly the court’s private information. When parties disagree regarding the court’s interpretative beliefs, they will assess their expected litigation payoffs differently. Therefore, parties may litigate a dispute although they are symmetrically informed about payoff relevant variables and renegotiation gains exist. Second, we suggest a novel interpretive procedure that responds to this problem. Parties should be able to obtain an “interim contract interpretation”: that is, a judicial interpretation of their contract at the renegotiation stage rather than after a breach occurs. A midstream interpretation, in the form of a declaratory judgment or a new reformation remedy, would permit parties to align their beliefs on expected litigation payoffs and therefore to continue an arrangement they would otherwise inefficiently terminate, or efficiently terminate a relationship without bearing unnecessary performance or litigation costs.