Donald Smythe, ‘Consideration for a Price: Using the Contract Price to Interpret Ambiguous Contract Terms’

Abstract:
Most contract cases involve disputes about the interpretation of the contracts. There is a voluminous law and economics literature on contract interpretation, but ironically, it does not address whether and how the contract term that is usually of most interest to economists – the contract price – might be used to interpret other ambiguous contract terms. This is no doubt in part because there are legal authorities that discourage courts from considering the adequacy of the contract price in deciding whether other clauses are contractually enforceable. However, these authorities are much more persuasive for some contracts than for others. Indeed, in some contracts for the sale of goods between sophisticated business parties the contract price provides costless information that may be highly relevant to interpreting parties’ intended bargains. From an economic perspective, therefore, courts would be remiss in such cases if they ignored it. Indeed, it is not clear that the drafters of the UCC intended to preclude courts from considering the contract price in interpreting sales contracts; the Official Comments to the UCC actually appear to prescribe that in at least some contexts courts should evaluate the contract price in interpreting parties’ intended bargains. It should not be surprising therefore that many courts have in fact considered the adequacy of the contract price in interpreting parties’ intended bargains under UCC contracts. But to the extent that they have, they have done so without any guidance from economic theory. This article presents an economic analysis of bargains and uses it to provide some guidelines to courts about how to use the contract price to interpret whether disputed terms are an intended part of parties’ bargains. It then illustrates how the guidelines might have been applied in some recent sales cases. The hope is that the use of some basic economic analysis might help to improve the resolution of at least some contractual disputes.

Smythe, Donald J., Consideration for a Price: Using the Contract Price to Interpret Ambiguous Contract Terms (March 22, 2013). North Illinois University Law Review, Forthcoming.

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