INTRODUCTION

In the economic analysis of contract law, a complete contingent contract is a hypothetical contract that anticipates every possible circumstance relevant to contract performance and specifies in complete detail all rights and duties of each party in response to these circumstances. A complete contingent contract requires no interpretation, and the court's role is limited to enforcing it according to its terms. No real contract ever achieves this level of completeness, however. In the real world of high transaction costs and bounded rationality, ambiguous or incomplete contracts are a frequent source of litigation.

In the law and economics literature, contract interpretation is usually defined as the undertaking by a court to determine what the terms of a contract are, or should be understood to be. In law, interpretation of express terms is ofter distinguished from construction, the process of identification of implied terms. In law and economics, the tasks of identifying the contract terms and clarifying their meaning are ofter analysed together. The focus is on the parties’ preferences for a certain interpretive regime, and on the effect that the interpretive norms have on the parties’ ex ante and ex post costs and behaviour. It is generally agreed that the process of determining the content and meaning of contractual terms should be goal neutral: a court resolving an interpretive dispute should aim to recover the parties’ intentions, whatever those intentions were at the moment of contract formation. Goal neutrality is ofter justified as an extension of the principle of freedom of contract. If parties are allowed to create their own contract, the interpreter's role should be restricted to determining the parties’ intentions prospectively and objectively. In determining the parties’ intentions, an interpreter should pay attention to the parties’ contractual ends (the shared objectives pursued by the parties in entering the contract) as well as to the means they chose to determine those ends (their preferred interpretive method).

A related justification for a goal-neutral interpretive framework is economic efficiency. Parties enter commercial contracts in order to maximise their joint gain. This entails agreeing to terms that maximise their joint surplus and agreeing on a division of the surplus via the contract price.