A Lesson on Some Limits of Economic Analysis: Schwartz and Scott on Contract Interpretation

Contract interpretation has been a hot topic of scholarly debate since 2003, when Professors Alan Schwartz of Yale and Robert E. Scott of Columbia published their provocative article, Contract Theory and the Limits of Contract Law, much of which develops an efficiency theory of contract interpretation. In 2010, they published a restatement of this theory and reply to critics, which has not yet drawn much commentary. This Article suggests that, even as restated, their theory offers an object lesson on some limits of economic analyses of the law. The Article assumes that their central argument is mathematically and economically impeccable.

It suggests, however, that the theory nonetheless fails. Their central argument rests on a naïve understanding of the nature of language and the legal context of contract interpretation. Their efficiency claim neglects an alternative theory that does not rest on economics, but that probably would support a more efficient law. And their basic premise—that efficiency should be the sole goal of a law for business contracts—makes the theory strikingly vulnerable.

In particular, virtually everyone, Schwartz and Scott included, agrees that rule of law values should constrain all laws. When considered, however, they doom Schwartz and Scott’s interpretation theory, as they may doom any monist theory.