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Listokin on Bayesian Contract Interpretation

By Lawrence Solum

Yair Listokin (Yale Law School) has posted Bayesian Contractual Interpretation (Journal of Legal Studies, Forthcoming) on SSRN. Here is the abstract:

Courts seeking the most likely intent of contracting parties should interpret contracts according to Bayes? Rule. The best interpretation of a contract reflects both the prior likelihood (base rate) of a pair of contracting parties having a given intention as well as the probability that the contract would be written as it is given that intention. If the base rate of the intention associated with the simplest reading of the contract is low, then Bayes? Rule implies that the simplest reading is not necessarily the interpretation of the contract that most likely captures the parties? intentions. The Bayesian framework explains when default rules should be more or less ?sticky? and helps define the appropriate role of boilerplate language in contractual interpretation.

And from the paper:

Consider Jacob and Youngs from a Bayesian perspective. Suppose that there are two avenues whereby the contract language calling for Reading pipe specifically might have come about. On the one hand, the language fits naturally if the parties truly intended to have Reading Pipe specifically. Alternatively, the parties may have meant merely to use pipe of Reading quality but in-artfully drafted a contract that seems to insist on Reading Pipe specifically. It is therefore more likely that the language in the contract would have been observed if the parties desired Reading Pipe than if the parties simply desired Reading quality pipe. So the most likely hypothetical bargain would at first glance seem to be Reading Pipe specifically, though this intuition is a reflection of the base rate fallacy.

Interpreting the contract to mean Reading pipe specifically because it is the most natural reading of the contract presents an instance of the ?base rate fallacy?,8 a common cognitive bias where the decision-maker underweights the ?prior? likelihood of parties wanting Reading Pipe specifically (the ?base rate?) relative to the (written) evidence directly at hand. Suppose that there are many more parties in the population who prefer pipe of Reading quality rather than Reading Pipe specifically. This means that when confronted with a contract that calls for Reading Pipe specifically, it may be more likely that the contract stemmed from parties who wanted pipe of Reading quality (high prior) and drafted their contract poorly rather than from parties who wanted Reading pipe specifically (low prior) and drafted their contract well. If this is the case, then the most likely bargain between the parties is pipe of Reading quality-- in spite of the fact that the contract calls for Reading pipe specifically.

Highly recommended.

There are two distinct problems here, which this paper conflates. The two problems can be untangled by invoking the traditional contract-law distinction between contract "interpretation" (which aims to recover the linguistic meaning or semantic content of the contract) and contract "construction" (which aims to determine the legal effect of the contract). Contract interpretation is a function of the semantic intentions of the parties, and normally is captured by the Gricean notion of speakers meaning. So the semantic content of a contract that uses the expression, "Reading Piple" could be "Pipe of the same quality as Reading Ripe," if both parties recognized that the "of the quality" sense of the expression was intended by the other (in other words, that there was "common knowledge" of this semantic intention.

Listokin's arguments goes to an entirely different problem--the problem of mismatch between semantic content and desired legal effect. This is a problem of contract construction--of determining the legal effect to be given to a contract.  So Listokin discusses the possibility that the parties "wanted" pipe of Reading quality.  This leads to further questions of great interest with respect to the nature of the mental state that Listokin is after.  We normally think of "wants" as occurent mental states, but in cases like this it is likely that Listokin has a dispositional state in mind--e.g., that he is after what the parties would have wanted if they had considered the matter.

This raises an interesting question of contract theory--under what circumstances should a court adopt a construction that varies from semantic content.  Should "wants" override the semantic content of the contract?  Does it make a difference whether the want is an occurrent or dispositional mental state?  These an entirely distinct problems from interpretive issue of determining what the semantic content actually is.

Marvelous paper!

Full post as published by Legal Theory Blog on January 26, 2010 (boomark / email).