Contract Theory and the Limits of Contract Law

Contract law has neither a complete descriptive theory, explaining what the law is, nor a complete normative theory, explaining what the law should be. These gaps are unsurprising given the traditional definition of contract as embracing all promises that the law will enforce. Even a theory of contract law that focuses only on the enforcement of bargains must still consider the entire continuum from standard form contracts between firms and consumers to commercial contracts among businesses. No descriptive theory has yet explained a law of contract that comprehends such a broad domain. Normative theories that are grounded in a single norm – such as autonomy or efficiency – also have foundered over the heterogeneity of contractual contexts to which the theory is to apply. Pluralist theories attempt to respond to the difficulty that unitary normative theories pose by urging courts to pursue efficiency, fairness, good faith, and the protection of individual autonomy. Such theories need, but so far lack, a meta-principle that tells which of these goals should be decisive when they conflict. We attempt to make progress here with a more modest approach-to set out and defend a normative theory to guide decisionmakers in the regulation of business contracts. The theory\u27s affirmative claim, in brief, is that contract law should facilitate the efforts of contracting parties to maximize the joint gains (the contractual surplus ) from transactions. The theory\u27s negative claim is that contract law should do nothing else. Both claims follow from the premise that the state should choose the rules that regulate commercial transactions according to the criterion of welfare maximization