“Why Infer”? What the New Institutional Economics Has to Say About Law-Supplied Default Rules

A central question of contract law remains: when should the law supply a term not expressly agreed to? Many scholars have addressed that question, yet the justification for law-supplied terms often remains unconvincing. Because many proposals to supply terms do not incorporate a comparative framework for assessing the costs and benefits of legal interventions, they are incompletely justified. This Article proposes that a comparative net benefit approach (developed in institutional economics to explain private arrangements) be adapted and expanded to resolve the fundamental issues of legal intervention. The Article uses that framework to critique the hypothetical bargain and Ayres/Gertner penalty default rule approaches to law-supplied terms. Finally, this Article illustrates the benefits of the comparative framework for resolving questions of law-supplied rules in the pre-contractual negotiation and subcontractor bidding contexts