Bayesian Contractual Interpretation

Abstract

Courts seeking the most likely intent of contracting parties should interpret contracts according to Bayes’s rule. The best interpretation of a contract reflects both the prior likelihood (base rate) of a pair of contracting parties having a given intention and 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’s rule implies that the simplest reading is not necessarily the interpretation of the contract that most likely captures the intention of the parties. The Bayesian framework explains when default rules should be more or less sticky and helps to define the appropriate role of boilerplate language in contractual interpretation.