Two Circumstances Under Which Rational Parties Choose to Design an Incomplete Contract and the Corresponding Measures of the Court

Abstract

Different from common cases in which bargaining parties spend many efforts in revising the contract, there are some circumstances in reality under which signing parties choose to design an incomplete contract on purpose. This article analyzes two possible reasons for the intentional incompleteness of contracts and corresponding measures that might help to avoid such ambiguous cases. One reason is high transaction costs resulting from the difficulties of specifying terms for the parties. Accordingly, the court should insist in interpreting the unspecified terms by requesting evidence as well as satisfying the expectations of the parties to maximize the total surplus. The other reason is the subjective factor of the contracting parties, that is, they are not willing to get trial outcomes from the court for fear of the uncertainty and transparency of litigation. In such a case, the court should let the conflicting parties settle rather than give any verdict.