Transverse stability and instability of solitary waves correspond to a class of perturbations that are travelling in a direction transverse to the direction of the basic solitary wave. In this paper we consider the problem of transverse instability of solitary waves for the water-wave problem, from both the model equation point of view and the full water-wave equations. A new universal geometric condition for transverse instability forms the backbone of the analysis. The theory is first illustrated by application to model PDEs for water waves such as the KP equation, and then it is applied to the full water-wave problem. This is the first theory proposed for transverse instability of solitary waves of the full water-wave problem. The theory suggests the introduction of a new functional for water waves, whose importance is suggested by the mathematical structure. Without explicit calculation, the theory is used to argue that the basic class of solitary waves of the water-wave problem, which bifurcate at Froude number unity, are likely to be stable to transverse perturbations, even at large amplitude.