the imaginary world of the contract and the seller’s commitment to make it real. It guides the seller’s conduct in contract performance.

To illustrate the use of purpose, in Fishman v. LaSalle National Bank,28 the meaning of a prepayment term in a promissory note was in issue. The note permitted prepayment with the payment of a premium that was the greater of one percent of the outstanding balance or a yield maintenance prepayment calculation. The yield maintenance calculation could be performed as a single calculation applied to the outstanding balance (producing a prepayment of $11,514). In the alternative, it could be performed as a series of calculations to determine the present value of what the lender would lose as a result of the prepayment ($393,852). The US Court of Appeals for the First Circuit concluded that the latter method of calculation should be used, reflecting the clause’s purpose in the contract. As reasonable parties and others in the same or similar circumstances would understand, the purpose was for the holder of the note to take the risk that interest rates would rise, while the borrower would take the risk that the rates would fall. Using the series of calculations would implement this purpose.29

§ 2.2.4. Ordinary Meanings

Many courts say that an interpreter should give contract language its ordinary meaning unless this meaning is unreasonable, does not yield a sensible result, or leads to “some absurdity, or some repugnance or inconsistency with the rest of the instrument.”30 Many of the same courts also include the whole contract, circumstances, and purpose(s). The ordinary meaning, then, is a factor to be weighed with other factors. This combination makes sense because an interpreter cannot give contract language its ordinary meaning without considering at least some of the context in which the parties used the language.31 Once we know the words in issue, the whole document, the circumstances, and the contract’s purpose(s), we have a context for attributing apt ordinary meanings to the words.

28247 F.3d 300 (1st Cir. 2001).

29Id. at 302–03.

30Ravetto v. Triton Thalassic Technologies, Inc., 941 A.2d 309, 323–24 (Conn. 2008); USA Life One Ins. Co., 682 N.E.2d at 539.

31Cf. Iowa Fuel & Minerals, Inc. v. Iowa State Bd. of Regents, 471 N.W.2d 859, 863 (distinguishing ordinary meanings as used in the contract from dictionary definitions of individual words); § 2.1.3.

The dictionary may provide candidates for ordinary meaning(s). Selecting the correct meaning from the lists of meanings in a dictionary, however, depends explicitly or implicitly on the conventions of language in the context of use.

It should be emphasized that the interpretive issue in a case is not like the question, “What is a tomato?” This kind of question probably will have more than one answer in ordinary English. (A tomato may be a fruit, a vegetable, or sui generis.) Instead, the question should be, “Is a tomato a vegetable within the meaning of this contract?” The parties are not bound to use vegetable in the sense in which botanists use it, if there is one such sense. Contract parties can use the word differently. Objectivism holds that the goal of respecting the contractual freedoms requires legal interpreters to pursue the reasonable meaning of the parties’ manifestations of intention, taking into account the contract’s purposes, the objective circumstances, and other objective elements.

We may suspect that many courts appear to rely on ordinary meanings alone when interpretive questions are easy. It then would be pedantic to explain how other interpretive elements give context to the words. For example, in one case, an automobile insurance policy provided coverage for personal or bodily injury to an insured “because of an auto accident.”32 The court found that the insured

fell down a hill as a result of slipping on ice or snow. The automobile in question did not cause or contribute to the fall. Indeed, [the insured] had completely alighted from the vehicle. Falling after one has exited a parked car does not constitute an “auto accident.” This is a slip-and-fall case, not an auto accident.33

Nonetheless, the parties often are speakers of ordinary English. They can be expected to cast their contracts in ordinary English in most situations. When they do, their manifestations of intention normally should be interpreted accordingly. Thus, even the generally subjectivist Restatement (Second) of Contracts [Restatement (Second)] makes ordinary meanings a key consideration (unless the parties have manifested a different intention or the words have a technical meaning).34 If, however, an ordinary meaning would lead to unreasonableness, harshness, absurdity,

32Nat’l Gen. Ins. Co. v. Felty, 2007 WL 689544 (E.D.Ky. 2007).

33Id. at *3.

34RESTATEMENT (SECOND) OF CONTRACTS § 202(3)(a) (1981).

or some repugnance or inconsistency with the rest of the document, a court should reject the ordinary meaning.35

§ 2.2.5. Trade Usages and Customs

Contract parties do not always use words in their ordinary senses. They may give words special definitions stated in the contract. Sometimes they use technical terms or terms of art within a profession or industry, as when they participate in a specific trade and reasonably expect each other to employ special usages in the trade. They may reasonably understand words with more particularity or generality than a dictionary meaning provides. On all of these occasions and others, a word or phrase in a contract may have an unusual (but nonetheless conventional) meaning. This is especially true of trade usages and customs, which exist within a context that is more particularized to the parties than ordinary English and where the conventions of the relevant practice may give some terms special or technical meanings.

The Uniform Commercial Code (UCC) encourages reliance on trade usages for cases within its scope of application, including transactions in goods.36 Trade usages commonly are employed in insurance cases.37 The UCC defines a trade usage very broadly as follows:

A “usage of trade” is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question.38

There are, however, much narrower definitions of a trade usage or custom, requiring that both parties know of the usage or that it be of long standing, notorious, well-established, and invariable, at the time when and place where the contract was made, so that they should have known.39

35USA Life One Ins. Co., 682 N.E.2d at 539; Simeone v. First Bank Nat. Ass’n, 971 F.2d 103, 107 (8th Cir. 1992).

36UCC §§ 1-102, 2-102 (2001).

37E.g., City Fuel Corp. v. National Fire Ins. Co. of Hartford, 846 N.E.2d 775, 776 (Mass. 2006); Quinlivan v. EMCASCO Ins. Co., 414 N.W.2d 494, 497 (Minn.App. 1987).

38UCC § 303(c) (2001). See also RESTATEMENT (SECOND) OF CONTRACTS § 222(1) (1981).

39E.g., SR Intern. Business Ins. Co., Ltd. v. World Trade Center Prop., LLC, 467 F.3d 107, 134 (2d Cir. 2006); Mullinnex LLC v. HKB Royalty Trust, 126 P.3d 909, 918–22 (Wyo. 2006).

According to the UCC, a usage of trade in the vocation or trade in which the parties are engaged, or of which they are or should be aware, is relevant in interpretation even if a contract is not ambiguous.40 Some courts, however, require a finding of ambiguity on the basis of ordinary meaning before considering evidence of a trade usage.41 Though the UCC provides that express terms, any course of performance, and any course of dealing have priority over a usage of trade,42 the courts often have occasion to allow fact-finders to employ such usages when interpreting a contract.43

§ 2.2.6. Legal Precedents and Statutory Definitions

A few courts consult legal precedents or statutory definitions when interpreting a contract.44 A term that appears in the disputed contract may have a definition or an interpretation in such legal sources—a legal meaning. These courts sometimes apply legal meanings presumptively to the same words in the contract in the case at hand, as when an insurance policy provides coverage for liability for “unfair competition,” which is a legal cause of action.45 The evidence, however, may show that an ordinary meaning should prevail over a legal meaning because the ordinary meaning better reflects the parties’ intention. Much care is needed to avoid taking definitions or interpretations out of context, producing an arbitrary result in the case at hand in relation to the parties’ intention.46 Thus, the parties’ intention, as revealed by the contract’s purpose, the circumstances, and other elements special to the case in question, may prevail over a legal meaning in many cases.47

In Petula Associates, Ltd. v. Dolco Packaging Corp.,48 a lease of commercial property gave the lessee an option to purchase the property for fair market value. The lease required the parties to agree on the fair market

40UCC § 303(d); § 2-202, com. 1(c) (2001).

41E.g., Langer v. Bartholomay, 745 N.W.2d 649, 656 (N.D. 2008); Milonas v. Public Employment Relations Bd., 648 N.Y.S.2d 779, 784 (App.Div. 1996).

42UCC § 303(e) (2001). See also RESTATEMENT (SECOND) OF CONTRACTS §203(b) (1981).

43E.g., Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1981).

44E.g., In re Estate of Uzelac, 114 P.3d 1164, 1168–69 (Utah 2005).

45Bank of the West v. Superior Court, 833 P.2d 545, 552 (Cal. 1992).

46See, e.g., World Trade Center Props., L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154, 186–87 (2d Cir. 2003).

47Utica City Nat. Bank v. Gunn, 118 N.E. 607, 608 (N.Y. 1918) (Cardozo, J).

48240 F.3d 499 (5th Cir. 2001).

value, and it defined the term by setting forth a list of factors for the parties to take into account.49 A dispute arose when the lessee exercised the option, but the parties failed to agree on the price. The US Court of Appeals for the Fifth Circuit, applying Texas law, looked to Texas precedents that defined fair market value as “the price a piece of property would receive on the open market if the seller and buyer were not compelled to enter into the transaction.”50 It ruled broadly that,

[c]onsequently, when the term “fair market value” is used in a contract governed by Texas law, it may be presumed that the parties intended the term to be understood according to this meaning, absent a clear indication to the contrary.51

The Texas precedent that the court consulted, however, involved a condemnation proceeding.52 The court did not consider whether the contract’s listed factors were consistent with the meaning of fair market value in such a proceeding. Nor did the court consider whether an option to purchase under a lease presents a different context requiring a different interpretation. Perhaps it would so require when the lessee paid for improvements to the property, which improvements raised its fair market value under the condemnation definition. The lessee should not have to pay for those improvements twice. It is conceivable, then, that the difference in the contexts should make a difference in the meaning. Moreover, the court’s presumption that the parties (objectively or subjectively) intended the term to have the meaning it had in a condemnation proceeding is far-fetched. The Restatement (Second) wisely disapproves of the use of legal meanings drawn from other contexts.53

Nonetheless, there is a kind of contract that some courts will, and the Restatement (Second) suggests they should, interpret in light of legal precedent among other elements.54 This is the standardized agreement, such as a typical insurance policy. (A standardized agreement may or may not be a contract of adhesion, but this makes no difference on a question

49Id. at 502.

50Id. at 503.

51Id.

52State v. Windham, 837 S.W.2d 73 (Tex. 1992).

53RESTATEMENT (SECOND) OF CONTRACTS § 201, cmt. c. (1981); see Flintkote Co. v. General Acc. Assur. Co., 410 F.Supp.2d 875, 887 (N.D.Cal. 2006); Della Ratta, Inc. v. American Better Community Developers, Inc., 380 A.2d 627, 634 –35 (Md.App. 1977).

54RESTATEMENT (SECOND) OF CONTRACTS § 211(2) (1981).