PREFACE
Contract law in the United States empowers people to make their own legal relations by promising, subject to certain constraints on seriously unfair contracts. It pursues four main goals. First, it seeks to ascertain and implement the parties’ intention when they have concluded an enforceable agreement. This goal permits parties to exercise their freedom to contract as they wish (freedom of contract) and not to have contractual duties imposed upon them unjustifiably (freedom from contract). Second, contract law seeks to protect and enhance the security of contractual transactions. That is, it seeks to protect a promisee’s reasonable expectations arising from, and reasonable reliance on, a promise. When fair, contract law seeks to hold promisors responsible for their expressions of intention. Third, like the law generally, contract law seeks to settle disputes non-arbitrarily. This is to say that contract law implements Rule of Law values, such as the values of consistency in the application of the law, predictability of legal results, and results that are justified in law. Fourth, again as in other areas of the law, contract law seeks to achieve the administrability of its rules and principles: A rule or principle is of little utility if interpreters, including parties, their attorneys, judges, and juries, cannot implement it at reasonable cost. Together, these goals pursue an overarching goal—to allow a contract to serve as an authoritative guide
to the parties’ proper conduct in contract performance.
Contract interpretation pursues these same goals. It does so through the performance of three practical tasks. First, an interpreter identifies the terms to be interpreted. Second, an interpreter determines whether the terms are ambiguous and encompass the rival interpretations favored by the parties. Third, if the terms are ambiguous in a contested respect, an interpreter resolves that ambiguity by choosing between the rival interpretations.
xi
XII |
PREFACE |
To elaborate, identifying the terms to be interpreted is primarily the province of the parol evidence rule. It can be stated in several ways. We will state only part of it for the moment—as a first approximation—as follows: When a written contract is the final and complete expression of the parties’ agreement, prior agreements do not establish contract terms if the terms of the prior agreement contradict or add to the terms of the written contract.1 When applied, the rule renders many prior agreements legally inoperative. As a consequence, it precludes the admission of evidence of the prior agreement for the purpose of establishing the contract’s terms. When the parties conclude a final and complete written agreement, they normally intend it to supersede any prior agreements reached in the course of negotiations. The writing then becomes the sole container of the contract’s terms.
Determining whether the terms are ambiguous usually is the province of the plain meaning rule. A few jurisdictions (and many contracts scholars) shun this rule. We will suggest that, despite significant criticism, the rule—properly understood—is a persistent and reasonable one as practiced by most courts. Even in litigation, written contract terms often are clear for the practical purpose at hand. Even though the governing term is ambiguous in the abstract, it may permit only one of the rival interpretations advanced by the parties. If this is the case, a judge should hold that the language is unambiguous and that the unambiguous meaning (the plain meaning) is the legal meaning. The key question concerns how much context a judge needs in order to answer the question of ambiguity while pursuing the goals of contract interpretation. That is, the question concerns which elements of contract interpretation a judge should take into account when considering whether there is an ambiguity.
Resolving an ambiguity, if any is found, often is the province of a jury, acting under the court’s supervision. Because juries operate in secret and have such wide discretion, we will focus on cases in which judges acted as the finders of fact. Again, the problem will be to understand which elements of contract interpretation a judge or a jury are or should be allowed to take into account. Under the prevailing law, the fact-finder generally is allowed to consider more elements when resolving an ambiguity, such as relevant parol evidence, than a judge may consider when identifying contract terms or deciding whether there is an ambiguity.
1 For a full statement of the parol evidence rule, see § 3.1.1.
P R E FAC E |
XIII |
To perform these three tasks, the courts draw on various resources for interpretation, which we shall call the elements of contract interpretation. The elements include the governing contract term, if any, and such features of its context as the law may allow the interpreter to take into account when performing a task. The features of the context may include dictionaries, the document as a whole, the circumstances when the contract was made, the contract’s purpose(s), trade usages, courses of dealing, practical constructions, statements of intention made during negotiations, and a party’s testimony in court as to its own past intent. The law may allow interpreters to take into account different sets of elements when performing the different tasks.
Three theories of contract interpretation are supposed to guide interpreters to perform the three tasks to further the four goals. The first is literalism. In a strict form, it restricts the elements that interpreters may rely on to the governing words and the dictionary. The second is objectivism. It broadens the set of elements to include the document as a whole, the objective circumstances at formation, trade usages, the document’s evident purpose(s), and any practical construction. The third is subjectivism, which further broadens the set of relevant elements to include all relevant evidence, including evidence of the parties’ course of dealing and the course of negotiations, and testimony by a party about its own past intention.
The law of contract interpretation (as distinct from theory) has been the subject of remarkably few scholarly works. The obstacle is that the scholarly works, including the great treatises, generally address the extremes of contract interpretation. That is, they focus on a tense dualism between objective and subjective theories of interpretation, ostensibly as advanced by Professors Samuel Williston and Arthur L. Corbin, respectively. Corbin’s subjectivism is said to have increasing influence, though there are signs of a revival of some form of objectivism. This book suggests that, conceptually and practically, there are three theories that should be considered—literalism, objectivism, and subjectivism. Many subjectivist critiques of objectivism really target literalism, leaving objectivism (and Williston) untouched and misunderstood. In the final chapter, we will suggest that a moderate version of objectivism, to be called objective contextual interpretation, should be the preferred theory of contract interpretation. Objective contextual interpretation allows an interpreter to consider enough context to avoid Corbin’s and others’ criticisms of literalism. It best guides an interpreter to perform the tasks in a way that furthers the goals.
XIV |
PREFACE |
A note on scope: We will make three key assumptions that define the scope of this study. First, we will assume that there is a domain of free contracting within which contract law governs promissory transactions. People may differ over whether this domain is or should be large or small. That is a question mainly for legislation, such as the minimum wage laws. Few societies have no domain of free contracting. There surely is a large one in the United States. Contract law operates in the domain of free contracting whether it is small or large. Second, we will assume that, in any event, a court or other interpreter has decided that the parties have made an enforceable contract. A question of interpretation, as the term is used here, arises after this decision. We will not consider the interpretation of purported offers and acceptances. Put another way, interpretation is necessary to guide the parties’ conduct in contract performance. Once we have decided to enforce a contract, we should do what we decided to do. Questions of unconscionability, mistake, duress, and other invalidating causes then drop out of the analysis, with an exception to be indicated below. Interpretation concerns the three tasks identified above, which together determine the parties’ rights, duties, and powers under a contract. Third, we will not consider the law of negotiable instruments, which contains some specialized rules for interpreting notes, checks, and drafts, and gives holders in due course special rights against obligors.
I wish to thank several people for their help and advice in conceiving, researching, and writing this book. Foremost are Serena Stier, Paige Nelson, Eric G. Andersen, and Andrew Banducci. Lawrence W. Newman suggested that I write a book on this topic. Dean Carolyn Jones of the University of Iowa College of Law provided me with a research leave in 2006 and an extraordinary semester free of teaching responsibilities in 2008. I also thank participants in the University of Iowa College of Law Faculty Seminar held on February 1, 2008.
Steven J. Burton May 10, 2008