The parties later may trade off part of such a provision for something else. Provisions in drafts, too, require interpretation. Here, as elsewhere, context can be critical.

Many courts also take into account a party’s statement(s) of intention during negotiations, especially when the intention pertains to a change in a draft. This kind of evidence will be considered below.78

§ 5.2.4. The Circumstances

The courts always say that an ambiguity in a contract should be resolved in light of the circumstances existing at its formation. Many courts include in the circumstances the negotiations leading to the contract and the parties’ statements of intention before and when they concluded the contract.79 Any court should include objective facts, whether or not judicial notice is appropriate. The circumstances provide important context for the contract. They can be decisive.80

The circumstances, other than those involving a party’s subjective intention, consist of objective facts. With the following exception, considering the objective circumstances is consistent with both the objective and subjective theories. When the circumstances include things such as the parties’ statements of intention before or at that time of concluding the contract, however, those parts of the circumstances are relevant only to the parties’ subjective intentions. Hence, courts that follow the objective theory would not allow such statements.

Gillmor v. Macey,81 discussed in Chapter 4 above,82 illustrates a simple and straightforward use of the circumstances to help resolve what the court treated as an ambiguity. To repeat for convenience, the case involved a contract granting an easement to the grantor’s neighbor. The contract stated:

[The grantee] agrees that he will not allow use of and will not himself use any three-wheeled motorized All Terrain Vehicles or any

78See § 5.2.6.

79Stroud, 641 S.E.2d at 146.

80E.g., Amfac, 839 P.2d at 24–26; Robson v. United Pac. Ins. Co., 391 S.W.2d 855, 860–62 (Mo. 1965).

81121 P.3d 57 (Utah App. 2005).

82See § 4.3.3.2.

two-wheeled motorcycles or motorized ‘dirt bikes’ on the Easement at any time.83

Later, the parties disagreed about whether the grantee could use or allow the use of four-wheeled all-terrain vehicles (ATVs) on the easement. Extrinsic evidence showed that both parties were aware of the grantor’s intention to limit the use of ATVs and dirt bikes on the easement because they caused noise and dust. The parties, moreover, were not aware that four-wheeled ATVs existed because such vehicles were new to the market when the contract was made.84 The court held that the grant forbade the use of four-wheeled ATVs on the easement.85

The opinion illustrates a strongly subjective approach because the court considered, as part of the circumstances, the parties’ awareness of the grantor’s mental intention. This intention was not expressed in the contract. Both the objective and subjective theories of interpretation generally require that the contract’s terms express the relevant intention, even if only as one branch of an ambiguity.86 The interpretive task is to resolve an ambiguity in the contract or its terms. The court also considered the parties’ lack of awareness that four-wheeled ATVs existed, and the newness of four-wheeled ATVs to the market. These facts, however, do not seem sufficient to justify the court’s holding. Without the grantor’s intention to prevent noise and dust on the easement, which intention was known to the grantee, the result would be groundless.

The circumstances also can include the law existing when and where the contract was made. The contract might use a distinctively legal term that has a well-settled legal meaning in an appropriately related context and for an appropriately related purpose. Under such circumstances, a court might find that the parties contracted with reference to it. 87 Such a conclusion, of course, may well be false. When on the New York Court of Appeals, Judge Benjamin N. Cardozo wrote:

The proper legal meaning . . . is not always the meaning of the parties. Surrounding circumstances may stamp upon a contract a popular or looser meaning.88

83Gillmor. 121 P.3d at 69.

84Id. at 71.

85Id. at 73.

86See RESTATEMENT (SECOND) OF CONTRACTS § 201 (1981) (subjective theory).

87See Alicia F. v. Department of Educ., 2007 WL 593633, *3 (D.Haw. 2007).

88Utica City Nat. Bank v. Gunn, 118 N.E. 607, 608 (N.Y. 1918).

In other words, the parties’ intention is paramount. For this reason, Corbin and the Restatement (Second) oppose the use of legal meanings as such, and some courts refuse to use them in contract interpretation.89 Bank of the West v. Superior Court90 illustrates an appropriate use of the law as part of the circumstances in an insurance context, where a

comprehensive general liability policy insured against certain legal liabilities. The policy covered “damages” for advertising injury caused by “unfair competition.” The question was whether “unfair competition” in the contract included statutory violations, which harm the public, or only common law violations, which harm competitors only. The Supreme Court of California considered the ordinary meaning of unfair competition, which included both kinds of violations, according to the dictionary. The term was ambiguous. The court rejected reliance on ordinary meanings, however, calling such an approach “abstract philology.”91 Instead, the court looked to the law. Damages were available for common law unfair competition. But the unfair competition statute did not provide for damages; instead, its only non-punitive remedy allowed restitution of the benefits gained by means of unfair competition. Consequently, the court decided that there was no coverage.92

Bank of the West uses the law because the policy’s purpose was to insure against legal liabilities. Hence, the parties probably intended “damages”and“unfair competition”to have their legal meanings. Consequently, the objection to using legal meanings—that the parties’ intention should prevail—does not apply.

§ 5.2.5. Purpose(s)

The purpose(s) of a contract or a term is often “of paramount importance” when a court resolves an ambiguity.93 In Wulf v. Quantum Chemical Corp.,94 an employer’s (Quantum’s) employee stock bonus plan included an account for hourly employees which was to be distributed to the employees when

89See Gallagher v. Lenart, 874 N.E.2d 43, 59–60 (Ill. 2007); Mirpad v. Calif. Ins. Guarantee Assoc., 34 Cal.Rptr. 3d 136, 147 (Cal.App. 2005); Pub. Serv. of Okla., 554 P.2d at 1185 (quoting 15 O.S. 1971 § 160); RESTATEMENT (SECOND) OF CONTRACTS § 201, cmt. c and Ill. 3 (1981); 3 ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 534 (1961).

90833 P.2d 545 (Cal. 1992).

91Id. at 552.

92Id.

93Teig, 769 N.Y.S.2d at 60; see RESTATEMENT (SECOND) OF CONTRACTS § 202(1) (1981).

9426 F.3d 1368 (6th Cir.1994).

their employment was “terminated.”95 A letter to the employees explaining the plan said: “You receive the value of your account when you leave Quantum.”96 An employer’s newsletter said that it wanted to provide “all employees with ownership of the company.”97 Later, the employer sold one of its divisions, and some employees were transferred to the other firm. The employees brought an action for breach of contract when the employer then refused to make a distribution to them.

The employer argued that the employees were not “terminated” upon the sale of the division, as required by the plan document. The employees argued that they had “left Quantum” when they started work for the new owner of the division. The court resolved the ambiguity in terminated in part by considering the evident purpose of such a plan. The purpose, it wrote, was motivational—to increase productivity by conferring on the employees part ownership of the company. The plan’s purpose would not be served by keeping the employees in the plan after they had gone to work for someone else.98 Consequently, the court held, the employeremployee relationship was “terminated” when Quantum sold the division and transferred the employees.99

Like other elements, purpose can outweigh the ordinary or technical meaning of a term or sentence. For example, in Reardon v. Kelly Services, an employment contract for a business executive and general

counsel provided:

If your termination by the Company is other than for cause . . . you will be paid a separation allowance representing the difference between your first year’s compensation of $256,000 . . . and the compensation payments you will have already received.

There was a corporate restructuring after the employee had worked for six years, and the employee then was terminated (without cause). The employer offered a separation payment equal to nine months’ salary with other benefits. In the employee’s action for breach of contract, he argued that the plain language of the above-quoted sentence entitled him to a separation payment of about $2.1 million, representing the compensation

95Id. at 1370.

96Id. at 1377.

97Id.

98Id.

99Id. See also Falkowski v. Imation Corp., 33 Cal.Rptr. 3d 724, 722–23 (Cal.App. 2005).

100210 Fed. Appx. 456 (6th Cir. 2006).