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fair procedures, and fostering predictability in the law. It favors a high degree of coherence among contract doctrines. The dispute settlement goal calls into question literalism’s propensity to dismiss a case whenever there is no single, literal meaning of a contract’s governing language.
A fourth goal is that of formulating legal rules that are administrable by the courts and by the parties. This goal may weigh in the balance in favor of rules that draw relatively clear lines and require objective proof. The most administrable rule, of course, is one that requires a court always to dismiss the plaintiff ’s action or to dismiss it when the contract language is unclear. The law’s dispute settlement function may outweigh that alternative.
Far less important in contract interpretation is a group of possible goals involving general fairness, equality, and justice, apart from the goals outlined above. These goals sometimes override the contractual freedoms. In particular, they are important when a court decides whether an agreement is enforceable under invalidating doctrines, such as duress, mistake, unconscionability, public policy, and the like. These doctrines, however, are applied before a court reaches a question of contract interpretation, as the term is used in this book. Once a court has decided that an agreement is an enforceable contract, we should do what we decided to do—enforce it.13 Consequently, the force of these goals largely is spent at an earlier step of the analysis. They play a very small role in contract interpretation.
§ 1.2. Tasks in Contract Interpretation
What is it we interpret? We interpret the terms of a contract. (Rather than introduce the complicated parol evidence rule here, we will put aside the task of identifying the terms until Chapter 3.) The terms are linguistic formulations that form the basis of the parties’ legal relations—their contractual rights, duties, and powers. It is important to recognize that all three theories focus interpretation centrally on the contract’s terms. This focus is obviously true of literalism, which targets the parties’ intention as revealed by the governing word(s). It also is true of objectivism, which focuses on the parties’ words, the whole contract, the objective circumstances, and other contextual elements. Further, in an opinion essentially
13 E.g., Rory v. Continental Ins. Co., 703 N.W.2d 23, 30–31 (Mich. 2005).
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endorsing the subjective theory on the question of ambiguity, Justice Roger Traynor wrote that
the intention of the parties as expressed in the contract is the source of contractual rights and duties. A court must ascertain and give effect to this intention by determining what the parties meant by the words they used.14
Accordingly, to interpret a contract using any of the three theories, an interpreter should ascertain the meaning of the contract’s terms.
§ 1.2.1. Unambiguous Terms
The parties state contract terms in language or, if implied, the terms are statable in language. When used in a contract, language generally refers to classes of ideas, actions, events, states of affairs, persons, and other things in the imaginary world of the contract.15 This is what we shall mean when we speak of a contract term’s meaning—its referents in the world of the contract. Once a contract has been concluded and the terms identified, the language is supposed to describe the world that the contract envisioned at formation. The language also is supposed to refer to the actions that the contract prohibits, permits, or requires of the parties in performance of their contract. And it may refer to a state of affairs, as when it describes circumstances that would constitute the occurrence or nonoccurrence of a condition to a party’s obligation. Once interpretation has given shape to the world of a contract, we can compare it with the real world and determine whether the imaginary world became the real world as envisioned. If it did not, we can determine whether the reason is that a party breached by failing to perform its promise when due, without excuse or justification.
There should be no interpretive dispute when the contract language refers clearly to an action prohibited, permitted, or required under the contract under the relevant circumstances. In practice, many, many reported cases involve purported interpretive disputes when the language is clear as between the meanings advanced by the parties. When there are
14Pacific. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.Rptr. 561, 564 (Cal. 1968) (emphasis added).
15STEVEN J. BURTON, PRINCIPLES OF CONTRACT LAW 383–84 (3d ed. 2006).
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two contested meanings, a third or fourth possible meaning is irrelevant. To find a relevant ambiguity, the applicable contract language or the contract as a whole must be ambiguous in the contested respect.16
In Roman v. Roman,17 for example, a married couple had contracted with an agency for the agency to freeze and store the couple’s embryos. A dispute arose when the couple was divorced, and one of them wanted to keep the embryos. The contract between them said:
If we are divorced or either of us files for divorce while any of our frozen embryos are still in the program, we hereby authorize and direct, jointly and individually, that one of the following actions be taken: The frozen embryo(s) shall be . . . [d]iscarded.18
The appellate court found that this language was clear. The embryos could be destroyed.19 The applicable term was “discarded.”Whatever else it might mean, it does not mean that one of the spouses could keep the embryos. Consequently, the contract was unambiguous in the contested respect.
Professor Arthur L. Corbin, a severe skeptic about finding actual party intentions from the face of a contract document, saw, too, that many reported cases involved clear contract language:
[A]n interpretation is not to be scorned merely because it seems obvious; words are, indeed, not to be condemned because they seem plain and clear and unambiguous. . . . There are cases in which the words of the writing are ambiguous to nobody; the contracting parties may themselves not even assert different interpretations. . . .
[T]heir attorneys may argue with eloquent and wearisome repetition for an interpretation favorable to their clients, without producing any relevant or credible evidence in support. . . . 20
Again,
[w]ithout a doubt, in supporting the interests of their clients, counsel often urge upon the court interpretations of language that are
16Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 177 (2d Cir. 2004); Donoghue v. IBC USA (Publications), Inc., 70 F.3d 206, 215–16 (1st Cir. 1995); Bank of the West v. Superior Court, 833 P.2d 545, 552 (Cal. 1992).
17193 S.W.3d 40 (Tex.App. 2006).
18Id. at 44.
19Id. at 52.
20Arthur L. Corbin, The Interpretation of Words and the Parol Evidence Rule, 50 CORNELL L.Q. 161, 171 (1965).
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far removed from common and ordinary usage, without producing any substantial evidence that the other party to the transaction gave the unusual meaning to the language or had any reason to suppose that the first party did so. In such cases, the harassed judge is justified in saying that the words are too plain and clear to justify such an interpretation.21
For another example, in Namad v. Salomon, Inc.,22 an employee sued his employer claiming that he was entitled to a bonus of $170,000, an amount equal to his previous annual salary. His written contract’s compensation clause provided:
The amounts of other compensation and entitlements, if any, including regular bonuses, special bonuses and stock awards, shall be at the discretion of the management. . . . Such bonuses as are awarded will be consistent with the customary policy of the company.23
The New York Court of Appeals held that summary judgment was properly awarded to the employer because this clause was unambiguous. The first sentence clearly gave the employer discretion to give any bonus or no bonus at all (“if any”). The employee argued that the customary policy of the company was to give bonuses approximately equal to his annual salary, and that the second sentence therefore supported his claim. The court, however, considered the compensation clause as a whole. It pointed out that interpreting the second sentence as the employee wanted would render the first sentence a nullity. Consequently, the contract on its face was reasonably susceptible to only one meaning. It may be added that the second sentence itself applies only to “[s]uch bonuses as are awarded,” confirming that the employer was free to refrain from awarding a bonus. The second sentence was not rendered a nullity, however, because it might apply when the employer did award a bonus.
In cases like Roman and Namad, one party is advancing an implausible meaning on the off-chance that a court will find the contract to be ambiguous. If the court does so, the case goes to a jury or a judge as finder of fact. For this reason and others, hopeful counsel may advance an implausible interpretation without any basis. Courts sometimes endorse such interpretations due to noncontractual considerations or simple error.
213 ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 542 (1960).
22543 N.E.2d 722 (N.Y. 1989).
23Id. at 752–53. See also SAS Institute, Inc. v. Breitenfeld, 167 S.W.3d 849 (Tex. 2005).