one must the seller ship the goods? There was no way to resolve the dispute. The court held that there was no contract.41

§ 1.3. Theories of Contract Interpretation

From the foregoing, it may be apparent that the three theories of contract interpretation are of practical importance. They capture much of what is involved when various interpreters identify terms, determine whether the contract is ambiguous, and then resolve any ambiguity. The theories seek to guide interpreters on how to perform these tasks to further the goals, as best we can. In particular, they are the bases for determining what elements of contract interpretation the parties, their lawyers, a judge, or a jury may take into account when making an interpretive judgment. Different jurisdictions tend to follow one or another theory on one or another of these issues, at least for a time, though some mix them up. Of course, the theories simplify the reality. Some courts will depart from what is required under the bulk of its precedents in hard cases: They may take into account more or fewer elements to justify what they regard as a just result.42 Other courts stick rigidly to their precedents even when the result may not be justified by the parties’ evident or subjective intentions.43 Nonetheless, it is best to view the practical legal issues through the trifocal lens of the theories. Because the theories play a substantial role in the detailed analysis in subsequent chapters, it may be helpful to elaborate further on them here.

§ 1.3.1. Literalism

Literalism requires interpretation according to the literal meaning of the directly applicable words used in a contract, without taking into account

41Id. at 908, 376; see Oswald v. Allen, 417 F.2d 43 (2d Cir. 1969); RESTATEMENT (SECOND) OF CONTRACTS § 201(3) (1981).

42Compare Gilmor v. Macey, 121 P.3d 57, 70 (Utah Ct.App. 2005) (rejecting strict application of the four corners rule even where a contract appears to be unambiguous) with Oakwood Village LLC v. Albertsons, Inc., 104 P.3d 1226, 1232 (Utah 2004) (strictly applying the four corners rule) and Bakowski v. Mountain States Steel, Inc., 52 P.3d 1179, 1184 (Utah 2002) (stating the four corners rule as controlling law) and Cent. Fla. Invs., Inc. v. Parkwest Assocs., 40 P.3d 599, 605 (Utah 2002) (“If the language within the four corners of the contract is unambiguous, the parties’ intention are determined from the plain meaning of the contractual language”).

43See, e.g., W.W.W. Associates, Inc. v. Giancontieri, 566 N.E.2d 639 (N.Y. 1990).

their context. According to this theory, the targets of interpretation are single words, and maybe a phrase, in the governing contract term. The interpreter may consult a dictionary. A word is ambiguous only if it bears more than one meaning or grammatical function (as do most words in dictionaries). That is, ambiguity is determined without resorting to any context, such as the document as a whole or the circumstances when the contract was formed. In this respect, the literal meaning of a contract’s words should be, though it sometimes is not, distinguished from the plain meaning of a contract.44 The latter concept may state a conclusion, whether or not reached on the basis of contextual evidence, that a term is unambiguous in the contested respect. Logically speaking, if there is an ambiguity on the key point in controversy, literalism requires that the case be dismissed. This is because a word cannot have a literal meaning—one true meaning apart from its context—and be ambiguous at the same time. Hence, literalism offers no resources for resolving an ambiguity.

Literalism is far from popular in the courts. Nonetheless, commercial arbitrators apparently choose literalism frequently.45 A few courts also purport to do so.46 For example,

Delaware follows the plain meaning rule of contract construction which instructs courts to rely solely on the clear, literal meaning of the words if a contract is clear on its face.47

Such a statement of the law, however, may be in tension with other authority in the same jurisdiction. The court that characterized Delaware law as above, for example, went on in the same case to quote the following statement from the same Delaware case:

An unambiguous integrated written contract should be construed in the way that an objective, reasonable third party would understand it.48

44Lipson v. Anesthesia Services, P.A., 790 A.2d 1261 (Del.Super. 2001).

45Lisa Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and Institutions, 99 MICH. L. REV. 1724, 1735 (2001); Lisa Bernstein, Merchant Law in a Merchant Court: Rethinking the Code’s Search for Immanent Business Norms, 144 U. PA. L. REV. 765, 1769–70 (1996).

46E.g., O’Donnell v. Twin City Fire Ins. Co., 40 F.Supp.2d 68, 72 (D.R.I. 1999); Elkhart Lake’s Road America, Inc. v. Chicago Historic Races, Ltd., 158 F.3d 970, 972 (7th Cir. 1998); State Highway Admin. v. Greiner Engineering Sciences, Inc., 577 A.2d 363, 370–72 (Md.App. 1990). See also Posner, supra note 5, at 1605–06.

47Swiss Bank Corp. v. Dresser Industries, Inc., 942 F.Supp. 398 (N.D. Ill. 1996) ((citing Myers v. Myers, 408 A.2d 279, 281 (Del. 1979)).

48Id.

This statement opens the door to more than the “literal meaning of the words.” It is objectivist because an objective, reasonable third party would not follow literalism. It seems more plausible to suppose that such a party inevitably would consider at least the whole document, the document’s purpose(s), and some other elements in the document’s context. No one but a pedant reads woodenly, word-by-word, with a dictionary at hand, without attending to some context. As Judge Learned Hand wrote, “it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary.”49

Moreover, no court interprets contract language to reach a literal result when it is unreasonable or absurd upon a reading of the contract as a whole.50 This rule is a check on literalism’s propensity for reaching a result that simply is not apt. Thus, at least in New York, lessor in a written contract can mean lessee when lessor is grammatically inconsistent with the rest of the document.51 As Judge Hand, a staunch objectivist, wrote,“[t]here is no surer way to misread any document than to read it literally.”52

Literal interpretation can come apart from the parties’ subjective and objective intentions, impairing the contractual freedoms. Literalist courts are not bothered by this. Their mantra is that:

[w]hen the language of a contract is plain and unambiguous, the court must afford it its literal meaning, despite a party’s contention that he understood the contract to mean something else.53

Courts often recite this or a similar mantra. Such mantras, however, can be misleading. They assume that the unambiguous language of a contract represents its “literal” meaning. If there were another meaning, of course, the language would be ambiguous, and there would be no literal meaning. The statement, up to the comma, consequently is a tautology. It amounts to saying, “If the language has only one meaning, the court must afford it that meaning.” Surely!

Dennison v. Harden54 is an example of literalism. A contract for the sale of real estate containing a commercial orchard indicated that the

49Cabell v. Markham, 148 F.2d 737, 739 (2d Cir. 1945).

50Beanstalk Group, 283 F.3d at 860.

51Castellano, 374 N.E.2d at 620.

52Guiseppi v. Walling, 144 F.2d 608, 624 (2d Cir. 1944).

53Sofran Peachtree City, LLC v. Peachtree Holdings, LLC, 550 S.E.2d 429, 432 (Ga.App. 2001).

54186 P.2d 908 (Wash. 1947). It is doubtful that the Washington Supreme Court would reach the same result today. See Hearst Communications, Inc. v. Seattle Times Co., 115 P.3d 262, 267 (Wash. 2005); Berg v. Hudesman, 801 P.2d 222, 226–27 (Wash. 1990).