and the purpose of the agreement—not only the ordinary meanings of the words. Also in the opinion, the court took into account the parties’ practical construction of the contract.81 Kass still represents objectivism because, by comparison with subjectivism, it is limited to objective elements. It does not allow, for example, extrinsic evidence of statements of intention during the negotiations, or testimony by a party about its own past intentions. Notably, by comparison with literalism, it adds context to literalism’s scant elements of interpretation. Consequently, unlike under literalism, the meaning of language will vary with the context.

§ 1.3.3. Subjectivism

Some courts employ subjectivism at all stages of contract interpretation, but especially when resolving an ambiguity. In its strongest form, subjectivism is the theory that prefers to interpret a contract according to the shared meaning the parties attached to the contract’s language. Like objectivism, it does not recognize unexpressed intentions.82 Subjectivism calls on an interpreter to draw inferences as to a party’s mental state from its manifestations of intention on the basis of all relevant evidence. Corbin, for example, believed that an interpreter presumptively should give an agreement’s words the meaning the parties gave them.83 In accord, the Restatement (Second) gives the following dramatic illustration involving an agreed private code:

A and B are engaged in buying and selling shares of stock from each other, and agree orally to conceal the nature of their dealings by using the word “sell” to mean “buy” and using the word “buy” to mean “sell.”A sends a written offer to B to “sell” certain shares, and B accepts. The parties are bound in accordance with the oral agreement.84

The result would be different under objectivism. Objectivism does not look to what the parties had in mind as the source of the meaning of language, so an agreed private code cannot constitute the meaning of the

81Id. at 181.

82Goddard v. S. Bay Union High Sch. Dist., 144 Cal. Rptr. 701, 706–07 (Cal.App. 1978).

83CORBIN, supra note 21, at § 538.

84RESTATEMENT (SECOND) OF CONTRACTS § 212, cmt. b., illus. 4 (1981); see id. § 201(1); CORBIN, supra note 21, at § 544.

words they use.85 Rather, objectivism looks to the meaning of the contract’s language as a matter of convention in the relevant context of use. Oliver Wendell Holmes, Jr. stated a strong form of objectivism as follows:

You cannot prove a mere private convention between two parties to give language a different meaning from its common one. It would open too great risks, if evidence were admissible to show that when they said five hundred feet they agreed it should mean one hundred inches, or that Bunker Hill Monument should signify the Old South Church.86

Williston, however, did not agree in principle because, for written contracts, he rejected the use of “common” meanings in favor of “local usages”—“the natural meaning of the writing to parties of the kind who contracted at the time and place where the contract was made, and [under] such circumstances as surrounded its making.”87 Accordingly, he wrote, “local or technical usage, if different from ordinary or normal usage,may be competent to [change the meaning of Bunker Hill Monument to Old South Church].”88 The parties’ subjective intentions, however, may not.

The parties’ subjective intentions, of course, do not always coincide. In such a case, subjectivist courts may follow Corbin’s fault principle, as elaborated in the Restatement (Second):89

(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made

(a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or

85See Hershon v. Gibraltar Bldg. & Loan Ass’n, Inc., 864 F.2d 848, 851, 857 (D.C. Cir. 1989).

86Goode v. Riley, 28 N.E. 228, 228 (Mass. 1891).

87WILLISTON, supra note 70, at § 607.

88Id. at § 611. See also RESTATEMENT (FIRST) OF CONTRACTS § 230, cmt. a (1932).

89CORBIN, supra note 21, at § 537. See Found. Intern., Inc. v. E.T. Ige Const., Inc., 78 P.3d 23, 33–34 (Haw. 2003); Centron DPL Co., Inc. v. Tilden Financial Corp., 965 F.2d 673, 675 (8th Cir. 1992); Fashion Fabrics of Iowa, Inc. v. Retail Investors Corp., 266 N.W.2d 22, 27 (Iowa 1978).

(b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.90

If the requirements of neither (a) nor (b) are satisfied, a court may supply a term or declare a failure of mutual assent.91 Requirement (2)(a) is subjective because the “attaching” of meaning, and knowledge of an attached meaning, are subjective. In (2)(b), attention shifts to whether one party should have known of the meaning subjectively attached by the other. At least one party must “attach” an eligible meaning. In other words, (2)(a) and (2)(b) are subjective because they require the interpreter to give the contract language a meaning that one party attached to it when the other party is at fault for a misunderstanding. This approach is not a strong subjective theory, which would require that both parties attach the same meaning in any case. It does treat only the strong subjective case as an instance of an agreement.

Sprucewood Investment Corp. v. Alaska Housing Finance Corp.92 illustrates the kind of evidence that some courts will consider when determining the parties’ subjective intentions. A housing finance company (AHFC) decided to revitalize a low-income area in Fairbanks, Alaska. To do so, it had to remove or demolish several existing buildings. It contracted with a construction company to do the work. The construction company then decided to remove the buildings from the site and salvage them. It contracted to sell them to a third party. AHFC then brought an action against the construction company for breach of contract, claiming that the contract required the complete demolition of the buildings, not their removal and sale. The court, relying on extrinsic evidence, affirmed the trial court’s grant of summary judgment for AHFC.

The invitation to bid set the terms of the contract. It provided, among other things, that the scope of the work would be “the removal and satisfactory disposal of all buildings,” and that “the buildings and foundations will be completely razed.”93 Another provision, the salvage provision, said that the removed items would become the contractor’s property, and an addendum to the bid packet said, “[t]he disposal of the building materials

90RESTATEMENT (SECOND) OF CONTRACTS § 201(2) (1981).

91Id. at §§ 201(3), 204.

9233 P.3d 1156 (Alaska 2001).

93Id. at 1158.

is at the contractor’s discretion.”94 When the contractor contracted to sell the salvaged buildings to the third party, both relied on the salvage provision.95 The dispute involved one party relying on the “completely razed” contract language and the other relying on the salvage provision. The court did not, however, determine that the written contract was ambiguous in the contested respect, nor did it require the ultimate interpretation to coincide with one prong of an ambiguity.96 Instead, it went directly to indications of the parties’ subjective intentions at the time of contracting. In particular, it relied on evidence showing that, before the award of the contract, the construction company’s president (Timmons) agreed to “demolish” the buildings;97 that upon his inquiry whether the contract allowed the removal and sale of the buildings, he was told that his company was required to completely demolish the buildings and could not sell them;98 and that Timmons did not form an intention to remove and sell the building until after the contract was formed.99 Based on these

uncontroverted facts, the court reasoned as follows:

Because AHFC and [the construction company] attached the same meaning to the contract’s terms and knew or had reason to know (through the discussion between AHFC’s representatives and Timmons) of the other’s intended meaning, the contract is enforceable in accordance with that meaning.100

The court gave no weight to the written salvage provision, even though the construction company and a third party had relied on it. By contrast, objectivism probably would find a structural ambiguity in the written contract, as between the “completely razed” language and the salvage provision. It would allow a different result when resolving this ambiguity. (Ironically, if not in bad faith, following the construction company’s breach, AHFC removed and sold the buildings.)101

The chief virtue of subjectivism is its strong insistence on freedom of and freedom from contract. In Sprucewood, it was fairly clear that the

94Id.

95Id. at 1159.

96Id. at 1162.

97Id. at 1163.

98Id.

99Id.

100Id.; see RESTATEMENT (SECOND) OF CONTRACTS § 201 (1981).

101 Sprucewood, 33 P.3d, at 1160.

parties both attached the same meaning to the contract as a whole at the time it was made. To give it any other meaning might fail to enforce the agreement they had in mind or to impose on them an agreement that neither (subjectively) intended. No policy goal other than respecting the contractual freedoms seems to have played a role in the court’s opinion, even though the construction company and a third party had relied on the written salvage clause. The court hinted that it would reach the same result had the contract not contained the “completely razed” language, but all else remained the same.102 If so, the case is somewhat like the Restatement (Second) illustration involving an agreed private code by which buy shall mean sell.103

Few subjectivist courts would go quite so far. In the famous Pacific Gas and Electric Co. case,104 for example, Chief Justice Roger Traynor required that, to be an eligible meaning that can render a contract term ambiguous, a proffered meaning must be one to which the contract language is “reasonably susceptible.”105 Such susceptibility is the same as a requirement that the language be ambiguous—that it reasonably bear more than one meaning. This requirement imposes a constraint on subjectivity. The “completely razed” language in Sprucewood probably would satisfy this constraint. But buy means sell would not.

A second virtue, in the eyes of some, is that the subjective theory moves the locus of interpretation from judges to juries and so particularizes the decision. For example, in Masterson v. Sine,106 a grant deed reserved to the grantors an option to repurchase the property for the selling price. The grantees were the grantor’s sister and brother-in-law. The grantor went bankrupt, and the trustee in bankruptcy sought to exercise the option. Based on extrinsic evidence, the grantor argued that the parties had made a parol agreement to keep the property in the grantor’s family; therefore, the option was personal to the grantor and could not be exercised by the trustee in bankruptcy. Over a strong dissent, the court held that the trial court erred by applying the parol evidence rule to keep extrinsic evidence of the parol agreement from the jury. The court appeared to eviscerate the parol evidence rule by turning it from a rule of

102Id. at 1162 (“a party will thus be bound not by the outer limits of an ambiguous document, but by the terms agreed upon by the parties”).

103See § 1.3.3.

104Pacific Gas & Elec. Co, 69 Cal.Rptr. at 561.

105Id. at 564. See also RESTATEMENT (SECOND) OF CONTRACTS § 212, cmt. c (1981).

10665 Cal.Rptr. 545 (Cal. 1968).

substantive law into a rule of evidence aimed at finding “the true intent of the parties.”107 Accordingly, the court wrote, “[e]vidence of oral collateral agreements should be excluded only when the fact finder is likely to be misled.”108

Criticisms of the subjective theory largely are the converse of the virtues of the objective theory. First, respecting the parties’ contractual sovereignty over their contract’s meaning should not be the only goal. The security of transactions, including holding parties responsible for their expressions when fair, and predictability, also may qualify the search for subjective intentions by giving effect to their intentions as manifested and conventionally understood. Second, due in part to the problems of proving subjectivities, the contract as interpreted under subjectivism easily can come apart from the parties’ subjective intentions or knowledge. Third, as indicated above, some third parties form reasonable expectations arising from, and reasonably rely on, written contracts without investigating their negotiating histories or other evidence of the parties’ subjective intentions when the contract was made.109 Fourth, coordination among the divisions of a modern firm, and between firms on one side of a contract, similarly is facilitated by keeping to the objective meanings of the contract. In addition, parties may rely on the document in its objective context after the employee(s) who negotiated and drafted the document have left their employment with the party.110

One criticism may be added. The key question is: How much context is needed for appropriate interpretation? Subjectivism admits all evidence relevant to the parties’ mental intentions when using the language in question. It presupposes that more context will get an interpreter closer to these intentions, even though the evidence remains fragmentary, and that there were relevant intentions. Or, in its more sophisticated form, in the case of an interpretive dispute, subjectivism requires inquiries into whether a party knew or should have known of the other’s subjectively held meaning. The link between context and subjective intention or knowledge, however, is tenuous. Consider, for example, unilateral statements of intent made in negotiations before the contract is concluded. Some such statements will not have been accepted by the other party and,

107Id. at 548.

108Id.

109See Shelby County State Bank v. Van Diest Supply Co., 303 F.3d 832, 838–40 (7th Cir. 2002).

110See, e.g., Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc., 664 F.2d 772, 785 (9th Cir. 1981).

therefore, will not represent the parties’ joint intentions, rendering them of no legal effect. Even agreements may be way-station agreements that were dropped as the negotiations evolved. Parol agreements on one term may be traded off later for another term; even well-evidenced parol agreements may have been superseded. Reconstructing the evolution of negotiations can be difficult and misleading. Consequently, statements in negotiations may not indicate the parties’ subjective intentions when they signed the contract, which intentions are the only authoritative intentions. Testimony in court of a party’s own intentions when the contract was made can be self-serving, especially when that party has convinced itself of the truth of its erroneous testimony. Ironically, the written contract, interpreted objectively based on something like the limited context approved by Kass v. Kass, might come closer to subjective intentions in the probably unusual cases in which these two theories would lead to different results.