knew of this conduct. And, it follows, the evidence did not show that the lessor accepted or acquiesced in it. Hence, the court considered facts that would not be relevant under the narrow view of a practical construction.

The broader view is the better one. In Coliseum Towers, the lessee’s conduct in contesting the taxes and the assessment clearly show that, prior to the dispute, the lessee believed it was responsible for the taxes. It would not be in the lessor’s interest to have believed otherwise. The reasonable inference is that the parties subjectively intended for the lessee to pay the taxes. Moreover, evidence of this conduct is objective evidence. It is not part of the circumstances when the contract was made, but it does show objectively how the lessee interpreted the lease—not only what was in the parties’ minds. A party’s conduct before a dispute arises, whether or not in performance of the contract, should be considered when relevant to the resolution of an ambiguity.

§ 5.2.10. Statutes and Judicial Precedents

Statutes and judicial precedents may give a meaning to a word that also is used ambiguously in a contract. It is tempting to take the word out of its context in the contract and give it the meaning it was given in the statute or precedent. Such a practice generally should be avoided.151 It is too often inconsistent with the first rule for resolving ambiguities—that the interpreter should give an ambiguous contract a meaning that is in accordance with the parties’ intention. Taking into account the entire contractual context in which the words were used serves to particularize the inquiry so as to do this. The meaning of a word or term in another context may have nothing to do with the parties’ intention in the present context.152

The Restatement (Second) gives the following illustration:

A agrees to sell beer to B at a specified price per barrel. At the time of the agreement both parties and others in their trade use as standard barrels wooden barrels which originally hold 31 gallons and

151See Flintkote Co. v. General Acc. Assur. Co., 410 F.Supp.2d 875, 887 (N.D. Cal. 2006); Somerset Area School Dist. v. Somerset Area Educ. Ass’n., 907 A.2d 1178, 1182 n.6 (Pa. Cmwlth. 2006); World Trade Center Props., L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154, 186–89 (2d Cir. 2003); RESTATEMENT (SECOND) OF CONTRACTS § 212, cmt. a (1981).

152See § 2.2.6.

hold less as they continue in use. A statute defines a barrel as 31½ gallons. The statute does not prevent interpretation of the agreement as referring to the barrels in use.153

The same thing should be true when a word in a non-standardized contract in question is ambiguous and also was used in a different contract that was the subject of a different litigation. The meaning a court gave to the word in that contractual context should not control its meaning in another contractual context.154

This criticism of the use of statutes and judicial precedents to define words out of context should be distinguished from two other uses. First, in Falkowski v. Imation Corp.,155 an ambiguous contract provided for a stock option plan. The court interpreted its provisions in light of the plan’s evident purpose—the attraction and retention of desirable employees. It confirmed that this was the purpose with reference to judicial precedents ascribing this purpose to other stock option plans.156 Such a use is different because it concerns purpose and a matter that is appropriate for judicial notice. It is not definitional. Second, terms in standardized agreements, to be discussed in the next section, sometimes are given standard meanings based on statutes or judicial precedents.157

§ 5.2.11. Standardized Agreements

Standardized agreements, including many insurance contracts, are very useful in a number of ways.158 To maintain their usefulness, the courts sometimes resolve ambiguities in the standard terms of such agreements in a standardized way, based on trade association explanations of standard industry forms, statutes, or legal precedents.159 This practice protects the

153RESTATEMENT (SECOND) OF CONTRACTS § 201, cmt. c, Ill. 3 (1981). See also id., cmt. c, Ill. 1.

154But see In re Estate of Uzelac, 114 P.3d 1164, 1168–69 (Utah 2005) (following precedent to resolve an ambiguity).

15533 Cal.Rptr.3d 724 (Cal.App. 2005).

156Langer v. Iowa Beef Packers, Inc., 420 F.2d 365, 368 (8th Cir. 1970).

157Brinderson Corp. v. Hampton Roads Sanitation Dist., 825 F.2d 41, 44 (4th Cir. 1987).

158Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv. L. REV. 1173, 1222–23 (1983).

159Flintkote, 410 F.Supp.2d at 487; cf. West American Ins. Co. v. Prewitt, 401 F.Supp.2d 781, 785, (E.D.Ky. 2005) (accepting relevance of certain judicial precedents but distinguishing them from the case at bar); Stephenson v. Oneok Resources Co., 99 P.3d 717, 722–23 (Okla.App. 2004) (rejecting proposed jury instruction requiring standardized interpretation based on industry forms).

interest of the standard form’s maker because an accumulation of consistent precedents, and the use of boilerplate terms tracking the language of the contracts that were authoritatively interpreted before, enhances the predictability and efficiency of the contract. Further, boilerplate clauses in financial contracts, such as indentures and debentures, may be interpreted uniformly to maintain their fungibility in capital markets; trading in such contracts would be hampered if their value varied depending on the proper interpretation of their terms.160 However, some courts do not resolve ambiguities in a standardized way unless there is a usage of trade.161 And many courts particularize the resolution of ambiguity by favoring separately negotiated or added terms over inconsistent printed terms.162

Adhesion contracts are a special kind of standardized contract. An adhesion contract is one between parties of unequal bargaining power, whereby the stronger party presents the contract to the weaker party on a take-it-or-leave-it basis, and the weaker party has little choice but to agree to the standard form.163 Adhesion contracts generally are enforceable unless they are unconscionable or otherwise invalid.164 In principle, an adhesion contract is interpreted in the same way as is any other contract.165 However, due to the inequality of bargaining power and the unilateral drafting, courts are more likely to resolve ambiguities against the drafter of an adhesion contract.166

§ 5.2.12. Reasonableness, Lawfulness, and Fairness

When resolving an ambiguity, the courts do not often consider, or instruct a jury to consider, what is reasonable, lawful, or fair.167 The Restatement

160Sharon Steel Corp., v. Chase Manhattan Bank, 691 F.2d 1039, 1048 (2d Cir. 1982).

161See Parks Real Estate Purchasing Group v. St. Paul Fire and Marine Ins. Co., 472 F.3d 33, 42 (2d Cir. 2006).

162E.g., Bristol-Meyers-Squib Co v. Ikon Office Solutions, Inc., 295 F.3d 680, 685 (7th Cir. 2002); Eureka Inv. Corp., N.V. v. Chicago Title Ins. Co., 530 F.Supp. 1110, 1118 (D.D.C. 1982): RESTATEMENT (SECOND) OF CONTRACTS § 203(d) (1981).

163See generally Rakoff, supra note 158.

164Broemmer v. Abortion Services of Phoenix, Ltd., 840 P.2d 1013, 1016 (Ariz. 1992).

165Rory v. Continental Ins. Co., 703 N.W.2d 23, 41 (Mich. 2005).

166Chicago & North Western Transp. Co. v. Emmet Fertilizer & Grain Co., 852 F.2d 358, 360 (8th Cir. 1988).

167Shelby County State Bank v. Van Diest Supply Co., 303 F.3d 832, 838 (7th Cir. (2002) (stating the principle but finding both parties’ interpretations reasonable); Mgmt. Sys. Assocs., Inc. v. McDonnell Douglas Corp., 762 F.2d 1161, 1172 (4th Cir. 1985).

(Second), however, approves of considering reasonableness and lawfulness. It provides that

an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect.168

Probably for reasons considered below,169 the Restatement (Second) does not approve of taking into account the fairness of the parties’ exchange when interpreting. Note that the provision quoted also incorporates the mere surplusage rule, which holds that every provision of a contract should be given some effect if possible, as the parties would have intended; none should be idle.170 The provision does not allow an interpretation to end-run this rule by giving a meaning to a term when that meaning would be unreasonable or unlawful.

§ 5.2.12.1. Reasonableness

Any question of reasonableness in interpretation should be decided when determining whether there is an ambiguity, which determination logically and procedurally must be made before an interpreter resolves an ambiguity. When deciding the question of ambiguity, the court decides whether the contract’s language is reasonably susceptible to both conflicting meanings advanced by the parties.171 An unreasonable meaning consequently should be excluded at that stage, normally leaving only one eligible meaning and an unambiguous contract in the contested respect, as a matter of law.172 Summary judgment or a directed verdict then is appropriate.

Nonetheless, some courts have considered the reasonableness of a proffered meaning when purporting to resolve an ambiguity.173 In

Crestview Bowl, Inc. v. Womer Const. Co., Inc.,174 a ten-year lease required the tenant to make monthly rental payments and to pay any increased property taxes. The lease was extended for ten years and again for another

168RESTATEMENT (SECOND) OF CONTRACTS § 203(a) (1981).

169See § 5.2.12.3.

170Abraham v. Rockwell Intern. Corp., 326 F.3d 1242, 1244 (Fed.Cir. 2003) ((applying § 203(a)).

171See § 4.3.3.1.

172See Baladevon, 871 F.Supp. at 98–99.

173E.g., Aron v. Gillman, 128 N.E.2d 284, 288–89 (N.Y. 1955).

174592 P.2d 74 (Kan. 1979).

ten years with increased rent, but without mentioning who would pay any increased property taxes. The court found the lease to be ambiguous and held that the tenant was obligated to pay the increased taxes:

It is unreasonable to conclude that the payment of any tax increases terminated at the end of the base lease. The net effect of such a holding could result in the landlord receiving less actual compensation each year any extension of the lease is in effect. In our times of rapidly escalating real estate taxes it is unrealistic that the landlord would bind itself to absorbing all such tax increases from 1971 to 1991, while shifting the burden of the additional taxes to the tenant only for the years 1967 to 1971.175

Therefore, the court concluded, the base lease’s requirement that the tenant pay any tax increases was a part of each ten-year extension.176 The opposite conclusion would lead to extreme unreasonableness or absurdity in light of the circumstances. If a court is to pursue reasonableness when resolving an ambiguity, it should exclude only an extreme or absurd meaning. Freedom of contract allows the parties to conclude odd contracts that may appear to be unreasonable to others.

§ 5.2.12.2. Lawfulness

Lawfulness is a similar matter because an unlawful meaning is not a reasonable meaning. Consequently, if one party advances a meaning that would require unlawful conduct in performance of the contract, that meaning should be excluded when determining whether the contract is relevantly ambiguous. (If this can be done without gutting the contract, it might not be declared unenforceable on public policy grounds.177) Put otherwise, a meaning requiring unlawful conduct should be excluded as a matter of law.

Lawfulness should be distinguished from the interpretive use, to resolve ambiguity, of statutes and legal precedents that give meaning to the same words as those which the parties used in the contract in question. Such a use of statutes and precedents was considered above.178

175Id. at 79.

176Id.

177See RESTATEMENT (SECOND) OF CONTRACTS § 178 & cmts. (1981).

178See §§ 2.2.6; 5.2.10.