§ 6.3. Summary of Major Points

legal reasons should be balanced in a hard case if the relevant elements have cross-cutting implications.

Third, there are three relevant theories of contract interpretation— literalism, objectivism, and subjectivism. Contracts scholarship heretofore has recognized only two—literalism and subjectivism—on the questions of meaning. Corbin vigorously attacked literalism because it is acontextual. He, followed by Farnsworth, Professors John D. Calamari and Joseph M. Perillo, and (largely) the Restatement (Second), concluded that subjectivism was the better theory because acontextual interpretation is impossible. Corbin’s arguments, however, do not touch objective contextual interpretation. The favored approach includes enough context to avoid his criticisms when interpretation involves a question of meaning.

Fourth, identifying the terms of a written contract is the province of the parol evidence rule. It provides in brief that, when a written contract is integrated, certain parol agreements are discharged. It is not the same as the four corners rule, which provides in this context that whether a written contract is integrated depends on the contract document alone. Further, parol evidence may be excluded when a contract is unambiguous but, again, that is on the basis of the four corners rule. It is not the case—but a source of much confusion—that, whenever a court excludes parol evidence, it is on the basis of the parol evidence rule.

Fifth, the question whether a contract or term is ambiguous depends on whether it is ambiguous in a contested respect, not in the abstract. That is, a court normally must decide whether the contract or a term bears two reasonable meanings, each of which is advanced by a party. A third or fourth meaning is irrelevant to the case at hand. Consequently, abstract arguments suggesting that all language is ambiguous, such as the one advanced by Corbin and others, are irrelevant in the law of contracts.

Sixth, the question of ambiguity is thrust upon contract law by the law of civil procedure. When a contract is unambiguous, there is no material question of fact for a fact-finder to decide. Moreover, while strong subjectivism would send most interpretive questions to the fact-finder, objective contextual interpretation prefers that judges decide the question of ambiguity as a matter of law. Doing so enhances predictability in the law.

Seventh, the plain meaning rule mainly provides that unambiguous contracts or terms shall be given their unambiguous (i.e., plain) meaning

as a matter of law. It is a tautology. The important question is whether an interpreter should determine whether a contract is ambiguous by looking at the contract document alone or in the light of contextual elements. Answering this question depends on whether the four corners rule should apply when addressing the question of ambiguity. Objective contextual interpretation rejects the four corners rule here because deciding this question involves ascertaining the reasonable meanings of contract language. Objective contextual interpretation requires, instead, that the court decide the question of ambiguity by considering the contract document in light of its objective context as presented by counsel, without admitting evidence.

Eighth, focusing on the elements of contract interpretation and extruding literalism permits us to distinguish between a contract’s objective and subjective contexts. The objective context consists of those elements that bear on the conventional meaning(s) of the parties’ manifestations of intention. The subjective context consists of those elements plus other elements from which inferences may be drawn solely about the parties’ subjective intentions as to the meaning(s) of their manifestations. Objective contextual interpretation employs the objective context both on the question of ambiguity and when resolving an ambiguity.

Ninth, objective contextual interpretation is highly critical of the currently popular alternative, subjectivism, for several reasons. For one thing, there are well-known hazards in conceiving and proving what a person had in mind in the past. Subjectivism assumes that considering more context will get an interpreter closer to the parties’ past subjective intentions; there is no basis for this assumption. And what an individual person had in mind when speaking or hearing, reading or writing language does not constitute the meaning of that language; so subjectivism can produce arbitrary interpretations that do not respect the contractual freedoms. For the foregoing three reasons, subjectivism will err and impair contractual freedom in some cases. Moreover, even if subjectivism would not, contractual freedom is not the sole goal. Enhancing the security of transactions also is a goal and may outweigh the contractual freedoms in some cases. Additionally, by comparison with objective contextual interpretation, subjectivism weakens predictability and equal treatment under the law. Finally, subjectivism applies only to interpretive questions that arise at the performance stage of the contracting process, not to interpretation questions arising at the formation stage, the latter of

which are decided objectively by all accounts. Objective contextual interpretation at the performance stage does a better job of achieving congruence between these two kinds of interpretive question.

Tenth, literalism and subjectivism depend on defective underlying theories of meaning. Literalism holds that the dictionary constitutes the meaning of a word in a contract. Subjectivism holds that such meaning is constituted by what a party had in mind when speaking or hearing, reading or writing the word. Objective contextual interpretation rejects both. It favors conventionalism, the view that meaning is constituted by the conventions of language use within the context of use. Objective contextual interpretation’s focus on the objective context and purpose flows from this theory of meaning.