$2.4 million) minus his first year’s salary ($256,000).101

The ordinary meaning of the sentence, apart from its purpose and context, clearly supports the employee’s argument. The court, however, found the sentence ambiguous due to conflicting plausible readings of it in isolation and in the context of the contract as a whole.102 It resolved the ambiguity against the employee. In light of the negotiating history, the purpose of the severance package was, as the employee had written in a letter to the employer during negotiations, “to deal with the potential risk of immediate financial crisis through loss of position.”103 The employee’s argument, if accepted, would lead to a payment of much more than he would need for an immediate financial crisis while he looked for another job.104 Thus, the court did not follow the ordinary meaning of the disputed sentence; instead, it implemented the sentence’s purpose.

There is a subtle difference in the use of purpose(s) under the objective and subjective theories. The objective theory considers the evident or conventional purpose(s) of the contract or the governing term.105 This follows from the theory’s focus on a reasonable understanding of the document, not what the parties had in mind. The subjective theory considers the parties’ purpose(s).106 The latter focus results from the theory’s effort to get at what the parties had in mind as their goal. On the subjective approach, purpose and intention are hard to distinguish. Perhaps this is why many courts follow the objective theory here.

§ 5.2.6. Statements of the Parties’ Intention or Understanding

The principal goal of contract interpretation is to ascertain the parties’ intention. Whichever kind of intention the courts pursue at other steps in the interpretive process, when resolving an ambiguity most will allow a party to testify about its past subjective intention. They may testify about statements of intention during negotiations or when the contract was

101Id. at 457.

102Id. at 462.

103Id. at 462–63.

104Id.

105Falkowski, 33 Cal.Rptr 3d at 732; Klapp, 663 N.W.2d at 454; Teig, 769 N.Y.S.2d at 60.

106See Reardon, 210 Fed.Appx. at 462; Paul W. Abbott, Inc. v. Axel Newman Heating and Plumbing Co., Inc., 166 N.W.2d 323, 324–25 (Minn. 1969).

formed.107 A party or its attorney may testify directly about its own past intentions or understandings.108 However, a party may not testify about its own intentions when they were not disclosed to the other party.109 The evidence as a whole must show a mutual intention.110

In Allstate Ins. Co. v. Watson,111 for instance, a lease for real property provided that the tenant would be responsible “for all damages . . . intentional or non-intentional.”112 The issue was whether the tenant was strictly liable for damage to the property. Strict liability, of course, does not require intentional action and so is “non-intentional.” A literal interpretation of the lease provision consequently would lead to the conclusion that the tenant was strictly liable for damage to the property. The court, however, refused to adopt the literal meaning. Taking a subjective approach, it relied on the testimony of the tenant and the person who drafted the contract on behalf of the landlord. Both stated in affidavits that it was not their intention to hold the tenant strictly liable but, instead, to require some degree of fault. Therefore, the court held, non-intentional within the meaning of the lease was not so broad as to make the tenant strictly liable.113

Allowing a party to testify about its own intention, or to report a statement of intention it made in the course of negotiations, carries a risk that the testimony will be self-serving and misleading. A party may perjure itself. More likely, a party may convince itself, consciously or unconsciously, of the truth of its testimony. In the latter case at the least, it may be difficult to ferret out the truth through cross-examination. Fact-finders may be misled.

§ 5.2.7. Trade Usages and Customs

The UCC makes trade usages, if any, integral to all agreements governed thereby.114 It defines a trade usage as “any practice or method of dealing

107Mark V, Inc. v. Mellekas, 845 P.2d 1213, 1236 (N.M. 1993); Kern Oil and Refining Co. v. Tenneco Oil Co., 792 F.2d 1380, 1384 (9th Cir. 1986).

108Lobo Painting, Inc. v. Lamb Const. Co., 231 S.W.3d 256, 258–60 (Mo.App. 2007); Flying J, 405 F.3d at 835; Garcia v. Truck Ins. Exchange, 682 P.2d 1100, 1104 (Cal. 1984).

109Nadherny v. Roseland Property Co., Inc., 390 F.3d 44, 51 (1st Cir. 2004).

110Baladevon, 871 F.Supp. at 98; Lonnqvist v. Lammi, 134 N.E. 255, 266–67 (Mass. 1920).

111195 S.W.3d 609 (Tenn. 2006).

112Id. at 611–12.

113Id. at 612.

114UCC § 1-201(b)(3) (2001); Capitol Converting Equip., Inc. v. Lep Transp., Inc., 750 F.Supp. 862, 866 (N.D. Ill. 1990).

having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in issue.”115 Other authorities require—much more stringently— that a usage or custom be known to both parties or be of long-standing, well-established, notorious, and invariable such that both parties should have known of it.116 Remarkably, at least one court has

regarded the established practices and usages within a particular trade or industry as a more reliable indicator of the true intentions of the parties than the sometimes imperfect and often incomplete language of the written contract.117

By all other authorities, this is wrong.

Reliance on a trade usage requires that the party advocating the usage prove that a relevant usage existed at the time when and place where the contract was concluded118 and that the usage binds both contract parties because each knew or should have known of it.119 Unless the parties otherwise agree, a trade usage under the UCC “is relevant in ascertaining the meaning of the parties’ agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement.”120 This means that a trade usage may be used to resolve an ambiguity in an express term. It also may add a term to the express agreement (by implication), and it may qualify a term. A few courts hold that qualifying a term allows a trade usage to contradict an express term to some extent, but not to negate it altogether.121 Under Article 2 of the UCC, though a trade usage always may explain or supplement even an integrated agreement, it apparently may not qualify the terms in an integrated

115UCC § 1-303(c) (2001).

116E.g., SR Intern. Business Ins. Co., Ltd. v. World Trade Center Prop., LLC, 467 F.3d 107, 134 (2d Cir. 2006).

117Urbana Farmers Union Elevator Co. v. Schock, 351 N.W.2d 88, 92 (N.D. 1984) (emphasis added) (citing Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1981)).

118Mullinnex LLC v. HKB Royalty Trust, 126 P.3d 909, 918–22 (Wyo. 2006).

119Id.; SR Intern. Business Ins., 467 F.3d at 134; FARNSWORTH, supra note 1, at § 7.13.

120UCC § 1-303(d) (2001).

121E.g., Nanakuli, 664 F.2d at 805; RESTATEMENT (SECOND) OF CONTRACTS § 221 (1981). But see Hazen First State Bank v. Speight, 888 F.2d 574, 577–78 (8th Cir. 1989) (evidence of trade usage inadmissible because it contradicted an express term); Tannenbaum v. Zelle, 552 F.2d 402, 414 (2d Cir. 1977) (because industry custom did not contradict express terms, evidence of custom was admissible); Pub. Serv. Co. of Okla., 554 P.2d at 1185–86 (evidence of usages and customs admissible only when express contract is ambiguous).

agreement or subtract a term in any agreement.122 Outside of the UCC, there is no known precedent allowing a trade usage or custom to qualify an agreement.

In general, the jurisdictions are split on whether the contract’s text must be ambiguous before admitting evidence of a trade usage or custom.123 Article 2, however, does not require a finding of ambiguity before admitting evidence of a trade usage in cases governed thereby.124 The Restatement (Second) is to the same effect.125

Judges allow evidence of trade usages to resolve ambiguities, whether patent or latent. The fact that a trade usage or custom reveals an ambiguity does not necessarily mean that the meaning which the trade usage reveals will or should prevail. The trade usage or custom reveals a presumptively reasonable meaning and must be weighed along with other relevant elements of interpretation in order to implement the parties’ agreement.126 Thus, the UCC treats a trade usage as “a factor in reaching the commercial meaning of the agreement that the parties have made.”127 It may be overridden or outweighed by the express terms, a course of dealing, or a course of performance.128 The parties, of course, need not conform their contract’s meaning to a trade usage or custom; they can agree otherwise. Trade usages and customs also are relevant in commercial contracts not governed by the UCC, especially insurance contracts.129

The court determines whether proffered evidence qualifies as evidence of a trade usage.130 The fact-finder decides whether the evidence establishes a usage, its scope, whether it binds both parties, and what weight to give it.131 If, however, a party proves that a trade usage is “embodied in a trade code or similar record, the interpretation of the record is a question

122UCC § 2-202 (2001).

123Compare Sunbeam Corp. v. Liberty Mut. Ins. Co., 781 A.2d 1189, 1193 (Pa. 2001) with Somerset Sav. Bank v. Chicago Title Ins. Co., 649 N.E.2d 1123, 1127–28 (Mass. 1995).

124UCC § 2-202, com. 1(c) (2001).

125RESTATEMENT (SECOND) OF CONTRACTS § 220, com. d (1981).

126Id. at § 203(b).

127UCC § 1-303, cmt. 3 (2001).

128Id. at § 1-303(e); Joseph H. Levie, Trade Usage and Custom Under the Common Law and the Uniform Commercial Code, 40 N.Y.U. L. REV. 1101, 1112 (1965).

129E.g., Sunbeam, 781 A.2d at 1193-95; RESTATEMENT (SECOND) OF CONTRACTS § 220 (1981).

130American Mach. and Tool Co. v. Strite-Anderson Mfg. Co., 353 N.W.2d 592, 597 (Minn. App. 1984).

131UCC § 1-303(c) (2001).