False dichotomies in commercial contract interpretation

• DOI: https://doi.org/10.1108/14770021211210678
• Pages: 27-43
• Date: 23 March 2012
• Published date: 23 March 2012
• Author: Larry A. DiMatteo
• Subject Matter: Economics

False dichotomies in commercial

contract interpretation

Larry A. DiMatteo

Warrington College of Business Administration,

University of Florida, Gainesville, Florida, USA

Abstract

Purpose – The purpose of this paper is to better understand how commercial contracts are

interpreted and the level of control that contracting parties have over the judicial interpretation of their

contracts.

Design/methodology/approach – The paper approaches the subject of commercial contract

interpretation through an analysis of four dichotomies debated in legal scholarship and found in

judicial decisions. The four dichotomies are formalism versus realism, literalism versus contextualism,

facilitation versus regulation, and rules versus standards.

Findings – The main f‌inding of the paper is that both poles of each of the dichotomies play important

roles in the interpretation and enforcement of commercial contracts. For example, contract

interpretation characterized by a high degree of formalism looks to the four-corners of the contract for

interpretive answers. In turn, some courts make use of external factors – such as distributive justice or

public policy concerns in interpreting contracts.

Research limitations/implications – One of the research implications of the paper is the need for

a more in-depth analysis of how contracting parties may agree on how their contracts are to be

interpreted and whether courts should be obligated to enforce party-mandated rules of interpretation.

Practical implications – The practical implication of understanding the means and methods of

contract interpretation is that it leads to a better understanding of commercial contracts in transborder

transactions.

Originality/value – The value of this research lies upon the fundamental premise that the same

philosophies and theories of interpretation found in most legal systems are replicated in the area of

international commercial contracting.

Keywords Commercial law,Contract law, International contracting,Interpretation,

Interpretivemethodologies, Contract theory

Paper type Research paper

1. Introduction

Along with contract formation, contract interpretation is the area of most

importance to contracting parties. Each country’s contract law provides rules for the

formation and interpretation of contracts. The formation rules can be divided into rules

of formality and offer-acceptance rules. Rules of formality vary between countries, but

some of the more common ones include the need for a writing for certain types of

contracts, need for a notarial endorsement, or the need to have witnesses to a signature.

Offer-acceptance rules def‌ine what constitutes an offer and acceptance, as well as when

they become effective and when they are terminated. A common core principle is that

an acceptance of an outstanding offer is evidence of mutual assent to enter a binding

contract.

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1477-0024.htm

The author would like to thank Qi “George” Zhou for his support.

Commercial

contract

interpretation

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Journal of International Trade Law

and Policy

Vol. 11 No. 1, 2012

pp. 27-43

qEmerald Group Publishing Limited

1477-0024

DOI 10.1108/14770021211210678

This article examines the second major area of contract law involving

the interpretation of legally binding contracts. This almost always is done in the

context of a contract dispute within an ongoing litigation or arbitration proceeding. The

interpretation of contracts is a two-stage process: the interpretation of the words or

terms of a contract and the application of contract rules to resolve disagreements of

meaning between the disputing parties. Disputes over the meaning or intent of the

parties relating to the terms of the contract generally revolve around two scenarios.

First, when the contract term at the core of the dispute is susceptible to various

meanings. This is the case of contractual ambiguity. Second, the contract fails to deal

with an issue that is at the center of a dispute. This is the case of contractual

incompleteness.

The later of the above two scenarios requires the court to f‌ill in a gap in the contract.

This is assuming that a court does not dismiss the dispute due to indef‌initeness of the

contract. Most courts will imply a term to f‌ill in the gap, especially in cases of executed

or partially executed contract performance. The court is aided in f‌illing in such terms

by specif‌ic default rules or terms provided by contract law. They will also utilize

extrinsic evidence such as trade usage, business customs, prior dealings between

the parties, and subsequent conduct or performance by the parties to answer the

hypothetical question: What would the parties have agreed to regarding the term or

issue if they were aware of it at the time of contract formation (Charny, 1991)?

This article will focus on the f‌irst of the two scenarios, although, much of what is

covered is also pertinent to the second scenario. It looks at the interesting question of

how courts interpret the express words of a private contract. This analysis is performed

from the perspective of the common law. However, the dichotomies or interpretive rule

choices discussed here are relevant to all legal systems. This analysis will be based on

the following hypothetical: two parties in good faith enter into a commercial contract;

a dispute arises relating to the meaning of a term in the contract; this dispute results in

one or both parties committing a breach; the result is a lawsuit in which the court is asked

to interpret the meaning of the disputed term.

The interpretation of a contract and the application of contract rules related to that

interpretation is both a descriptive and normative enterprise. The descriptive part is

recognizing which rules of interpretation are provided by contract law. The normative

issue is what those rules should entail. Ultimately, the issues of interpretation distill

down to evidentiary concerns. What types of evidence should the court use to

determine the meaning of a contract word, phrase, or term? The key debate in this area

is whether the court should look outside the written contract and use extrinsic or

contextual evidence to determine the meaning of the contract? The practical question

discussed in this article, from a public policy perspective, is whether the parties should

be able to contract around contract law’s rules of interpretation? How can parties

control how their contracts are to be interpreted in case of a dispute? Can the parties

provide instructions or contract-determined rules of interpretation to be applied by a

court or arbitral tribunal?

Part 2 examines the general theories of contract interpretation including, the

objective or reasonable person theory, subjective or meeting of the minds theory , and

an inter-subjective theory of contract interpretation (DiMatteo, 1998). It will also

analyze the important role played by trade usage in the interpretation of commercial

contracts. Part 3 presents longstanding scholarly-generated dichotomies that present

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