Academic journal article American University Law Review

Interpreting Contracts without Context

Academic journal article American University Law Review

Interpreting Contracts without Context

Article excerpt

Introduction

Contracts always present questions of interpretation. This is nothing new. One of contract law's most important functions is to resolve interpretive problems created by the use of imprecise or unclear language.1 In the usual case, the text is unclear, but there will be some contextual evidence-in the form of prior drafts, statements made during negotiations, course of dealing and performance, or usage of trade-to help clarify the parties' intent.2 The search for evidence to put the parties' intentions into proper context is fundamental to contract interpretation. Indeed, contract law is centrally defined by the tension created by this search, which pits the desire to honor the contract's text against the recognition that, without an understanding of context, a court may misconstrue the parties' intentions.3

Recently, however, some scholars have raised a different concern: the absence of contextual evidence may leave courts without tools to resolve common interpretive problems.4 Assume, for example, that after principal negotiators have sketched the outlines of a deal, their lawyers document the transaction by using a contract from a previous transaction as a template. The lawyers may assume that the clauses in this template were carefully honed in prior transactions. Or perhaps they assume that many of the clauses are boilerplate and, even if imperfectly drafted, must remain constant from transaction to transaction. In either case, neither the lawyers nor their principals may pay any heed to many parts of the contract.

If contracts were indeed standardized and well-understood by market participants, this inattentiveness would pose few problems.5 For example, even if the parties and their lawyers gave no thought to a clause, evidence of trade usage can clarify its meaning.6 But what if contracts are not standardized? Lawyers are famous tinkerers with contract language.7 A change introduced by one lawyer, perhaps intended merely to clarify rather than change the meaning, may pass unnoticed into other contracts.8 Consequently, an ostensibly "standard" clause may vary from contract to contract. In a dispute, a party that discovers such a discrepancy may claim, opportunistically, that the contract has an unexpected meaning.9

Contract theory is increasingly focused on this danger.10 As an empirical matter, however, it is not clear the concern is warranted.11 How often do contracts create these interpretive problems, where courts must assign meaning to text without helpful contextual evidence about what the contracting parties intended? The literature to date has mostly examined this question by focusing on an arguably idiosyncratic clause in an arguably idiosyncratic contract: the pari passu clause in sovereign debt contracts.12 We examine whether clauses routinely found in ordinary commercial agreements also generate interpretive disputes that cannot be placed into meaningful context.13

We find that they do. specifically, we show that many choice-of-law clauses and arbitration clauses-boilerplate provisions that are frequently borrowed wholesale from other agreements-present interpretive challenges to courts. Without contextual information as to the meaning of the clause, what are judges to do? we explore several possible answers, each imperfect in its own right: (1) considering evidence about how contracts are produced and selected; (2) asking whether different versions of the disputed clause are priced differently; and (3) giving weight to surveys and other evidence of majoritarian preference. Although lawyers rarely attempt to introduce evidence of this sort, we do not think contract law forbids it.14 The practice of litigating contract disputes, like the practice of contract drafting, can be standardized and slow to innovate.15 If "acontextual" contracts are a problem, the answer is not, or not necessarily, to change contract law. Instead, the answer may lie in changing the way lawyers litigate contract cases. …

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