THE LAW OFINTERPRETING CONTRACTS

Richard R. Orsingerrichard@ondafamilylaw.com

http://www.orsinger.com

Orsinger, Nelson, Downing & Anderson, LLP

Dallas Office:5950 Sherry Lane, Suite 800

Dallas, Texas 75225214-273-2400

and

San Antonio Office:1616 Tower Life BuildingSan Antonio, Texas 78205

210-225-5567

State Bar of TexasAdvanced Civil Appellate Practice Course

September 6-7, 2007Four Seasons Hotel, Austin, Texas

CHAPTER 8

2007Richard R. OrsingerAll Rights Reserved

I. OVERVIEW.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-

II. THE SCHOOLS OF THOUGHT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-A. THE CLASSICAL VIEW.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-B. LEGAL REALISM.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-C. LAW AND ECONOMICS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-D. A DYNAMIC APPROACH TO CONTRACTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . -8-E. THE IMPACT OF THEORY ON PRACTICE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-

III. IMPORTANT CONCEPTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-A. THE GOAL OF INTERPRETATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8-B. THE UNIFORM COMMERCIAL CODE (UCC)... . . . . . . . . . . . . . . . . . . . . . . . -9-C. THE ORIGINAL AND SECOND RESTATEMENTS OF CONTRACTS.. . . . . . . -9-D. INTERNATIONAL COMMERCIAL LAW... . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-E. STANDARD OF INTERPRETATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-F. THE FOUR CORNERS RULE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-G. THE PLAIN MEANING RULE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-H. INTERPRETATION VS. CONSTRUCTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-I. AGREEMENT VS. CONTRACT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-J. INTEGRATED VS. PARTIALLY INTEGRATED VS. UNINTEGRATED.. . . . . -15-K. VAGUENESS VS. AMBIGUITY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-L. AMBIGUITY... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-M. IMPLIED TERMS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-N. FILLING IN THE GAPS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-O. RULES VS. STANDARDS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-P. COURSE OF DEALING... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-Q. COURSE OF PERFORMANCE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-R. USAGE OF TRADE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-S. STATUTE OF FRAUDS... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-T. PAROL EVIDENCE RULE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-U. MERGER CLAUSE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-V. SUBSEQUENT ORAL MODIFICATION... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-W. SCRIVENERS ERROR.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-X. DEFAULT TERMS PROVIDED BY LAW... . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-Y. FORM CONTRACTS AND BOILERPLATE.. . . . . . . . . . . . . . . . . . . . . . . . . . -23-Z. HIERARCHY OF CONSIDERATIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-AA. SECONDARY RULES OF CONSTRUCTION.. . . . . . . . . . . . . . . . . . . . . . . . . -24-

1. Noscitur a Sociis (Take Words in Their Immediate Context).. . . . . . . . . . . -24-2. Ejusdem Generis.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-3. Expressio Unius est Exclusio Alterius... . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-4. The Specific Prevails Over the General... . . . . . . . . . . . . . . . . . . . . . . . . . . -25-5. The Earlier Prevails Over the Later.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-6. Handwritten Over Typed and Typed Over Preprinted.. . . . . . . . . . . . . . . . . -25-7. Words Prevail Over Numbers or Symbols... . . . . . . . . . . . . . . . . . . . . . . . . -25-

8. Contra Proferentem.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-9. Presumption Favoring Arbitration.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-

BB. THE PEERLESS CASE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-

IV. CONTRACT INTERPRETATION IN TEXAS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-A. PRIMARY CONCERN.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-B. RULES OF CONSTRUCTION GENERALLY.. . . . . . . . . . . . . . . . . . . . . . . . . . . -27-C. WHEN CONSIDERING ONLY THE AGREEMENT ITSELF... . . . . . . . . . . . . . -27-

1. Fully Integrated, Partially Integrated, and Unintegrated.. . . . . . . . . . . . . . . -27-2. Four Corners Rule.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-3. Multiple Contemporaneous Documents Construed as One.. . . . . . . . . . . . . -28-4. Clear Mistakes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-5. Scriveners Error.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-6. Plain Meaning Rule.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-7. Construe Contract as a Whole.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-8. Noscitur a Sociis (Take Words in Their Immediate Context).. . . . . . . . . . . -30-9. Expressio Unius est Exclusio Alterius... . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-10. Ejusden Generis.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-11. Specific Terms Prevail Over General Terms.. . . . . . . . . . . . . . . . . . . . . . . -30-12. Earlier Terms Prevail Over Later Terms (But not in Wills).. . . . . . . . . . . -30-13. Handwritten Over Typed and Typed Over Preprinted.. . . . . . . . . . . . . . . . -31-14. Words Prevail Over Numbers or Symbols... . . . . . . . . . . . . . . . . . . . . . . . -31-15. Notwithstanding Anything Else Clause.. . . . . . . . . . . . . . . . . . . . . . . . . -31-16. Surrounding Circumstances.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-17. Utilitarian Standpoint... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-18. Construction Must Be Reasonable.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-19. Use Rules of Grammar... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-20. Exceptions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-21. Contra Proferentem (Construe Against the Drafter).. . . . . . . . . . . . . . . . . -32-22. Things to Avoid.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-

a. Dont Render Clauses Meaningless.. . . . . . . . . . . . . . . . . . . . . . . . . -32-b. Validity Preferred Over Invalidity.. . . . . . . . . . . . . . . . . . . . . . . . . . -32-c. Presumption Against Illegality.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-d. Avoid Forfeitures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-e. Avoid Implied Terms.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-

23. Special Contracts.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-a. Arbitration Clauses... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-b. Deeds.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-c. Guarantees.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-d. Insurance Policies.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-

D. WHEN CONSIDERING THINGS OUTSIDE THE AGREEMENT... . . . . . . . . . -34-1. Statute of Frauds.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-2. Parol Evidence Rule... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-3. Surrounding Circumstances.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-4. Course of Performance... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-

5. Course of Dealing.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-6. Usages of Trade.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-

E. AMBIGUITY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-1. Definition of Ambiguity... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-2. Patent Vs. Latent Ambiguity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-3. Question of Law Vs. Question of Fact... . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-4. What is Considered?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-

F. GAP-FILLING... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-

V. SUMMARY JUDGMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-

VI. THE ROLE OF THE JURY IN CONTRACT INTERPRETATION.. . . . . . . . . . . . . . . . -39-

VII. REVIEW ON APPEAL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-

VIII. CONCLUSION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-

IX. FURTHER READING.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-

X. THE PEERLESS CASE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-

The Law of Interpreting Contractsby

Richard R. Orsinger

Board Certified in Family Lawand Civil Appellate Law

Texas Board of Legal Specialization

I. OVERVIEW. Views on how courtsshould interpret contracts vary widely. At thesimplest level, the views have been contrastedas being either classical or modern, static ordynamic, textualist or contextualist, objectiveor subjective, literal or purposive, standard-ized or individualized, binary or multi-faceted. Scholarly writings about contract theoryreflect both detractors and defenders of classi-cal rules of contract interpretation, and presentseveral new schools of thought, but the writ-ings, taken as a whole, betray a lack of con-sensus on an underlying theory to justify eitherthe old or the new approaches. The doctrine ofstare decisis favors continuation of old meth-ods, but some writers suggest that courts bendthem occasionally, without saying so, toachieve justice in individual cases. And somesuggest that courts pick and choose from theavailable rules of construction in order toreach a desired outcome.

The situation is complicated by the fact thatdifferent sets of rules apply to different typesof contracts. Common law rules of interpreta-tion apply generally, but state legislatures haveadopted statutes, such as the Uniform Com-mercial Code, which prescribe rules andstandards to be applied to certain kinds ofcontracts. Other contracts are affected byconsumer protection laws, real property law,employment law, and securities law, to namea few. Alan Schwartz & Robert Scott, Con-tract Theory and the Limits of Contract Law,113 Yale L. J. 541, 544 (2003) [Schwartz &

Scott]. The U.S. government has enteredinto a treaty that some say preempts state lawsin international contract disputes involving thesale of goods. Plus, contracting parties some-times opt out of, or expressly invoke, variousstatutory or common law rules. So contractlaw is a patchwork.

This article describes old and new approachesto interpreting contracts, and then recounts therules of contract interpretation that are gener-ally recognized, citing to Texas cases thatspeak to those rules. The article also consid-ers the role of judge, jury, and appellate court,in cases involving contract interpretation.

II. THE SCHOOLS OF THOUGHT.

A. THE CLASSICAL VIEW. In 1855, aprofessor of law at Harvard Law School,Theosophilus Parsons, published a two vol-ume treatise on contract law, called THELAW OF CONTRACTS, that radically de-parted from other books previously written.Instead of just listing cases and their holdings,Professor Parsons expounded his view of theprinciples of contract law, and supported theseviews by notes discussing individual cases. Parsons did not write the supporting notes. Parsons employed Harvard law students toread and digest the underlying cases, andsubmit their summaries to another Harvardstudent named Christopher Columbus Lang-dell (1826-1906), who wrote the explanatorynotes. These students read, and Langdell

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synthesized, some 6,000 cases, primarily fromEngland but some from Massachusetts, NewYork, and a few other U.S. states. In thespring of 1870, when Langdell took overParsons professorship, as well as the dean-ship of Harvard Law School (he was deanfrom 1870 to 1895), Langdell undertook toprepare a casebook of contract cases (the firstcasebook ever), the first volume of which hecompleted by October 1870.

Prior to Langdell, writings on contract law hadgrouped cases according to the types of partiesinvolved (innkeepers, merchants, minors,etc.), or subject matter (services, money,property, etc.) rather than by underlying prin-ciples. Bruce A. Kimball; Langdell on Con-tracts and Legal Reasoning: Correcting theHolmesean Caricature, 25 Law & HistoryReview No. 2 p. 39 (Summer 2007)(Kimball). Langdellconceived of an ordered intellectual frame-work for contract law consisting of rules thatreflected principles like offer, acceptance,consideration, etc. Langells preface to thefirst edition of his case book reflects his in-tent:

Law, considered as a science, consistsof certain principles and doctrines [T]he number of fundamental legaldoctrines is much less than is com-monly supposed It seems to me,therefore, to be possible to take abranch of the law such as Contracts,for example, and, without exceedingcomparatively moderate limits, toselect, classify and arrange all thecases which had contributed in anyimportant degree to the growth, devel-opment, or establishment of any of itsessential doctrines.

See Luke Nottage, Tracing Trajectories inContract Law Theory: Form in Anglo-NewZealand Law, Substance in Japan and the US,Sydney Law School Research Paper, at 7 n. 10(2007b, forthcoming) (Nottage), availableon-line at:.

Given its historical priority and age, Lang-dells approach is called classical, eventhough it represents a modernization of con-tract law as it had existed up to the late 19thCentury. Developing underlying principlesand rules for various areas of law grew beyondcontract law and became a movement in thelaw generally that came to be called formal-ism. The classical approach to contractsmoved to preeminence through the efforts ofSamuel Williston (1861-1963), a Harvard lawprofessor who served as the Reporter for theUniform Sales Act of 1906, and authored atreatise on sales law in 1909, which wasexpanded into a 5-volume treatise on the lawof contracts (1920). Professor Williston alsoserved as the Reporter for the American LawInstitutes Restatement of Contracts (1932). Williston lived to the age of 101. See MarkMovsesian, Rediscovering Williston, 62Washington & Lee L. Rev. 207 (2005). Willi-ston elevated predictability to a primary placein contract law. "A system of law cannot beregarded as successful unless rights and dutiescan, in a great majority of instances, be fore-told without litigation." SAMUEL WILLI-STON, LIFE AND LAW 209 (1941), quotedin Allen D. Boyer, Samuel Williston's StruggleWith Depression, 42 Buff. L. Rev. 1, 23(1994). In Willistons view:

In the formation of a bargain, intentionof the parties does not mean secret

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intention, nor generally even intentionmanifested to third persons, but onlythe intention manifested to the otherparty. If the offeror understood thetransaction to be different from thatwhich his words plainly expressed, itis immaterial, as his obligation mustbe measured by his overt acts.

1 WILLISTON ON SALES, p. 5, 5, quotedin Whaley Lumber Co. v. Reliance Brick Co.,2 S.W.2d 911, 916 (Tex. Civ. App. 1928, nowrit).

The classical view ignored the subjectiveintent of the contracting parties and insteadlooked solely to the language of the contract todetermine what was agreed upon. This ap-proach relied upon the judges interpretationof the words of the contract, assisted by rulesof construction that didnt vary from case tocase. This rule-based approach to interpretingcontracts on their face, while ignoring thesurrounding context of the contracting, hassubsequently been disparaged as operatingexclusively on axiomatic and deductive rea-soning, where axioms are uncritically acceptedas true, and are applied with a deductive logic(i.e., syllogistically) in a manner wholly inde-pendent from surrounding circumstances.Classical contract law . . . conceived contractlaw as a small set of core doc-trinesaxiomsthat were justified on theground that they were self-evident, and as alarger set of doctrines that were justifiedlargely on the ground that they could be de-duced from the axioms. Melvin Eisenberg,The Emergence of Dynamic Contract Law, 88Cal. L. Rev. 1743, 1751 (2000) [Eisenberg]. Under the classical approach, the focus wasnot on the specific parties to the contract, andtheir conceptions of their agreement, butrather on the words of the contract they

signed, without regard to surrounding circum-stances. Federal District Judge Learned Handwrote:

A contract has, strictly speaking, noth-ing to do with the personal, or individ-ual, intent of the parties. A contract isan obligation attached by the mereforce of law to certain acts of the par-ties, usually words, which ordinarilyaccompany and represent a knownintent.

Hotchkiss v. Nat'l City Bank, 200 F. 287, 293(S.D.N.Y. 1911). Thus, Eisenberg writes, [a]contract involved what is called a meeting ofthe minds of the parties. But this does notmean that they must have arrived at a commonmental state touching the matter at hand. Thestandard by which their conduct is judged andtheir rights are limited is not internal, butexternal. Eisenberg, at 1756. This view wasreflected in the original Restatement of Con-tracts (1932):

The meaning that shall be given tomanifestations of intention is not nec-essarily that which the party fromwhom the manifestation proceeds,expects or understands.

Restatement of Contracts 226, Comment b.

The central weakness of this approach is thatwords do not always have a definite meaning. Justice Oliver Wendell Holmes Jr. noted:

A word is not a crystal, transparentand unchanged, it is the skin of a liv-ing thought and may vary greatly incolor and content according to thecircumstances and the time in which itis used.

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Towne v. Eisner, 245 U.S. 418, 425, 38 S.Ct.158, 159, 62 L.Ed. 372 (1918). Beyond theunderlying problem of words as indicators ofthoughts, is the reality that some (many?)contracts omit important terms, contain con-flicting provisions, use vague descriptions,and contain ambiguities. Rules had to beconstructed to patch around these deficienciesto allow the judge to reach a meaning withoutlooking beyond the four corners of the docu-ment. Some of these rules gave weight tosome parts of the contract over other parts(i.e., specific terms control over generalterms), but in the instance of true gaps in theagreement it was necessary to provide defaultprovisions that would fill in terms that theagreement omitted, or else to conclude that nocontract had been formed. At first thesedefault provisions were stated in common lawdecisions, but later various legislatures step-ped in with uniform default terms to help fillgaps (particularly with regard to the sale ofgoods), to avoid having to inquire what theparties themselves intended.

In an influential article in the 1899 HarvardLaw Review, Holmes articulated an objectivestandard for interpreting contracts that lookedbeyond the words of the agreement:

[W]e ask, not what this man meant,but what those words would mean inthe mouth of a normal speaker ofEnglish, using them in the circum-stances in which they were used, and itis to the end of answering this lastquestion that we let in evidence as towhat the circumstances were. But thenormal speaker of English is merely aspecial variety, a literary form, so tospeak, of our old friend the prudentman. He is external to the particularwriter, and a reference to him as the

criterion is simply another instance ofthe externality of the law.

O.W. Holmes, Jr., The Theory of Legal Inter-pretation, 12 Harv. L. Rev. 417, 417-18(1899). In Holmess view, objectivity incontract interpretation was not to be achievedby applying unchanging rules to the face ofthe agreement. It was not a question of whatone party meant, or even what the other partyunderstood. To Holmes objectivity meant thatthe contract should be evaluated through theeyes of a disinterested third party, including inthe mix that persons common knowledge. Inpractice, Holmes approached interpretationquestions (statutory as well as contractual) byconsidering not only the words, but also thecontext in which the words were written,including not only the document as a wholebut also the geographic, historical and societalcontext which might give meaning to thewords. Thus Holmes did not confine himselfto applying rules of construction to the fourcorners of the document, and he did lookoutside the contract, but he avoided an assess-ment of the understanding of either party tothe contract and instead sought to determinewhat a reasonable person would take thewords to mean. Patrick J. Kelley, ObjectiveInterpretation and Objective Meaning inHolmes and Dickerson: Interpretive Practiceand Interpretive Theory, 1 Nev. L.J. 112, 117-121 (2001).

The Restatement of Contracts (1932) adoptedthis reasonable person standard of interpreta-tion, as reflected in Section 230:

230. Standard Of InterpretationWhere There Is Integration

The standard of interpretation of anintegration, except where it produces

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an ambiguous result, or is excluded bya rule of law establishing a definitemeaning, is the meaning that would beattached to the integration by a reason-ably intelligent person acquainted withall operative usages and knowing allthe circumstances prior to and con-temporaneous with the making of theintegration, other than oral statementsby the parties of what they intended itto mean.

Comment b to Section 230 notes:

Where a contract has been integratedthe parties have assented to the writtenwords as the definite expression oftheir agreement. . . They have assentedto the writing as the expression of thethings to which they agree, thereforethe terms of the writing are conclu-sive, and a contract may have a mean-ing different from that which eitherparty supposed it to have.

Although the classical and the objective ap-proaches to interpreting contracts have beenunder assault for more than half a century, it isenjoying a bit of a resurgence. Justice RichardPosner surmises that [t]his may be due in partto the fact that fewer and fewer legal academ-ics have significant experience in the realworld of contract drafting and business litiga-tion. Richard Posner, The Law and Econom-ics of Contract Interpretation, 83 Tex. L. Rev.1581, 1583 (2005) (R. Posner).

B. LEGAL REALISM. Beginning in 1906, Roscoe Pound (Dean of Harvard Law School1919 to 1936) began to argue against what hecalled mechanical jurisprudence, and sug-gested instead a sociological approach whererules of law would be evaluated on the basis

of the social interests that they served. Knapp,Crystal & Prince, PROBLEMS IN CON-TRACT LAW CASES AND MATER-IALS11 (Aspen 2003) (Knapp), on line at:. A school ofLegal Realists arose, spearheaded by lawprofessors at Columbia Law School, whichdenied that judicial objectivity was possible,and instead said that court decisions are theoutcome of a decision-making process wherethe choice of legal rules and perception of thefacts are influenced by personalities, points ofview, interest, class, etc. Knapp, at 11. Writ-ers on contract law began to debate the justifi-cations for contract rules, and the effect thatsuch rules had on different types of peopleaprocess that goes on today. Some proponentsattempted to modernize the prevailing viewsof contract law. Although he didnt considerhimself to be a Legal Realist, one such instiga-tor of change was Arthur Linton Corbin(1874-1967). In 1903 Corbin became YaleLaw Schools first full-time professor, andtaught there for 40 years. Corbin justified his effort to modernize con-tract law in these terms:

[T]he law does not consist of a seriesof unchangeable rules or principlesengraved upon an indestructible brassplate or, like the code of Hammurabi,upon a stone column. Every system ofjustice and of right is of human devel-opment, and the necessary corollary isthat no known system is eternal. In thelong history of the law can be ob-served the birth and death of legalprinciples. They move first with theuncertain steps of childhood, thenenjoy a season of confident maturity,and finally pass tottering to the grave.

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. . . The law is merely a part of ourchanging civilization. The history oflaw is the history of . . . society. Legalprinciples represent the prevailingmores of the time, and with the moresthey must necessarily be born, survivefor the appointed season, and perish.

ARTHUR L. CORBIN, ANSON ON CON-TRACTS v-vi (3d Am. ed. 1919). Corbinsview of contract interpretation is reflected inthe following comment: The final inter-pretation of a word or phrase should not beadjudged without giving consideration to allrelevant word usages, to the entire context andthe whole contract, and to all relevant sur-rounding circumstances. 3 CORBIN ONCONTRACTS 5555, at 236 (1960). Furtherinsight into Corbins thinking is reflected intwelve letters he wrote at different periods ofhis life, unearthed by Professor Perillo. SeeJoseph M. Perillo, Twelve Letters From Ar-thur L. Corbin to Robert Braucher, 50 Wash.& Lee L. Rev. 755 (1993) ([there] will al-ways be two large fields of legal uncer-tainty--the field of the obsolete and dying, andthe field of the new born and growing.) (Ihave read all the contract cases for the last 12years; and I know that certainty does notexist and the illusion perpetrates injustice.).Although differences arose, in both theoryand expression, between Corbin and Willi-ston, Corbin nonetheless considered Willistonto be his teacher on contract law, and Corbincollaborated closely with Williston in prepar-ing the original Restatement of Contracts.Arthur L. Corbin, In Memoriam: SamuelWilliston, 76 Harv. L. Rev. 1327 (1963).

A prominent legal realist in the contract areawas Karl N. Llewellyn (1893-1962), whostudied under Corbin at Yale Law School. Llewellyn was a professor at Columbia Law

School. Llewellyn argued that judges shouldbecome familiar with the facts of a case, sothey could acquire a situation sense thatwould lead to the right result. Knapp, at 24.Professor Llewellyn published a case book oncontract law that broke with Langells blackletter law approach by discussing economicconsiderations, business practices, and otherfactors influencing the expectations and be-haviors of commercial buyers. Nottage, at 9. Llewellen served as Reporter for the UniformCommercial Code (UCC), a project that wasstarted in 1940 and came to fruition in 1951.Llewellyn was the principal draftsman ofArticle 2, on sales, which contained provisionsrelating to the formation and interpretation ofcontracts. Professor Llewellyn influenced theUCC to be more in accord with prevailingbusiness practices, and to focus more ongeneral standards and less on mechanicalrules. Instead of merely enacting the existingbody of contract law, the UCC in many in-stances deviated from the common law ofcontract that had developed for the sale ofgoods. See Knapp, at 20. A copy of the UCCis on-line at: .

The Uniform Commercial Code rejected thepurely textual approach to interpreting con-tracts:

1. This Act rejects both the"lay-dictionary" and the "convey-ancer's" reading of a commercialagreement. Instead the meaning of theagreement of the parties is to be deter-mined by the language used by themand by their action, read and inter-preted in the light of commercial prac-tices and other surrounding circum-stances. The measure and backgroundfor interpretation are set by the com-

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mercial context, which may explainand supplement even the language ofa formal or final writing.

Uniform Commercial Code, 1-205, OfficialComment, Purposes, 1.

This expanded view found expression inRestatement (Second) of Contracts (1981) 202(1):

Words and other conduct are inter-preted in the light of all circumstances,and if the principal purpose of theparties is ascertainable it is given greatweight.

The Restatement (Second) rejected the reason-able third person perspective of interpretingagreements. Section 212, Comment a, said:the operative meaning is found in the transac-tion and its context rather than in the law or inthe usages of people other than the parties.

Contrary to the formalism of classic contractlaw and Restatement First, the approach tocontract interpretation and gap-filling pre-scribed by Restatement Second and the U.C.C.is more concerned with arriving at the actualagreement of the parties, or where there is nosuch agreement, construing the contract in amanner that is fair and reasonable under thecircumstances. Harold Dubroff, The ImpliedCovenant of Good Faith in Contract Interpre-tation and Gap-Filling: Reviling a ReveredRelic, 80 St. John's L. Rev. 559, 572 (2006).

C. LAW AND ECONOMICS. Beginningin the early 1960s, Nobel Prize-winning econ-omists began to suggest an economic assess-ment of legal doctrines. See Schwartz & Scott,at 548. The reliability of promises, it wasargued, encourages promissory exchanges.

Nancy S. Kim, Evolving Business and SocialNorms and Interpretation Rules: The Need fora Dynamic Approach to Contract Disputes, 84Neb. L. Rev. 506, 513 (2005) (Kim). Aprominent proponent of the economic ap-proach to contract interpretation, JusticeRichard Posner of the U.S. Seventh Court ofAppeals wrote:

The goal of a system, methodology, ordoctrine of contractual interpretation isto minimize contractual transactioncosts, briefly understood as obstaclesto efforts voluntarily to shift resourcesto their most valuable use.

R. Posner, at 1583. Posner suggested a for-mula:

C = x + p(x)[y + z + e(x,y,z)]

where C is the social transaction costs of acontract (social in the sense of includingcosts to third parties, such as the courts andfuture transacting parties, as distinct from justthe costs to the parties to the particular con-tract), and where x is the negotiation anddrafting cost, p the probability of litigation, ythe parties litigation costs, z the cost of litiga-tion to the judiciary, and e the error costs. R.Posner, at 1583. Contracting parties can spendmore on the first term (that is x, or negotiatingand drafting) in order to reduce the secondterm (that is p(x)[y + z + e(x,y,z)], or thepotential cost of litigation and the risk of anerroneous outcome of litigation). Lawyersprefer that; businessmen usually dont. De-fault terms, usually provided by statute, tendto reduce the cost of both terms of the for-mula. So do form contracts.

As far as an overarching philosophy, it couldbe said that the economic approach views the

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purpose of contract law as maximizing thetotal benefits created by an agreement.Schwartz & Scott, at 552. In Richard Posnersview, each party wants to gain from the trans-action by agreeing to terms that maximize thesurplus created by the transactionthe excessof benefits over costs, the excess being di-vided between the parties. R. Posner, at1588. Not only is this a motivation for theparties to contract, but it can also be taken asa standard by which to resolve contractualdisputes, if a judge or juror or arbitratorwished to consider that aspect of a transactionas an indication on how to resolve a dispute.

D. A DYNAMIC APPROACH TO CON-TRACTS. While the debate continues aboutwhen and how far to go beyond the face of theagreement in interpreting a contract, a schoolof thought was developed that views thecontracting process not as the single event ofsigning the document but rather the entirecourse of dealings of the parties, from negotia-tions through performance.

The dynamic approach argues that contractsseldom occur at one instant in time, and thatthe contracting process has a past, present, andfuture, all of which are important to interpret-ing the contract. Eisenberg, at 1762. A num-ber of writers subscribe to this so-called dy-namic theory of contract law, but their de-scriptions of the approach vary. A centraltenet of the dynamic theory is that the goal ofcontract interpretation is to effectuate theactual objectives of the contracting parties. Eisenberg, at 1745. This goes beyond theRestatement (Second) which gives the intentof the parties great weight. One writerviews the dynamic approach as a rejection ofkeeping to any one theory of contract law, andinstead considering the tenets proposed byvarious theories in order to find the best rule

for a particular situation. Kim, at 518. Thegoal, according to this writer, is to find thesolution that the parties would have enacted ifthey had addressed the problem during negoti-ations. Kim, at 528.

E. THE IMPACT OF THEORY ONPRACTICE. Some writings on contract lawseek to justify existing rule of interpretationusing new and different rationales. Othersadvocate a change in existing rules, particu-larly to weaken or dispense with the parolevidence rule. Professor Farnsworth wrote in1990: Viewed from the academe, the mostsignificant non-event of the decade was thefailure of contract theory to have a significantimpact on practice. E. Allan Farnsworth,Developments in Contract Law During the1980's: The Top Ten, 41 Case W. Res. L. Rev.203, 225 (1990) (Farnsworth). This is stilllargely true seventeen years later.

III. IMPORTANT CONCEPTS. There arecertain concepts that are important to the issueof contract interpretation. Some of these arediscussed below.

A. THE GOAL OF INTERPRETATION. Richard Posner described contract interpreta-tion as the undertaking by a judge or jury (oran arbitrator . . .) to figure out what the termsof a contract are, or should be understood tobe. R. Posner, at 1581. It is sometimes saidthat an agreement results from a meeting ofthe minds of the contracting parties, and thatin contract interpretation courts are to deter-mine the intent of the parties. The textualapproach limits the court to the four corners ofthe contract as the sole source of determiningthe parties intent, and admits that the resultmay be something neither party intended. Joseph Perillo noted: This perspective subor-dinates the parties' intentions to the intrinsic

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meaning of words. Joseph M. Perillo, TheOrigins of the Objective Theory of ContractFormation and Interpretation, 69 Fordham L.Rev. 427, 431 (2000). The objective approachto contract interpretation considers the wordsof the contract and part (but not all) of thecontext surrounding the agreement, but stillignores the subjective intent of the contractingparties.

B. THE UNIFORM COMMERCIALCODE (UCC). Promulgated in 1951 bythe National Conference of Commissioners onUniform State Laws (NCCUSL), workingwith the American Law Institute (ALI), theUCC is a proposed statutory framework forcommercial transactions. It has largely beenenacted in all states except that Louisiana hasnot adopted Article 2 governing sales ofgoods. The NCCUSL says: The [Article 2]rules provide for each stage of a contractualrelationship from formation to performance.Included are provisions governing implied andexpress warranties, risk of loss, statute offrauds and extrinsic evidence, interpretation,auction sales, gap-filling terms that applywhen parties fail to reach agreement, breachesof contract and remedies for breaches of con-tract.

The Uniform Commercial Code began as arewrite of the Uniform Sales Act, but morphedinto a collection of laws relating to variouscommercial transactions. Article 2 governssales, including not only sales between mer-chants but also sales by merchants to consum-ers and sales between non-merchants. Knapp,at 20. Many of the terms in Article 2 couldeasily apply to other types of contracts, andsome courts have used Article 2 rules byanalogy to non-sales transactions. The

NCCUSL and ALI recently worked for severalyears on revisions to Article 2. See W. DavidEast, The Statute of Frauds and the ParolEvidence Rule Under the NCCUSL 2000Annual Meeting Proposed Revision of U.C.C.Article 2, 54 SMU L. Rev. 867 (2001). De-spite opposition from a number of businessorganizations, the revisions passed theNCCUSL in 2003, but failed to pass at theALIs membership meeting later that year. The effort to update Article 2 has been aban-doned.

As explained in II.B above, the UCC Article 2provisions regarding contract interpretationconsider not only the text of the agreement butalso some actions of the parties, commercialpract ices , and other surroundingcircumstances. Subsequent writers havecharacterized these and other principles ofArticle 2 as vague standards. AlanSchwartz surmises that the vagueness resultedfrom the fact that the drafters were primarilyacademics who wanted vagueness to increasethe likelihood that the draft would be acceptedby the more conservative membership at largeof the NCCUSL and the ALI. Alan Schwartz& Robert E. Scott, The Political Economy ofPrivate Legislatures, 143 U. Pa. L. Rev. 595,646 (1995). Thus the explanation of Article 2includes politics, not just intrinsic merit.

C. THE ORIGINAL AND SECOND RE-STATEMENTS OF CONTRACTS. TheALIs first ever restatement was the Restate-ment of Contracts, adopted in 1932. It wasformatted to state the general rule, and if courtopinions diverged then it stated the betterrule and the alternative rule. The Restate-ment tended toward generalization and pre-dictability, at the expense of diversity andflexibility. Knapp, at 21. Restatement 226said this about interpretation:

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226. What Is Interpretation

Interpretation of words and of othermanifestations of intention forming anagreement, or having reference to theformation of an agreement, is the as-certainment of the meaning to begiven to such words and manifesta-tions.

Note that the focus of interpretation is on themeaning of the words used in the agreement,and not the actual intent of the parties.

In 1962, the ALI began rewriting the Restate-ment of Contracts. The Reporter for theRestatement (Second) of Contracts was Pro-fessor E. Allan Farnsworth, of ColumbiaSchool of Law. The Restatement (Second)was influenced by the UCC.

The Restatement (Second) of Contracts rejectsa purely-textual approach and abandons theobjective reasonable person standard. Insteadexpress terms are interpreted in light of allthe circumstances (subject to the parol evi-dence rule). If the subjective intent (principalpurpose) of the parties can be discerned it isgiven great weight. Indicators of the par-ties intent are to be measured against courseof performance, course of dealing, or usage oftrade. If the course of performance involvesrepeated actions, that the other party acceptsor acquiesces in, then course of performanceis given great weight in interpreting theagreement.

Professor John E. Murray, Jr., draws thiscomparison:

The First and Second Restatement ofContracts contain the following hypo-thetical: A says to B, I offer to sell you

my horse for $100. B knowing that Aintends to offer to sell his cow for thatprice, not his horse, and that the word'horse' is a slip of the tongue, replies Iaccept. Restatement (First) of Contractarticle 71 illust. 2 (1932); Restatement(Second) of Contracts article 20 illus.5 (1981). Neither Restatements finds acontract for the sale of the horse. Thefirst Restatement also finds no con-tract for the sale of the cow, but theSecond Restatement concludes thatthere is a contract for the sale of thecow.

John E. Murray, Jr., An Essay on the Forma-tion of Contracts and Related Matters underthe United Nations Convention on Contractsfor the International Sale of Goods, 8 Journalof Law and Commerce 11 (1988). For a review of criticisms of theALI and the Restatement process, see KristenDavid Adams, Blaming the Mirror: The Re-statements and the Common Law, 40 Ind. L.Rev. 205 (2007).

D. INTERNATIONAL COMMERCIALLAW. The United Nations Convention on theInternational Sale of Goods (CISG) becameeffective on January 1, 1988. See McQuillen,The Development of a Federal CISG CommonLaw in U.S. Courts: Patterns of Interpretationand Citation, 610 Miami L. Rev. 509 (2007)(McQuillen). Like UCC Article 2, it appliesto the sale of goods, only on an internationalscale. Unlike the UCC, the CISG does notapply to consumer transactions. The CISG isa treaty with more than sixty signatories, andthe U.S. has subscribed to it, so it is part of thesupreme law of the land. On line access torelevant information is available at.

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The CISG looks at the true intent of the par-ties. Article 8(3) says that courts should givedue consideration. . . to all relevant circum-stances of the case including the negotiations,any practices which the parties have estab-lished between themselves, usages and anysubsequent conduct of the parties. SeeMcQuillen, at 520.

The CISG contains no statute of frauds orparol evidence rule. Article 11 provides: "Acontract for sale need not be concluded in orevidenced by a writing and is not subject toany other requirement as to form. It may beproved by any means, including witnesses." Inratifying the treaty, the United States did notmake the declaration permitted under Article12, which would have preserved the statute offrauds and parol evidence rules.

On October 23, 2004, the CISG AdvisoryCouncil adopted CISG Advisory CouncilOpinion No. 3, Parol Evidence Rule, PlainMeaning Rule, Contractual Merger Clauseand the CISG, which stated:

1. The Parol Evidence Rule has notbeen incorporated into the CISG. TheCISG governs the role and weight tobe ascribed to contractual writing.

2. In some common law jurisdictions,the Plain Meaning Rule prevents acourt from considering evidence out-side a seemingly unambiguous writingfor purposes of contractual interpreta-tion. The Plain Meaning Rule does notapply under the CISG.

3. A Merger Clause, also referred to asan Entire Agreement Clause, when ina contract governed by the CISG,

derogates from norms of interpretationand evidence contained in the CISG.The effect may be to prevent a partyfrom relying on evidence of statementsor agreements not contained in thewriting. Moreover, if the parties sointend, a Merger Clause may bar evi-dence of trade usages.

However, in determining the effect ofsuch a Merger Clause, the parties'statements and negotiations, as well asall other relevant circumstances shallbe taken into account.

.

In one case, the Fifth Circuit Court of Appealsheld that Texas parol evidence rule applieddespite the CISG, while in another case theEleventh Circuit Court of Appeals held thatthe CISG preempted state law, and thus de-clined to apply the parol evidence rule. SeeMcQuillen, at 521-23; Note, The Inapplicabil-ity of the Parol Evidence Rule to the UnitedNations Convention on Contracts for theInternational Sale of Goods, 28 Hofstra L.Rev. 799 (2000). Several federal districtcourts have recognized preemption of theparol evidence rule by the CISG. McQuillen,at 521-23.

To cover gaps in the CISG, the private organi-zation UNIDROIT prepared Principles ofInternational Commercial Contracts, in 1994. These principles do not have the force of law,and are perceived as scholarly opinion.

Efforts are underway to see how parties tointernational contracts with arbitration clausesare approaching the use of CISG or otherinternational norms as opposed to contract law

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of individual nations. See Christopher R.Drahozal, Contracting out of National Law:an Empirical Look at the New Law Merchant,80 Notre Dame L. Rev. 523 (2005). The earlyassessment is that they arent opting out ofnational law. Id.

Globalization of trade brings new concernsinto focus. Negotiations and drafting may beconducted in a non-English language that doesnot translate well into English. An example isthat Japanese does not have a future tense. Kim, at 534. It may be difficult for an Ameri-can judge to envision what a reasonable thirdperson might find the contract to mean, whenthe Mandarin Chinese contract is between theSingapore branch of a Chinese company andan American company, calling for perfor-mance in Indonesia but with payment to bemade in Euros.

E. STANDARD OF INTERPRETATION. Standard of interpretation was defined in theoriginal Restatement of Contracts 227 asthe test applied by the law to words and toother manifestations of intention in order todetermine the meaning to be given to them. The Restatement offered a list of potentialstandards of interpretation: (1) the standard ofgeneral usage; (2) a standard of limited usage(usage in a particular locality, or by a sect, orin a particular occupation, or by immigrantsusing a local dialect); (3) a mutual standard(common to the contracting parties but notothers); (4) an individual standard (either themeaning the person making the communica-tion intended the communication to express,or that the person receiving the communica-tion understood from it); (5) a standard ofreasonable expectation (the meaning whichthe party employing the words should reason-ably have apprehended that they would conveyto the other party); (6) a standard of reason-

able understanding (the meaning which theperson addressed might reasonably give tothem). The standard of interpretation appliedby the Restatement to an integrated agreementwas the meaning that would be attached tothe integration by a reasonably intelligentperson acquainted with all operative usagesand knowing all the circumstances prior toand contemporaneous with the making of theintegration, other than oral statements by theparties of what they intended it to mean. Id. 230. These standards differ in whose per-spective is used to evaluate the contract. Where there was no integrated contract, theRestatement assumed a standard of interpreta-tion, that the words and actions of the partyare given the meaning which that partyshould reasonably expect that the other partywould give to them. Id. 233.

The Restatement (Second) of Contracts saysthis about interpreting agreements:

212. Interpretation Of IntegratedAgreement

(1) The interpretation of an integratedagreement is directed to the meaningof the terms of the writing or writingsin the light of the circumstances, inaccordance with the rules stated in thisChapter.

In the Restatement (Second) of Contracts, thestandard of interpretation is implicit in itsrules of interpretation:

202. Rules In Aid Of Interpretation

(1) Words and other conduct are inter-preted in the light of all the circum-stances, and if the principal purpose of

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the parties is ascertainable it is givengreat weight.

(2) A writing is interpreted as a whole,and all writings that are part of thesame transaction are interpreted to-gether.

(3) Unless a different intention is man-ifested,

(a) where language has a gen-erally prevailing meaning, it isinterpreted in accordance withthat meaning;(b) technical terms and wordsof art are given their technicalmeaning when used in a trans-action within their technicalfield.

(4) Where an agreement involvesrepeated occasions for performance byeither party with knowledge of thenature of the performance and oppor-tunity for objection to it by the other,any course of performance accepted oracquiesced in without objection isgiven great weight in the interpretationof the agreement.

(5) Wherever reasonable, the manifes-tations of intention of the parties to apromise or agreement are interpretedas consistent with each other and withany relevant course of performance,course of dealing, or usage of trade.

F. THE FOUR CORNERS RULE. Thefour corners rule says that the meaning of anunambiguous agreement is to be determinedfrom the words of the contract alone. Therule bars the parties to a written contract thatis clear on its face-- meaning that a reader

who is competent in English but unaware ofthe agreement's context would think the writ-ing admitted of only one meaning--frompresenting evidence bearing on interpretation,which is to say extrinsic evidence--evidenceoutside the four corners of the written con-tract. The judge alone determines what thecontract means when no extrinsic evidence ispresented because he is a more competentinterpreter of a document than a jury is. R.Posner, at 1596.

The four corners rule can be justified on thegrounds that, because the dispute is resolvedfrom examination of the documents them-selves, it is quick, inexpensive, and morecertain in outcome. Richard Posner com-mented on the thrust behind the four cornersrule: [w]ritten contracts would mean little ifa party could try to persuade a jury that whilethe contract said X, the parties had actuallyagreed, without telling anybody or writinganything down, that the deal was Y. RichardA. Posner, LAW AND LITERATURE 245-46(rev. & enlarged ed. 1998). In a judicialopinion, Justice Richard A. Posner said thisabout the four corners rule:

The older view, sometimes called thefour corners rule, which excludesextrinsic evidence if the contract isclear on its face, is not ridiculous.(There is ancient wisdom as well asancient prejudice.) The rule tends tocut down on the amount of litigation,in part by reducing the role of the jury;for it is the jury that interprets con-tracts when interpretation requiresconsideration of extrinsic evidence.Parties to contracts may prefer, ex ante(that is, when negotiating the contract,and therefore before an interpretivedispute has arisen), to avoid the ex-

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pense and uncertainty of having a juryresolve a dispute between them, evenat the cost of some inflexibility ininterpretation.

Federal Deposit Ins. Corp. v. W.R. Grace &Co., 877 F.2d 614, 621 (7th Cir. 1989) (Posner,J.).

G. THE PLAIN MEANING RULE. Theplain meaning rule provides that a judge, ifs/he believes that the meaning of a disputedcontract term is clear, must refuse to admitextrinsic evidence regarding the meaningintended by either party. Margaret Kniffin, ANew Trend in Contract Interpretation: TheSearch For Reality as Opposed to VirtualReality, 74 Oregon L. Rev. 643, 644 (1995). The court must even refuse to consider extrin-sic evidence that the meaning is not reallyplain. Eisenberg, at 1767.

The Restatement (Second) of Contracts 212,comment b, says:

b. Plain meaning and extrinsic evi-dence. It is sometimes said that extrin-sic evidence cannot change the plainmeaning of a writing, but meaning canalmost never be plain except in a con-text. Accordingly, the rule stated inSubsection (1) is not limited to caseswhere it is determined that the lan-guage used is ambiguous. Any deter-mination of meaning or ambiguityshould only be made in the light of therelevant evidence of the situation andrelations of the parties, the subjectmatter of the transaction, preliminarynegotiations and statements madetherein, usages of trade, and the courseof dealing between the parties. See 202, 219-23. But after the transaction

has been shown in all its length andbreadth, the words of an integratedagreement remain the most importantevidence of intention. Standards ofpreference among reasonable mean-ings are stated in 203, 206, 207.

In a highly-regarded draft speech in the Houseof Lords, Lord Hoffman gave the followingdescription of the plain meaning rule:

The "rule" that words should be giventheir "natural and ordinary meaning"reflects the common sense propositionthat we do not easily accept that peo-ple have made linguistic mistakes,particularly in formal documents. Onthe other hand, if one would neverthe-less conclude from the backgroundthat something must have gone wrongwith the language, the law does notrequire judges to attribute to the par-ties an intention which they plainlycould not have had. Lord Diplockmade this point more vigorously whenhe said in The Antaios CompaniaNeviera S.A. v. Salen Rederierna A.B.19851 A.C. 191, 201: ". . . if detailedsemantic and syntactical analysis ofwords in a commercial contract isgoing to lead to a conclusion thatflouts business commonsense, it mustbe made to yield to business common-sense."

Investors Compensation Scheme v. WestBromwich Building Society, [1997] UKHL 28.

Professor Eisenberg has written that theplain-meaning rule has been largely aban-doned. Eisenberg, at 1768. He supports this

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assertion with a citation to Restatement (Sec-ond) of Contracts 212(1), and comment b ofthat section: meaning can almost never beplain except in a context. The absence ofcitations to state appellate decisions is telling. As we shall see, the plain meaning rule isalive and well in Texas.

H. INTERPRETATION VS. CONSTRUC-TION. Professor Corbin distinguished con-tract interpretation from contract construction:interpretation is an effort to determine themeaning of the words, while construction isdetermining the legal effect of the language. Arthur L. Corbin, CORBIN ONCONTRACTS 534 (1960). Other writershave questioned whether the distinction exists,or whether it is useful. See Glasser & Rowley,On Parol: The Construction and Interpreta-tion of Written Agreements and the Role ofExtrinsic Evidence in Contract Litigation, 49Bay. L. Rev. 657 n. 2 (1997) [Glasser &Rowley]. The Uniform Commercial Coderecognizes an analogous distinction betweenand agreement and a contract. See thenext section.

I. AGREEMENT VS. CONTRACT. TheUCC distinguishes between an agreementand a contract. UCC 1-201(3) provides:

(3) "Agreement" means the bargain ofthe parties in fact as found in theirlanguage or by implication from othercircumstances including course ofdealing or usage of trade or course ofperformance as provided in this Act(Sections 1-205 and 2-208). Whetheran agreement has legal consequencesis determined by the provisions of thisAct, if applicable; otherwise by thelaw of contracts (Section 1-103).(Compare "Contract.")

UCC 1-201(11) provides:

(11) "Contract" means the total legalobligation which results from the par-ties' agreement as affected by this Actand any other applicable rules of law.(Compare "Agreement.")

J. INTEGRATED VS. PARTIALLY IN-TEGRATED VS. UNINTEGRATED. Anintegrated agreement may be either fullyintegrated or only partially integrated. A fullyintegrated contract is one that is a final andcomplete expression of all the terms agreedupon between or among the parties. A con-tract is partially integrated if the writtenagreement is a final and complete expressionof some or all of the terms therein, but not allof the terms agreed upon . . . are contained inthe written agreement. Keith A. Rowley,Contract Construction and Interpretation:From the Four Corners to Parol Evidence(and Everything in Between), 69 Miss. L. J.73, 101-02 (1999) (Rowley). If the evi-dence ... does not indicate that the writing isintended as an integration, i.e., a final expres-sion of one or more terms of an agreement .. . then the agreement is said to beunintegrated. . . . Conn Acoustics, Inc. v.Xhema Const., Inc.,, 870 A.2d 1178, 1181(Conn. App. 2005).

The Restatement (Second) of Contracts statesthe following regarding integration:

209. Integrated Agreements

(1) An integrated agreement is a writ-ing or writings constituting a finalexpression of one or more terms of anagreement.

(2) Whether there is an integrated

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agreement is to be determined by thecourt as a question preliminary todetermination of a question of inter-pretation or to application of the parolevidence rule.

(3) Where the parties reduce an agree-ment to a writing which in view of itscompleteness and specificity reason-ably appears to be a complete agree-ment, it is taken to be an integratedagreement unless it is established byother evidence that the writing did notconstitute a final expression.

If the agreement is fully integrated, extrinsicevidence is not admissible to show the partiesintent or the meaning of the words used. Rowley, at 238. If partially integrated, extrin-sic evidence is admissible on the missingparts, but it cannot contradict the portions ofthe agreement that are final. Id. at 238. If theagreement is unintegrated, the parol evidencerule does not apply. Rowley, at 262.

K. VAGUENESS VS. AMBIGUITY. Professors Schwartz and Scott differentiatevagueness from ambiguity. They say that aword is vague to the extent that it can applyto a wide spectrum of referents,. . . or tosomewhat different referents in differentpeople. Ambiguity requires at least twodistinct, usually inconsistent, meanings. Schwartz & Scott, at 570 n. 55. They contrasta famous case over the meaning of the wordchicken from an even more famous caseover which of two ships named Peerless theparties meant in a contract. Id.

L. AMBIGUITY. An instrument is ambig-uous if one or more terms or provisions aresusceptible to more than one reasonable mean-ing. Rowley, at 90.

The Fifth Circuit Court of Appeals has brokenthe ambiguity analysis into three parts:

(i) are the express contract terms am-biguous;(ii) are they still ambiguous after con-sidering course of dealing, usage oftrade, and course of performance; ifso, then(iii) admit extrinsic evidence and letthe fact finder determine the meaning.

Paragon Resources, Inc. v. National Fuel GasDistrib. Corp., 695 F.2d 991, 996 (5th Cir.1983) (applying Texas law). The first inquiryis a question of law for the court. The thirdinquiry is a question of fact for the fact-finder. The Fifth Circuit was uncertain whether thesecond inquiry was a question of law, or offact, or both. Id. at 996. See Rowley, at 339.

Ambiguity may be patentappearing on theface of the contract or latent aris[ing] fromwords which are uncertain when applied to thesubject matter of the contract. Rowley, at 91.

M. IMPLIED TERMS. Professor Corbinrecognized two types of terms that a court willread into an agreement when the words arelacking: terms that are implied-in-fact andimplied-in-law. Implied-in-fact terms areconstrued from by the parties' words or con-duct. Implied-in-law terms are a judicialconstruct, whereby the court declares theexistence of a legal duty or condition when thewords to support it are absent. 3 Arthur L.Corbin, CORBIN ON CONTRACTS 561, at276-77 (1960). Corbin says that im-plied-in-law analysis applies only when thereis no indication from the contract language,the parties' conduct, or the surrounding cir-cumstances that the parties reached agreementon the issue. Id. 564. See Restatement(Second) of Contracts 226 (1981) "An event

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may be made a condition either by the agree-ment of the parties or by a term supplied bythe court."

You can always imply a condition in a con-tract. But why do you imply it? It is becauseof some belief as to the practice of the com-munity or of a class, or because of someopinion as to policy, or, in short, because ofsome attitude of yours upon a matter notcapable of exact quantitative measurement,and therefore not capable of founding exactlogical conclusions." Oliver Wendell Holmes,Jr., The Path of the Law, 10 Harv. L. Rev.457, 466 (1897).

Lord Watson is sometimes quoted:

[W]hen the parties to a . . . contract . .. have not expressed their intentions ina particular event, but have left theseto implication, a Court of Law, inorder to ascertain the implied meaningof the contract, must assume that theparties intended to stipulate for thatwhich is fair and reasonable, havingregard to their mutual interests and tothe main objects of the contract. . . .[W]hen one . . . of these [unforeseen]possibilities becomes a fact, the mean-ing of the contract must be taken to be,not what the parties did intend (forthey had neither thought nor intentionregarding it), but that which the par-ties, as fair and reasonable men, wouldpresumably have agreed upon[.]

Dahl v. Nelson, Donkin, & Co., 6 App. Cas.38, 59 (1881).

N. FILLING IN THE GAPS. An importantcontract interpretation issue arises when thereis a gap in a contract, and the court must

decide whether to let the contract fail or toinstead fill in the gap and allow the contract tobe enforced as judicially-revised.

The original Restatement of Contracts 32said: An offer must be so definite in itsterms, or require such definite terms in theacceptance, that the promises and perfor-mances to be rendered by each party are rea-sonably certain. The Comment went on toexplain that [t]he law cannot subject a personto a contractual duty or give another a contrac-tual right unless the character thereof is fixedby the agreement of the parties.

The UCC took a different view. UCC 2-204(3) provides:

Even though one or more terms areleft open a contract for sale does notfail for indefiniteness if the partieshave intended to make a contract andthere is a reasonably certain basis forgiving an appropriate remedy.

The Restatement (Second) of Contracts (1981)concurs:

204 Supplying An Omitted EssentialTerm

When the parties to a bargain suffi-ciently defined to be a contract havenot agreed with respect to a termwhich is essential to a determinationof their rights and duties, a term whichis reasonable in the circumstances issupplied by the court.

The Restatement (Second) of Contracts 204, comment b provides:

The parties to an agreement may en-

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tirely fail to foresee the situationwhich later arises and gives rise to adispute; they then have no expecta-tions with respect to that situation, anda search for their meaning with respectto it is fruitless. Or they may haveexpectations but fail to manifest them,either because the expectation rests onan assumption which is unconsciousor only partly conscious, or becausethe situation seems to be unimportantor unlikely, or because the discussionof it might be unpleasant or mightproduce delay or impasse.

The Restatement (Second) of Contracts 204, comment d provides:

The process of supplying an omittedterm has sometimes been disguised asa literal or a purposive reading ofcontract language directed to a situa-tion other than the situation that arises.Sometimes it is said that the search isfor the term the parties would haveagreed to if the question had beenbrought to their attention. Both themeaning of the words used and theprobability that a particular termwould have been used if the questionhad been raised may be factors indetermining what term is reasonable inthe circumstances. But where there isin fact no agreement, the court shouldsupply a term which comports withcommunity standards of fairness andpolicy rather than analyze a hypotheti-cal model of the bargaining process.

Restatement (Second) of Contracts 226,comment c, provides:

When the parties have omitted a term

that is essential to a determination oftheir rights and duties, the court maysupply a term which is reasonable inthe circumstances.

Gap-filling has become a way of life in mod-ern contract law. Posner describes gap-fillingas an effort to determine how the partieswould have resolved the issue that has arisenhad they forseen it when they negotiated theircontract. R. Posner, at 1587. Posner offersfour approaches to gap-filling: (1) try to deter-mine what the parties would have intendedhad they agreed on the missing term; (2) pickthe economically efficient solution; (3) applysome tie-breaking rules like contra proferen-tum; (4) stick with the four corners, in whichevent the contract may well fail (as in Rafflesv. Wichelhaus, the Peerless case,) discussedat III.BB. below.

O. RULES VS. STANDARDS. The originalRestatement of Contracts tended toward thestatement of rules, while the Restatement(Second) of Contracts tends toward the state-ment of standards. Richard Posner noted:

A rule is clear by virtue of being exact. But its exactness makes it maladaptedto unforseen situations, creating pres-sure for recognizing exceptions, whichwill often reduce clarity. A standard isflexible and therefore adaptable to avariety of contexts, but the price offlexibility is vagueness.

R. Posner, at 1587.

P. COURSE OF DEALING. The UCC 1-303(b) defines course of dealing:

A course of dealing is a sequence ofprevious conduct between the parties

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to a particular transaction which isfairly to be regarded as establishing acommon basis of understanding forinterpreting their expressions andother conduct.

The course of dealing comes third in UCCsection 1-303(e)'s hierarchy of contract inter-pretative tools, behind express terms andcourse of performance but ahead of usage oftrade.

Q. COURSE OF PERFORMANCE. TheUCC 1-303(a) defines course of perfor-mance as:

A "course of performance" is a se-quence of conduct between the partiesto a particular transaction that existsif: (1) the agreement of the partieswith respect to the transaction in-volves repeated occasions for perfor-mance by a party; and (2) the otherparty, with knowledge of the nature ofthe performance and opportunity forobjection to it, accepts the perfor-mance or acquiesces in it withoutobjection.

R. USAGE OF TRADE. The UCC 1-303(c) defines a usage of trade:

A usage of trade is any practice ormethod of dealing having such regu-larity of observance in a place, voca-tion or trade as to justify an expecta-tion that it will be observed with re-spect to the transaction in question.The existence and scope of such ausage are to be proved as facts. If it isestablished that such a usage is em-bodied in a written trade code or simi-lar writing the interpretation of the

writing is for the court.

S. STATUTE OF FRAUDS. The EnglishParliament adopted the first statute of fraudsin 1677. As with the modern American equiv-alents, the statute required that certain types ofcontracts must be evidenced by a signedwriting to be enforceable. In the UnitedStates, the statute of frauds was the sole sig-nificant incursion by legislatures into the lawof contracting, until the adoption in somestates of the 1906 Uniform Sales Act, whicheventually led to the comprehensive UniformCommercial Code of 1951.

T. PAROL EVIDENCE RULE. Under theparol evidence rule, if the parties to a writtenagreement have a contract that is complete orintegrated, then evidence concerning negoti-ations leading up to the agreement that wouldcontradict the terms of the agreement is notadmissible. R. Posner, at 1602. The parolevidence rule overlaps the four-corners rule,because both exclude evidence of prior orcontemporaneous negotiations offered tocontradict the agreement. However, the four-corners rule also prohibits evidence of prior orcontemporaneous negotiations offered tosupplement or help to explain the agreement,and the four-corners rule also precludes con-sideration of subsequent events that mightreflect the meaning of the agreement, whilethe parol evidence rule does not apply toextrinsic evidence that post-dates the agree-ment. Rowley, at 295.

The parol evidence rule does not bar evidenceof fraud, mutual mistake, non-payment ofconsideration, or scriveners error. Rowley, at269-284. Additionally, the trend is to say thatthe parol evidence rule does not excludeextrinsic evidence offered to show that theagreement has a latent ambiguity when ap-

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plied to the facts.

[T]wo types of ambiguity can usefullybe distinguished. One is internal (in-trinsic), and is present when theagreement itself is unclear. The otheris external (extrinsic) and is presentwhen, although the agreement itself isa perfectly lucid and apparently com-plete specimen of English prose, any-one familiar with the real-world con-text of the agreement would wonderwhat it meant with reference to theparticular question that has arisen. . . . So parol and other extrinsic evidenceis admissible, even in a case involvinga contract with an integration clause,to demonstrate that the contract isambiguous. [citations omitted]

Federal Deposit Ins. Corp. v. W.R. Grace &Co., 877 F.2d 614, 620 (7th Cir. 1989) (Posner,J.).

The parol evidence rule does not bar consider-ation of consistent additional terms, unless theagreement is fully integrated. See Rowley, at331-32. The parol evidence rule does notpreclude the court from considering extrinsicevidence on whether that agreement wasintended by the parties to be integrated. R.Posner, at 1604.

The Parol Evidence Rule has been incorpo-rated into the UCC 2-202:

Terms with respect to which the con-firmatory memoranda of the partiesagree or which are otherwise set forthin a writing intended by the parties asa final expression of their agreementwith respect to such terms as are in-cluded therein may not be contradicted

by evidence of any prior agreement orof a contemporaneous oral agreementbut may be explained or supplemented(a) by course of performance, courseof dealing, or usage of trade (Section1-303), and (b) by evidence of consis-tent additional terms unless the courtfinds the writing to have been intendedalso as a complete and exclusive state-ment of the terms of the agreement.

UCC 1.201(3), 1-303 & 2-202(a), as wellas Restatement (Second) of Contracts 203,permit course of performance, course ofdealing, and usage of trade to be considered ininterpreting the parties agreement. Somewriters criticize the allowing of this evidencedespite the parol evidence rule as being arbi-trary. Professor Eric Posner disagrees, sayingthat these particular factors can be proved byobjective evidence and disinterested wit-nesses, while the parties after-the-fact state-ments of their subjective intent cannot. EricPosner, The Parol Evidence Rule, the PlainMeaning Rule, and the Principles of Contrac-tual Interpretation, 146 U. Pa. L. Rev. 533,558-59 (1998).

The Restatement (Second) of Contracts 204,Comment e, discusses the application of theparol evidence rule to contracts with omittedterms:

The fact that an essential term is omit-ted may indicate that the agreement isnot integrated or that there is partialrather than complete integration. Insuch cases the omitted term may besupplied by prior negotiations or aprior agreement. See 216. But omis-sion of a term does not show conclu-sively that integration was not com-plete and a completely integrated

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agreement, if binding, discharges prioragreements within its scope. See 213. Where there is complete integra-tion and interpretation of the writingdiscloses a failure to agree on an es-sential term, evidence of prior negotia-tions or agreements is not admissibleto supply the omitted term, but suchevidence may be admissible, if rele-vant, on the question of what is rea-sonable in the circumstances.

The parol evidence rule does not bar proof ofa subsequent agreement that is supported byseparate consideration and meets the otherrequirements to be valid contract. Rowley, at253-54.

A liberal approach to the parol evidence ruleis reflected in a famous opinion written byChief Justice Roger J. Traynor of the Califor-nia Supreme Court, in which the court ruledthat [t]he test of admissibility of extrinsicevidence to explain the meaning of a writteninstrument is not whether it appears to thecourt to be plain and unambiguous on its face,but whether the offered evidence is relevant toprove a meaning to which the language of theinstrument is reasonably susceptible. PacificGas & Elec. Co. v. G. W. Thomas Drayage &Rigging Co., 69 Cal.2d 33, 442 P.2d 641 (Cal.1968). Justice Traynor continued:

Although extrinsic evidence is notadmissible to add to, detract from, orvary the terms of a written contract,these terms must first be determinedbefore it can be decided whether ornot extrinsic evidence is being offeredfor a prohibited purpose. The fact thatthe terms of an instrument appear clearto a judge does not preclude the possi-bility that the parties chose the lan-

guage of the instrument to expressdifferent terms. That possibility is notlimited to contracts whose terms haveacquired a particular meaning by tradeusage, but exists whenever the parties'understanding of the words used mayhave differed from the judge's under-standing.

Accordingly, rational interpretationrequires at least a preliminary consid-eration of all credible evidence offeredto prove the intention of the parties. .. . Such evidence includes testimonyas to the circumstances surroundingthe making of the agreement * * *including the object, nature and sub-ject matter of the writing * * * so thatthe court can place itself in the samesituation in which the parties foundthemselves at the time of contracting.. . . If the court decides,*** after con-sidering this evidence, that the lan-guage of a contract, in the light of allthe circumstances, is fairly suscepti-ble of either one of the two interpreta-tions contended for * * * . . . extrinsicevidence relevant to prove either ofsuch meanings is admissible. [foot-notes and citations omitted]

Id. at 644-46.

Professor Corbin expressed his view of theparol evidence rule in strong terms:

The cardinal rule with which all inter-pretation begins is that its purpose isto ascertain the intention of the parties.The criticized [parol evidence] rule, ifactually applied, excludes proof oftheir actual intention. It is universallyagreed that it is the first duty of the

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court to put itself in the position of theparties at the time the contract wasmade; it is wholly impossible to dothis without being informed by extrin-sic evidence of the circumstancessurrounding the making of the con-tract.

Arthur L. Corbin, The Interpretation of Wordsand the Parol Evidence Rule, 50 Cornell L.Q.161, 162 (1964).

If a written and signed agreement has beenlost or destroyed, such an agreement may beproved by parol evidence. Rowley, at 285.

U. MERGER CLAUSE. A merger clause,sometimes called an integration clause or anentire agreement clause, declares the agree-ment to be the complete and final agreementof the parties, merging all prior preliminaryagreements and discussions. The clause is astatement that the contract is an integratedcontract which bolsters the application of theparol evidence rule. R. Posner, at 1600 n. 46.

V. SUBSEQUENT ORAL MODIFICA-TION. The parol evidence rule does not barextrinsic evidence regarding subsequent oralmodification of a prior written agreement. Rowley, at 300. Drafting lawyers attempt toavoid the rule about subsequent oral modifica-tions by including a no oral modificationclause in their contracts.

W. SCRIVENERS ERROR. A scrivenerserror, or lapsus linguae, is an accidental devi-ation from the parties agreement made indrafting the writing. In contract law, a scriv-ener's error, like a mutual mistake, occurswhen the intention of the parties is identical atthe time of the transaction but the writtenagreement does not express that intention

because of that error; this permits a courtacting in equity to reform an agreement. WILLISTON ON CONTRACTS 70:93.

The rule is well-settled that a court isnot permitted to rewrite a document oradd terms not included by the parties.. . . A scrivener's error presents anexception to this general rule, becauseas the United States Court of Appealsfor the Seventh Circuit has observed,scrivener's errors are difficult to pre-vent, and ... no useful social purpose isserved by enforcing ... mistakenterm[s]. . . . Our description of scriv-eners' errors in Wellmore Coal paral-lels that of the Illinois Court of Ap-peals, which defined such errors asthose evidenced in the writing that canbe proven without parol evidence. . . .Scrivener's errors tend to occur singu-larly; they are not continuous, ongo-ing, and repeated.

Westgate at Williamsburg CondominiumAss'n, Inc. v. Philip Richardson Co., Inc., 270Va. 566, 621 S.E.2d 114, 118 (Va. 2005),citing S.T.S. Transport Service, Inc. v. VolvoWhite Truck Corp., 766 F.2d 1089, 1093 (7thCir. 1985) (A merely mathematical or cleri-cal error occurs when some term is eitherone-tenth or ten times as large as it should be;when a term is added in the wrong column;when it is added rather than subtracted; whenit is overlooked).

X. DEFAULT TERMS PROVIDED BYLAW. Article 2 of the UCC and other statu-tory schemes often provide default terms thatwill apply, unless the agreement specifies tothe contrary. The practice is not unique tosales contracts; the Uniform Partnership Act isanother example of such a default statute.

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Where the default provisions are based onprevailing commercial practices, they canreduce the cost of contacting, since parties cansimply invoke the defaults by reference oreven leave the agreement blank in certainrespects in reliance on the law providing themissing terms.

Y. FORM CONTRACTS AND BOILER-PLATE. In 1971, David Slawson estimatedthat nearly all contracts were presented by oneparty to another using a standard form. W.David Slawson, Standard Form Contracts andDemocratic Control of Lawmaking Power, 84Harv. L. Rev. 529, 529 (1971). It is widelybelieved that form contracts are seldom readby the non-drafting party. See Andrew Rob-ertson, The Limits of Voluntariness in Con-tract, 29 Melbourne Univ. L. Rev. (2005)..

Form contracts contain standard clausesdesigned to resolve contingencies that mayarise in the course of performance. R.Posner, at 1585. Some argue that form agree-ments in consumer transactions tend to beone-sided because they are drafted by sellersor industry organizations and are biased to-ward the seller or provider of services. R.Posner, at 1585. Forms that are drafted by aneutral organization, however, tend to befairer. Examples would be the State Bar ofTexas Real Estate Forms Manual, and theTexas Family Law Practice Manual (draftedby the Family Law Section of the State Bar ofTexas), which are neutral, reduce negotiationand drafting costs, and anticipate the mostlikely problems with performance, therebyreducing the chance and cost of litigation.

Given the proliferation of forms in consumertransactions, one has to reevaluate the meet-

ing of the minds concept of agreements, andeven the importance of the subjective intent ofthe parties. As anyone who has purchased ahouse or a car on credit can attest, buyersseldom read all the documents, or all of thefine print, before they sign on the dottedline, and if they were to read it only lawyer-consumers would understand all the legal-ese. It is more reasonable to say that, in aform-dominated industry, the buyer agrees tobe bound by whatever is in the paperwork. SeeKim, at 544. Buyers do this not because theyunderstand the terms, but rather because alllenders require this paperwork, and you eithersign it or you dont get financing. In thisinstance, a seller-oriented approach or an objective approach to interpreting the contractare the only ones that are viable.

Richard Posner notes that the ease of copyinglanguage using word processors has encour-aged lawyers to borrow boilerplate fromearlier contracts in drafting new ones. Thiscan cause problems where the clauses trans-posed to the new agreement may make animperfect fit with the other clauses in thecontract, generating ambiguities. R. Posner,at 1587.

Z. HIERARCHY OF CONSIDERA-TIONS. Although some jurisdictions haverelaxed the strict hierarchy of rules in inter-preting a contract, the traditional hierarchy is:(1) express terms, (2) course of performance,(3) course of dealing, (4) trade usages, (5)default rules, (6) general standards of reason-ableness. Eyal Zamir, The Inverted Hierarchyof Contract Interpretation and Supplementa-tion, 97 Colum. L. Rev. 1710, 1710 (1997)(Zamir). Testimony from the parties aboutwhat they intended is not part of the tradi-tional hierarchy.

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UCC 1-303(e) provides a hierarchy of aidsto interpretation:

Except as otherwise provided in sub-section (f), the express terms of anagreement and any applicable courseof performance, course of dealing, orusage of trade must be construedwhenever reasonable as consistentwith each other. If such a constructionis unreasonable: (1) express termsprevail over course of performance,course of dealing, and usage of trade;(2) course of performance prevailsover course of dealing and usage oftrade; and (3) course of dealing pre-vails over usage of trade.

The Restatement (Second) of Contracts (1981)offered this hierarchy:

203. Standards of Preference InInterpretation

In the interpretation of a promise oragreement or a term thereof, the fol-lowing standards of preference aregenerally applicable:

(a) an interpretation which gives areasonable, lawful, and effectivemeaning to all the terms is preferred toan interpretation which leaves a partunreasonable, unlawful, or of no ef-fect;

(b) express terms are given greaterweight than course of performance,course of dealing, and usage of trade,course of performance is given greaterweight than course of dealing or usageof trade, and course of dealing is givengreater weight than usage of trade;

(c) specific terms and exact terms aregiven greater weight than generallanguage;

(d) separately negotiated or addedterms are given greater weight thanstandardized terms or other terms notseparately negotiated.

Section 206 of the Restatement (Second) ofContracts continues the presumption againstthe drafting party.

Most approaches to contract interpretationrecognize the primary importance of theexpress words of the agreement.

AA. SECONDARY RULES OF CON-STRUCTION.

1. Noscitur a Sociis (Take Words in TheirImmediate Context). Noscitur a Sociis isa Latin maxim which, translated into English,means a word is known by the company itkeeps. Fiess v. State Farm Lloyds, 202S.W.3d 744, 750 (Tex. 2006), citing Gustaf-son v. Alloyd Co., 513 U.S. 561, 575, 115S.Ct. 1061, 131 L.Ed.2d 1 (1995) (This rulewe rely upon to avoid ascribing to one word ameaning so broad that it is inconsistent withits accompanying words).

2. Ejusdem Generis. The Latin phraseejusdem generis means [o]f the same kind,class, or nature. In the construction of laws,wills and other instruments, the 'ejusdemgeneris rule' is, that where general wordsfollow an enumeration of persons or things, bywords of a particular and specific meaning,such general words are not to be construed intheir widest extent, but are to be held as apply-ing only to persons or things of the samegeneral kind or class as those specifically

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mentioned. BLACK'S LAW DICTIONARY464 (5th ed. 1979). A student article gatheredthe following citations:

Courts should apply the doctrine onlyto ambiguous instruments; an unam-biguous instrument needs no aid inconstruction. See Cole v. McDonald,236 Miss. 168, 187, 109 So. 2d 628,637 (1959) (ejusdem generis not appli-cable where manifest intention ofparties is evident); Anderson & KerrDrilling Co. v. Bruhlmeyer, 134 Tex.574, 582, 136 S.W.2d 800, 804-05(1940) (ejusdem generis merely rule ofconstruction to be used as 'an aid tointerpretation when . . . intention is nototherwise apparent'); Burdette v.Bruen, 118 W. Va. 624, 628-29, 191S.E. 360, 361-62 (1937) (ejusdemgeneris cannot be invoked 'where thelanguage under consideration is clearand unambiguous as to what is in-tended'). But see Wulf v. Shultz, 211Kan. 724, 508 P.2d 896 (1973) (ejus-dem generis applied to concededlyunambiguous instrument).

Note, Interpretation of 'Other Minerals' in aGrant or Reservation of a Mineral Interest, 71Cornell L. Rev. 618, 621 (1986).

3. Expressio Unius est Exclusio Alterius.Yet another Latin maxim, meaning the ex-press mention of one thing excludes all oth-ers. [W]hen an enumeration of specificthings is not followed by some more generalword or phrase, then things of the same kindor species as those specifically enumerated aredeemed to be excluded. Thus, for example,[w]here only one exception is mentioned in acontract, the rule of expressio unius est exclu-sio alterius applies and exceptions not men-

tioned cannot be engrafted upon it. Rowley,at 155.

4. The Specific Prevails Over the General. If a specific provision of an agreement con-flicts with a general provision, the specificcontrols over the general, or qualifies themeaning of the general provision, unless theparties clearly manifest a contrary intent. Rowley, at 156.

5. The Earlier Prevails Over the Later. Where two provisions cannot otherwise bereconciled, the term stated earlier prevailsover the later term. The rule is reversed whenconstruing a will. Rowley, at 162-63.

6. Handwritten Over Typed and TypedOver Preprinted. Handwritten provisions arefavored over typed, and typed provisions arefavored over pre-printed provisions, unless theparties clearly manifest a contrary intent. Rowley, at 159.

7. Words Prevail Over Numbers or Sym-bols. It is true that where words and figuresare used to express the same number, and theydo not agree, the words must prevail. That isbecause people are more liable to mistake inwriting figures than words. Gran v.Spangenberg, 54 N.W. 933, 934 (Minn.1893).

8. Contra Proferentem. A Latin maximsaying to construe the contract against thedrafter. Originally, the doctrine was labeledverba chartarum fortius accipiuntur contraproferentem. 3 Arthur L. Corbin, CORBINON CONTRACTS 559, at 262 (1960). Onepossible justification is that the drafting partycan be seen at fault for the vagueness orambiguity. An economic perspective says that[t]his principle reflects an assumption that

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the drafter can more cheaply ensure that thecontract is reflected in the writing than theother party can. E. Posner, at 558.

9. Presumption Favoring Arbitration. InAT & T Technologies, Inc. v. CommunicationsWorkers of America, 475 U.S. 643, 106 S.Ct.1415 (U.S. 1986), the Supreme Court said thatit has been established that where the con-tract contains an arbitration clause, there is apresumption of arbitrability in the sense that[a]n order to arbitrate the particular grievanceshould not be denied unless it may be saidwith positive assurance that the arbitrationclause is not susceptible of an interpretationthat covers the asserted dispute. Doubtsshould be resolved in favor of coverage.

BB. THE PEERLESS CASE. The Peer-less case is Raffles v. Wichelhaus, 2 H. & C.906, 159 Eng. Rep. 375 (Ex. 1864). It is afamous case, and still talked about. A reportof the decision is attached to the end of thisarticle. In Raffles, the plaintiff entered in