THE LAW OF INTERPRETING CONTRACTS - Orsinger THE “PEERLESS” CASE. ... -45--1-The Law of Interpreting Contracts by Richard R. Orsinger ... read and digest the underlying cases,

THE LAW OFINTERPRETING CONTRACTS

Richard R. [email protected]

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McCurley, Orsinger, McCurley, Nelson & Downing, L.L.P.

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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. SCRIVENER’S 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. Scrivener’s 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. Don’t 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-

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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-fac-eted. 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 justifyeither the old or the new approaches. Thedoctrine of stare decisis favors continuation ofold methods, but some writers suggest thatcourts bend them occasionally, without sayingso, to achieve justice in individual cases. Andsome suggest that courts pick and choose fromthe available 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 legislatureshave adopted statutes, such as the UniformCommercial 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 entered

into 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 Langdellsynthesized, some 6,000 cases, primarily fromEngland but some from Massachusetts, New

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York, 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 lawhad grouped cases according to the types ofparties involved (innkeepers, merchants,minors, etc.), or subject matter (services,money, property, etc.) rather than by underly-ing principles. Bruce A. Kimball; Langdellon Contracts and Legal Reasoning: Correct-ing the Holmesean Caricature, 25 Law &History Review No. 2 p. 39 (Summer 2007)(“Kimball”)<http://www.historycooperative.org/journals/lhr/25.2/kimball.html>. Langdellconceived of an ordered intellectual frame-work for contract law consisting of rules thatreflected principles like offer, acceptance,consideration, etc. Langell’s preface to thefirst edition of his case book reflects hisintent:

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-New

Zealand Law, Substance in Japan and the US,Sydney Law School Research Paper, at 7 n.10 (2007b, forthcoming) (“Nottage”), avail-able on-line at:<http://law.anu.edu.au/anjel/documents/ResearchPublications/ComparativeContractLaw-TheoryDevelopment.pdf>.

Given its historical priority and age, Lang-dell’s approach is called “classical,” eventhough it represents a modernization of con-tract law as it had existed up to the late 19th

Century. Developing underlying principlesand rules for various areas of law grew be-yond contract law and became a movement inthe law generally that came to be called “for-malism.” 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 LawInstitute’s 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 Strug-gle With Depression, 42 Buff. L. Rev. 1, 23(1994). In Williston’s view:

In the formation of a bargain, inten-tion of the parties does not mean se-cret intention, nor generally even in-tention manifested to third persons,but only the intention manifested to

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the other party. If the offeror under-stood “the transaction to be differentfrom that which his words plainlyexpressed, it is immaterial, as his obli-gation must be measured by his overtacts.”

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 contractto determine what was agreed upon. Thisapproach relied upon the judge’s interpreta-tion of the words of the contract, assisted byrules of construction that didn’t vary fromcase to case. This rule-based approach tointerpreting contracts on their face, whileignoring the surrounding context of the con-tracting, has subsequently been disparaged asoperating exclusively on axiomatic and de-ductive reasoning, where axioms are uncriti-cally accepted as true, and are applied with adeductive logic (i.e., syllogistically) in amanner wholly independent from surroundingcircumstances. “Classical contract law . . .conceived contract law as a small set of coredoctrines–axioms–that were justified on theground that they were self-evident, and as alarger set of doctrines that were justifiedlargely on the ground that they could bededuced from the axioms.” MelvinEisenberg, The Emergence of Dynamic Con-tract Law, 88 Cal. L. Rev. 1743, 1751 (2000)[“Eisenberg”]. Under the classical approach,the focus was not on the specific parties to thecontract, and their conceptions of their agree-ment, but rather on the words of the contractthey signed, without regard to surroundingcircumstances. Federal District JudgeLearned Hand wrote:

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 com-mon mental state touching the matter at hand.The standard by which their conduct is judgedand their 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.

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?)

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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, andit is 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 thecriterion 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 Holmes’s 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 person’s 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 producesan 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 all

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the 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 haveassented to the writing as the expres-sion of the things to which they agree,therefore the terms of the writing areconclusive, and a contract may have ameaning different from that whicheither party supposed it to have.

Although the classical and the objectiveapproaches to interpreting contracts have beenunder assault for more than half a century, itis enjoying a bit of a resurgence. JusticeRichard Posner surmises that “[t]his may bedue in part to the fact that fewer and fewerlegal academics have significant experience inthe ‘real world’ of contract drafting and busi-ness litigation.” Richard Posner, The Law andEconomics 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 basisof the social interests that they served.Knapp, Crystal & Prince, PROBLEMS INCONTRACT LAW – CASES AND MATER-IALS 11 (Aspen 2003) (“Knapp”), on line at:<http://www.str2.jura.uni-erlangen.de/other/patterson/contractsmaterials.pdf>. A school of“Legal Realists” arose, spearheaded by law

professors 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 people–aprocess that goes on today. Some proponentsattempted to modernize the prevailing viewsof contract law. Although he didn’t considerhimself to be a Legal Realist, one such insti-gator of change was Arthur Linton Corbin(1874-1967). In 1903 Corbin became YaleLaw School’s first full-time professor, andtaught there for 40 years.<http://www.law.yale.edu/cbl/3075.htm>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.. . . 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.

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ARTHUR L. CORBIN, ANSON ON CON-TRACTS v-vi (3d Am. ed. 1919). Corbin’sview 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 Corbin’s 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 LawSchool. 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 Langell’s 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 provi-sions relating to the formation and interpreta-tion of contracts. Professor Llewellyn influ-enced the UCC to be more in accord withprevailing business practices, and to focusmore on general standards and less on me-chanical rules. Instead of merely enacting theexisting body of contract law, the UCC inmany instances deviated from the commonlaw of contract that had developed for the saleof goods. See Knapp, at 20. A copy of theUCC is on-line at: <http://www.law.cornell.edu/ucc>.

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-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):

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Words and other conduct are inter-preted in the light of allcircumstances, and if the principalpurpose of the parties is ascertainableit is given great weight.

The Restatement (Second) rejected the rea-sonable third person perspective of interpret-ing agreements. Section 212, Comment a,said: “the operative meaning is found in thetransaction and its context rather than in thelaw or in the usages of people other than theparties.”

“Contrary to the formalism of classic contractlaw and Restatement First, the approach tocontract interpretation and gap-filling pre-scribed by Restatement Second and theU.C.C. is more concerned with arriving at theactual agreement of the parties, or where thereis no such agreement, construing the contractin a manner that is fair and reasonable underthe circumstances.” Harold Dubroff, TheImplied Covenant of Good Faith in ContractInterpretation and Gap-Filling: Reviling aRevered Relic, 80 St. John's L. Rev. 559, 572(2006).

C. LAW AND ECONOMICS. Beginningin the early 1960s, Nobel Prize-winningeconomists began to suggest an economicassessment of legal doctrines. See Schwartz &Scott, at 548. The reliability of promises, itwas argued, encourages promissory ex-changes. Nancy S. Kim, Evolving Businessand Social Norms and Interpretation Rules:The Need for a Dynamic Approach to Con-tract Disputes, 84 Neb. L. Rev. 506, 513(2005) (“Kim”). A prominent proponent ofthe economic approach to contract interpreta-tion, Justice Richard Posner of the U.S. Sev-enth Court of Appeals wrote:

The goal of a system, methodology, or

doctrine of contractual interpretationis to 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 don’t. 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 thepurpose of contract law as maximizing the“total benefits” created by an agreement.Schwartz & Scott, at 552. In Richard Pos-ner’s view, each party wants to gain from thetransaction by “agreeing to terms that maxi-mize the surplus created by thetransaction–the excess of benefits over costs,the excess being divided between the parties.”R. Posner, at 1588. Not only is this a motiva-tion for the parties to contract, but it can alsobe taken as a standard by which to resolve

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contractual disputes, if a judge or juror orarbitrator wished to consider that aspect of atransaction as an indication on how to resolvea 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 negoti-ations through performance.

The dynamic approach argues that contractsseldom occur at one instant in time, and thatthe contracting process has a past, present,and future, all of which are important tointerpreting the contract. Eisenberg, at 1762.A number of writers subscribe to this so-called “dynamic” theory of contract law, buttheir descriptions of the approach vary. Acentral tenet of the dynamic theory is that thegoal of contract interpretation is to effectuatethe actual 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 rulefor 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 intrinsicmeaning 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 by

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the 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 impliedand express 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.” <http://www.nccusl.org/Update/uniform act_summaries/uniformacts-s-ucc22003.asp>

The Uniform Commercial Code began as arewrite of the Uniform Sales Act, butmorphed into a collection of laws relating tovarious commercial transactions. Article 2governs sales, including not only sales be-tween merchants but also sales by merchantsto consumers and sales between non-mer-chants. Knapp, at 20. Many of the terms inArticle 2 could easily apply to other types ofcontracts, and some courts have used Article2 rules by analogy to non-sales transactions.The NCCUSL and ALI recently worked forseveral years on revisions to Article 2. See W.David East, The Statute of Frauds and theParol Evidence Rule Under the NCCUSL2000 Annual Meeting Proposed Revision ofU.C.C. Article 2, 54 SMU L. Rev. 867 (2001).Despite opposition from a number of businessorganizations, the revisions passed theNCCUSL in 2003, but failed to pass at theALI’s membership meeting later that year.The effort to update Article 2 has been aban-doned.

As explained in II.B above, the UCC Article2 provisions regarding contract interpretationconsider not only the text of the agreement butalso some actions of the parties, commercialpractices, and other surrounding circum-stances. Subsequent writers have character-ized these and other principles of Article 2 as“vague standards.” Alan Schwartz surmisesthat the vagueness resulted from the fact thatthe drafters were primarily academics whowanted vagueness to increase the likelihoodthat the draft would be accepted by the moreconservative membership at large of theNCCUSL 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. TheALI’s 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”:

§ 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.

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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 youmy 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 findsa contract for the sale of the horse.The first Restatement also finds nocontract for the sale of the cow, butthe Second Restatement concludesthat there is a contract for the sale ofthe cow.

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)<http://cisgw3.law.pace.edu/cisg/text/murray8.html>. For a review of criticisms of theALI and the Restatement process, see KristenDavid Adams, Blaming the Mirror: TheRestatements 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 ap-plies to the sale of goods, only on an interna-tional scale. Unlike the UCC, the CISG doesnot apply to consumer transactions. TheCISG is a treaty with more than sixty signato-ries, and the U.S. has subscribed to it, so it ispart of the supreme law of the land. On lineaccess to relevant information is available at<http://cisgw3.law.pace.edu>.

The CISG looks at the true intent of the par-ties. Article 8(3) says that courts should give“due 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." In

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ratifying 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 state-ments or agreements not contained inthe writing. 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.

<http://cisgw3.law.pace.edu/cisg/CISG-AC-op3.html#1>.

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 lawof 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 aren’t 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 be

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made in Euros.

E. STANDARD OF INTERPRETATION.“Standard of interpretation” was defined inthe original Restatement of Contracts § 227 as“the 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 con-vey to the other party); (6) a standard ofreasonable understanding (the meaning whichthe person 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 ofthe 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 by

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either 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 interpreta-tion of 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. The“four corners rule” says that the meaning ofan unambiguous agreement is to be deter-mined from the words of the contract alone.“The rule bars the parties to a written contractthat is ‘clear on its face’-- meaning that areader who is competent in English but un-aware of the agreement's context would thinkthe writing admitted of only onemeaning--from presenting evidence bearingon interpretation, which is to say ‘extrinsic’evidence--evidence outside the ‘four corners’of the written contract. The judge alone deter-mines what the contract means when noextrinsic evidence is presented because he isa more competent interpreter of a documentthan 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.” Richard

A. 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 the“four 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, exante (that is, when negotiating thecontract, and therefore before an inter-pretive dispute has arisen), to avoidthe expense and uncertainty of havinga jury resolve a dispute between them,even at the cost of some inflexibilityin interpretation.

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:

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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 transactionhas 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 Compania

Neviera 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<http://www.publications.parliament.uk/pa/ld199798/ldjudgmt/jd970619/invest03.htm>.

Professor Eisenberg has written that “theplain-meaning rule has been largely aban-doned.” Eisenberg, at 1768. He supports thisassertion 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 andInterpretation of Written Agreements and theRole of Extrinsic Evidence in Contract Litiga-tion, 49 Bay. L. Rev. 657 n. 2 (1997) [“Glas-ser & Rowley”]. The Uniform CommercialCode recognizes an analogous distinctionbetween and “agreement” and a “contract.”See the next section.

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I. AGREEMENT VS. CONTRACT. TheUCC distinguishes between an “agreement”and 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 theparties' agreement as affected by thisAct and any other applicable rules oflaw. (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 integratedagreement 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 parties’intent 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 a

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word is “vague” to the extent that it can applyto a “wide spectrum of referents,”. . . or to“somewhat 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 word“chicken” 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 patent–appearing “on theface of the contract – or latent –aris[ing] fromwords which are uncertain when applied tothe subject matter of the contract.” Rowley, at91.

M. IMPLIED TERMS. Professor Corbinrecognized two types of terms that a court will

read 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 whenthe words 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 eventmay 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. . . .

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[W]hen one . . . of these [un-foreseen] possibilities be-comes a fact, the meaning ofthe contract must be taken tobe, not what the parties didintend (for they had neitherthought nor intention regard-ing it), but that which the par-ties, as fair and reasonablemen, would presumably haveagreed 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 mustdecide 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 arereasonably certain.” The Comment went onto explain that “[t]he law cannot subject aperson to a contractual duty or give another acontractual right unless the character thereofis fixed by 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-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 the

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meaning 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 reasonablein the circumstances. But where thereis in fact no agreement, the courtshould supply a term which comportswith community standards of fairnessand policy rather than analyze a hypo-thetical model of the bargaining pro-cess.

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

When the parties have omitted a termthat 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 todetermine what the parties would have in-tended had they agreed on the missing term;(2) pick the economically efficient solution;(3) apply some tie-breaking rules like contraproferentum; (4) stick with the four corners, inwhich event the contract may well fail (as inRaffles v. Wichelhaus, the “Peerless case,”)discussed at 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 ex-act. But its exactness makes itmaladapted to unforseen situations,creating pressure for recognizing ex-ceptions, which will often reduceclarity. A standard is flexible andtherefore adaptable to a variety ofcontexts, but the price of flexibility isvagueness.

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 partiesto 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 without

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objection.

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 thewriting 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 typesof contracts 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 or“integrated,” then evidence concerning nego-tiations leading up to the agreement thatwould contradict the terms of the agreement isnot admissible. 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 to

supplement 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 scrivener’s 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-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 extrinsic

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evidence 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 becontradicted by evidence of any prioragreement or of a contemporaneousoral agreement but may be explainedor supplemented (a) by course of per-formance, course of dealing, or usageof trade (Section 1-303), and (b) byevidence of consistent additionalterms unless the court finds the writ-ing to have been intended also as acomplete and exclusive statement ofthe 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 integratedagreement, 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 &

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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 appearclear to a judge does not preclude thepossibility that the parties chose thelanguage 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,*** afterconsidering this evidence, that thelanguage of a contract, in the light ofall the circumstances, is ‘fairly suscep-tible of either one of the two interpre-tations contended for * * *’ . . . extrin-sic evidence 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 par-ties. The criticized [parol evidence]rule, if actually applied, excludesproof of their actual intention. It isuniversally agreed that it is the firstduty of the court to put itself in theposition of the parties at the time thecontract was made; it is wholly impos-sible to do this without being informedby extrinsic evidence of the circum-stances surrounding the making of thecontract.

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 “mergerclause,” sometimes called an “integrationclause” or an “entire agreement clause,”declares the agreement to be the complete andfinal agreement of the parties, merging allprior preliminary agreements and discussions.The clause is a statement that the contract isan “integrated contract” which bolsters theapplication of the parol 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 to

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avoid the rule about subsequent oral modifica-tions by including a “no oral modificationclause” in their contracts.

W. SCRIVENER’S ERROR. A scrivener’serror, or lapsus linguae, is an accidentaldeviation 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 intentionbecause 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 Actis another example of such a default statute.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).<http://www.austlii.edu.au/au/journals/MULR/2005/5.html>.

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 biasedtoward 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 of

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Texas’ 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.See Kim, at 544. Buyers do this not becausethey understand the terms, but rather becauseall lenders require this paperwork, and youeither sign it or you don’t get financing. Inthis instance, a seller-oriented approach or anobjective 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.

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;

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(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 phrase“ejusdem generis” means “[o]f the same kind,class, or nature. In the construction of laws,wills and other instruments, the 'ejusdem

generis rule' is, that where general wordsfollow an enumeration of persons or things,by words of a particular and specific meaning,such general words are not to be construed intheir widest extent, but are to be held as ap-plying only to persons or things of the samegeneral kind or class as those specificallymentioned.” 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 ap-plicable 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 ruleof construction 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 general

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word 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 provisionsare favored over typed, and typed provisionsare favored over pre-printed provisions, unlessthe parties 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, CORBIN

ON CONTRACTS § 559, at 262 (1960). Onepossible justification is that the drafting partycan be seen “at fault” for the vagueness orambiguity. An economic perspective saysthat “[t]his principle reflects an assumptionthat the drafter can more cheaply ensure thatthe contract 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 that“it 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 into acontract to sell 125 bales of Indian cotton tothe defendant. The contract specified that thecotton would be arriving in Liverpool on theship Peerless from Bombay ("to arrive exPeerless from Bombay"). Unbeknownst to theparties, there were two ships named Peerlessarriving from Bombay, one departing inOctober and another in December. The defen-dant claimed that he understood the contractto mean cotton on the October ship while theplaintiff claimed that contract was for thearrival of the December ship. In December,when the later ship arrived in England, theplaintiff tried to deliver the cotton but thedefendant refused to accept it. The plaintiff

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sued for breach of contract. The court ruledthat, although courts will strive to find areasonable interpretation in order to preservethe agreement whenever possible, the courtwas unable to determine which ship namedPeerless was intended in the contract. As aresult, there was no “consensus ad idem,” andthe two parties did not agree to the samething, so there was no binding contract. Thedefendant won.

In this case, the court essentially found thatthere was no “meeting of the minds.” Statedanother way, the plaintiff’s subjective intentwas not the same as the defendant’s subjectiveintent.

While the case report doesn’t relate the sur-rounding circumstances, one suspects that ifthe price of cotton had dropped after the timeof contracting, the defendant likely committedan opportunistic breach. Otherwise the defen-dant would have complained when the firstPeerless arrived and no cotton was deliveredby the plaintiff to the defendant.

IV. CONTRACT INTERPRETATION INTEXAS. Texas courts have essentially ig-nored the new theories advanced in law re-view articles over the last 50 years challeng-ing the traditional approach to contract inter-pretation. For a good overview of Texas lawon contract interpretation see Glasser & KeithA. Rowley, On Parol: The Construction andinterpretation of Written Agreements and theRole of Extrinsic Evidence in Contract Litiga-tion, 49 Bay. L. Rev 657 (1997) (“Glasser &Rowley”).

A. PRIMARY CONCERN. “When constru-ing a contract, the court's primary concern isto give effect to the written expression of theparties' intent.” Forbau v. Aetna Life Ins. Co.,876 S.W.2d 132, 133 (Tex. 1994). Notice the

focus on the written expression rather than theparties true intent. “Even if the court coulddiscern the actual intent, it is not the actualintent of the parties that governs, but theactual intent of the parties as expressed in theinstrument as a whole, ‘without reference tomatters of mere form, relative position ofdescriptions, technicalities, or arbitraryrules.’” Luckel v. White, 819 S.W.2d 459, 462,463 (Tex. 1991).

B. RULES OF CONSTRUCTION GEN-ERALLY.

“Courts try to solve disputes over themeaning of contracts by giving themthe meaning the parties intended themto have. This is as it should be. Butwhat meaning the parties to a contractintended it to have is often unclear.Once a dispute arises over meaning, itcan hardly be expected that the partieswill agree on what meaning was in-tended. It is for this reason that thecourts have built up a system of rulesof interpretation and construction toarrive at meaning, ignoring testimonyof subjective intent.

‘Intention of the parties' is oftenguesswork at best. Sometimes the trueintention of one or even of both par-ties may be defeated, as when the ruleis applied of giving a contract themeaning its plain, clear language im-plies, irrespective of what the partiesmay claim it was intended to mean.So, while use of rules of interpretationand construction may not always re-sult in ascertaining the true intentionof parties in using particular languagein a contract, their use yet must bebetter than pure guesswork in mostcases else they would never have been

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evolved.” Southland Royalty Co. v.Pan Am. Petroleum Corp., 378S.W.2d 50, 58 (Tex. 1964) (Calvert,C.J., concurring).

“If, after the pertinent rules of construction areapplied, the contract can be given a definite orcertain legal meaning, it is unambiguous andwe construe it as a matter of law.” Frost Nat.Bank v. L & F Distributors, Ltd., 165 S.W.3d310, 312 (Tex. 2005).

“While these general rules of constructionapply when we construe ambiguous contractsor contracts that are reasonably susceptible tomore than one interpretation, we hold that thecontract language at issue is unambiguous andthat MHR did not breach the contract.” Lopezv. Munoz, Hockema & Reed, L.L.P., 22S.W.3d 857, 860 (Tex. 2000).

C. WHEN CONSIDERING ONLY THEAGREEMENT ITSELF.

1. Fully Integrated, Partially Integrated,and Unintegrated. “Under the parol evidencerule, if the parties have integrated their agree-ment into a single written memorial, all priornegotiations and agreements with regard tothe same subject matter are excluded fromconsideration, whether they were oral or writ-ten” Baroid Equip., Inc. v. Odeco Drilling,Inc., 184 S.W.3d 1, 13 (Tex. App.–Houston[1st Dist.] 2005, pet. denied). “When a con-tract is a final and complete expression of allthe terms regarding that agreement, but not afinal and complete expression of all the termsagreed upon between the parties, it is consid-ered a partially integrated contract. See gener-ally David R. Dow, Et Al., Texas Practice:Contract Law § 8.3 (2005). With respect to apartially integrated contract, parol evidence isadmissible to supplement or explain the con-tract, but is not admissible to contradict it.”

Lowe v. Lowe, 2006 WL 3239852 (Tex App.--Beaumont 2006, no pet.) (memorandumopinion).

2. Four Corners Rule. “The primary duty ofa court when construing such a deed is toascertain the intent of the parties from all ofthe language in the deed by a fundamentalrule of construction known as the ‘four cor-ners’ rule. . . . Luckel v. White, 819 S.W.2d459, 462, 463 (Tex. 1991).

3. Multiple Contemporaneous DocumentsConstrued as One. “It is a generally ac-cepted rule of contracts that ‘Where severalinstruments, executed contemporaneously orat different times, pertain to the same transac-tion, they will be read together although theydo not expressly refer to each other.’” Boardof Ins. Com'rs v. Great Southern Life Ins. Co.,150 Tex. 258, 239 S.W.2d 803, 809 (Tex.1951). “[C]ourts are to give effect to all provi-sions of a contract, whether a contract iscomprised of one, or more than one, docu-ment.” City of Galveston v. Galveston Mun.Police Ass'n, 57 S.W.3d 532, 538 (Tex. App.--Houston [14 Dist.] 2001, no pet.).

4. Clear Mistakes. “Where it is clear that aword has been written into an instrumentinadvertently, and it is clearly inconsistentwith, and repugnant to the meaning of theparties, as shown by the whole instrument, itwill be treated as surplusage and rejectedaltogether.” Trinity Portland Cement Co. v.Lion Bonding & Surety Co., 229 S.W. 483,485 (Tex. Comm'n App. 1921, judgmtadopted).

5. Scrivener’s Error. The rule of scrivener’serror is not a rule of construction, but it is arule that permits the court to ignore or correcta portion of the written agreement that isobviously a drafting error. “[T]he fact that an

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error was caused by a scrivener's failure toembody the true agreement of the parties in awritten instrument is a proper ground forreformation.” Hatch v. Williams, 110 S.W.3d516, 522 (Tex. App.--Waco 2003, no pet.).

The following Texas case shows a liberalview of what constitutes a scrivener’s error.The doctrine was applied by the court ofappeals to reform a contract even though thejury found there was no mutual mistake.

The employment contract that Light-ner actually signed failed to include apage that contained provisions ad-dressing the restrictions placed onLightner by his non-compete agree-ment with LMG. . . . An earlier un-signed draft of the document that in-cluded the omitted provisions wasreviewed by Lightner's attorney.When the final document was pre-pared for signatures, one of the pageswas included twice and an apparentgap in the text from one of the pagesto the next indicated a skipped page.Even so, all the pages were numberedconsecutively. LMG claims the pagewas omitted from the final documentby an inadvertent mistake, thatLightner knew of the non-competeagreement and its terms, and that heeven accepted $100,000 in exchangefor it.

* * *

The jury found the omission of thepage was not a mutual mistake, andthe trial court thereupon refused toenforce the non-compete agreement.LMG challenges this jury findingclaiming that mutual mistake wasestablished as a matter of law and that

the finding should be disregarded.

We see the question as being whetherthe parties had a mutual understandingand intent that Lightner was to bebound by a non-compete agreementwhen he signed the employment con-tract with LMG. That question can beresolved in the affirmative simply byconsidering Lightner's testimony andby examining the document Lightneractually signed.

Lightner testified he was aware hisemployment agreement included acovenant not to compete, but he dis-claimed any interest in it and deniedknowing its terms. He said “It was notan important issue for me in signing[the agreement].” Moreover, the docu-ment Lightner signed clearly containsa promise not to compete againstLMG for two years after termination.And the agreement expresslyacknowledges that he was to be paid$100,000 “[f]or and in considerationof [Lightner's] agreement to the termsand conditions of the covenant not tocompete.”

Lightner says he was “completelyunaware” of the omitted provisions,which he says destroys any mutualunderstanding and intent that wouldsupport an agreement. We disagree.The evidence conclusively establishesLightner's intent to be bound by thecovenant not to compete. Lightner'sclaim not to know all the terms of thecovenant does not avoid his responsi-bilities under the agreement he made.See Roland v. McCullough, 561S.W.2d 207, 213 (Tex.Civ.App.--SanAntonio 1978, writ ref'd n.r.e.) (“A

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contract may not be avoided on theground of mistake of fact where itappears that ignorance of the facts wasthe result of carelessness, indifference,or inattention”).

“Reformation is a proper remedywhen the parties have reached a defi-nite and explicit agreement, under-stood in the same sense by both, but,by their mutual or common mistake,the written contract fails to expressthis agreement.”. . . Because it is clearthe parties had a non-compete agree-ment, but it is unclear from the signeddocument what all the terms of theagreement were, the matter must beremanded to the trial court to reformthe written contract to conform to theterms of the agreement.

Laredo Medical Group v. Lightner, 153S.W.3d 70, 74 (Tex. App.--San Antonio 2004,pet. denied).

6. Plain Meaning Rule. “We give termstheir plain, ordinary, and generally acceptedmeaning unless the instrument shows that theparties used them in a technical or differentsense.” Heritage Res., Inc. v. NationsBank,939 S.W.2d 118, 121 (Tex. 1996). “Languageused by parties in a contract should be ac-corded its plain, grammatical meaning unlessit definitely appears that the intention of theparties would thereby be defeated.” Lyons v.Montgomery, 701 S.W.2d 641, 643 (Tex.1985).

7. Construe Contract as a Whole. “Thiscourt is bound to read all parts of a contracttogether to ascertain the agreement of theparties. . . . The contract must be consideredas a whole. . . . Moreover, each part of thecontract should be given effect.” Forbau v.

Aetna Life Ins. Co., 876 S.W.2d 132, 133(Tex. 1994). “In construing an unambiguousoil and gas lease our task is to ascertain theparties' intentions as expressed in the lease. .. . To achieve this goal, we examine the entiredocument and consider each part with everyother part so that the effect and meaning ofone part on any other part may be determined.. . . We presume that the parties to a contractintend every clause to have some effect.”Heritage Resources, Inc. v. NationsBank, 939S.W.2d 118, 121 (Tex. 1996). “No one phrase,sentence, or section [of a contract] should beisolated from its setting and considered apartfrom the other provisions.” Guardian TrustCo. v. Bauereisen, 132 Tex. 396, 121 S.W.2d579, 583 (1938).

8. Noscitur a Sociis (Take Words in TheirImmediate Context). A Latin maxim which,translated into English, means “a word isknown by the company it keeps.” Fiess v.State Farm Lloyds, 202 S.W.3d 744, 750(Tex. 2006).

9. Expressio Unius est Exclusio Alterius.“The maxim, that ‘the express mention of onething implies the exclusion of another,’ isordinarily used to control, limit, or restrain theotherwise implied effect of an instrument, andnot to ‘annex incidents to written contracts inmatters with respect to which they are silent.’”Morrow v. Morgan, 48 Tex. 304 *3 (Tex.1877). “The maxim expressio unius est exclu-sio alterius, meaning that the naming of onething excludes another, though not conclusive,is applicable to these facts.” CKB & Assocs.,Inc. v. Moore McCormack Petroleum, Inc.,734 S.W.2d 653, 655 (Tex. 1987). “[I]nconstruing the agreement we must adhere tothe maxim that ‘the expression of one thing isthe exclusion of another thing.’” PhillipsPetroleum Co. v. Gillman, 593 S.W.2d 152,154 (Tex. Civ. App.–Amarillo 1980, writ

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ref’d n.r.e.).

10. Ejusden Generis. “[W]hen words of ageneral nature are used in connection with thedesignation of particular objects or classes ofpersons or things, the meaning of the generalwords will be restricted to the particular desig-nation.” Hilco Elec. Coop. v. MidlothianButane Gas Co., 111 S.W.3d 75, 81 (Tex.2003). Dynamic Pub. & Distributing L.L.C.v. Unitec Indus. Center Property OwnersAss'n, Inc., 167 S.W.3d 341 (Tex. App.--SanAntonio 2005, no pet.) (“The principle ofejusdem generis . . . applies only when acontract is ambiguous”).

11. Specific Terms Prevail Over GeneralTerms. “Another [secondary rule of con-struction] is the rule which gives effect to anearlier over a later provision.” SouthlandRoyalty Co. v. Pan Am. Petroleum Corp., 378S.W.2d 50, 578 (Tex. 1964). “In a contract, aspecific term controls over a more generalone.” Shell v. Austin Rehearsal Complex,Inc., 1998 WL 476728 * 12 (Tex. App.--Austin 1998, no pet.). “[T]he contract inquestion appears on the surface to be ambigu-ous; however, we believe the apparent ambi-guity may be resolved by the application of awell-settled rule of construction, to wit: that ifgeneral terms appear in a contract, they willbe overcome and controlled by specific lan-guage dealing with the same subject.” City ofSan Antonio v. Heath & Stich, Inc., 567S.W.2d 56, 60 (Tex. Civ. App.--Waco 1978,writ ref'd n.r.e.).

12. Earlier Terms Prevail Over LaterTerms (But not in Wills). “[P]rovisionsstated earlier in an agreement are favored oversubsequent provisions.” Wells Fargo Bank,Minnesota, N.A. v. North Cent. Plaza I,L.L.P., 194 S.W.3d 723 (Tex. App.--Dallas2006, pet. denied). However, several cases

have held that, in interpreting a will, “if thereis an irreconcilable conflict in an earlier and alater clause, the earlier clause must give wayto the later one, which prevails as the latestexpression of the testator's intention on thatparticular subject.” Kaufhold v. McIver, 682S.W.2d 660, 666 (Tex. App.–Houston [1stDist.] 1984, writ ref’d n.r.e.); Morriss v.Pickett, 503 S.W.2d 344 (Tex. Civ. App.--SanAntonio 1973, writ ref'd n.r.e.). SeeDougherty v. Humphrey, 424 S.W.2d 617, 20(Tex. 1968) (“The court of civil appeals ap-plied the rule that when there is a conflictamong provisions in a will, the last clause inthe will controls. That rule is only applicablewhen it clearly appears that the clauses con-flict and can not be reconciled.”).

13. Handwritten Over Typed and TypedOver Preprinted. “[T]here are other second-ary rules of construction for resolving appar-ent conflicts . . . . One is the rule which giveseffect to written or typewritten provisionsover printed provisions.” Southland RoyaltyCo. v. Pan Am. Petroleum Corp., 378 S.W.2d50, 578 (Tex. 1964).

14. Words Prevail Over Numbers or Sym-bols. “When there is a variance betweenunambiguous written words and figures thewritten words control. . . .” Guthrie v. Nat'lHomes Corp., 394 S.W.2d 494, 496 (Tex.1965).

15. “Notwithstanding Anything Else”Clause. “The expression ‘anything in thislease to the contrary notwithstanding,’ whenused in the final section of a written contract,has priority over any contrary provision of thecontract directed to the same question.” SeeN.M. Uranium, Inc. v. Moser, 587 S.W.2d809, 814 (Tex. Civ. App.--Corpus Christi1979, writ ref'd n.r.e.). “When parties use theclause ‘notwithstanding anything to the con-

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trary contained herein’ in a paragraph of theircontract, they contemplate the possibility thatother parts of their contract may conflict withthat paragraph, and they agree that this para-graph must be given effect regardless of anycontrary provisions of the contract.” Helme-rich v. Payne Int'l Drilling Co. v. Swift EnergyCo., 180 S.W.3d 635, 643 (Tex. App.--Hous-ton [14th Dist.] 2005, pet. denied).

16. Surrounding Circumstances. “In deter-mining whether a contract is ambiguous, welook to the contract as a whole, in light of thecircumstances present when the contract wasexecuted. . . These circumstances include thecommonly understood meaning in the industryof a specialized term, which may be proven byextrinsic evidence such as expert testimony orreference material.” XCO Production Co. v.Jamison, 194 S.W.3d 622 , 627-28 (Tex.App.–Houston [14th Dist.] 2006, pet. denied).

17. Utilitarian Standpoint. “We construecontracts ‘from a utilitarian standpoint bearingin mind the particular business activity soughtto be served’ and ‘will avoid when possibleand proper a construction which is unreason-able, inequitable, and oppressive.’ Frost Nat.Bank v. L & F Distributors, Ltd., 165 S.W.3d310, 312 (Tex. 2005).

18. Construction Must Be “Reasonable.”“Courts will avoid when possible and propera construction which is unreasonable, inequi-table, and oppressive.” Reilly v. RangersMgmt., Inc., 727 S.W.2d 527, 530 (Tex.1987). “We construe a contract by determin-ing how the “reasonable person” would haveused and understood its language, consideringthe circumstances surrounding the contract'snegotiation and keeping in mind the purposesintended to be accomplished by the partieswhen entering into the contract.” 7979 AirportGarage, L.L.C. v. Dollar Rent A Car Systems,

Inc., 2007 WL 1732223 (Tex. App.--Houston[14 Dist.] 2007, n.p.h.).

19. Use Rules of Grammar. “Courts arerequired to follow elemental rules of grammarfor a reasonable application of the legal rulesof construction.” General Financial Services,Inc. v. Practice Place, Inc., 897 S.W.2d 516,522 (Tex. App.--Fort Worth 1995, no pet.).

20. Exceptions. “The ordinary purpose of anexception is to take something out of thecontract which would otherwise have beenincluded in it. . . . When the meaning of anexception is reasonably certain, it must begiven effect unless wholly repugnant to theprovision intended to be limited by it.” Lyonsv. Montgomery, 701 S.W.2d 641, 643 (Tex.1985).

21. Contra Proferentem (Construe Againstthe Drafter). “Under the doctrine, an ambig-uous contract will be interpreted against itsauthor.” Evergreen Nat. Indem. Co. v. Tan ItAll, Inc., 111 S.W.3d 669, 677 (Tex. App.--Austin 2003, no pet.). “In Texas, a writing isgenerally construed most strictly against itsauthor and in such a manner as to reach areasonable result consistent with the apparentintent of the parties. . . .” Temple-Eastex Inc.v. Addison Bank, 672 S.W.2d 793, 798 (Tex.1984). “[T]he doctrine of contra proferentemis applied only when construing an ambiguouscontract.” Lewis v. Vitol, S.A., 2006 WL1767138 (Tex. App.--Houston [1 Dist.] 2006,no pet.). “[A] contract generally is construedagainst its drafter only as a last resort underTexas law– i.e., after the application of ordi-nary rules of construction leave a reasonabledoubt as to its interpretation. ” Forest OilCorp. v. Strata Energy, 929 F.2d 1039,1043-44 (5th Cir. 1991). Accord, EvergreenNat. Indem. Co., at 676 (“The doctrine ofcontra proferentem is a device of last resort

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employed by courts when construing ambigu-ous contractual provisions”).

22. Things to Avoid. There are things for thecourt to avoid in construing an agreement.

a. Don’t Render Clauses Meaningless. “Inthe interpretation of contracts the primaryconcern of courts is to ascertain and to giveeffect to the intentions of the parties as ex-pressed in the instrument. . . . To achieve thisobject the Court will examine and considerthe entire instrument so that none of the provi-sions will be rendered meaningless.” R & PEnters. v. LaGuarta, Gavrel & Kirk, Inc., 596S.W.2d 517, 518-19 (Tex. 1980).

b. Validity Preferred Over Invalidity. “If,to our minds, the language of the deed isreasonably susceptible of a constructionwhich would identify any definite interest inthe land in suit, we should give it that con-struction, for it is a rule universally recog-nized that if an instrument admits of twoconstructions, one of which would make itvalid and the other invalid, the former mustprevail.” Dahlberg v. Holden, 150 Tex. 179,238 S.W.2d 699, 702 (Tex. 1951).

c. Presumption Against Illegality. “Whileof course courts have no right to depart fromthe terms in which the contract is expressed tomake legal what the parties have made unlaw-ful, nevertheless when the contract by itsterms, construed as a whole, is doubtful, oreven susceptible of more than one reasonableconstruction, the court will adopt the con-struction which comports with legality. It ispresumed that in contracting parties intend toobserve and obey the law.” Walker v. TempleTrust Co., 124 Tex. 575, 80 S.W.2d 935, 936-37 (1935). Accord, Smart v. Tower Land &Inv. Co., 597 S.W.2d 333, 340 (Tex. 1980).

d. Avoid Forfeitures. “[C]ourts will notdeclare a forfeiture, unless they are compelledto do so, by language which will admit of butone construction, and that construction is suchas compels a forfeiture.” Automobile Ins. Co.v. Teague, 37 S.W.2d 151, 153 (Tex. Comm'nApp. 1931, judgmt. adopted).

e. Avoid Implied Terms. “[W]hen partiesreduce their agreements to writing, the writteninstrument is presumed to embody their entirecontract, and the court should not read into theinstrument additional provisions unless this benecessary in order to effectuate the intentionof the parties as disclosed by the contract as awhole.” Danciger Oil & Ref. Co. v. Powell,154 S.W.2d 632, 635 (Tex 1941).

23. Special Contracts. Certain types ofcontracts have special interpretive rules.

a. Arbitration Clauses. “Because of thestrong policy favoring arbitration, ‘[a]n orderto arbitrate should not be denied unless it canbe said with positive assurance that the arbi-tration clause is not susceptible of an interpre-tation that covers the asserted dispute.’ . . .Thus, ‘[a]ny doubts concerning the scope ofarbitrable issues should be resolved in favorof arbitration.’” Williams Industries, Inc. v.Earth Development Systems Corp., 110S.W.3d 131, 137 (Tex. App.--Houston [1Dist.] 2003, no pet.) [citations omitted].

b. Deeds. “[I]t is recognized that ordinarilya deed will be construed most strongly againstthe grantor. This cannon of construction is notapplied by the courts where the intention ofthe parties is clearly expressed and the instru-ment is unambiguous.” Arnold v. AshbelSmith Land Company, 307 S.W.2d 818. 824(Tex. Civ. App.--Houston 1957, writ ref'd).

“Double M. urges us to consider canons that

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have been developed for interpreting deedsand reservations. For example, courts haveheld that deeds should be construed to conveythe greatest estate possible and that reserva-tions should be construed against the grantor.These canons, however, do not apply whenthe deed is unambiguous.” Stewman Ranch,Inc. v. Double M. Ranch, Ltd., 192 S.W.3d808, 811 (Tex. App.--Eastland 2006, pet.denied). See Bruce M. Kramer, The Sisy-phean Task of Interpreting Mineral Deeds andLeases: An Encyclopedia of Canons of Con-struction, 24 Tex. Tech L. Rev. 1, 110-11(1993).

c. Guarantees. “A guarantor is entitled tohave his agreement strictly construed so thatit is limited to his undertakings, and it will notbe extended by construction or implication.”Reece v. First State Bank of Denton, 566S.W.2d 296, 297 (Tex. 1978). “Where uncer-tainty exists as to the meaning of a contract ofguaranty, its terms should be given a construc-tion which is most favorable to the guarantor.”Coker v. Coker, 650 S.W.2d 391, 394 n. 1(Tex. 1983).

d. Insurance Policies. “Whether a contract,like an insurance policy, is ambiguous is alegal question decided by examining the entirecontract in light of the circumstances presentwhen the parties entered the contract. . . . [I]fa policy is subject to more than one reason-able interpretation, we must adopt the con-struction most favorable to the insured whenwe resolve the uncertainty.” State Farm Fire& Cas. Co. v. Vaughan, 968 S.W.2d 931, 933(Tex. 1998). “[T]he interpretation of insur-ance contracts is governed by the same rulesof construction applicable to other writtencontracts.” State Farm Life Ins. Co. v.Beaston, 907 S.W.2d 430, 433 (Tex. 1995).

When construing a contract, courts

must strive to give effect to the writtenexpression of the parties' intent. Id.(citations omitted). To do so, theymust read all parts of a contract to-gether. Id. (citations omitted). Indeed,courts must be particularly wary ofisolating from its surroundings orconsidering apart from other provi-sions a single phrase, sentence, orsection of a contract. See id. at 133-34(citations omitted). Only if an insur-ance policy remains ambiguous de-spite these canons of interpretationshould courts construe its languageagainst the insurer in a manner thatfavors coverage.

State Farm Life Ins. Co. v. Beaston, 907S.W.2d 430, 433 (Tex. 1995). “ [I]f a policyis subject to more than one reasonable inter-pretation, we must adopt the constructionmost favorable to the insured when we resolvethe uncertainty.” State Farm Fire & Cas. Co.v. Vaughan, 968 S.W.2d 931, 933 (Tex.1998).

D. WHEN CONSIDERING THINGSOUTSIDE THE AGREEMENT.

1. Statute of Frauds. The Texas statute offrauds is set out in Tex. Bus. & Com. Codech. 26. The statue provides that certain typesof contractual obligations are not enforceable“unless the promise or agreement, or a memo-randum of it, is (1) in writing; and (2) signedby the person to be charged with the promiseor agreement or by someone lawfully autho-rized to sign for him.” Tex. Bus. Comm. Code§ 26.01. Section 26.02 applies the require-ment to loans over $50,000.00. The TexasLegislature has also adopted a “statute ofconveyances” which provides that a convey-ance of an interest in real estate, to be en-forced, must be “in writing and must be sub-

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scribed and delivered by the conveyor or bythe conveyor's agent authorized in writing.”Tex. Prop. Code § 5.021. When an allegedmodification of an agreement encompasses amatter required by the statute of frauds to bein writing, the modification is unenforceableunless it is in writing. Barnett v. Legacy Bankof Texas, 2003 WL 22358578 (Tex. App.--Eastland 2003, rev. denied) (memorandumopinion).

2. Parol Evidence Rule. "The parol evidencerule is not a rule of evidence at all, but a ruleof substantive law. . . . When parties haveconcluded a valid integrated agreement withrespect to a particular subject matter, the ruleprecludes the enforcement of inconsistentprior or contemporaneous agreements. . . Onthe other hand, the rule does not precludeenforcement of prior or contemporaneousagreements which are collateral to an inte-grated agreement and which are not inconsis-tent with and do not vary or contradict theexpress or implied terms or obligationsthereof.” Hubacek v. Ennis State Bank, 317S.W.2d 30, 31 (Tex. 1958) (citations omitted).

“The Court may read a written document inthe light of surrounding circumstances, whichcan be proved, in order to arrive at the truemeaning and intention of the parties as ex-pressed in the words used, but will not hearparol evidence of language or words otherthan those used by the parties themselves inthe writing. No other words are to be added toor subtracted from the written instrument.'”Self v. King, 28 Tex. 552 (1866).

“Where the terms of the contract are plain andunambiguous the construction given it by thecontracting parties is ordinarily immaterialand, in the absence of fraud, accident or mis-take, parol evidence is not admissible to varyits terms.” Richardson v. Hart, 185 S.W.2d

563, 564 (Tex. 1945).

“The details which merely explain or clarifythe essential terms appearing in the instrumentmay ordinarily be shown by parol.” Wilson v.Fisher, S188 S.W.2d 150, 152 (Tex. 1945).

“Extrinsic evidence may, indeed, be admissi-ble to give the words of a contract a meaningconsistent with that to which they are reason-ably susceptible, i.e., to ‘interpret’ contractualterms. If the contract language is not fairlysusceptible of more than one legal meaning orconstruction, however, extrinsic evidence isinadmissible to contradict or vary the meaningof the explicit language of the parties' writtenagreement.” National Union Fire Ins. v. CBIIndus., Inc., 907 S.W.2d 517, 521 (Tex.1995).

“McDade urges that the contract was latentlyambiguous because it believed that theFriendswood exception only allowed Friends-wood to lease space it already owned to ABS.. . . McDade's interpretation, however, is parolevidence, and parol evidence of intent cannotbe admitted for the purpose of creating anambiguity . . . . Only after a contract isfound to be ambiguous may parol evidence beadmitted for the purpose of ascertaining thetrue intentions of the parties expressed in thecontract.” Friendswood Development Co. v.McDade & Co., 926 S.W.2d 280, 283 (Tex.1996).

Tex. Bus. & Comm. Code § 26.02 (c) & (d)contain a form of the parol evidence rule thatapplies to loans for more than $50,000.00.The statute provides:

(c) The rights and obligations of theparties to an agreement subject toSubsection (b) of this section shall bedetermined solely from the written

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loan agreement, and any prior oralagreements between the parties aresuperseded by and merged into theloan agreement.

(d) An agreement subject to Subsec-tion (b) of this section may not bevaried by any oral agreements or dis-cussions that occur before or contem-poraneously [FN1]with the executionof the agreement.

However, subsections (e) and (f) require thatthe lender give a prescribed notice to theborrower before the loan agreement is signed,or else the rule will not be applied.

Parol evidence may be introduced to showthat a promissory note is not enforceablebecause the special purpose for, or conditionupon, which it was delivered did not occur.Akin v. Dahl, 661 S.W.2d 914, 916(Tex.1983). “A ‘condition precedent’ is acondition that ‘postpones the effective date ofthe instrument until the happening of a contin-gency. . . . Parol evidence is always compe-tent to show the nonexistence of a contract orthe conditions upon which it may becomeeffective.” Borg-Warner Acceptance Corp. v.Jesse Vinson Imports, Inc., 1991 WL 4848 *2(Tex. App.--Houston [14 Dist.] 1991, writdenied) (not for publication)[citations omit-ted].

“The parol evidence rule excludes only priorand contemporaneous negotiations. It does notapply to subsequent agreements entered intoby the parties.” Garcia v. Karam, 154 Tex.240, 276 S.W.2d 255, 258 (Tex. 1955); ac-cord, Katerndahl v. State Farm Fire and Cas.Co., 961 S.W.2d 518, 523-24 (Tex. App.--SanAntonio 1997, no pet.).

“[I]n the absence of fraud, accident, or mutual

mistake, the parol or extrinsic evidence rule isparticularly applicable where the writtencontract contains a recital that it contains the“entire agreement between the parties,” or asimilarly worded merger provision.” Wein-acht v. Phillips Coal Co., 673 S.W.2d 677,679 (Tex. App.--Dallas 1984, no writ).

3. Surrounding Circumstances. “A ques-tion relating to the construction of an indem-nity contract is presented. We are to take thewording of the instrument, consider the samein the light of the surrounding circumstances,and apply the pertinent rules of constructionthereto and thus settle the meaning of thecontract.” Spence & Howe Const. Co. v. GulfOil Corp., 365 S.W.2d 631, 632 (Tex. 1963).

“Both parties offered evidence of the courseof dealings between the parties and the cir-cumstances surrounding the execution of the1971 (Osceola) purchase order contract,including the customs and usages in the tankconstruction design, fabrication, and erectionbusiness and the sufficiency of theautopositive print for use in designing theOsceola vessel. This evidence was not inviolation of the parol evidence rule. Eventhough the 1971 purchase order agreementwas not ambiguous, the court was entitled toconsider the surrounding facts and circum-stances, not to vary or add to the contract, butto learn the intention with which the wordswere used.” Gorbett Bros. Steel Co., Inc. v.Anderson, Clayton & Co., 533 S.W.2d 413,418 (Tex. Civ. App.--Houston [1st Dist.]1976, no writ).

Parol evidence is admissible to show a latentambiguity in an agreement. See paragraphIV.E.2 below.

4. Course of Performance. Tex. Bus. &Comm. Code § 1.303 says that “the express

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terms of an agreement and any applicablecourse of performance, course of dealing, orusage of trade must be construed wheneverreasonable as consistent with each other.” So,in sale-of-merchandise transactions the courtmust look at course of performance in theprocess of interpreting the express terms of anagreement. However, in East MontgomeryCounty Municipal Utility District No. 1 v.Roman Forest Consolidated Municipal UtilityDistrict, 620 S.W.2d 110, 112 (Tex. 1981),the court said: “The conduct of the parties isonly relevant after the court has determined(as a matter of law) that the contract is ambigu-ous.”

5. Course of Dealing. International Thera-peutics, Inc. v. McGraw-Edison Co., 721 F.2d488, 491(5th Cir. 1983):

A course of dealing is a sequence ofprevious conduct between the partiesto a particular transaction which isfairly to be regarded as establishing acommon basis of understanding forinterpreting their expressions andother conduct. The emphasis is on asequence of events; a single transac-tion cannot constitute a course of deal-ing.

6. Usages of Trade. “Extrinsic evidencemay, indeed, be admissible to give the wordsof a contract a meaning consistent with that towhich they are reasonably susceptible, i.e., to‘interpret’ contractual terms. FN6 If the con-tract language is not fairly susceptible of morethan one legal meaning or construction, how-ever, extrinsic evidence is inadmissible tocontradict or vary the meaning of the explicitlanguage of the parties' written agreement.”Nat'l Union Fire Ins. Co. v. CBI Indus. Inc.,907 S.W.2d 517, 521 (Tex. 1995). “FN6. In

cases involving ‘trade usage’ evidence, forexample, the meaning to which a certain termor phrase is most reasonably susceptible is theone which so regularly observed in place,vocation, trade, or industry so ‘as to justify anexpectation that it will be observed withrespect to a particular agreement.’ Restate-ment (2d) of Contracts § 222(1). See also Tex.Bus. & Com. Code § 1.205(b).” Id.

E. AMBIGUITY.

1. Definition of Ambiguity. “A contract isambiguous when its meaning is uncertain anddoubtful or is reasonably susceptible to morethan one interpretation.” Heritage Resources,Inc. v. NationsBank, 939 S.W.2d 118, 121(Tex. 1996); Coker v. Coker, 650 S.W.2d 391,393 (Tex. 1983). “A contract is not ambigu-ous if it can be given a certain or definite legalmeaning or interpretation.” Lopez v. Munoz,Hockema & Reed, L.L.P., 22 S.W.3d 857, 860(Tex. 2000). “If a written instrument is soworded that a court may properly give it acertain or definite legal meaning or interpreta-tion, it is not ambiguous. On the other hand, acontract is ambiguous only when the applica-tion of the applicable rules of interpretation tothe instrument leave it genuinely uncertainwhich one of the two meanings is the propermeaning.” R & P Enterprises v. LaGuarta,Gavrel & Kirk, Inc., 596 S.W.2d 517, 519(Tex. 1980).

“ An ambiguity does not arise simply becausethe parties advance conflicting interpretationsof the contract. . . . For an ambiguity to exist,both interpretations must be reasonable.”Columbia Gas Trans. Corp. v. New Ulm Gas,Ltd., 940 S.W.2d 587, 589 (Tex. 1996).

2. Patent Vs. Latent Ambiguity. “An ambi-guity in a contract may be said to be ‘patent’or ‘latent.’ A patent ambiguity is evident on

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the face of the contract. . . . A latent ambiguityarises when a contract which is unambiguouson its face is applied to the subject matter withwhich it deals and an ambiguity appears byreason of some collateral matter. FN4 . . . Ifa latent ambiguity arises from this application,parol evidence is admissible for the purposeof ascertaining the true intention of the partiesas expressed in the agreement.” Nat'l UnionFire Ins. Co. v. CBI Indus. Inc., 907 S.W.2d517, 520 (Tex. 1995). “FN4. For example, ifa contract called for goods to be delivered to‘the green house on Pecan Street,’ and therewere in fact two green houses on the street, itwould be latently ambiguous.” Id.

3. Question of Law Vs. Question of Fact.“The question of whether a contract is ambig-uous is one of law for the court.” HeritageResources, Inc. v. NationsBank, 939 S.W.2d118, 121 (Tex. 1996). “This Court may con-clude a contract is ambiguous, even thoughthe parties do not so contend.” EOG Re-sources, Inc. v. Wagner & Brown, Ltd., 202S.W.3d 338, 344 (Tex. App.--Corpus Christi2006, pet. denied).

4. What is Considered? If after applying theestablished rules of interpretation, a writteninstrument remains reasonably susceptible tomore than one meaning, extraneous evidenceis admissible to determine the true meaning ofthe instrument.” R & P Enterprises v.LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d517, 519 (Tex. 1980). “The ambiguity mustbecome evident when the contract is read incontext of the surrounding circumstances, notafter parol evidence of intent is admitted tocreate an ambiguity.” Nat'l Union Fire Ins.Co. v. CBI Indus. Inc., 907 S.W.2d 517, 521(Tex. 1995).

F. GAP-FILLING. “The parol evidencerule provides that, in the absence of fraud,

accident, or mistake, extrinsic evidence is notadmissible to vary, add to, or contradict theterms of a written instrument that is faciallycomplete and unambiguous. 36 Tex.Jur.3dEvidence § 315 (1984). But, if the instrumentis incomplete on its face, extrinsic evidencemay be admitted to show the part that ismissing, provided the evidence does notconflict with the written provisions.” Martinv. Ford, 853 S.W.2d 680, 681-82 (Tex. App.--Texarkana 1993, writ den’d). Accord, FirstVictoria Nat. Bank v. Briones, 788 S.W.2d632 (Tex. App.--Corpus Christi 1990, writref’d n.r.e.).

V. SUMMARY JUDGMENT. Cases can befound that say interpreting a contract is aquestion of law, while others say that it is aquestion of fact. Professor Corbin has beenwidely quoted for saying that "[t]he questionof interpretation of language and conduct--thequestion of what is the meaning that should begiven by a court to the words of a contract, isa question of fact, not a question of law." 3 A.Corbin, CORBIN ON CONTRACTS § 554, at219 (1960). This is in keeping with Corbin’scontextual approach to contract interpretation.But Corbin goes on to say: “if the evidence isso clear that no reasonable man would deter-mine the issue before the court in any way butone,” then the issue is one that is properly forthe judge to determine. Id. § 554, at 222.Accord, St. Joseph Professional Bldg. Corp. v.American Nat. Ins. Co., 511 S.W.2d 578, 581(Tex. Civ. App.--1974, writ ref’d n.r.e.) (“If itcould be said the commitment was ambigu-ous, then there are two extrinsic factors whichsupport a construction favoring tenant occu-pancy. As these factors are undisputed, con-struction would remain a matter for thecourt”).

But Corbin’s perspective is that context evi-dence must always be considered. And many

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of the cases that quote Corbin involve agree-ments which the court found to be ambiguous.Few would disagree with the view that extrin-sic evidence becomes admissible, and jury’srole arises, once an agreement is found to beambiguous. The more controversial proposi-tion is whether extrinsic evidence should beconsidered on the question of how to interpretan unambiguous agreement, and if so thenwhat happens if the evidence is conflicting?Does the jury resolve the conflicts and thecourt uses the verdict as a basis for interpret-ing the agreement, or does the jury interpretthe agreement itself?

Corbin notwithstanding, the Texas SupremeCourt has made it clear that the “[i]nterpreta-tion of a contract becomes a fact issue to beresolved by extrinsic evidence only whenapplication of pertinent rules of constructionleaves a genuine uncertainty as to which oftwo meanings is proper.” Harris v. Rowe, 593S.W.2d 303, 306 (Tex. 1979); see Coker v.Coker, 650 S.W.2d 391, 394 (Tex. 1983)(“When a contract contains an ambiguity, thegranting of a motion for summary judgment isimproper because the interpretation of theinstrument becomes a fact issue”). The TexasSupreme Court is saying that extrinsic evi-dence is not admissible to interpret an unam-biguous agreement. So, a jury issue can arisein Texas only for ambiguous agreements orwhen there is a gap.

“When a contract is reasonably susceptible tomore than one meaning, extraneous evidenceis admissible to determine the true meaning ofthe instrument. . . . Summary judgment insuch a case is improper, as the question of thetrue meaning of the contract becomes one offact for the jury.” North Central Oil Corp. v.Louisiana Land and Exploration Co., 22S.W.3d 572, 581 (Tex. App.--Houston [1Dist.] 2000, pet denied). See e.g. Smith v.

Prudential Prop. and Cas. Ins. Co., 10S.W.3d 846, 850 (Ark. 2000). “The construc-tion and legal effect of written contracts arematters to be determined by the court, not bythe jury, except when the meaning of thelanguage depends upon disputed extrinsicevidence.”

VI. THE ROLE OF THE JURY IN CON-TRACT INTERPRETATION. A study bythe National Center for State Courts showedthat contract disputes constituted 16.4% ofstate civil jury trials in 1996 as compared totort cases which constituted 82.6% of statejury trials in 1996. Caseload Highlights:Examining the Work of the State Courts,2001. A February 2005 report 63% of trialswere tort. Among the contract cases, exclud-ing debt collection suits, slightly more weretried to a jury than to the court.<http://www.ncsconline.org/D_Research/csp/Highlights/Vol11No1.pdf>. The smallpercent of contract disputes may result fromthe fact that a contractual relationship, unlikea tortious relationship, is consensual to beginwith, and contracting parties who wish tomaintain ongoing business relationships andtheir reputations may be more inclined torenegotiate contract terms when problemsdevelop. See Nottage, at 15 (regarding StewartMacaulay’s empirical studies on contract lawin actual practice). Also, contract litigantsmay be bargaining away their right to a jurytrial or agreeing to arbitrate. Richard Posnernoted that contracting parties are sometimesleery of juries determining their contractdisputes. At the time of contracting they canagree to binding arbitration or they can agreeto waive a jury if a trial occurs. R. Posner, at1595. They can also use a merger clause inthe contract, as a way to invoke the parolevidence rule in an effort to steer away fromfactual disputes about the nature of the par-ties’ agreement.

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Statements are legion that the interpre-tation of a written contract raises aquestion of law for the judge (and forthe appellate court). I will begin bydemonstrating that this proposition isproblematic from the perspective ofgenerally prevailing standard for dis-tinguishing fact and law issues.

William C. Whitford, The Role of the Jury(and the Fact/Law Distinction) In the Inter-pretation of Written Contracts, 2001 Wis. L.Rev. 931 (2001). (“Whitford”). The article isa “must read” if you are grappling with asummary judgment involving contract inter-pretation, or trying to fashion a jury chargeinvolving contract interpretation.

Restatement (Second) of Contracts § 212,comments d and e, say this about contractinterpretations and juries:

d. "Question of law." Analytically,what meaning is attached to a word orother symbol by one or more people isa question of fact. But general usageas to the meaning of words in theEnglish language is commonly aproper subject for judicial notice with-out the aid of evidence extrinsic to thewriting. Historically, moreover, partlyperhaps because of the fact that jurorswere often illiterate, questions of in-terpretation of written documents havebeen treated as questions of law in thesense that they are decided by the trialjudge rather than by the jury. Like-wise, since an appellate court is com-monly in as good a position to decidesuch questions as the trial judge, theyhave been treated as questions of lawfor purposes of appellate review. Suchtreatment has the effect of limiting thepower of the trier of fact to exercise a

dispensing power in the guise of afinding of fact, and thus contributes tothe stability and predictability of con-tractual relations. In cases of standard-ized contracts such as insurance poli-cies, it also provides a method of as-suring that like cases will be decidedalike.

e. Evaluation of extrinsic evidence.Even though an agreement is not inte-grated, or even though the meaning ofan integrated agreement depends onextrinsic evidence, a question of inter-pretation is not left to the trier of factwhere the evidence is so clear that noreasonable person would determinethe issue in any way but one. But ifthe issue depends on evidence outsidethe writing, and the possible infer-ences are conflicting, the choice is forthe trier of fact.

UCC Section 209(2) provides that the ques-tion of whether there is an integrated agree-ment is for the court to determine beforeattempting interpretation and before consider-ing the parol evidence rule. See Rowley, at335.

The question arises in a gap-filling case whe-ther the judge or jury fills the gap. The Re-statement (Second) of Contracts does not say.Richard E. Speidel, Restatement Second:Omitted Terms and Contract Method, 67Cornell L.Rev. 785, 804 (1982). It seems tobe accepted that the terms and meaning of anoral agreement, or of a written agreement thathas been lost, are for the jury.

The U.S. Supreme Court said, as a matter offederal procedure: “Although the construc-tion of written instruments is one for thecourt, where the case turns upon the proper

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conclusions to be drawn from a series ofletters, particularly of a commercial character,taken in connection with other facts andcircumstances, it is one which is properlyreferred to a jury.” Rankin v. Fidelity Insur-ance, Trust & Safe Deposit Co., 189 U.S. 242,252-253, 23 S.Ct. 553, 557, 47 L.Ed. 792(1903).

The question arises as to just what to submitto the jury. Many years ago, the Texas Su-preme Court said:

When the effect of the writing doesnot depend entirely upon the construc-tion or meaning of its terms, but uponextrinsic facts and circumstances, thenit becomes the duty of the court tosubmit for the consideration of thejury the instrument, together with theattending facts and circumstancesadduced in evidence, with such in-structions upon the legal effect of theinstrument as would meet the variousphases presented by the extrinsic evi-dence.

Taylor v. McNutt, 58 Tex. 71 (Tex. 1882).Thus, the language in Taylor v. McNutt, sug-gests that the jury will interpret the agreement,after the judge gives them the appropriaterules of construction to use.

The Pattern Jury Charges PJC 101.2 has thecourt asking the jury whether the defendantbreached the contract. If there is a disputeregarding the meaning of the agreement, andthe agreement is not ambiguous, then themeaning of the contract is determined by thejudge and the jury is to be advised of thecourt’s interpretation in instructions. Thecommentary to PJC 101.2 says:

Interpretation. Construction of an

unambiguous term is an issue for thecourt. If appropriate, an instructionshould be included giving the jury thecorrect interpretation of that term. SeePJC 101.7. If the court determinesthat a particular provision is ambigu-ous, an instruction on resolving thatambiguity should be included. SeePJC 101.8.

Texas Pattern Jury Charges (Business, Con-sumer, Insurance, Employment) p. 31. ThePattern Jury Charges, PJC 101.7, observes:

Court’s construction should be in-cluded in charge. If the constructionof a provision of the agreement is indispute and the court resolves thedispute by interpreting the provisionaccording to the rules of construction,the court should include that interpre-tation in submitting PJC 101.2.

The Pattern Jury Charges, PJC 101.8, ad-dresses an ambiguous provision of an agree-ment, suggesting the following jury instruc-tion.

It is your duty to interpret the follow-ing language of the agreement:

[Insert ambiguous language.]

You must decide its meaning by deter-mining the intent of the parties at thetime of the agreement. Consider allthe facts and circumstances surround-ing the making of the agreement, theinterpretation placed on the agreementby the parties, and the conduct of theparties.

Presumably the jury is given a choice betweenthe parties’ two inconsistent interpretations.

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PJC 101.9, in its comment, states that “Texaslaw is not clear on whether trade custom ismerely evidentiary and not appropriate forjury instruction or whether it may in fact formthe basis for a proper instruction.” PJC 101.9at 40. The comment suggests that such aquestion “could inquire whether a particularcustom or usage existed and, if it existed,whether the parties intended that it wouldaffect a contract term” Id. This approachsuggests that the jury would be asked toresolve the specific question of whether cus-tom or usage should be used by the court ininterpreting the agreement, and if so, thenperhaps the judge takes that verdict and plugsthe result into the rest of the interpretive effortto arrive at the meaning of the agreement.

Note that a dispute can arise as to whether anagreement is integrated. One writer suggeststhat the question of whether a writing is inte-grated, and, if so, fully integrated, are ques-tions of law for the court. Rowley, at 335, n.904 (citing among other things U.C.C. § 2-202 cmt. 3). “[W]e hold that it is a questionof fact in this case whether the terms agreed toand embodied in the September 2 and October19, 1983 writings were intended to be thefinal expressions of the contract or were onlypreliminary negotiations which the parties didnot intend to have legal significance untilexecution of the contemplated legal documen-tation. This question was properly submittedto and answered by the jury in fulfillment ofits fact finding responsibilities. In some cases,of course, the court may decide, as a matter oflaw, that there existed no immediate intent tobe bound. This case, however, is not such acase.” Foreca, S.A. v. GRD Development Co.,Inc., 758 S.W.2d 744, 746 (Tex. 1988).

Professor Whitford has pointed out that adetermined litigant can circumvent the four-corners rule and parol evidence rule by raising

jury issues through the assertion of claims forfraud, mutual mistake, waiver, and the like. Whitford, at 941-42.

VII. REVIEW ON APPEAL. “When acontract is not ambiguous, the construction ofthe written instrument is a question of law forthe court . . . . We review the trial court'slegal conclusions de novo.” MCI Telecommu-nications Corp. v. Texas Utilities Elec. Co.,995 S.W.2d 647, 650-51 (Tex. 1999). “Theinterpretation of an unambiguous document isa question of law. We review the trial court'sdecision de novo. . . . We perform that reviewwithout considering parol evidence . . . . Weconsider the entire document under the ‘fourcorners’ rule. . . . To determine the parties'intention, we look only at what the partiesactually stated in the deed, not what theyallegedly meant.” Stewman Ranch, Inc. v.Double M. Ranch, Ltd., 192 S.W.3d 808, 810(Tex. App.--Eastland 2006, pet. denied).“Whether a contract is ambiguous is a ques-tion of law for the court. . . . We review thetrial court's legal conclusions de novo. . . .Wedetermine whether the contract is ambiguousby looking at the contract as a whole in lightof the circumstances present when the partiesentered the contract.” Kennedy Ship & Re-pair, L.P. v. Pham, 210 S.W.3d 11, 22 (Tex.App.--Houston [14th Dist.] 2006, no pet.).“Interpretation of a contract is a matter of law,as is the determination that a contract is am-biguous, and both are reviewed de novo.”Camden Iron & Metal, Inc. v. Krafsur (In reNewell Indus., Inc.), 336 F.3d 446, 448 (5thCir. 2003) (applying Texas law).

“We review parol evidence questions de novo,as questions of law.” Haden v. David J.Sacks, P.C., 222 S.W.3d 580, 592 (Tex.App.--Houston [1st Dist.] 2007, pet. pending).

On the federal side, the rule is a little differ-

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ent. In Palmer v. Fuqua, 641 F.2d 1146, 1154n. 15 (5th Cir. 1981), the Fifth Circuit, apply-ing Texas law but federal procedure was facedwith the question of whether to review thetrial court’s interpretation of an agreement asa factual determination to be reviewed underthe clearly erroneous rule, or as a conclusionof law freely reviewable by the appellatecourt. The Court noted:

It is clear that the interpretation of thelegal effect of a contract is a questionof law for the court to decide. . . . Thequestion whether the Ritchie leasefalls within the phrase "area of interestowned by this Partnership," however,might more accurately be character-ized as a question of fact. . . . Yeteven when dealing with the interpreta-tion of the meaning of a contract, "ifthe evidence is so clear that no reason-able man would determine the issuebefore the court in any way but one,"the issue is one that is properly for thejudge to determine. . . . Thus, themeaning of a contract, when the con-tract is not ambiguous, is oftentimescharacterized as a question of law.[Citations omitted]

VIII. CONCLUSION. Although much hasbeen written about the right and wrong waysto go about interpreting contracts, Texas lawon interpreting contracts has not changedgreatly in 100 years. When interpreting anagreement, whether in summary judgment, attrial, or on appeal, lawyers should know therules of interpretation to invoke. Lawyersfeeling constrained by these rules may usealternate approaches, like finding a patent orlatent ambiguity, or fraud in the inducement,or invoking equity to reform the agreement, toput the facts before the fact finder in hopes ofovercoming the words of the contract.

IX. FURTHER READING.

• Randy E. Barnett, The Sound of Si-lence: Default Rules and ContractualConsent, 78 Va. L. Rev. 821 (1992).

• Larry A. DiMatteo, Reason and Con-text: A Dual Track Theory of Interpre-tation, 109 Penn. State L. Rev. 397(2004).

• E. Allan Farnsworth, The Interpreta-tion of International contracts and theUse of Preambles, Int’l Business LawJ. No. 3-4, 271-279 (2002), on line at:<http://cisgw3.law.pace.edu/cisg/bilbio/farnsworth.html>.

• Avery Wiener Katz, The Economics ofForm and Substance in Contract In-terpretation, 104 Colum. L. Rev. 496(2004).

• Adam Kramer, Common Sense Princi-ples of Contract Interpretation, 23(2)Oxford J. Of Legal Studies 173 (2003)(a British perspective), on line at:<http://www.3vb.com/pgs-articles/ak-Interpretation-as-published.shtml>.

• Mark L. Movsesian, RediscoveringWilliston, 62 Wash. & Lee L. Rev.207 (2005).

• Vincent Nelson, The Interpretation OfContracts: The Rules Re-Written ForModern Times, (2004) (detailing Eng-lish law’s movement away from liter-alism to purposive interpretation ofcontracts), available on line at:<http://www.39essex.com/documents/VN_seminar_Contracts_handout_310304_FINAL.pdf>.

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• Robert E. Scott & George G. Triantis,Anticipating Litigation in ContractDesign, 115 Yale L.J. 814 (2006).

• George G. Triantis, The Efficiency ofVague Contract Terms: A Response tothe Schwartz-Scott Theory of U.C.C.Article 2, 62 La. L. Rev. 1065 (2002).

• Zipporah Batshaw Wiseman, TheLimits of Vision: Karl Llewellyn andthe Merchant Rules, 100 Harv. L.Rev. 465 (1987).

• Bruno Zeller, Determining the Con-tractual Intent of Parties Under theCISG and Common Law–A Compara-tive Analysis, 4 European J. Of LawReform No. 4 629 (2002), available online at:<http://cisgw3.law.pace.edu/cisg/biblio/zeller8.html>.

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X. THE “PEERLESS” CASE.

RAFFLES v. WICHELHAUS (1864)

Court of the Exchequer2 Hurl. & C. 906

Declaration. For that it was agreed between the plaintiff and the defendants, to wit, at Liverpool, thatthe plaintiff should sell to the defendants, and the defendants buy of the plaintiff, certain goods, towit, 125 bales of Surat cotton, guaranteed middling fair merchant's dhollorah, to arrive ex Peerlessfrom Bombay; and that the cotton should be taken from the quay, and that the defendants would paythe plaintiff for the same at a certain rate, to wit, at the rate of 17.25 d. per pound, within a certaintime then agreed upon after the arrival of said goods in England. Averments: that the said goods didarrive by said ship from Bombay to England, to wit, at Liverpool, and the plaintiff was then andthere ready and willing and offered to deliver that said goods to the defendants, etc. Breach: that thedefendants refused to accept the said goods or pay the plaintiff for them.

Plea. That the said ship mentioned in the said agreement was meant and intended by the defendantto be the ship called the Peerless, which sailed from Bombay, to wit, in October; and that theplaintiff was not ready and willing, and did not offer to deliver to the defendants any bales of cottonwhich arrived by the last-mentioned ship, but instead thereof was only ready and willing, and offeredto deliver to the defendants 125 bales of Surat cotton which arrived by another and different ship,which was also called the Peerless, and which sailed from Bombay, to wit, in December.

Demurrer, and joinder therin. Milward, in support of the demurrer. The contract was for the sale ofa number of bales of cotton of a particular description, which the plaintiff was ready to deliver. Itis immaterial by what ship the cotton was to arrive, so that it was a ship called the Peerless. Thewords, "to arrive ex Peerless," only mean that if the vessel is lost on the voyage, the contract is tobe at an end. [Pollock, C.B. It would be a question for the jury whether both parties meant the sameship to be called the Peerless.] That would be so if the contract was for the sale of a ship called thePeerless; but it is for the sale of cotton on board a ship of that name. [Pollock, C.B. The defendantonly bought that cotton which was to arrive by a particular ship. It may as well be said, that if thereis a contract for the purchase of certain goods in a wharehouse A., that is satisfied by the deliveryof goods of the same description in wharehouse B.] In that case there would be goods in bothwharehouses; here, it does not appear that the plaintiff had any goods on board the other Peerless.[Martin, B. It is imposing on the defendant a different contract from that which he entered into.Pollock, C.B. It is like a contract for the purchase of wine coming from a particular estate in Spainor France, where there are two estates of the same name.] The defendant has no right to contradict,

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by parole evidence, a written contract good upon the face of it. He does not impute mispepresenta-tion or fraud, but only says he fancied the ship a different one. Intention is of no avail, unless statedat the time of contract. [Pollock, C.B. One vessel sailed in October, the other in December.] Thetime of sailing is no part of the contract.

Mellish (Cohen with him), in support of the plea. There is nothing on the face of the contract toshow that any particular ship called the Peerless was meant; but the moment it appears that two shipscalled the Peerless were about to sail from Bombay there is a latent ambiguity, and parol evidencemay be given for the purpose of showing that the defendant meant one Peerless and the plaintiffanother. That being so, there was no consensus ad item, and therefore no binding contract. He wasthen stopped by the Court.

Per Curiam. Judgment for the defendants.