Interpretation of Contracts: U.S. Context

In my previous post, the interpretation of commercial contract was outlined in light of the decisions of the supreme court of India. Interestingly Steven J Burton in his latest book: Elements of Contract Interpretation discusses the effective tools of contract interpretation in the United States. The author points out three different theories of contract interpretation generally followed in the U.S. The theories are discussed as under:

1. Literalism
This theory is similar to the ‘ordinary meaning test’ in the Indian context. It posits that ambiguous words in the contract are to be assigned their literal meaning i.e. their dictionary meanings. This theory can be criticised on the ground that generally dictionary would assign two or more meanings to a given word; in that case the context has to be perused into inorder to determine the correct literal meaning. Literalism expressly disregards the use of the context and hence, there seems to be an inherent fallacy in this theory.

2. Objectivism
This theory posits that in determining an ambiguous clause in a contract the entire contract should be read as a whole. Under this theory due regard is also given to the relation between the parties, the circumstances prevailing at the time of conclusion of the contract and the entire purpose of the contract. The following observation of the court of appeals in Kass v. Kass is apposite here:

“.......in deciding whether an agreement is ambiguous courts should examine the entire contract and consider the relation of the parties and the circumstances under which it was executed. Particular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties manifested thereby. Form should not prevail over substance and a sensible meaning should be sought.”

3. Subjectivism
This theory is akin to the “subjective intent” test under most international commercial agreements such as the Convention on the International Sale of Goods (CISG). This element of contractual interpretation posits that the subjective intent of a party should be taken into consideration if the other party or a reasonable man under the same circumstances could not have been unaware of that intent.

Conclusion:
On a thorough analysis Steve finds “objectivism” as the most preferred tool of contractual interpretation.