Risk Averse Contract Interpretation
25 Pages Posted: 22 Jun 2020 Last revised: 23 Jun 2020
Date Written: May 8, 2020
Boilerplate reveals the inadequacies of a certain stylized approach to contract interpretation. This essay argues, however, that boilerplate does not require its own, conceptually unique interpretive apparatus. The methods we use to read boilerplate can be derived from principles that inform contract interpretation in general. We can treat it “normally” for two reasons. First, contract interpretation should always take into account factors that scholars deem especially important in the context of boilerplate. If we understand contract interpretation always to incorporate external references of reasonable meaning, boilerplate does not require its own interpretive regime. More specifically, boilerplate only functions if we take into account the standard market terms that it ordinarily accompanies. But courts should always take standard market terms into account as a benchmark for interpreting ambiguous contract language. Properly applied, an externally-sensitive methodology accounts for third-party effects of boilerplate interpretation without requiring a specialized procedure.
The emphasis here on external references departs from both the contextual and formalist approaches that have dominated the debate on contract interpretation. Participants in the debate, but especially contextualists, tend to assume that the relevant context is largely specific to the parties, such that contextualization is substantially the same as tailored gap-filling. But the relevant contextual facts are usually not specific to the parties, rather they describe the market in which they operate. The second mistake is committed mostly by formalists. One of their compelling arguments sounds in judicial humility. This essay argues that, while some parties are more risk-averse than others, risk aversion is indeed the appropriate stance of courts in selecting their interpretative methodology. This risk aversion argues in favor of judges discounting both their own untethered understanding of contract language and their judgments about the particular intentions of contracting parties in favor of the third, often overlooked leg of interpretation—social determinants of contract terms. Just as courts are better at filling in price than quantity, courts are better at ascertaining market norms and reading contract terms in that context than they are at attempting to reconstruct the particular bargain that any two contracting parties may have struck. Risk aversion thus cuts in favor of assuming contracts are market-conforming unless there is a clear indication that the parties chose to meaningfully depart from the market standard.
This approach delivers especially important benefits in the context of boilerplate. Where terms are used en masse, they have consequences that no single private user has reason to assign substantial weight. However, a court that interprets a term in a fashion that ordinarily takes into account that it governs many similarly—even if not identically worded—deals cannot but take into account the reasonableness of the interpretation across the market. A court interpreting boilerplate should favor the interpretation that minimizes externalities both to other users of the given boilerplate and to other concentrated groups with a stake in the boilerplate. Systematically interpreting boilerplate in this way will make it more costly for bilateral sets of contracting parties to transact on anti-social terms.
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