Document Type

Article

Publication Title

Rutgers Law Journal

Publication Date

Winter 2003

Abstract

This article is a critique of two competing theories of contract interpretation, the textual approach, focusing exclusively on the parties' words, and the contextual approach, focusing on the circumstances surrounding the contract. Both approaches nominally aim to ascertain and give effect to the parties' original intent, but the means to this same end can differ dramatically. Each approach has strong theoretical and precedential support, and each has merit as an academic theory. An analysis of cases involving options or warrants drafted with missing or incomplete anti-dilution provisions illustrates the shortcomings of both theories. In practice, some courts are applying the principles of contract interpretation in such an inappropriate or incorrect fashion as to render the principles virtually meaningless. In all but one of the cases discussed herein, the courts used principles of contract interpretation to reach results that cannot be justified under the literal terms of such principles, and that do not further the underlying purpose of such principles. Instead, the courts used the principles primarily as a means to achieve some subjective judicial end, with the judge giving lip-service to the principles to justify the desired result. The inconsistent and insupportable results in this area of the law evidence, in a microcosm, the broader problems with judicial interpretation of contracts in general.

Part I of this article examines both the textual and contextual approaches to contract interpretation, analyzing the “plain meaning rule” indicated by the textual approach and the Restatement principles regarding the omission of essential contract terms indicated by the contextual approach.

Part II is an analysis of various courts' misapplication of the plain meaning rule and the Restatement principles in their respective interpretations of option or warrant agreements that lack, or contain incomplete, anti-dilution provisions. The Part examines six judicial opinions, in five of which the court supplied the missing anti-dilution provision by stretching the principles of contract interpretation beyond the point of reasonableness. The sixth court declined to supply an adjustment provision, but, in so doing, also misapplied the principle of contract interpretation it cited. These unsound decisions may conform to some judicial notion of common sense, but they are not supportable as a matter of stare decisis under the principles of contract interpretation relied on therein.

Part III is an analysis of the New York Court of Appeals decision in Reiss v. Financial Performance Corp. in which the court correctly applied a systematic, contextual approach to contract interpretation. The article concludes that each of the cases analyzed might have been decided differently, had the judge elected to use a different approach to contract interpretation or used the chosen approach correctly. The benefits of a system of stare decisis are compromised by the incorrect application of precedents. This conclusion threatens the stability of our system of freedom of contract and illustrates the need to rein in the inconsistency with which courts interpret all contracts, not just option and warrant agreements.

Share

COinS