Unit 6: Interpretation of Contracts

Unit 6: Interpretation of Contracts

“Interpretation – Introduction … The Twin Towers … From Fried Frozen Foods to Obama Care … Painting to Paintings, and Conclusion”
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Summaries

  • Unit 6: Interpretation of Contracts > Interpretation - Introduction > Interpretation - Part 1
  • Unit 6: Interpretation of Contracts > Interpretation - Introduction > Interpretation - Part 2
  • Unit 6: Interpretation of Contracts > The Twin Towers > Interpretation - Part 3c - Twin Towers (Cont'd)
  • Unit 6: Interpretation of Contracts > From Fried Frozen Foods to ObamaCare > Fried Frozen Foods - Part 2
  • Unit 6: Interpretation of Contracts > From Fried Frozen Foods to ObamaCare > Interpretation - Part 5 - Affordable Care Act
  • Unit 6: Interpretation of Contracts > Painting to Paintings, and Conclusion > Interpretation - Part 6 - Painters and Contractors
  • Unit 6: Interpretation of Contracts > Painting to Paintings, and Conclusion > Part 7 - Prince Sergey and Rembrandt
  • Unit 6: Interpretation of Contracts > Painting to Paintings, and Conclusion > Prince Sergey and Rembrandt - Part 2
  • Unit 6: Interpretation of Contracts > Painting to Paintings, and Conclusion > Interpretation - Part 8 - Conclusion

Unit 6: Interpretation of Contracts > Interpretation – Introduction > Interpretation – Part 1

  • CHARLES FRIED: We have been talking about what has to happen to have a contract.
  • We’ve talked about whether the parties really have made a promise, whether they meant to have a contract, and we’ve talked about the consequences of breaking a contract.
  • Now I want to talk about something a little bit different.
  • That is, assuming you’ve got a contract, what does that contract mean? What is the meaning of the contract that you have? How does a court interpret that contract when disputes arise? Interpretation, of course, is everywhere.
  • You have a conversation with a friend, well you interpret your friend’s words and she interprets yours.
  • In any case, if she does not quite understand, she’ll just say, “What do you mean by that? Explain your words for me.
  • You say, “Let me put it another way, I’ll tell you what I meant.

Unit 6: Interpretation of Contracts > Interpretation – Introduction > Interpretation – Part 2

  • Now, turning back to our topic, assuming we’ve got a contract, what does it mean? We are particularly going to be talking about written contracts, because written contracts pose, in many ways, the most difficult and interesting questions.
  • Also they tend to be the most important and serious contracts, but I don’t want you to make a mistake here.
  • A contract does not have to be in writing in order to be binding.
  • You’ve seen, off and on, lots of examples of contracts where nothing is in writing, or certainly nothing is in writing which both parties have signed.
  • Remember Texaco and Pennzoil, which ended up costing Texaco something like $11 billion in damages? Well that had to do with a contract, and the court decided that there really was a contract there.
  • The parties had written lots of things to each other, off and on, and had had meetings and phone calls among themselves in the end, the contract, which the court said existed, was not on any one piece of paper, and certainly not on any one piece of paper which both have signed.
  • So you don’t need that, and you have some very big and very important contracts, which are just spoken.
  • I’m not going to be focusing on those, because, in a way, the spoken contract is a bit like the conversation.
  • There’s a rule in the United States that contracts for the sale of land, or for the sale of goods, which are worth more than $500, have to have some kind of writing.
  • One of them is that a lot of people think that unless a contract, a promise, has been put in writing, and maybe even signed, it’s not a contract.
  • When we talked about the PepsiCo case, one of the worries was, did they really mean it to be a contract? Remember the case of the $300 silver watch.
  • One reason people think that the invitation to dinner is not a contract is because it wasn’t in writing.
  • We’re inclined to think that kind of informal, social arrangement, though it is a promise, and though it caused one of the parties considerable grief, was not something that was meant to be a contract.
  • So another reason to put a contract in writing, is that it’s a sign that you intend to create legal relations.

Unit 6: Interpretation of Contracts > The Twin Towers > Interpretation – Part 3c – Twin Towers (Cont’d)

  • The court said that that language clearly means that what happened on 9/11, those two planes as part of a coordinated attack by the same group, bringing down both towers is, in terms of the language of the contract, “one occurrence.
  • Some of the insurance contracts didn’t include a definition of occurrence.
  • So some of them would have insured, let’s say, half a billion per occurrence, leaving the word occurrence undefined.
  • What is the court to do then? Was it one occurrence or two? Should the insurance company be on the hook for half a billion or for two times that? Here’s what the court said in that circumstance.
  • The court said that the word “occurrence” is sufficiently broad, standing alone, and is therefore susceptible to several interpretations.
  • The jury had to decide- because the judge couldn’t decide it as a matter of law- a jury had to decide whether the parties to the contract meant the term occurrence to cover the coordinated attack by two planes, 18 minutes apart, on the two towers, or whether each one of them is a separate occurrence.
  • The jury concluded on some of the policies that the attack was to be treated as two occurrences.
  • So how did they decide that in this case? Well, usually the reason to put in this per occurrence language is to limit the number of deductibles.
  • Insurance companies will put in the occurrence language so that, as I told you, every time you get a ding in a parking lot, you’re not going to be able to run to the company and have it fixed.
  • The per occurrence language is there to protect the insurance company against being swamped by a lot of smaller claims, and to protect the owner from having a genuine large claim, artificially broken down into a lot of small claims.
  • So you have to have a reasonable definition of occurrence, both to protect the insurance company and to make sure that the homeowner or the car owner gets the protection he or she thinks she’s contracting for.
  • Why have this very, very broad definition of occurrence, which we had in the insurance contract, which my client had? Why put that in? Who put that in? That phrase, that very broad phrase.
  • The deductible is per occurrence and defined occurrence very broadly, as we have seen.
  • Because the term occurrence, which defines the deductible, the floor per occurrence, also defines the event to which the ceiling applies.
  • If 9/11 was one occurrence, then they’d only get $3.5 billion, because that’s all they insured for.
  • If it was two occurrences, they’d get $3.5 billion for each occurrence, each plane crash, each tower, and that’s $7 billion, and that’s the worth of the property.

Unit 6: Interpretation of Contracts > From Fried Frozen Foods to ObamaCare > Fried Frozen Foods – Part 2

  • The investors got a pay out, and also, they got a chance to participate in any really big improvement in the price of the stock, the value of the company.
  • There was no improvement in the value of the shares, even though a new share was worth exactly five times the value of an old share.
  • Now it’s worth $20. But that doesn’t mean that the company has become any more valuable since the number of the new shares is exactly one-fifth of the old ones.
  • If the company had wanted to talk about the underlying value of the corporation, it could have said so.
  • If they had wanted to have the value depend on the value of the company measured by the old shares, it could have said so, but it didn’t.
  • The company and the judge agreed, says, yes, but the deal has a context.
  • The purpose of the deal was for the investors to participate in the improvement in the value of the company, and the company has not improved in value.

Unit 6: Interpretation of Contracts > From Fried Frozen Foods to ObamaCare > Interpretation – Part 5 – Affordable Care Act

  • Looked at another way in context, it survives and survived and can do its job.
  • Everybody agreed that if the phrase “An exchange established by the State” meant that certain federal tax benefits were available only in exchanges established by the States, rather than also for those established by the federal government in a state or for a state, then the effect in very short order on the whole many hundreds of pages scheme of revised health insurance in the country would deteriorate and go into what was called a death spiral.
  • So the question was whether the Supreme Court would interpret the phrase “An exchange established by the State” literally, plain meaning, or take into account the broader context.
  • So when deciding whether the language is plain, we must read the words in their context and with a view to their place in the overall statutory scheme.
  • Just like our contracts, the words in context in view of the whole purpose of the scheme.
  • “While the meaning of the phrase ‘An exchange established by the State’ may seem plain when viewed in isolation, such a reading turns out to be untenable in light of the statute as a whole.
  • ” “In this instance, the context and structure of the act compel us to depart from what would otherwise be the most natural reading of the pertinent statutory phrase,” “Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them.
  • If at all possible, we must interpret the act in a way that is consistent with the former and avoids the latter.
  • The phrase can fairly be read consistent with what we see as Congress’s plan, and that is the reading we adopt.
  • ” The idea is that when the court decides what the statute means, it has to work not just with an individual phrase, but with that phrase in the context of the whole statute, what the legislature was trying to accomplish.
  • Attributing a purpose to just two people, to a contract, two parties to a contract, is an intellectual undertaking of a perfectly usual sort.
  • So consider again that contract between the investors and Fried Foods.
  • Take the attribution of a purpose to the whole contract between the investors and the company.
  • Standing alone, the phrase $7.00 a share as a trigger price seems about as clear cut and unambiguous as you can get like “established by the State” in the Affordable Care Act.
  • Put it in context, the corporation and the investors had something in mind.
  • So as in every case of human language, every case of a text in which human beings put down their purpose, we have to look at it and try to figure out what their purpose might be.
  • What did the court do? Did they just read the words “$7.00 is the trigger price” and $20 is way above that? No! What it did was interpret the contract as a whole.
  • They looked at the whole agreement the parties had made, figured out what the whole agreement meant, what the whole purpose of it was, just like the Supreme Court in the Obamacare case, and then interpreted that one phrase, $7.00 trigger price, in the context of the purpose as a whole.
  • In that context, the trigger price after the reverse stock split is now $35. And the shares had come nowhere near that.

Unit 6: Interpretation of Contracts > Painting to Paintings, and Conclusion > Interpretation – Part 6 – Painters and Contractors

  • He hires a painting contractor to do the interior painting.
  • Great, easy, but $2 per square foot what? Is it $2 per square foot covered with paint, or is it something else? How many different ways can you see to charge for painting this room? In this case, it turns out that in the community where both the painting contractor and the developer works, it is well understood that what the painter charges for is measured from corner to corner and ceiling to floor.
  • Would the developer have to pay even if the painting contractor didn’t paint over those empty spaces? Well, the custom was exactly that.
  • You don’t subtract for the area of the windows, and the doors, and the door frames, and so on, even if they are not painted.
  • It’s much easier just to slap paint on a whole wall than in having to go around the windows and around the entrance ways.
  • Those openings, those empty places may save some money on paint, but it’s a lot more time and a lot more work.
  • If you just read the words, $2 per square foot, you might say that doesn’t mean that the painter gets paid for what she doesn’t paint.

Unit 6: Interpretation of Contracts > Painting to Paintings, and Conclusion > Part 7 – Prince Sergey and Rembrandt

  • Duveen is a well-known dealer in valuable paintings and Lorenzo is a rich art collector, acquiring paintings for his own pleasure, and for the glory of giving them to great museums in his name.
  • Duveen knows the kinds of things Lorenzo particularly likes.
  • Lorenzo relies on Duveen’s knowledge and contacts to hear about great treasures that may be available, and also to separate the genuine works from the many fakes that abound in the art market.
  • Duveen tells Lorenzo that he thinks he knows where these two paintings are, and he can get them for him if Lorenzo will pay Duveen $50,000 for each.
  • Joseph Duveen undertakes to obtain portraits of X and of Y by Rembrandt.
  • Lorenzo, M., undertakes to buy said portraits from Duveen for $50,000 each.
  • When Duveen finds out what happened- in that world, nothing remains secret very long- he’s furious and sues Lorenzo for breach of contract.

Unit 6: Interpretation of Contracts > Painting to Paintings, and Conclusion > Prince Sergey and Rembrandt – Part 2

  • I’ll sell them to you for $60,000 each and then buy them back from you for $50,000 like I promised.
  • Interpreting a contract, as in the insurance contract on the Twin Towers or Fried Foods required us not to understand just the individual words, but the point of the transaction as a whole.
  • As the Chief Justice said, “What was the point of the whole piece of legislation?” And from that starting point of mutual understanding, trust, we can go on to figure out how to understand the meaning of the particular words used.
  • We can say it’s a matter of interpreting the whole contract.
  • Every contract has an implicit agreement by the parties to carry out their obligations in good faith.
  • In the New York case on which I based my story, the court said that every promise implies a further unspoken promise not to do anything that interferes with the contract.
  • Every contract is a cooperative endeavor and doesn’t make sense except on that premise.
  • That doesn’t mean that a contracting party has to go out of its way to help the other side do what it is supposed to do.
  • Lorenzo didn’t have to seek out the owner of the paintings and persuade him to sell them to Duveen.
  • Except here, we are interpreting a clause, the duty of good faith, that isn’t even in the contract.
  • We are interpreting a clause that is itself interpreted into the contract.
  • In all of these situations, there are the words themselves, the twin towers insurance contract, the painting contract, the health care statute, and the background assumptions against which they are interpreted.
  • As in the painting contract, what is the customary background against which to understand such seemingly obvious terms as $2 a square foot? That’s the job of interpretation.
  • For a judge or a lawyer, it may require the interpreter to learn about all sorts of contexts and situations, insurance deals, health care, painting contracts, the art market.

Unit 6: Interpretation of Contracts > Painting to Paintings, and Conclusion > Interpretation – Part 8 – Conclusion

  • Remember Rose of Aberlone, the pregnant cow, Hiram Walker sold her to Sherwood, a banker and hobby farmer for $80, which was a fair price, if all she was good for was beef.
  • Sherwood and Walker thought they had been dealing with a beef cow, and she was a breeder.
  • How did you interpret that case? And remember the two ships Peerless? There, too, there was no deal, because the minds of the buyer and seller had not met on what was essential to the deal.
  • Was this a sale of cotton to arrive on a particular ship, or was it just a contract for the purchase and sale of a quantity of Indian cotton? Remember, there were two ships named Peerless traveling between Bombay and Liverpool.
  • The buyer claimed that he intended the ship leaving Bombay in October, and the seller thought the deal was for cotton arriving on a ship that left in December.
  • If the contract was just about cotton to arrive by a certain date, and it was late, whoever lost out because the shift in prices could sue for the difference in price.
  • As the court ruled, the parties thought that this was a deal about cotton coming on a particular ship, like Rose, and they had two different ships in mind, what looked like an agreement was not an agreement at all.
  • Now whether it was a deal about a quantity of cotton, or a deal about cotton coming on a particular ship, was a matter of interpretation.
  • The court said that the purpose of the contract was to view the procession, and if the procession was canceled, the joint purpose of the parties had been frustrated, and the deal would be called off.
  • Remember the shipping company that wanted out of the rate it agreed on to carry motor oil from Beaumont, Texas to Bombay, now Mumbai, India.
  • At the time, the shipping company took the cargo on, it was expected that it would move through the Suez Canal.
  • Before the ship got there, the canal was closed because of the Six Day War between Israel and its Arab neighbors.
  • The purpose of the contract against the background of understandings and customs in the shipping business, just like my example of the painting contractor.

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