False dichotomies in commercial contract interpretation

Abstract

PurposeThe purpose of this paper is to better understand how commercial contracts are interpreted and the level of control that contracting parties have over the judicial interpretation of their contracts.Design/methodology/approachThe paper approaches the subject of commercial contract interpretation through an analysis of four dichotomies debated in legal scholarship and found in judicial decisions. The four dichotomies are formalism versus realism, literalism versus contextualism, facilitation versus regulation, and rules versus standards.FindingsThe main finding of the paper is that both poles of each of the dichotomies play important roles in the interpretation and enforcement of commercial contracts. For example, contract interpretation characterized by a high degree of formalism looks to the four‐corners of the contract for interpretive answers. In turn, some courts make use of external factors – such as distributive justice or public policy concerns in interpreting contracts.Research limitations/implicationsOne of the research implications of the paper is the need for a more in‐depth analysis of how contracting parties may agree on how their contracts are to be interpreted and whether courts should be obligated to enforce party‐mandated rules of interpretation.Practical implicationsThe practical implication of understanding the means and methods of contract interpretation is that it leads to a better understanding of commercial contracts in transborder transactions.Originality/valueThe value of this research lies upon the fundamental premise that the same philosophies and theories of interpretation found in most legal systems are replicated in the area of international commercial contracting.