The Interpretation of Commercial Contracts: An Empirical Study

Abstract

The theoretical debate over contract interpretation revolves over one central question: what is the preference of most contracting parties for contract interpretation rules. Textualist theorists believe that most parties prefer textualist rules of interpretation, under which the contract interpreter must normally consider only the contract's written text. In contrast, contextualist theorists believe that most parties prefer contextualist rules of interpretation, under which the interpreter should consider all relevant contextual evidence to interpret the contract, beyond the written text. Despite the widespread debate over contract interpretation, there has been very little empirical research on this topic. This article aims to fill this research gap by empirically analyzing actual interpretation clauses of commercial contracts. Examining 1,521 commercial contracts that have been disclosed to the Securities and Exchange Commission, this article finds that a clear majority (75.28%) of contracts include a textualist “merger clause”, which typically triggers a set of textualist rules of contract interpretation. In addition, the results of this study indicate that the merger clauses, included in the sample contracts, are not mere arbitrary boilerplates, which were randomly added to the contracts. More specifically, the study found a significant statistical association between the contractual existence of a variety of textualist contractual clauses, other than a merger clause, and the existence of the textualist merger clause. The theoretical and practical implications of these results are discussed.