ContractsProf Blog

Editor: D. A. Jeremy Telman
Valparaiso Univ. Law School

Friday, February 21, 2014

KCON 9: Friday Afternoon Session: Contract Interpretation

BayernShawn Bayern presented his work in progress on Meta-contextualist Contract Interpretation.  Although Professor Bayern began by suggesting that, non-withstanding his previous presentations at this conference in which he denounced formalism and defended contextualist approaches, he really thinks that if asked in any given context, which interpretive regime should apply to a particular transaction, his answer is, "it depends."  In short, the answer to the question of textualism vs. contextualism is contextual.  Thus, Professor Bayern is a meta-contextualist.  Parties should be able to determine what interpretive regime will apply to them.  It might well be textualist, but (ah ha!), the text of the parties' agreement should not be dispositive in determining that issue.  Rather, courts should look to the context informing that agreement.   Happily, this seems to be what courts do.  If the parties make clear that they intend to be bound by their text, then courts should take a textual approach.  Otherwise, they should not just rely on the text, regardless how clear it is, but should review the text in the context of the negotiations.  After all, a contract negotiated at gunpoint should not be binding regardless of its clarity.

Gerhart_peterPeter Gerhart then presented his paper co-authored with Juliet Kostritsky, Efficient Contextualism.  The main point of the paper, like Professor Bayern's, is that the distinction between contextual and textual approaches is not particularly useful.  Our real goal is to get at the parties' obligations, and whether we do that with text or context does not really matter.  Both approaches, if pursued one-sidedly, have significant drawbacks.  Textualism can lead to literalism and absurd results.  Contextualism, if unconstrained, can be terribly inefficient and capricious.

Instead Professor Gerhart proposes "efficient contextualism" through determinate reasoning, which requires each party to identify the facts that must be true in order for their interpretation to succeed.  While Professor Bayern thinks that the methodology appropriate to each contract must be determined with specific reference to the context in which that contract was negotiated, Professor Gerhard suggests that there can be a uniform approach to interpretation that would in fact be what unites the law of contracts.  He used the facts of Jacob & Youngs v. Kent to illustrate.  What does "use Reading Pipe" mean in the context of that agreement and what result is surplus maximizing?  The answer depends on what the parties knew or reasonably should have known and intended at the time of the agreement.  Determinate reasoning should promote efficiency by narrowing the issues in dispute which can then be settled either through motion practice or by a quick trial to resolve the few factual disputes on which the parties' differing contractual interpretations hinge.

Amir14Finally, Amir Pichhadze (pictured left in an image from the Yazigallery), an SJD candidate at the University of Michigan whose recent successes have garnered a lot of attention, presented his paper on Transfer Pricing & Contractual Interpretation.  The subject matter of his paper is complex, so I will post an abstract that he has shared with me:

As the OECD’s Transfer Pricing Guidelines (“TPG”) and US Regulations recognize, the contractual terms of a controlled transaction are a ‘relevant circumstance’ (i.e. ‘comparability factor’) that ought to be taken into account when conducting the transfer pricing comparability analysis.

The purpose of this paper is to identify that domestic contractual interpretation law has a critical role in this comparability analysis. Firstly, it makes it possible to ascertain the substance of the terms, as they were intended by the parties. This is essential in order to properly recognized and give effect to the transaction as it was structured by the parties. Second, the parties’ contractual intentions make it possible to determine whether the controlled transaction’s surrounding circumstances are linked to the transfer price, which would make them a ‘relevant circumstance’ in the comparability analysis.

In Canada v. GlaxoSmithKline Inc. (“Glaxo case”), for example, if Glaxo Canada intended in the controlled transaction [which was a Supply Agreement with Adechsa, an associated foreign company] to bundle payments for goods received under the expressed terms of the controlled transaction as well as for services received from its parent company [Glaxo Group, which is located in the UK] under a separate Licence Agreement, then that Licence Agreement would have to be taken into account as a ‘relevant circumstance’ because it is linked to (i.e. it has an impact on) the transfer price.

 Part 1 of this paper identifies that in order to properly ascertain Glaxo Canada’s contractual intentions, in the Supply Agreement, the courts had to interpret that agreement by applying the relevant principles from Canada’s contractual interpretation law. By failing to do so, the courts have risked making an error of law in their analysis. The extent of their error will be explored in part 2 of this paper. The analysis of the courts’ approach in this case ought to serve an important function. It ought to alert courts in other countries to recognize the role that their domestic contractual interpretation law has in the transfer pricing comparability analysis, so that they avoid making the same errors as those made by the Canadian courts.

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