Over 100 years ago, Learned Hand, while serving as a federal judge for the Southern District of New York, famously said that:
A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent. If, however, it were proved by twenty bishops that either party when he used the words intended something else than the usual meaning which the law imposes on them, he would still be held, unless there were mutual mistake or something else of the sort.1
This objective means of interpreting contracts is an ancient principle derived from the English common law.2 It is the approach of the vast majority of U.S. states (and a nuanced version of that approach, which takes into account both “textualism and contextualism … as tools to ascertain objective meaning of the language the parties have chosen to express their agreement,”3 appears to be the current interpretive process of the English courts). But New York and Delaware judges have recently issued even stronger statements about how seriously they take their states’ objectively-based, “contractarian” approach to the interpretation of written deal documents (and recent pronouncements from English judges suggest a similar commitment). If you have ever questioned the value of a well-drafted written agreement that accurately expresses the complete deal you made, these statements from a number of recent cases should remove any doubts.
As most deal professionals know, in the absence of ambiguity, and as long as the writing constitutes a “fully integrated” expression of the parties’ deal respecting the subject matter thereof,4 the written agreement generally is the deal and must be given its ordinary meaning in accordance with its express terms. And “extrinsic evidence may not be used to interpret the intent of the parties, vary the terms of the contract, or to create an ambiguity.”5 The obvious benefits of this approach is commercial certainty that a deal made in writing can be relied upon as being the complete deal, so that even strangers to the negotiations surrounding the execution of that agreement (including, importantly, a judge) can read and interpret it. The disadvantage of this approach for the imprudent, of course, is that unexpressed intent has no bearing on the meaning of the written agreement.
To the extent anyone is in need of a reminder of Delaware’s solid contractarian resolve (along with a recognition of New York’s continued objective approach to contract interpretation), Vice Chancellor Slights, in Zohar II 2005-1, Limited v. FSAR Holdings, Inc., C.A. No. 12946-VCS, 2017 WL 5956877 (Del Ch. Nov. 30, 2017), recently issued the following statement:
The words parties use to bind themselves together in a contractual relationship matter. This is especially so when sophisticated parties have engaged in extensive negotiations that produce a bespoke contract. And it is so even when one of those parties later swears that all involved in the relationship intended the contract to say something other than what is captured in its clear and unambiguous terms. This is black letter contract law—both in Delaware and in New York (the law that governs the contracts at issue in this case). Yet even the most vivid legal doctrine can, at times, be obscured by complex facts and impassioned pleas to the court’s sense of fairness in the midst of a potentially harsh result. That dynamic is very much at work in this case. Nevertheless, New York’s contract law, like Delaware’s, is not prone to outcome-driven variability. With this in mind, the result of this otherwise complicated case was cast the moment the ink was dry on the parties’ contracts.6
In a similar reinforcement of New York’s commitment to contractarian principles, the New York Court of Appeals recently noted, in Nomura Home Equity Loan, Inc., Series 2006—FM2 v. Nomura Credit & Capital, Inc., 2017 WL 6327110 (N.Y. Dec. 12, 2017), that:
It is fundamental that, “when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms” [and] … [c]ourts may not, through their interpretation of a contract, add or excise terms or distort the meaning of any particular words or phrases, thereby creating a new contract under the guise of interpreting the parties’ own agreements[.] … In accordance with these principles, courts must honor contractual provisions that limit liability or damages because those provisions represent the parties’ agreement on the allocation of the risk of economic loss in certain eventualities. … [T]he parties “may later regret their assumption of the risks of non-performance in this manner, but the courts let them lie on the bed they made.”7
And finally, a recent English Court of Appeal decision, Teva Pharma-Produtos Farmaceuticos LDA v. Astrazeneca-Produtos Farmaceuticos LAD,  EWCA Civ 2135 (14 Dec. 2017), re-emphasized the importance of not taking “contextualism” too far and permitting the judge to be “diverted from [a written agreement’s] clear and natural meaning by considerations of what he saw as commercial common sense.”8 Indeed, the court quoted from the UK Supreme Court decision of Arnold v. Britton,  UKSC 36, at , as follows:
[W]hile commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.9
It is less important to understand from these recent cases what the courts were determining the words of a specific written agreement meant, than it is to understand the principles these cases were employing across jurisdictions to determine that meaning. Whether it is the breadth of a release, the location and limit of a project, the completion of which was to trigger an earnout, the requirements for an effective “dispute notice” for an indemnification claim, whether a limited remedy provision was truly the “sole remedy” for all claims that may arise from an agreement, the validity of a proxy, or any number of other important terms being interpreted by these and similar recent cases, the courts are holding parties to the specific words they use in their written agreements. Good drafting by knowledgeable counsel, who is current on the caselaw that can impact the interpretation and enforceability of your deal documents, truly matters. But equally important is for deal professionals themselves to ensure that the objective deal terms evidenced by the written agreement match the subjective intent of the deal professionals executing or approving that written agreement. As was noted in an earlier post to Weil’s Global Private Equity Insights blog:
It is not what you intend by the words you use in a written agreement that determine their meaning; their meaning is determined regardless of any subjective intent, based on the meanings commonly ascribed to those words, particularly meanings ascribed in caselaw. Words truly matter! Deal professionals must review contracts with this premise in mind; and their counsel must continue to ensure, as this author has previously entreated, that their drafting is “responsive to the reported decisions of the courts that could ultimately be required to interpret that contract.” The former requires actual review of the written agreements by the deal professional (independent of any legal review), and the latter requires counsel that stays current on important drafting-related caselaw so that they are in a better position to be able to accurately “predict” how a court will interpret the words used in those agreements.10
As evidenced by Learned Hand’s over 100 year-old observation, none of this is new. Indeed, in 1897, in an essay published in the Harvard Law Review, Oliver Wendell Holmes, Jr. observed that “the making of a contract depends … not on the parties having meant the same thing but on their having said the same thing.”11 But the ushering in of a new year is as good an opportunity as any to urge renewed focus, by both deal professionals and their counsel, on both the benefits and perils of the common law’s objective approach to the interpretation of written agreements.
- Hotchkiss v. National City Bank, 200 F. 287, 293 (S.D.N.Y. 1911).↵
- See generally, Joseph M. Perillo, The Origins of the Objective Theory of Contract Formation and Interpretation, 69 Fordham L. Rev. 427 (2000); see also Glenn West, Private Equity 101 — The Need to Contractually “Box” Identified Risk, Weil Insights, Weil’s Global Private Equity Watch, December 28, 2015.↵
- Wood v. Capita Insurance Services Limited  UKSC 24, at .↵
- See Kanno v. Marwit Capital Partners II, LP, G052348 (Cal. Ct. App., 4th Dist., 3rd Div. Dec. 22, 2017) (oral agreement to redeem stock enforceable despite the existence of three written agreements regarding business acquisition purporting to all be fully integrated, because oral agreement did not contradict written agreements and subject matter was independent—and the fact that there were three written agreements, each purporting to be fully integrated but not referring to the other agreements, which obviously contained terms not integrated in the other independent agreements, effectively rebutted the presumption that the integration clauses were definitive).↵
- Exelon Generation Acquisitions, LLC v. Deere & Co., No. 28, 2017 (Del. Dec. 18, 2017).↵
- Zohar II 2005-1, Limited v. FSAR Holdings, Inc., C.A. No. 12946-VCS, 2017 WL 5956877, at *1 (Del Ch. Nov. 30, 2017); see also The HC Companies, Inc. v. Meyers Industries, Inc., C.A. No. 12671-VCS (Del. Ch. Dec. 7, 2017) (“This may seem like a harsh result, but it is the result dictated by what these two sophisticated parties bargained for. To reiterate, Delaware courts enforce bad deals the same as good deals. The Court cannot rewrite the contracts, and it cannot ignore the plain terms of the contracts.”).↵
- Nomura Home Equity Loan, Inc., Series 2006—FM2 v. Nomura Credit & Capital, Inc., 2017 WL 6327110, at *3 (N.Y. Dec. 12, 2017) (internal citations omitted).↵
- Teva Pharma-Produtos Farmaceuticos LDA v. Astrazeneca-Produtos Farmaceuticos LAD,  EWCA Civ 2135, at  (14 Dec. 2017).↵
- Id. at .↵
- Glenn West, Contract Drafting 101—It Doesn’t Matter What You Actually Meant by What You Said; It Only Matters What is Determined to be Meant by What You Actually Said, Weil Insights, Weil’s Global Private Equity Watch, September 19, 2016.↵
- Oliver Wendell Holmes, Jr., The Path of the Law, 10 Harv. L. Rev. 457, 464 (1897); see also, Perillo, supra note 2, at 476.↵