E. Allan Farnsworth [*]
I have been asked to address the matters covered in two of the remarkable chapters produced by the GTCI dealing with preambles and interpretation clauses. Because these two chapters run well over one hundred printed pages, I must be selective. In doing so I have taken two tips from the chapter on interpretation clauses.
First, according to that chapter's opening paragraph, "True to its objectives, the GTCl looked at interpretation clauses ... from the perspective of international contracts draftsmen". My discussion will therefore focus on draftsmen rather than litigators, judges, or arbitrators. For the draftsman the question is not whether a particular clause is or is not enforceable under the law of a particular jurisdiction; the question is rather whether the clause has a sufficient chance of being held enforceable under the law of some jurisdiction whose law might turn out to be the governing law to merit its inclusion in the contract.
Second, the conclusion of that chapter's first section notes that one reason for "the standardization of interpretation clauses may be related to the influence of Anglo-American drafting techniques for international contracts", techniques that are sometimes "considered as the state of the art of contract drafting". My perspective will therefore be that of a draftsman who considers that a question may arise as to the [page 271] enforceability of the clause under the law of some common law jurisdiction. For obvious reasons, my emphasis will be on the law of the United States.
I will suppose that the draftsman's efforts are on behalf of a typical large multinational corporation interested in substantial undertakings that may last for a period of years, during which the draftsman as well as many of the other individuals involved in negotiating the transaction may no longer be connected with the corporation and may not even be available to testify about the process of negotiation and drafting. I will therefore assume that it is in the interest of the corporation, as it is in the interest of any large bureaucratic organization to have its contracts governed by a written document that it can keep in its files and that is as far as possible the exclusive source of the obligations of the parties to the contract. The corporation expects its draftsman to do all that can be done to enhance the integrity of the writing. In particular the corporation to exclude evidence of any negotiations relating to the contract. I shall refer to evidence of statements of all kinds, oral or written, that are not contained in the writing itself as extrinsic evidence.
At least in the perception of a common lawyer, the draftsman in this situation has two distinct goals. To begin with, the draftsman wants to bar the use of extrinsic evidence when it is offered for the purpose of making additions to or modifications of what is in the writing. Furthermore, the draftsman wants to bar extrinsic evidence when it is offered for the purpose of interpreting what is in the writing. Because this distinction between adding to or modifying the language that is in the writing and interpreting that language is essential to an understanding to the Anglo-American law in this area, the rest of my study is divided into two parts, one dealing with each of those topics.
Barring Use of Extrinsic Evidence to Add or Modify: Entire Agreement Clauses and N-O-M Clauses
The problem of barring extrinsic evidence to add to or modify the writing has two aspects. The first aspect concerns extrinsic evidence of statements prior to the time of the making of the contract. This aspect is governed by the infamous and misleadingly-named parol evidence rule. The second aspect concerns extrinsic evidence of statements subsequent to the time of the making of the contract. The parol evidence rule has nothing to say as to this. [page 272]
I turn first to extrinsic evidence of statements prior to the time of the making of the contract and to the parol evidence rule, of which an American scholar once wrote: " Few things are darker than this, or fuller of subtle difficulties". The chapter on interpretation clauses contains an excellent introduction to the rule, but for my purposes it can be greatly simplified. Suppose that negotiators have made oral or written statements inconsistent with the writing. Can such statements be used in support of an argument for additions to or modifications of the writing? According to the parol evidence rule, if a contract is completely integrated in a writing, the writing then becomes the exclusive statement of the terms of the contract and prior oral or written statements cannot be used to add to or modify the writing. I called the rule, misleadingly-named " because it bars not only" parol " (literally oral) statements but also written ones.
The most satisfactory explanation of the rule is that the parties are free when they make their contract to agree that nothing that went before will be binding on them, and if there such an agreement, either explicit or implicit, their contract is taken to be completely integrated in their writing -- in other words that their writing contains their entire agreement. Thus the draftsman can make sure that the contract is completely integrated simply by saying so in what is commonly called in international transactions an "entire agreement" clause and in American parlance a "merger" or "integration" clause. Sample clauses, reciting that the writing contains the entire agreement of the parties or is the exclusive statement of their agreement can be found in the work on interpretation clauses. The draftsman who includes such a clause in an international commercial contract can be confident that it will be respected by any judge or arbitrator applying a common law system.
A few words of caution with respect to entire agreement clauses are in order here. First, it is common to put such a clause near the end of an international contract, in the company perhaps of a choice of law provision and an arbitration clause. As the work on preambles warns, since an entire agreement clause is an operative provision, it is not desirable to put it in a preamble. Second, because an entire agreement clause will bar written as well as oral statements, if there are prior agreements between the parties involving the same subject matter that are to be survive in some way the later agreement, this should be made clear in a related provision. [page 273]
Note that since such a clause only operates to exclude extrinsic evidence. It will not exclude a term implied in law -- such as one imposing an obligation of good faith -- for which no extrinsic evidence is necessary.
There are some situations in which an entire agreement clause will not, by itself, exclude extrinsic evidence. An entire agreement clause will not exclude extrinsic evidence of a misrepresentation. This is because misrepresentation is regarded as striking at the very validity of the contract itself, including the entire agreement clause. The draftsman who wants to exclude extrinsic evidence for this purpose might consider a provision reciting that the other party has made a "full investigation" of the transaction and is "not relying on any statement or representation" of the party for whom the draftsman is acting. Such a provision has been upheld in a few American jurisdictions including New York. Nor will an entire agreement clause exclude evidence of trade usage. An express term of the contract will, however, prevail over trade usage  and a draftsman might consider including a general provision to the effect that the writing shall not be supplemented by any usage or custom. There is some authority suggesting that such a broad clause would be upheld  Whether it is worthwhile to include language of questionable efficacy dealing with misrepresentations or with trade usage will depend on the circumstances.
What is clear beyond doubt is that an entire agreement clause, which speaks as of the time the contract is made, will not bar extrinsic evidence of statements subsequent to the time the contract is made. Suppose that technicians responsible for performance under the contract make oral statements that are not consistent with the writing. Can such statements be used in support of an argument for modification? To exclude them a no-oral-agreement clause is needed, reciting that no modification of the contract is valid unless in writing. Examples are given in the work on interpretation clauses. Are such clauses effective? The Vienna Sales Convention says that they are, and the American Uniform Commercial Code says the same. But beyond that the law is uncertain. Some American states adhere to the traditional view that whatever the parties write today cannot limit their power to make mutual agreements in the future, including oral mutual agreements. This may pose problems for the litigator, the judge, or the arbitrator, but not for the draftsman. The chance that a no-oral-modification clause will be upheld is clearly sufficient to merit the inclusion of such a clause. [page 274]
Because modification is a concept distinct from waiver, the draftsman should include an anti-waiver clause in addition to a no-oral-modification clause. Although, according to the chapter on interpretation clauses, English courts generally uphold such clauses, American courts have not always done so. Nevertheless, such clauses have a sufficient chance of success, even in the United States, to merit inclusion.
Those interested in trendy jargon, so far ignored by the GTCI, may be interested in the term "zipper clause" (clause fermeture à glissiere ?). The term describes a provision that attempts to enhance the integrity of the writing by containing both an entire agreement clause and a no-oral-modification clause, so that the provision "zips up" the writing -- shutting out extrinsic evidence concerning matters both prior to and subsequent to the making of the contract.
Barring Use of Extrinsic Evidence to Interpret: Plain Meaning Rules
The draftsman's second goal is to bar the use of extrinsic evidence that is offered for the purpose of interpreting what is in the writing, as distinguished from adding to or modifying what is in the writing. Here we encounter rules known as plain meaning rules. Whether such a rule should be regarded as a branch of the parol evidence rule or an entirely separate and distinct rule is a matter of taste, but in order to emphasize the difference between the draftsman's two goals, I will treat it here as separate and distinct.
If the issue is one of interpretation of language in a completely integrated contract, common law courts generally agree that they may consider extrinsic evidence as to matters prior to the making of the contract if the language is not sufficiently clear -- if the meaning of the language is not plain. Thus it is commonly said that the court may look to such extrinsic evidence if the language is "ambiguous", by which the court means that the language is susceptible to two reasonable meanings. This, then, requires a two-stage process. In the first stage, the court must decide whether or not the language is ambiguous. In the second stage, the court (or perhaps a jury) must interpret the language. If in the first stage the court has decided that the language is not ambiguous, it will not consider extrinsic evidence in the second stage. If, however, in the first stage the court has decided that the language is ambiguous, it will consider all extrinsic evidence in the second stage. [page 275]
Courts differ with respect to what a court may consider in the first stage in order to determine whether language is ambiguous, so that extrinsic evidence will be considered in the second stage. Courts sometimes refer to a '"four corners " rule under which a court will not look beyond the face of the writing -- beyond its four corners. I doubt that any American court would adhere to such a strict rule these days. In the first stage a court will at least look beyond the four corners of the writing and consider the surrounding circumstances, such as the nature of the parties and the background of the transaction. Such a "context" rule is followed in most American courts. There is, however, a more liberal view, which prevails in California and some other western states, under which the court is free to consider extrinsic evidence in the first stage in order to determine whether language is ambiguous, and then exclude it in the second stage if it has decided in the first stage that it is not ambiguous.
In judging the impact of this more liberal view, it is important to remember that extensive pre-trial discovery is permitted in American courts. If extrinsic evidence can be considered in the first stage, the scope of discovery is greatly widened. What can the draftsman do to bar the use of extrinsic evidence for the purpose of interpretation?
First, the draftsman should once again be sure to include an entire agreement clause. This will make it clear that the contract is completely integrated so that a plain meaning rule applies so that extrinsic evidence will only be considered for the purpose of interpreting language if the language is ambiguous. Second, the draftsman might consider a provision incorporating the context rule and rejecting the more liberal -- California -- view. There is authority indicating that a provision barring the use of extrinsic evidence in the second stage if the language is ambiguous is unenforceable in an American court on the ground that it is against public policy to require a court to interpret a contract like a horse "wearing judicial blinders". This would not, however, invalidate a provision rejecting the liberal view by barring the use of extrinsic evidence in the first stage in order to determine whether language is ambiguous. Third, the draftsman might take account of the problem in picking the applicable law under a choice of law clause -- preferring, for example, the law of New York, a jurisdiction with a strict context rule, to that of California. Fourth, the draftsman might take account of the problem in deciding in favor of arbitration instead of litigation in court, since the availability [page 276] of discovery is generally much more limited in arbitration. It is worth noting that the Unidroit Principles contain no plain meaning rule, so that evidence of prior negotiations is admissible even if the language is not ambiguous, but in practice the Principles are likely to be applied in arbitrations, where discovery is unlikely to be a problem.
The role of conduct subsequent to the making of the contract differs among common law countries. In the United States it is a well recognized principle, affirmed by the Uniform Commercial Code, that the parties' "practical construction" of the contract as evidenced by their conduct after the making of the contract is persuasive evidence of the meaning of the relevant contract language. This principle is rejected by English courts, however, on the ground that the meaning of contract language is determined at the time the contract is made and cannot be altered by subsequent conduct, and most other common law courts probably incline to the English view. In all common law countries, however, subsequent conduct may amount to a waiver of a contractual provision or even to a modification of the contract. The draftsman can use a no-oral-modification clause and an anti-waiver provision in an attempt to prevent this, but such clauses will not bar the use of subsequent conduct for the purpose of interpretation, and it is unclear whether any provision would be effective to do this.
An Example: The MCC-Marble Case
You would not think me a true common lawyer if I did not give you at least one case as a concrete example. Consider, therefore, MCC-Marble Ceramic Center v. Ceramica Nuova D'Agostino, decided by a United States federal court of appeals and one of the few important American cases under the Vienna Sales Convention. In 1990, a representative of the seller, an Italian manufacture of tiles, met with the president of the buyer, a Florida retailer of tiles, at a trade fair in Bologna, Italy. Because the buyer's president spoke no Italian, negotiations were carried on through a translator engaged by the Italian manufacturer. The parties made an oral agreement for the sale of tiles and the buyer's president signed one of the Italian manufacturer's standard forms, printed in Italian on front on back. A few months later, in 1991, they also made a requirements contract.
When the tiles were shipped, the Florida buyer claimed that they were not of the quality required by the contract and reduced its payments. The Italian manufacturer responded by refusing to fill the buyer's orders, and the buyer sued for [page 277] breach of the 1991 requirements contract. The Italian manufacturer relied on provisions in Italian on the back of its standard forms signed at the trade fair in 1990. These provisions required the buyer to give notice of any complaints by certified mail within 10 days after delivery, which the buyer had not done, and gave the Italian manufacturer the right to cancel the contract and any other contract for any default in payment. Directly below the signature of the buyer's president was a statement in Italian that the buyer "is aware of the sales conditions stated on the reverse" and "expressly approves of them".
The buyer argued that the parties never intended the terms printed on the reverse of the order form to apply to their agreements. It submitted its president's affidavit that he had no subjective intent to apply to their agreements and that the Italian manufacturer's representative at the trade fair was aware of that intent. This was supported by affidavits from the Italian manufacturer's representative himself and from the Italian manufacturer's translator. The trial court rejected this argument of the American buyer and granted summary judgment for the Italian manufacturer. The American buyer appealed. The appeals court, applying the Vienna Sales Convention, held for the buyer and reversed.
The court quoted article 8(1) of the CISG, which instructs courts to interpret the "statements ... and other conduct of a party ... according to his intent " as long as the other party "knew or could not have been unaware" and concluded that this language "requires courts to consider evidence of a party's subjective intent when signing a contract if the other party to the contract was aware of that intent at the time". According to the affidavits, "the parties intended not to be bound by the terms on the reverse of [the seller's] for despite a provision directly below the signature line that expressly ... incorporated those terms ".
The court concluded that the parol evidence rule played no role under the Convention in such a case. Article 8(3) directs courts to give "due consideration ... to all relevant circumstances of the case including the negotiations", which this court regarded "as a rejection of the parol evidence rule" and "a clear instruction to admit and consider parol evidence regarding the negotiations to the extent they reveal the parties' subjective intent".
We can imagine the feeling of frustration of the Italian manufacturer of tiles on learning that the carefully drafted provisions on the back of its form and their explicit incorporation by a provision on the front of the form were all of no [page 278] effect. And one can question the court's decision: the case involved a modification of what was in the writing, whereas article 8 of the Convention seems clearly directed only at the use of extrinsic evidence for the purpose of interpreting what is in the writing. But for the draftsmen of the Italian manufacturer's form such a question is of little importance. The question for the draftsman is how can the form be improved so that the Italian manufacturer will not again experience a similar frustration. The answer is simple: include an entire agreement clause. The court itself noted that "to the extent parties wish to avoid parol evidence problems they can do so by including a merger clause in their agreement". The court cited article 6 of the Convention, which affirms the parties' freedom of contract by allowing them to derogate from the Convention s provisions.
In conclusion, there is much that a contracts draftsman can do to enhance the integrity of a writing. In particular, I have emphasized entire agreement clauses, no-oral-modification clauses, anti-waiver clauses, clauses excluding evidence of trade usage, and clauses adopting the context rule of interpretation. At least where there is a significant chance that the law of a common law system will be the applicable law, such clauses merit inclusion or at least serious consideration by the draftsman. Many helpful examples and much useful analysis can be found in the relevant chapters produced by GTCI. [page 279 ]
* McCormack Professor of Law, Columbia University.
1. Interpretation Clauses in International Contracts, 2000, Revue de Droit des Affaires Internationales/lnt'1 Business Law Journal 719; The Use of Preambles, Droit des Contrats Internationaux, FEC, 1989. For discussion of the American law on these subjects, see Farnsworth on Contracts ch. 7, especially §§ 7.6a, 7.1 Oa (2d ed. 1998).
2. The leading case is Danann Realty Corp. v. Harris, 157 N.E.2d 597(N. V. 1959).
3. This is the rule of Uniform Commercial Code 2-202, under which even a completely integrated contract may be supplemented by usage of trade.
4. This is the rule of Uniform Commercial Code 1-205(4), under which "express terms control ... usage of trade".
5. In Columbia Nitrogen Corp. v. Royster Co., 451 F.3d 3, 9 (4th Cir. 1971), the Court pointed out that the contract did "not expressly state that ... usage of trade cannot be used to explain or supplement the written contract", but stopped short of saying that such a general provision would have been decisive.
6. See, e.g., Formall, Inc. v. Community National Bank, 360 N.W.2d 902 (Mich. App. 1984) ("'anti-waiver' clause is itself subject to estoppel").
7. The leading case is Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 442 P.2d 641, 644 (Cal. 1968), in which the Court said that the first stage "requires at least a preliminary consideration of all credible evidence offered to prove the intentions of the parties".
8. The Court used this phrase in Garden State Plaza Corp. v. S.S. Kresge Co., 189 A.2d 448 (N.J. Super. 1963).
9. Unidroit Principles art. 4.3 provides that in interpreting a contract "regard shall be had to all circumstances, including ... preliminary negotiations between the parties".
10. Uniform Commercial Code 2-208, entitled "Course of Performance or Practical Construction", provides that a "course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement".
11. See Farnsworth on Contracts § 7.15 (2d ed. 1998).
12. 144 F.3d 1384 (11th Cir. 1998). [page 279 ]