OBJECTIVISM VERSUS SUBJECTIVISM IN THE PROCESS OF THE INTERPRETATION OF THE CONTRACT

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1 Humanities and Social Sciences Review, CD-ROM. ISSN: :: 04(02): (2015) OBJECTIVISM VERSUS SUBJECTIVISM IN THE PROCESS OF THE INTERPRETATION OF THE CONTRACT Pavlína Jane ková Masaryk University, Czech Republic In contractual process, there arises the question of what the meaning of the contract is. Thus, there is a need for interpretation. In the process of the interpretation of the contract we can distinguish two approaches subjective and objective. This article focuses on modern international instruments (the United Nations Convention on Contracts for the International Sale of Goods, the UNIDROIT Principles of International Commercial Contracts and Principles of European Contract Law), and the way in which they used the objective and subjective perspectives. Keywords: Interpretation, Objective perspective, Subjective perspective, Intention. Introduction In the contractual process, there arises the question of what the meaning of the statements made by or other conduct of the parties (or we can say the meaning of the contract) is. In order to determine this, there is a need for interpretation. In this field, we can distinguish between the objective and subjective perspectives of interpretation. Neither the subjective nor objective approach is applied completely by itself. There is no single subjective or objective theory. In modern systems of law both of these principles are applied. The aim of this paper is to analyse the way in which subjective and objective perspectives are used in international law. Attention will be focused on the United Nations Convention on Contracts for the International Sale of Goods (CISG) which is one of the most successful international conventions so far 1. Further, the research is based on two important non-state international instruments (the UNIDROIT Principles of International Commercial Contracts and Principles of European Contract Law PECL). Thus, the aim is to analyse how these instruments deal with the requirement of an objectively correct interpretation, as the process of interpretation also involves a subjective perspective. 1 CISG was adopted April 11, 1980 and entered into force on January 1, According to UNCITRAL report from 26 September 2014, 83 states have adopted it. 221

2 222 Objectivism versus Subjectivism in the Process... Subjective Perspective Subjectivism works on the presumption of individualism. It stresses the role of knowing subject which means that different interpreters can interpret the conduct of the other party in different ways. The subjective theory of interpretation is based on the actual intentions of the parties. 2 All of the analysed legislation is based on respect for party autonomy (freedom of contract). The acceptance of the subjective intentions of the parties is an expression of this principle. The common intentions of the parties have priority in international law systems. In the case of Investor Compensation Scheme v West Bromwich Building Society, 3 Lord Hoffmann summarized five basic principles of interpretation. However, these principles reflect a common law system and reject a subjective perspective. According to them, the establishment of subjective intention is also subordinated to objective approaches. And the intention of a party should be ascertained from the expression of the language. Thus, the meaning of the contract is determined according to the perspective of the reasonable person. This approach does not correspond with the adjustment of modern international instruments in which the subjective perspective prevails. There is no reason for the strict rejection of the subjective perspective if it is possible to establish the common intention of the parties (or individual intent where the other party knew what that intent was). Moreover, the analysed legislation does not attach so much emphasis to the literal meaning of the expression of the intent but rather to the real common intention of the parties. 4 The language which was used is also relevant but it is not the only criterion; other criteria and relevant circumstances are also taken into account. It may be objected that there are two, or more, parties involved in a contract. Thus, the intention of one party cannot be a decisive criterion for the interpretation of the contract. It is possible that the addressee understands the declaration of the internal intention of the other party differently. 5 Yet, certain requirements are imposed on both negotiating parties the initiator is responsible for making clear and unambiguous statements or performing other conduct which express the intended meaning; also the addressee (an interpreter) is responsible for arriving at a reasonably correct interpretation. 6 Where there is a clearly intended meaning, there is no need to reject the subjective criterion. Objective Perspective Objectivism, on the other hand, emphasizes only objective criteria of evaluation and eliminates any subjective evaluation. Objectivity means a more factual approach 7. Objective approaches are based on reasonable expectations and external signs of the act. The objective theory stresses that the intentions of the parties should be ascertained from their words and conduct rather than from their unexpressed intentions. This should lead to a higher degree of legal certainty because parties do not have to contend with subjective intentions. 8 As already said, common law 2 CANARIS, Claus-Wilhelm GRIGOLEIT, Hans Christoph. Interpretation of Contracts. SSRN, 2010, p. 5 [online]. Social Science Research Network [cit ]. 3 Investor Compensation Scheme v West Bromwich Building Society [1998] 1WLR Article 4.1 para. 1 of the UNIDROIT Principles, article 5:101 of PECL. 5 CANARIS, Claus-Wilhelm GRIGOLEIT, Hans Christoph. Interpretation of Contracts. SSRN, 2010, p. 3 [online]. Social Science Research Network [cit ]. 6 KRAMER, Adam. Common sense principles of contract interpretation (and how we ve been using them all along). Oxford Journal of Legal Studies, Vol. 23, No. 2 (2003). p CLEMENTS, Carl B. Towards an Objective Approach to Offender Classification. p. 47 [online]. HEINONLINE [cit ]. 8 PERILLO, Joseph M. The Origins of the Objective Theory of Contract Formation and Interpretation. Fordham Law Review, Vol. 69, No. 2, p. 427, 431 [online]. [cit ]. CANARIS, Claus-Wilhelm GRIGOLEIT, Hans Christoph. Interpretation of Contracts. SSRN, 2010, p. 5 [online]. Social Science Research Network [cit ]. MCMEEL, Gerard. The Construction of contracts. Interpretation, Implication, and Rectification. Oxford: Oxford University Press, p. 36.

3 Pavlína Janečková 223 prefers objective approaches. 9 Modern international laws combine both criteria. 10 As an objective test, the perspective of a reasonable person is brought into play so that other criteria can be considered in the process of interpretation, not just the literal meaning of the words. The concept of a reasonable person is not abstract; either, a high level of intelligence on the part of such a person is not assumed. Para. 2 of article 8 of CISG envisages a person of the same kind as the other party (the addressee), (which means that the reasonable person has, for example, the same linguistic background or other skills as the other party). In addition, this person is in the same circumstances as the other party (which, for example, means that this person has knowledge of prior dealings and negotiations between the parties). This means that the reasonable person has knowledge of the background of the particular case. Thus, if it is impossible to establish subjective intent, then a party s conduct (contract) will be interpreted using the objective meaning of a reasonable person. In particular, when a contract affects a third party, some reasonable degree of certainty as to the meaning of the contract is important for that third party. 11 Thus, in these situations, it would be more reasonable to use the objective approach because, for a third party, it could be unfair to establish the meaning of the contract only according to the subjective intentions of the contracting parties. International Legislation CISG CISG uses both criteria (the subjective and objective). With respect to this international instrument, we can demonstrate that for the interpretation of legal conduct both criteria are necessary. It is quite impossible to exclude the subjective point of view, thus, article 8 of CISG also provides objective methods of interpretation that limit or supplement the subjective viewpoint. We can suggest that the interpretative rules contained within it can be regarded as a basic framework which can serve as a model for other international and national legislation. The interpretation of legal conduct is regulated by article 8 of CISG. The article actually provides the interpretation rules to be applied to statements made by or other conduct performed by a party during the contract formation process. Statements of the parties should be interpreted pursuant to either a subjective or an objective test. If it is possible, the subjective intent of one party prevails (but it is possible only in cases in which the other party knew or could not have been unaware what that intent was). In practice, however, the test of a party s actual intent will not often be applied. This is because it is usually not possible to prove that the other party knew or should have known. Furthermore, at the time of the formation of the contract, the parties did not contemplate the situation that would arise; thus, it would be difficult to reconstruct intentions. 12 Thus, if this is not possible, it is necessary to apply an objective method based on the understanding of a reasonable person. Both criteria are affected by relevant circumstances, which should also be taken into consideration. These circumstances are called the factual matrix 13 and include everything that is relevant to the determination of the meaning of the contract (or the statement or other conduct). Linguistic meaning 9 MCMEEL, Gerard. The Construction of contracts. Interpretation, Implication, and Rectification. Oxford: Oxford University Press, p LEWISON, Kim. The interpretation of contracts. London: Sweet & Maxwell, p Article 8 para. 2 of CISG, article 4.2 para. 2 of the UNIDROIT Principles, article 5:101 para. 3 of PECL. Literal meaning of the document is also objective but it was refused by modern laws because of such formalism. 11 LEWISON, Kim. The interpretation of contracts. London: Sweet & Maxwell, p MCLAUCHLAN, David. Contract interpretation: What is it about? Sydney Law Review, Vo. 31, p. 10 [online]. Social Science Research Network [cit ]. HOUTTE, Hans van. Contract negotiations and the UNIDROIT Principles. Uniform Law Review, Vol. 19, No. 4, p Prenn v Simmonds [1971] 1 WLR Reardon Smith Line Ltd v Ynvar Hansen-Tangen (The Diana Prosperity) [1976] 1WLR 989.

4 224 Objectivism versus Subjectivism in the Process... alone is not sufficient. The interpretation has to be contextual, so further evidence is admissible. Context is important in the process of interpretation. Surrounding circumstances may influence the interpretation itself. To be relevant, these circumstances should be known to both parties. The interpretation should not be based on circumstances which one party was unaware of. 14 CISG provides an illustrative list of relevant circumstances of cases (these circumstances could be important in determining the intentions of the parties and the perspective of the reasonable person). It states that negotiations, practices, usages and subsequent conduct should be taken into account. According to the British judge Leonard Hoffmann, 15 previous negotiations between the parties are excluded from the admissible background (except for rectification). However, article 8 para confirms that negotiations between parties may be relevant for the interpretation of the contract. All background knowledge which is relevant and which was available to the parties is admissible (McLauchlan 17 argues that prior negotiation is not inconsistent with the objective approach). The traditional approach the four corners of the document is not used nowadays. Nevertheless, parties have a duty to negotiate in good faith 18 (according to article of the UNIDROIT Principles, parties are free to negotiate; however, the party which negotiates in bad faith is liable for the losses. Thus, the party that failed to negotiate in good faith is obliged to pay damages caused to the other party). The UNIDROIT Principles and PECL These two instruments are non-state systems of law which were devised by independent experts and scholars from all over the world. Both can be used, for example, to fill gaps in CISG or to interpret or supplement CISG or even domestic laws. The UNIDROIT Principles also combine the subjective method with the objective one. In contrast to CISG, its scope is wider. Article 8 of CISG can be applied only to the interpretation of contracts for the international sale of goods. The UNIDROIT Principles can serve for the interpretation of any sort of commercial contract. CISG expressly provides only rules for the interpretation of individual intent. The UNIDROIT Principles expressly regulate the interpretation of the contract. The most important factor in this process is the common intention (or common will) of the parties. The subjective perspective also prevails. The objective test is again the meaning that a reasonable person would attribute to it. How statements or other conduct should be interpreted is practically identical to article 8 of CISG. In addition, the UNIDROIT Principles lay down several rules which are useful in the process of interpretation. These rules are based on objective methods. Regulation of the interpretation of legal conduct in PECL is similar to that in the UNIDROIT Principles. It also deals expressly with the interpretation of the contract and contains five auxiliary rules. Moreover, PECL expressly lay down that the common intention of the parties prevails even if this differs from the literal meaning of the words 19. In addition, illustrative list of relevant circumstances is more extensive than that in CISG. 14 KRAMER, Adam. Common sense principles of contract interpretation (and how we ve been using them all along). Oxford Journal of Legal Studies, Vol. 23, No. 2 (2003). p Investor Compensation Scheme v West Bromwich Building Society [1998] 1WLR 896. LEWISON, Kim. The interpretation of contracts. London: Sweet & Maxwell, p Article 4.3 of the UNIDROIT Principles and article 5:102 of PECL contains a similar regulation. 17 MCLAUCHLAN, David. Contract interpretation: What is it about? Sydney Law Review, Vo. 31, p. 5 [online]. Social Science Research Network [cit ]. 18 KIRBY, Michael. Towards a Grand Theory of Interpretation: The Case of Statutes and Contracts. Statute Law Review, Vol. 24, No. 2, p. 100 [online]. [cit ]. MCMEEL, Gerard. The Construction of contracts. Interpretation, Implication, and Rectification. Oxford: Oxford University Press, p. 42. HOUTTE, Hans van. Contract negotiations and the UNIDROIT Principles. Uniform Law Review, Vol. 19, No. 4, p Article 5:101 para. 1 of PECL.

5 Pavlína Janečková 225 Conclusion All of the analysed international instruments contain very similar forms of regulation. CISG provides the basis and the UNIDROIT Principles and PECL are available to supplement it. All the instruments combine subjective and objective methods. Although, there is the requirement of an objectively correct interpretation, it would not be helpful to exclude the subjective perspective. The use of an absolutely objective 20 perspective is impossible. The subjective perspective is very important in the process of the interpretation of the subjective conduct of the parties. If it is possible, the subjective perspective prevails in all these instruments. It is only limited by the objective perspective of a reasonable person. For both subjective and objective perspectives, context is important in the process of contract interpretation. The main reason for promoting the objective approach is that this approach supports certainty and predictability (to lay stress only on the subjective perspective would diminish legal certainty). However, if it is possible to establish the real common intention of the parties and third persons are not affected, then it is not necessary to apply the objective criterion. This is because legal certainty is not compromised while the parties share a common will with respect to the meaning of the contract. International instruments incline towards the subjective approach, but, in practice, it cannot often be used. Because of this, a more objective approach is more appropriate. Thus, CISG, the UNIDROIT Principles, and PECL also employ the viewpoint of a reasonable person and other objective rules which are useful for the correct interpretation of the contract. References Literature 1. CANARIS, Claus-Wilhelm GRIGOLEIT, Hans Christoph. Interpretation of Contracts. SSRN, 2010 [online]. Available from: 2. CLEMENTS, Carl B. Towards an Objective Approach to Offender Classification. p [online]. Available from: 3. HOUTTE, Hans van. Contract negotiations and the UNIDROIT Principles. Uniform Law Review, Vol. 19, No. 4, p KIRBY, Michael. Towards a Grand Theory of Interpretation: The Case of Statutes and Contracts. Statute Law Review, Vol. 24, No. 2, p [online]. Available from: 5. KRAMER, Adam. Common sense principles of contract interpretation (and how we ve been using them all along). Oxford Journal of Legal Studies, vol. 23, no. 2 (2003). p LEWISON, Kim. The interpretation of contracts. London: Sweet & Maxwell, MCLAUCHLAN, David. Contract interpretation: What is it about? Sydney Law Review, Vo. 31, p [online]. Available from: 8. MCMEEL, Gerard. The Construction of contracts. Interpretation, Implication, and Rectification. Oxford: Oxford University Press, PERILLO, Joseph M. The Origins of the Objective Theory of Contract Formation and Interpretation. Fordham Law Review, Vol. 69, No. 2, p [online]. Available from: 20 CANARIS, Claus-Wilhelm GRIGOLEIT, Hans Christoph. Interpretation of Contracts. SSRN, 2010, p. 7 [online]. Social Science Research Network [cit ].

6 226 Objectivism versus Subjectivism in the Process... Court Decisions 10. Prenn v Simmonds [1971] 1 WLR Reardon Smith Line Ltd v Ynvar Hansen-Tangen (The Diana Prosperity) [1976] 1WLR Investor Compensation Scheme v West Bromwich Building Society [1998] 1WLR 896. Legal Acts 13. Principles of European Contract Law 14. The UNIDROIT Principles of International Commercial Contracts 15. The United Nations Convention on Contracts for the International Sale of Goods