Contract language is often recycled. The same words get reused in separate transactions between different parties. Generally speaking, the fact that different parties use the same boilerplate does not entail that those words should receive the same judicial interpretation in each transaction. Parties’ prior dealings, what they said during negotiations, local usages, the structure of the agreement as a whole, and other contextual factors can all affect their objectively reasonable understanding of boilerplate language. The correct interpretation of a contractual writing is therefore in most cases properly understood as a question of fact and ‘does not become imbued with stare decisis effect just because a judge made it’.
Except when it does. Sometimes courts purposively give boilerplate language the same construction across multiple transactions, even in the face of evidence that the parties to the litigation understood it differently. And sometimes a court’s construction of boilerplate used in one transaction is treated as binding on future courts’ constructions of the same boilerplate in a different transaction between different parties. In fact, the comments to section 2 of the American Law Institute’s recent Restatement of Liability Insurance Law go so far as to say that ‘[j]udicial decisions regarding the interpretation of standard-form terms [...] are subject to de novo review on appeal and provide stare decisis’.
Of course, as every first-year Contracts student around the world should be told, insurance law is an odd duck. But, to focus on the US example, when one dives into the case law, one finds other areas where courts treat the fact that the contractual language at issue is boilerplate as a reason to exclude evidence of the parties’ understanding of it. Kolbe v. BAC Home Loans Servicing (5th Cir. 2013), for example, considered the construction of a clause that the federal government required to be included in all federally insured mortgage agreements. Chief Judge Lynch’s plurality opinion argued the evidence of the parties’ shared understanding of the clause was irrelevant. ‘Extrinsic evidence of the parties’ unique intentions regarding a uniform clause is generally uninformative because unlike individually tailored contracts, uniform clauses do not derive from the negotiations of the specific parties to a contract.’ Courts have arrived at similar conclusions, for different reasons, in cases involving the certification of contract-based consumer class actions, where the issue is whether the claims are sufficiently similar to be aggregated. Thus the District Court in In re TD Bank, N.A. Debit Card Overdraft Fee Litigation (D.S.C. 2018) explained, ‘[i]f there is any type of standardized agreement that ought to be interpreted uniformly, without regard to the non-drafting party’s idiosyncratic comprehension of its terms, it is a consumer checking account agreement.’ And although it has been relatively uninfluential (White (1997), Warkentine (2008), Zacks (2016)), section 211(2) of the Restatement (Second) of Contracts provides that a standardized agreement ‘is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the writing’.
These examples suggest two questions with important practical consequences, each of which I address in ‘Boilerplate and Party Intent’. When should courts adopt the same construction of boilerplate language across multiple transactions, even in the face of evidence that the parties understood it differently? And how is the uniform construction of contract boilerplate best achieved?
An examination of the case law suggests three reasons courts sometimes give boilerplate language a uniform construction. The first, as illustrated by Kolbe, is that the state has required that contractual writings of a certain type include the boilerplate. The idea of mandatory terms—legal terms every contract includes, no matter what the parties say—is a familiar one. Scholars have paid less attention to mandatory clauses—words that the state requires be included in every contractual writing. A moment’s reflection, however, suggests that when the state requires that specific language be included in contractual writings, it is most likely seeking to achieve a uniform legal effect. The mandatory clause is meant to be notice of a mandatory term. The mandatory clause should therefore be construed to mean the same in every transaction—even when the parties assumed it meant something else.
The second reason courts opt for uniform construction is that market participants employ a standard form in order to achieve uniformity of terms because such uniformity benefits the market as a whole. Not all standard forms satisfy this description. There is little reason to think, for example, that the residential rental market benefits from uniform construction of the form leases many landlords and renters use. But in markets where participants pool information, where there is an active secondary market, or where the predictability is especially valuable, parties are especially likely to benefit from uniform construction of a standard form. Examples include segments of the insurance market that employ standard policies authored by the Insurance Services Office (ISO), and the market for credit default swaps, where the International Swap Dealers Association (ISDA) Master Agreement dominates.
A third reason is that class adjudication is sometimes possible only if boilerplate language is construed uniformly. Cases in this category commonly involve contracts of adhesion—writings drafted by one party and given to many others on a take-it-or-leave-it basis. When individual claim amounts are low, class actions or class arbitration can be the only financially viable way to sue on the contract. Where this is so, it can be desirable to ignore evidence of how individual parties understood the boilerplate in order to certify the class. As a result of the decline of consumer and employment class adjudication in the United States, these decisions are today few and far between. But political winds shift, and legislative action might someday change that.
How should courts achieve the uniform construction of boilerplate? One court’s deference to an earlier court’s interpretation of the same language—stare decisis—can obviously help. But sophisticated parties often seek to relitigate questions of interpretation, and one court might disagree with an earlier court’s reasoning. It is therefore important that the first court to consider an issue provide an interpretation that sticks.
One way to get there is to focus on the text’s plain meaning. By excluding evidence of context and cabining judicial discretion, plain meaning rules are in theory more likely to produce uniform constructions of boilerplate language. Whether this is true in practice depends on just how plain plain meaning is. The case law contains myriad examples of courts finding that words that at first glance appear plain are in fact susceptible to multiple reasonable interpretations.
Some have suggested that a strong form of contra proferentem might also help. In the insurance industry, for example, regularly reading policies against the interests of the insurer can lead to more consistent results. But contra proferentem does not always ensure uniformity. Consider the construction of what counts as an ‘occurrence’ in a general liability insurance policy. Insureds with low per-claim deductibles and caps prefer the construction that generates more claims, whereas insureds with high per-claim deductibles and caps prefer a construction that generates fewer.
Finally, if boilerplate language is authored by a third-party, a court might be reasonable to defer to the author’s interpretation, as distinguished from that of the parties to the transaction. This approach is eminently reasonable in the case of mandatory clauses. When the state requires that contractual writings of a certain type include specific language, courts should ceteris paribus defer to the state’s interpretation of that language. Things are somewhat more complicated when the parties use a standard form drafted by an industry association. If the association clearly represents the interests of both sides to the transaction, the court might reasonably defer to its understanding of the standard form it wrote. When the industry association is partisan, however, even a contractual clause suggesting that courts defer to the association’s interpretation should not cause a court to do so. This explains why courts have been receptive to amicus briefs submitted by the ISDA when interpreting the ISDA Master Agreement, and why they rarely rely on ISO interpretations of the standard insurance policies it promulgates.
Gregory Klass is Agnes N. Williams Research Professor and Professor of Law, Georgetown University Law Center.