The Contract Interpretation Two-Step: Step One, Ambiguity Determination and Step Two, the Battle of the Two Reasonable Meanings

ABSTRACT: This Article clarifies the two step approach used by the courts to analyze contract interpretation issues and introduces the concept of the ‘Battle of the Two Reasonable Meanings’. The academic debate which centers around whether the textualist approach (plain meaning and four corners of the document approach) or contextualist approach (use of outside evidence) is better is a false dichotomy, both approaches are used, albeit in different steps (textualist at Step 1 and contextualist at Step 2) in the contract interpretation analysis. The courts use a two-step process using both and are unlikely to embrace either as advocated by various authors. This two-step approach reduces attempts to obtain nonbargained-for benefits in contract interpretation litigation. The purpose of contract ambiguity (Step Two or ‘battle of the two reasonable meanings’) law should be to prevent one party from obtaining a nonbargained-for benefit just because the contract is ambiguous. Since ambiguity is present in all language interactions, preventing one party from obtaining a nonbargained-for benefit because of ambiguity promotes the formation of contracts. This is because of underlying economic principles which would encourage the rational (maximizing) party to litigate to obtain a nonbargained-for benefit.