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Subject Area: Political Theory

The Letter and the Spirit of Contract Law - Leonard P. Liggio, Literature of Liberty, Autumn 1982, vol. 5, No. 3 [1982]

Edition used:

Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.

Part of: Literature of Liberty: A Review of Contemporary Liberal Thought, 20 vols. 19781-982

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


The Letter and the Spirit of Contract Law

Leon E. Trakman

  • Professor of Law, Dalhousie University

“Interpreting Contracts: A Common Law Dilemma.” The Canadian Bar Review 59 (June 1981): 241–300.

The common law court traditionally has been faced with a dilemma. Should the court exercise caution and literalism in construing mercantile agreements by examining only the explicit words of the agreement in interpreting the intention of the parties? Or, by contrast, should the court be bold and creative in construing agreements and determine the intention of the contracting parties from the circumstances surrounding the transaction, from the business conventions and conceivably from the judge's own perception of what is fair and reasonable in the situation?

Professor Trakman analyzes to what extent common law judges are inclined towards a cautious or a bold approach in construing nonperformance obligations in commercial contracts. His study analyzes whether particular judicial methods of construing nonperformance obligations in contracts are functional and the extent to which they are useful in practice. The author emphasizes the philosophical values of judges, their approaches to interpretation and the link between their personal values and their interpretation of nonperformance clauses in business contracts. While recognizing that judicial ideology is essential in developing the common law, the author believes that the existence of a judicial methodology, a process of consistent reasoning, is even more fundamental if the common law of nonperformance is to ensure the viability of commerce.

Professor Trakman studies mercantile freedom of contract (autonomy) in common law and international commerce, the common law function of narrow interpretation and broad construction of nonperformance clauses, “intentionalism” and the express terms of a commerical contract, the limitations of mercantile autonomy, judicial creativity in construing terms of a contract, judicial construction as a recourse to equity, judicial construction and the rule oriented approach, and the possibility of reform.

The process of judicial investigation progresses from an analysis of the literal terms of nonperformance clauses to a synthesis of the negotiations between the parties, their past and present business understandings and their performance expectations. Construction ought to include consideration of the type of trade practices which businessmen actually employ, their market habits, and their industry usages. What merchants reasonably intend from a judge's perspective relates directly back to what they actually intend. The probable behavior of merchants blends in with the actual behavior of merchants.

“Implied terms” are only supportable as methods of judicial construction where the fictional basis of implied terms conforms to actual values prevailing among specific merchants within identifiable environments. The “foundations” or “objects” of agreements are only viable concepts where courts are aware of the dynamic features of business, the profit and market goals that underlie trade, as well as the give and take that evolves in buying and selling in the marketplace.

The utility of judicial boldness or caution is a relative, not a constant, phenomenon. The manner of construction by courts alters as parties, markets, and trade practices alter. The form of construction serves as a means towards a functional end, not an end in itself. Ultimately, the “life of the law” lies in the actual experience of commercial practice itself as the reference point for judicial interpretation.