Wielsch 2018 ContractInterpretationRegimes

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Contract Interpretation Regimes
Article in Modern Law Review · November 2018

DOI: 10.1111/1468-2230.12375
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Dan Wielsch∗
Freedom of contract requires the integrity of social institutions that ensure the preconditions
for private autonomy. This has been largely ignored by a private law doctrine that works on
the assumption of the state being the supplier of background justice. The article argues for an
institutional turn in contract interpretation. Depending on whether contracts can link up to
existing conventions or have to create their institutional context in the first place, courts may
apply either an ‘institution-preserving interpretation’ or an ‘institution-creating interpretation’.
This implies the need to refrain from following universal rules of contractual interpretation.
Rather, legal doctrine should focus on the development of sector-specific standards of inter-
pretation and on support for private legal regimes that ensure socially reflexive constructions of
contracts.
Legal interpretation can never be ‘free’; it can never be the function of an

understanding of the text or word alone. Nor can it be a simple function
of what the interpreter conceives to be merely a reading of the ‘social text’,
a reading of all relevant social data . . . legal interpretation must reflexively
consider its own social organization.1
(RE-)FRAMING THE ISSUE OF LEGAL INTERPRETATION:

CONTRACTS IN THE MATRIX OF MEANING
There is no single source of meaning for a given contract. Instead, the words or
the text of a contract are subject to processes of meaning-production in different
social contexts. Yet, what counts in the first instance is that the contract has to
be consistent with the rules and principles of the legal system. This consistency
is ultimately produced through the courts. In fact, the operational function of
courts is to determine the meaning of contractual agreements and other legal
acts with binding effect for a society within the respective jurisdiction.2
However, the standard for consistency of private contracts with the rest of the
legal order is significantly relaxed because the principle of private autonomy is a
built-in switch to make the legal system susceptible to environmental autonomy.
Textual and contextual interpretation may differ in that they admit a narrower
or broader evidentiary basis for determining the meaning respectively, but they
∗
Professor of Law at the University of Cologne, Chair of Private Law and Legal Theory.
1 R. M. Cover, ‘Violence and the Word’ (1985-1986) 95 Yale LJ 1601, 1617.
2 This central function of courts within the legal system applies to other legal acts as well.
Constitutional courts, for instance, evaluate the meaning of statutes with binding effect even on
the legislator.

C 2018 The Author. The Modern Law Review
C 2018 The Modern Law Review Limited. (2018) 81(6) MLR 958–988
Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 101 Station Landing, Medford, MA 02155, USA
Dan Wielsch
actually share the idea of seeking to recover the parties’ intentions.3 Textual
interpretation just seems to make a stronger claim to the autonomy of the
parties. By making the parties per se the sovereigns of meaning, one would
strictly honour their will as articulated ex ante.
Against this background, the following argument calls for an institutional
turn in contract interpretation along two dimensions. In the first instance, it
challenges courts to investigate the social environment of the contract compre-
hensively. If one takes contextual interpretation seriously, it must be considered
that contractual agreements are subject not just to individual intentions but to a
plurality of communication systems that produce meaning. It is submitted here
that each autonomous social system that is affected through the prescriptive
programme of actions subjects the contract in question to its own rationality.
Since these emergent systems and their main institutions in turn constitute
the actual preconditions for the effective exercise of autonomy, the impact of
individual rights on these orders is relevant to the interpretation of contrac-
tual rights. Courts are therefore requested to pay equal regard to all normative
sources of meaning in order to make the law fulfil its societal function of de-
ciding normative conflicts in a just manner. For instance, in a subsequent step
the judge must check the parties’ reading of the text against a moral reading
(for instance, as represented by boni mores rules) or an economic reading (for
instance, as represented by competition law rules).
In a second move, judicial interpretation of contracts would have to become
aware of its own institutional practice. Usually, the judge can take the relevant
social context as a given. Here, text is a function of context. Whatever con-
text the judge determines to be essential for the correct meaning of the text,
meaning is imposed on the text. However, the institutional context required
for a specific transaction or project may still have to evolve or may need to be
established in the first place. Under these circumstances, courts lack knowledge
about the functioning of these institutions and their normative requirements.
They are not in a privileged position to master the contextual meaning. Here
the conventional relation of meaning-production in the legal system between
courts in the centre and contracts in the periphery turns around. As a con-
sequence, courts would have to extend private autonomy from the formation
of text to the standards of contract interpretation. The courts’ role would be
to facilitate innovative contractual practices that shape socially responsible in-
stitutional arrangements for novel types of cooperation. Societal interpretation
would then take the lead, making it manifest that social differentiation trans-
lates into sector-specific regimes of interpretation of contracts. Eventually, as
the text initiates the creation of context, contracts would become their own
institutions of interpretation.
In order to work out the relation between contract and its social context
in a more detailed and precise way, the article draws on the reconstruction
of law as a specialised communication system.4 Since the problem of contract
3 See, for example, A. Schwartz and R. E. Scott, ‘Contract Interpretation Redux’ (2010) 119
Yale LJ 926, 938.
4 N. Luhmann, Law as a Social System (Oxford: OUP, Eng tr, 2004).

C 2018 The Modern Law Review Limited.
(2018) 81(6) MLR 958–988 959

interpretation is ubiquitous, the argument is underpinned by references to civil

law but also to English and US law. In this subsection, some elements necessary
for understanding the reconstruction of law in terms of communication theory
and the resulting institutional perspective on contracts will be explained.
A relational view of contracts
In order to grasp the social contextualisation of contract, the first step is to

shift the focus of legal analysis from the concept of contracting persons to
the social relation between them as such.5 Any temporary relation between
two or more persons (actors) can be described as a specific form of a social
communications system, an ‘interaction system’. This interaction system may
be free from any legal reference such as in a relation of friendship. Under
certain circumstances, however, the law imposes normative obligations on this
social relation even if the actors have not (yet) concluded a contract in order
to regulate their affairs in a legally binding way. For instance, the law requires
bargaining parties to negotiate with care.6 Or in situations in which one of
the parties to an expected contract enters into a contract with an expert third
party to produce information relevant for the deal, the expert may be obliged
to heed the interests of the contractually unrelated party who reasonably relies
on the information produced.
Once the actors have actually concluded a contract, the law is supposed to
regulate the social relation primarily according to the rules fixed in the contract.
The function of a contract consists in the creation of a new environmental
reference for the persons involved. It coordinates the autonomies temporarily so
that each actor can be sure that his expectations are satisfied.7 Through contract
each party expects to expand its scope of autonomous action in a way that is
impossible without the cooperation of others.8 This is made possible because
the law stabilises the emergent interaction system. Individual expectations about
the future action of others are most likely to be fulfilled when linked to rights
and duties incorporated into a contract. Instead of being forced to permanently
adapt to changing circumstances resulting from social interaction with another
individual, the parties can rely on the contractual promise made.9 Leaving aside
5 For more details about a relational approach in legal analysis, see D. Wielsch, ‘Relational Justice’
(2013) 76 Law & Contemporary Problems 191, 194.
6 For a survey of European legal systems with regard to legal obligations in pre-contractual dealings
(with special emphasis on the differences between English law and the continental legal systems),
cf J. H. M. van Erp, ‘The Pre-contractual Stage’ in A. S. Hartkamp et al (eds), Towards a European
Civil Code (Alphen aan de Rijn: Wolters Kluwer Law and Business, 4th ed, 2011).
7 Though in a limited and very specific way, the contract makes the observation capacity of
individuals available for each other while these individuals pursue their respective purposes.
8 Therefore at least two perspectives need to be distinguished: From the perspective of the
interaction system, actors are regarded as ‘parties’ and form part of the interaction system’s
environment. From the perspective of the actors, it is in turn the contract that becomes an
important part of their social environment as it provides the environmental conditions for the
autonomy of actors.
9 A less demanding form of coordinating the observations of autonomous systems is the social
institution of the market. The market enables actors to observe the observations of other

960 (2018) 81(6) MLR 958–988

Dan Wielsch
the subject matter of the agreement, the function of the two promises is to
assure that all context and conditions relevant for performance have been made
endogenous in the contract – that the ‘contracting world’ is conclusive. At least
under conditions of a well-defined goal of cooperation and a stable institutional
environment, the parties, as well as subsequent judicial interpretation, may
rightly assume that text replaces context.
Institutional turn in contract interpretation
Yet, the specification of a contractual text through the parties is just the starting
point for the social hermeneutics of a given contract. Its interpretation – and
the preservation of the parties’ intentions – is problematic because there is
no single predominant source of meaning for it. The words of a contract are
also subject to processes of meaning-production different from the minds of
the parties, which entails that an interpretation cannot stop with the ordinary
meaning of the word. The recovery of the parties’ intentions requires that the
meaning of the words be contextualised.
In the economic world, for example, a contract is reconstructed as an en-
trepreneurial project, as a profit-seeking monetary transaction under more or
less competitive market conditions. But not all obligations characteristic of an
economic contract can be explained from an exclusively economic perspec-
tive. The reason for considering rationalities outside the economic sphere is
that parties pursue a ‘productive’ project in one of the many social worlds,
either in distribution, production, services, engineering, science, medicine,
journalism, sports, tourism, education, or in art.10 In fact, the performance of
the contract relies on the specific rationalities of these discourses as well as on
the integrity of social institutions that enable and mediate cooperation in the
respective fields.
It therefore seems that the question then is not so much about the scope of
the evidentiary basis of the will of the parties alone but about the relevance
of other sources of meaning-production in the act of legal interpretation. To
be sure, the law has a unique function in that it normatively resolves conflicts
between different readings of the contractual text with binding effect for the
whole of society. But in order to do so, it must first comprehensively evaluate the
different social sources of meaning and their potential conflict of perspectives.
In a world of highly fragmented and specialised discourses that structure the
realms of meaning in society, legal interpretation has to be reconsidered as
well. Therefore, the law decides on the ‘language game’ in the assessment of
meanings of words in the specific social world.11
autonomous actors. It is a way for the economic system to make itself partially visible: a totality
of operations (of payment transactions) in a definite moment of time that can be observed
independently by economic actors, allowing them to infer the scarcity of certain goods.
10 G. Teubner, ‘Contracting Worlds: The Many Autonomies of Private Law’ (2000) 9 Social &
Legal Studies 399, 404.
11 H. Collins, ‘Objectivity and Committed Contextualism in Interpretation’ in S. Worthington
(ed), Commercial law and commercial practice (London: Bloomsbury, 2003) 189, 209 with reference

(2018) 81(6) MLR 958–988 961

In determining the limits of recognising the parties’ prerogative in the in-

terpretation of contracts, reference to the bilateral unit does not exhaust the
job of legal interpretation, though private law may indeed have the richest ex-
pertise in evaluating the relation between the contractual parties as such. Thus,
it may be appealing to pinpoint the idea of private law as protecting a special
kind of morality that reflects the bipolar character of the plaintiff-defendant
relationship in which the position of one party appears as solely being con-
ditioned by the position of the other.12 Yet this would ignore the point that
the dyadic interaction system is just one of several social systems and institu-
tions that determine the effectiveness of the contractually stipulated freedoms.
Furthermore, the fact that self-determination unfolds in the sphere of action –
that law is about the reality of freedom13 – prompts legal analysis to explore the
conditions of autonomous action comprehensively. When jurisprudence was
still conceived as social theory, early liberal theory came to understand that in-
dividual freedom was indirectly related to the common good through the social
institution of the market.14 Had individual rights not been linked in this way
to the common good, society would not have tolerated an autonomy-based
concept of contract. ‘[F]reedom of contract does not commend itself for moral
reasons only . . . It is the inevitable counterpart of a free enterprise system.’15
Master of meaning
Under the principle of private autonomy, the law still controls the meaning
of contracts by means of the operations of the courts, though in a mode
of extensive environmental reference. Put in another way, the law trusts the
parties to evaluate the relevant context. This reveals a distinctive feature of the
concept of private autonomy: in order to become truly effective, not only does
it provide that parties are free to stipulate the content of the contract, but also
that they have the prerogative of interpreting the legal effect of the contract.
Private autonomy is the archetype of societal interpretation of the law.
However, the processing of a contract through the legal system is an ambiva-
lent issue for the parties. From the perspective of the individual minds involved,
the text of the contract already represents a kind of ‘medial alienation’ of their
perceptions and intentions to external media such as spoken language and
writing. Due to the medial instantiation of the contract, law as a different
social communication system is now able to assign meaning to the words.16
to L. Wittgenstein, Philosophical Investigations (Oxford: Blackwell, 2nd ed, Eng tr, 1958) note to
para 70.
12 E. J. Weinrib, The Idea of Private Law (Oxford: OUP, 2012) xi-xii.
13 According to Kant, law refers to the ‘external and in particular practical relationship of one
person to another insofar as their actions, as phenomena, can exert (direct or indirect) influence
on each other.’ cf I. Kant, The Philosophy of Law: An Exposition of the Fundamental Principles of
Jurisprudence as the Science of Right (1797, Edinburgh: Clark, Eng tr, 1887) 44-45.
14 A. Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations vol II (Indianapolis: Liberty
Classics, 1981) 687.
15 F. Kessler, ‘Contracts of Adhesion – Some Thoughts About Freedom of Contract’ (1943) 43
Columbia Law Review 629, 629-630.
16 Collins, n 11 above, 189.

962 (2018) 81(6) MLR 958–988

Dan Wielsch
This determination of meaning happens independently of – and maybe in ig-

norance of – the actual operations of the interaction system and the intentions
of the parties.17 It processes the meaning according to its own rationales that
range from preserving legal certainty to the implementation of justice models
for specific types of transactions.18 Judicial interpretation rules are a crucial
factor of this autonomous legal construction of contractual meaning.19
For example, in US law the parole evidence rule and the plain meaning rule
are means for achieving a strictly textual interpretation that enables the courts
to create standard vocabularies for the conduct of commercial transactions.20
By assigning a set of terms with a clear, unambiguous meaning, the courts can
eliminate all deviant interpretations that some parties might claim better match
their specific intentions. By establishing a standard meaning of certain contract
terms, the courts thus frame and manage the alleged understanding of the vast
majority of parties using the same terms as a collective good.21 By these means
the courts, in principle, dispose of a powerful tool to shape expectations and
practices concerning the relevant transactions. However, parties are still able to
control indirectly how disputes over their contract are adjudicated either by not
integrating their writing fully or by incorporating context into the express terms
of the contract through idiosyncratic definitions and other specific language.
In contrast, contextualist jurisdictions subject the parties to a mandatory
interpretation regime as they take written contract language merely as estab-
lishing prima facie terms, which courts have to override when evidence of the
context of the transaction suggests that this meaning falls short of the actual
intention of the parties and their purposes – an approach that entirely places the
completion of the contract in the hands of the courts and that trusts the courts
17 Collins argues that the remarkable feature of Lord Hoffmann’s summary of the general interpre-
tation of contracts in the judgment Investors Compensation Scheme v West Bromwich BS [1998] 1
WLR 896, HL is its disregard to the intention of the parties, ibid, 198. For further comments on
the criteria restated in this judgment, see E. Peel, Treitel on The Law of Contract (London: Sweet
& Maxwell, 13th ed, 2011) 6-006.
18 E. A. Farnsworth et al, Contracts: Cases and Materials (New York: Aspen Publishers, 3rd ed,
2004) § 7.7, 267 (‘Interpretation is the process by which a court ascertains the meaning that it
will give to the language used by the parties in determining the legal effect of the contract.’). cf
also the distinction in A. L. Corbin, Corbin on Contracts vol 3 (St. Paul: West Publishing, 1960)
§ 534 between the ‘interpretation’ and the ‘construction’ of a contract, the latter determining
its legal operation and implying ‘questions [that] are not answered by interpretation.” They all
involve the “legal operation” of the contract after its meaning has been found by interpretation,
a legal operation to be determined by long study of the common law, equity and statutes.’
A. G. Guest, ‘Express Terms’ in H. G. Beale (ed), Chitty on Contracts (London: Sweet &
Maxwell, 31st ed, 2012) 12-041 uses ‘construction’ in the sense of ‘interpretation’ to describe a
process ‘by which a court arrives at the meaning to be given to the language used by the parties
in the express terms of a written agreement.’
19 The agreement by the parties must be interpreted objectively, as Lord Hoffmann said in Investors
Compensation Scheme v West Bromwich BS: ‘Interpretation is the ascertainment of the meaning
which the document would convey to a reasonable person having all the background knowledge
which would reasonably have been available to the parties in the situation in which they were
at the time of the contract.’
20 R. E. Scott, ‘Text versus Context: The Failure of the Unitary Law of Contract Interpretation’ in
F. H. Buckley (ed), The American Illness: Essays on the Rule of Law (New Haven: Yale University
Press, 2013) 312, 322.
21 ibid.

(2018) 81(6) MLR 958–988 963

with the capability of adequately recovering the commercial context.22 The

contextualist approach in UK law repressed the parole evidence rule, which is
left with no significant scope of application.23 In the eyes of legal realists, courts
apply legal rules tactically in order to pursue overarching policy, so that in a
case of a dispute over meaning, the result is to determine the actual intentions
of the parties.24
Struggle for recognition
The central issue for legal interpretation then is the deference of legal adju-
dication to autonomous sources of meaning-production other than through
the state legal system itself. The concept of private autonomy does not stop at
the stage of contract conclusion but extends to influencing its interpretation
through courts. Parties may also shape the standards by which their acts are
judged.
This challenge starts with the question whether and how far the law has to
consider a subjective meaning of the parties. As indicated, the contract ‘sta-
bilises a specific difference over time’ allowing each participant to develop more
complex preferences and plans and hence an enriched autonomy. Routinely,
the legal system contributes to this stabilisation by enforcing the contract and
by making available default rules in case the contractual programme does not
suffice to regulate the cooperation in the detail required. However, the focus of
the parties on regulating their bilateral relationship is reflected in rules ‘being
indifferent to everything else, including the consequences of the contract on
individuals and businesses not party to it.’25 Although the law in principle
tolerates this daring social blindness of contract, under certain conditions legal
construction indeed modifies or even overrides contractual rights and duties.
The law can then draw on the textuality of contract to detect the fragmented
regulatory dimensions that are obscured by a unitary will-centred perspective.26
It has reason to put the contractual programme into context with its social en-
vironment of which the personal will is just one of multiple possible references.
Augmented context is reintroduced into text. Based on the authority of the
judge or the arbiter, binding legal interpretation rewrites the contract.
In other words, since the social interaction system is already a kind of in-
terpretation regime (though the smallest one possible) each legal order has to
take a position on the relevance of contextual circumstances referred to as the
‘factual matrix’ such as trade usage, prior dealings and the parties’ experience
in forming the contract. The answer is likely to vary with the transactional
prototype, ie the characteristics of the juridified interaction system that ranges
22 ibid, 325.
23 Law Commission, Law of Contract: The Parol Evidence Rule Report No 154, Cmnd 9700 (1986).
24 R. J. Gilson, C. F. Sabel and R. E. Scott, ‘Text and Context: Contract Interpretation as Contract
Design’ (2014) 100 Cornell L Rev 23, 51 drawing on Corbin.
25 n 4 above, 396.
26 P. Femia, ‘Desire for Text. Bridling the Divisional Strategy of Contract’ (2013) 76 Law &
Contemporary Problems 151, 156.

964 (2018) 81(6) MLR 958–988

Dan Wielsch
from a thoroughly negotiated contract between sophisticated commercial par-

ties to mass-market, standardised transactions with consumers. However, the
analysis must be subsequently extended to other social contexts affected by the
contract.
First, this means that the law has to be self-reflective of its own discursive
formation of contracts and acknowledge that it is not merely about binding the
authentic wills of human beings. Second, it needs to be self-reflective of the
legal construction of interests of contractual partners that likewise exist only as
semantic artefacts in the realm of the law or, as Kelsen has put it, the natural
person being just a ‘personification of a set of legal norms’ that regulate the
conduct of a human being.27 Even more important, the law must leave behind
the conventional view that the nation state’s legal order will naturally provide
background justice and guarantee execution of the contractual programme. The
extra-contractual foundations of contract that determine the effectiveness of the
contract are rather produced by social institutions – institutions that potentially
transcend the borders of the nation state and work on a global scale. Thus,
the crucial question for legal construction is whether contractually created
rights comport with the normative requirements of these social institutions.
An approach that asks this question may be called ‘institution-preserving inter-
pretation’. In the second part of this article, after introducing some institutional
preconditions of private autonomy, this mode of interpretation will be applied
to bargained contracts, standard form contracts and collective agreements.
In other cases, the institutional context necessary for the transaction is not at
hand and has to develop simultaneously with the performance of the contract.
Under such circumstances, interpretation is ‘institution-creating’, as will be
examined in the third section. First, the ISDA Master Agreement is analysed as
one example of institution-creation through contract. Second, the article will
explore collaborative agreements in rapidly innovating industries as ‘contextu-
alising regimes’ before turning to the role of specialised courts in building such
regimes. Finally, the focus shifts to the GNU General Public License as one
example of the usage of technical terms in licence provisions to force state legal
organs to interpret contracts in the light of their social function. In any case,
the legal system has to reconstruct the institutional preconditions for certain
classes of contracts in its own terms and to construe the legal meaning of the
contract in accordance with them.
Focusing on the institutional sphere leads to a redefinition of the role of state
courts in this process. Arbitral tribunals and sector-specific organisations are,
in contrast to state courts, prepared to add a genuinely institutional perspective
to the dominant focus of contractual interpretation on individual will. Because
such organisations are working in the periphery of the legal system and not in
its centre, they are better placed for evaluating institutional autonomies. For
this reason, courts should defer to the reflexivity of such organisations to make
use of their deeper knowledge about the transactional context in question.
Such a genuinely institutional perspective thus intensifies the question of who
should be the master of contractual meaning: institutions in the centre or the
27 H. Kelsen, General Theory of Law and State (1945, Cambridge: HUP, Eng tr, 1949) 94-95.

(2018) 81(6) MLR 958–988 965

periphery of the law. Moreover, and this is the crucial point, this perspective
implies the need to review the institutional organisation of legal interpretation
itself. Such institutional reconsideration of contractual interpretation relies on
the characterisation of contract as a genuinely societal phenomenon.
INSTITUTION-PRESERVING INTERPRETATION
Institutional preconditions of private autonomy
The working condition of modern private law is that society can afford party
autonomy in contracting as an instrument of idiosyncratic social regulation
because actions of individuals are only indirectly related to the common good.
The claim of the bourgeois revolution to abolish all intermediate powers by
liberating the individual from feudal and corporatist chains and to confine the
state to the protection of ‘life, liberty, and estate’ can be maintained only under
the assumption that civil society would be able to reach wealth and justice on its
own. It is only because civil society does allegedly have at its disposal an effective
ordering mechanism in the form of free markets and competition that it can
emancipate itself from substantive definitions of the common good through
the state that characterised the political society of the feudal age. It is only
because competition is said to coordinate individual plans without coercion,
in a mediated way for the good of all, that the founding principle of this type
of society could be regarded as individual self-determination. Considering the
historical development of legal philosophy, it may not have been sufficiently
clear that conceiving of freedom as an individual right – as Kant did28 – must be
complemented by a theory about social institutions that provide for the actual
preconditions of freedom guaranteed by these rights. However, it was evident
also for Kant that bestowing on the individual an original right to freedom
must be backed by a concept of the institutionalisation of self-determination,
with his own account focusing on the civil state as the central protector of
autonomy.
To the extent that the political structure of society complies with the im-
peratives of reason as spelled out by legal philosophy and indeed uses law as a
medium for the institutionalisation of freedom, the law gets entangled in the
antinomies of freedom. Historically, private law doctrine was not prepared to
recognise the implications of the juridification of freedom for the law itself.
Yet, after this moment of juridification, the law needed methods that permit it
to reflect on its social effects comprehensively.
Nevertheless, the development of modern private law took a different path
at first. On the basis of a legal positivism that was established in Germany by
Savigny and the Historical School, the ‘inner system’ of the law became its
28 n 13 above. For a critique of concluding rights from freedom, cf W. N. Hohfeld, ‘Some

Fundamental Legal Conceptions as Applied in Judicial Reasoning’ (1913) 23 Yale LJ 16, 33
et seq. Generally on the critique of rights, cf D. Kennedy, A Critique of Adjudication (Cambridge:
HUP, 1998) 315 et seq.

966 (2018) 81(6) MLR 958–988

Dan Wielsch
most important source of legitimation.29 The rationality of law did not have
to be tested against standards outside the law; doctrine replaced philosophy
tout court. All claims of rationality got absorbed in references to individual
autonomy and its dogmatisation in the category of the will. As a matter of fact,
this self-referential concept of law turned out to be successful in the sense that
it matched the interests dominating society at that time and was able to survive
some periods of legal evolution. The will-based categories of the pandectists
could easily be instrumentalised by the entrepreneurial class and were correlated
with the social and economic ideals promoting commercial expansion during
the industrial revolution.
The central premise of liberal contract doctrine is also the reason for its
shortcomings. The idea that equal freedom is guaranteed by the equal distribu-
tion of rights consciously ignores the actual differences between rights-holders;
it argues as if contracts were identical with the personal and social autonomies
they regulate. In contrast, it is submitted here, contract must not be conflated
with the social relations it regulates either on purpose or as a matter of fact.
When liberal doctrine nevertheless confines legal inquiries to the will of each
of the contracting parties as the only reference for meaning of the contract, its
reconstructions of that will are fictitious almost by necessity. They condemn
the law to a social reductionism that is incapable of fulfilling the function of
the law to protect social relations.
When legal analysis instead recognises the need to develop models of law’s
social effects, it must do so in all dimensions that are relevant. The distinction
that can be drawn between the persons to whom the conclusion of the con-
tract is attributed and the social system constituted through their interaction
already indicates a plurality of references to be elucidated. In fact, the same
legal structure can be of relevance in different meaning-processing systems
simultaneously.30
For instance, as most contracts structure economic deals, legal analysis must
take into consideration that iterations of autonomous transactions based on
freedom of contract entail economic competition. Since the emergent social
order of competitive markets in turn constitutes the actual preconditions for
the effective exercise of autonomy, the impact of individual rights on the
market order is a normative problem – and must therefore be regarded as
another important environmental reference for the contract. Only when legal
reasoning recognises the normative relevance of the individual contract for the
economic order as well as the normative relevance of the economic order for
the individual contract, will the the law achieve a comprehensive reflexivity
that is essential for law’s social responsibility.
Assuming the need to bring contractual interpretation into line with the
normative requirements of institutions that provide for the effective conditions
of private autonomy, the legal system may face two different situations. In
the first case, the legal system has already gained sufficient knowledge about
29 F. Wieacker, A History of Private Law in Europe (1952, Oxford: Clarendon Press, Eng tr, 1996)
343.
30 n 5 above, 194-196.

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these institutional preconditions through iterative cycles of litigation concern-

ing a certain type of private interaction, which thus constitutes well-established
case law. Contractual interpretation by state legal organs is then ready to con-
sider these interdependencies, especially where the institutional imperatives are
already incorporated by some pieces of statutory law with which the interpre-
tation of the contract has to be consistent. The mode of interpretation applied
is what was earlier called ‘institution-preserving interpretation’, as the main task
is to align the normative programme of the contract with the explicated insti-
tutional normativity of its context. This, however, is not a one-sided affair in
the sense that the institutional dimension of interpretation serves only to prove
normative gaps in the stipulations between the parties. It may also prompt the
court to reflect on the contingency of allegedly general interpretation rules and
to call into question their adequacy for the type of transaction in the particular
case.
In the second case, the legal system still lacks sufficient knowledge about
the institutional preconditions for autonomous contracting. This may be the
case where certain markets show unprecedented peculiarities and dynamics,
so that a given contract cannot be construed and tested in the light of an
established set of functioning parameters of the relevant market. There may
also be situations in which the parties do not have sufficient prescience of their
own transaction and then collaboratively explore the possibility of gradually
articulating their intentions, most directly by learning from a context jointly
created.31 Characteristic of these cases is an unusually high level of uncertainty
resulting from the absence of an accommodating institutional environment. In
response to such a lack of context, private interpretation regimes emerge to
stabilise the expectations of the community involved. Institutional context is
not available in this case, as it has to evolve first. Such institution-creation will
happen primarily through innovations in contract practice itself and through
private organisations that coordinate these developments. What is called for
under such conditions is an ‘institution-creating interpretation’ applied either
by these coordinating institutions or by courts. Courts must be made aware
of the fact that contracting cannot just link up to a convention but must
create it. Courts should also be supportive of innovation in contract design and
deliberately engage in co-shaping the institutional context. In these instances,
it can be said that ‘interpretation becomes a matter of design, not doctrine’.32
Interpreting bargained contracts
The first and elementary prerequisite for the legal recognition of a privately
crafted normative programme that is binding on another person is the
procedural integrity of its formation. The discursive process of contracting
must provide for the chance to introduce the perspectives of all persons
affected by the executed contract. The involvement of affected perspectives
31 n 24 above , 96-97.
32 ibid, 54.

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Dan Wielsch
both constitutes and delimits the normative claim of the contract, as reflected
in the doctrine of privity of contract.
This holds valid already for the question whether the parties have reached
consent or whether a divergent understanding by the parties hinders a valid
contract formation and leaves them in dissent. Of course, the intention of a
party cannot by itself form the authoritative criterion for the interpretation,
because it constitutes a purely internal state of mind.33 Instead, each party is
held to such meaning of her declaration that is attributed to it by law. That
meaning is binding on the party irrespective of her actual understanding. The
consenting party faces the legally relevant meaning as a norm.34
In practice, the relevant meaning for legal attribution is that which the offeror
ought to assume the addressee would reasonably apprehend.35 For this meaning
the offeror can be held responsible – itself being sufficiently protected by the rule
that her own reasonable perspective in turn is relevant for the interpretation
of the corresponding declaration of the counterparty.36 In order to fix the
relevant legal meaning, the law thus starts from the communication and then
reconstructs the meaning of the text introduced by one party in the light of the
context, namely the interest of the counterparty. If the meaning of a contract
clause is questioned, the law therefore retroactively settles a semantic convention
that is fuelled by the two perspectives of the affected parties, tempered with
the help of the standard of reasonableness and – speaking from a civil law
perspective – the principle of good faith. Generally, English contract law does
not impose a duty on the parties to act in good faith.37 But English courts
can come to the same conclusion as the good faith principle by using a less
literal approach to interpretation.38 In the alternative, if there is proof of an
idiosyncratic convention of meaning among the two, it may simply hold either
party to this understanding.39 In consequence, the parties are well advised
to anticipate such a mutual reintroduction of differing perspectives in their
dealings upfront.
33 C-W. Canaris and H. C. Grigoleit, ‘Interpretation of Contracts’ in A. S. Hartkamp et al (eds),

Towards a European Civil Code (Alphen aan de Rijn: Wolters Kluwer Law and Business, 4th ed,
2011) 591.
34 This has been elaborated, with great influence on German contract law doctrine, by K. Larenz,
Die Methode der Auslegung des Rechtsgeschäfts (Leipzig: Deichert, 1930) 71.
35 ibid, 72. Smith v Hughes (1871) LR 6 597, QB with regard to the objective approach of
interpretation; Peel, n 17 above, 1 (1-002), 208 (6-009). For US doctrine, cf Corbin on Contracts
n 18 above § 538 (‘A contractor is bound in accordance with the meaning that he induces
another to understand and act upon, if he knows or has reason to know that the other will so
understand and act.’). cf also A. L. Corbin, ‘Interpretation of Words and the Parol Evidence
Rule’ (1965) 50 Cornell Law Review 161, 190.
36 n 33 above, 595 et seq.
37 S. J. Whittaker, ‘Introductory’ in Chitty on Contracts n 18 above, 1-039.
38 E. McKendrick, ‘The Interpretation of Contracts: Lord Hoffmann’s Re-Statement’ in Wor-
thington (ed), n 11 above, 162; exceptionally, English contract law considers good faith: Chitty
on Contracts ibid, 1-044 seq.
39 The concept of the «Willenserklärung» (declaration of intent) replacing the contract as the
dogmatic cornerstone in German law is simply the idea to bind contractual interpretation to the
interests of the parties. When it is stated that a contract is constituted by two «Willenserklärungen»
it means that the law is not free to construe obligations and remedies but is obliged to fix it with
respect to the understanding of the parties.

(2018) 81(6) MLR 958–988 969

If one perspective gets neglected in the process of contracting so that its

procedural rationality cannot become effective, one cannot presume the bilat-
eral relation to be commutatively just.40 The law of the state then does not
have reason to recognise the private regulation. This pertains to cases of fraud
and mistake, in which statutory law explicitly grants the affected party a right
to avoid the contract. However, there can also be constellations beyond those
covered by statutory provisions in which only one of the parties generated the
normative programme of the contract as a matter of fact. For example, accord-
ing to the German Federal Constitutional Court, this may be the case where
an offer was accepted under conditions of ‘structural inequality in bargaining
power’ between the two parties.41 Here, the fundamental right to freedom
of action in Article 2(1) of the German constitution would require judges to
scrutinise whether the preconditions of self-determination through freedom of
contract were effective and, if not, to reconstruct the meaning of the respective
contract now including the neglected perspective. In practice, this will regularly
lead to a correction of the contract carried out by the judge.42
From a normative point of view, the procedural integrity of contract forma-
tion therefore requires equal chances for each party to introduce her perspective
into the contract as well as the real option to find an alternative contractual
partner. This goes beyond the liberal theory which suggests that negotiations
between formally equal parties can by itself guarantee fairness. As a matter of
fact, these preconditions can be taken for granted only if equally sophisticated
parties do business within competitive markets. Since liberal contract doctrine
focuses on developing rules for protecting the fairness of negotiations, its as-
sumptions are bound to a specific transactional paradigm in which the other two
conditions can be taken for granted. It therefore only preserves the integrity of
the institutional preconditions for a limited class of contracts. In contrast, alter-
native approaches to contract law investigate the preconditions of autonomous
will formation far more comprehensively.43 Yet, of even greater importance is
the fact that contract doctrine has gained significant experience in protecting
the communication process leading to the conclusion of a bargained contract.
Interpreting standard form contracts
Another mode of contracting uses standard contract terms. Here, the contract
gets re-formalised and meaning is detached from the concrete relation. If one
party introduces boilerplate provisions, the counterparty can be said to submit
40 For the modern adaption of the ancient concept of commutative justice, cf already T. Hobbes,
Leviathan: Revised student edition R. Tuck (ed) (New York: Cambridge University Press, 1991)
ch 15, 105 (‘The value of all things contracted for, is measured by the Appetite of the Contractors:
and therefore the just value, is that which they be contented to give.’)
41 Bundesverfassungsgericht [BVerfG] [Federal Const. Court], 89, 219 (Bürgschaft).
42 D. Wielsch, ‘The Function of Fundamental Rights in EU Contract Law’ (2014) 10 European
Review of Contract Law 365, 383.
43 For an overview of factors the law might require for bringing about a binding agreement
and the concerns of fairness-oriented approaches, see C. Willett, Fairness in Consumer Contracts
(Farnham: Ashgate, 2007) 27 et seq.

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Dan Wielsch
itself to a ‘ready-made legal order’.44 Under these circumstances, the ‘specific

difference’ established by the contract is designed by the issuer of the terms
alone. Therefore, the resulting indifference of the contract towards its social
environment may extend not just to third persons but also to the counterparty.
Although, of course, the contract remains a social system of interaction between
two actors, the mono-perspective setup of the text may cause the environmental
reference of the interaction system of the contract to be biased in favour of the
autonomy of one party.
From the perspective of relational legal analysis, private law thus has reason to
reintroduce the missing perspective into the contractual relation. Some national
legal orders have indeed enacted particular regulations regarding standard-form
contracts and subject adhesion contracts to a fairness test.45 As it appears, the
most stringent way for private law to conceive of such instruments of contract
review is to regard individual contract and private regulation through standard
terms as two distinct categories that respond to different problems of social
ordering: the former representing a mutually established legal framework for
a customised deal, the latter imposing a prefixed normative scheme for mass
distribution under uniform conditions.
In fact, standardised contracts can be regarded as a form of private regulation
that must meet certain criteria of justification in order to be recognised as legally
enforceable.46 In the absence of a pre-contractual bargaining discourse, which
could be reflective of different sources of legal meaning concerning contractual
rights, the fairness test47 emulates the missing discourse as if it had happened:
the counterparty is only subject to the standard terms if they stipulate rights and
duties that would at minimum result from actual discourse. A fairness test for
standard contract terms thus operates as a public rule of recognition for a special
type of private regulation that is prone to neglect environmental reference.48
The pervasive regulatory character of standard terms entails remarkable pecu-
liarities at the stage of interpretation. In the first place, the courts are committed
to an ‘objective interpretation’, detached from the individual circumstances of
the contract. Rather they construe the terms with a view to its economic pur-
pose and the typical relation between the issuer and the targeted customers.49
In Germany, higher courts treat standard terms as if they were legal norms the
44 As famously phrased by the German Reichsgericht in DR 1941, 1211.

45 On differing assessments of the need for regulating standard-form contracts and the resulting
different models in approaching the issue, cf T. Wilhelmsson, ‘Various Approaches to Unfair
Terms and Their Background Philosophies’(2008) 1 Juridica International 51.
46 D. Wielsch, ‘Global Law’s Toolbox: Private Regulation by Standards’ (2012) 60 Am J Comp L
1075, 1078-1080; n 5 above, 207-208; see also H.-W. Micklitz, ‘Some Reflections on Cassis de
Dijon and the Control of Unfair Contract Terms in Consumer Contracts’ in H. Collins (ed),
Standard Contract Terms in Europe: a Basis for and a Challenge to European Contract Law (Alphen aan
de Rijn: Wolters Kluwer Law and Business, 2008) 19 et seq.
47 n 45 above.
48 For an elaboration of this idea, see n 5 above.
49 Bundesgerichtshof [BGH] [Supreme Court] Entscheidungen des Bundesgerichtshofes in Zivilsachen
[BGHZ] 51, 55, 58; 77, 116, 118; Bundesgerichtshof [BGH] [Supreme Court] NJW-RR 2004,
1347, 1348; NJW 2005, 425, 426; and J. Basedow, ‘§ 305c’ in F. J. Säcker, R. Rixecker, H.
Oetker and B. Limperg (eds), MüKo-BGB vol 2 (München: C. H. Beck, 7th ed, 2016) n 22
with further reference.

(2018) 81(6) MLR 958–988 971

appellate judge can construe without being bound by the findings of the lower
court, arguing that the standard terms’ locally unrestricted use would call for
a uniform interpretation.50 Furthermore, section 305c(2) of the German Civil
Code [BGB] contains the contra proferentem rule for the interpretation of vague
standard terms. It requires courts to attach that meaning to a clause that is most
favourable to the counterparty, yet with the favourability not determined by
means of a benevolent reading of the clause but based on the result of its overall
assessment under the statutory fairness rules.51 In fact, this requires a reading
most unfavourable to the counterparty because the term is then likely to be
voided according to the fairness test and replaced with proper default rules that
state law considers to be a just solution. This approach pre-empts the danger
that the issuer or other players in the same market use the same ambiguous terms
in other contracts, claiming an understanding that would be ruled out in the
pending litigation. Since the courts apply such a method of interpretation not
just in representative actions brought by organisations litigating in the collective
interests of consumers, but also in individual actions, contractual interpretation
in the case of standard terms shifts from referencing the interests of the concrete
parties to assuming the broader function of regulating certain market segments.
Even if the act of interpretation is still to be distinguished from the fairness test
analytically, the method of interpretation gets closely linked to the aims and
reasons of the statutory fairness regime. In consequence, the standard contract
terms in question have to be in accordance with those rules the legislator and
the courts regard as constitutive for justice in the relevant markets.
This line of reasoning, which directs legal analysis of standard terms to the
institutional imperatives of the market, is supported by the prevailing rationale
for controlling standard contract terms. According to the view endorsed by
economic analysis of law, fairness tests compensate for a partial market failure.52
If contract terms themselves are reconceived as a commodity the supply of
which is subjected to market forces, the resulting market is assumed to show
the features of an Akerlof-market in that it is likely to lack competition about
terms and conditions due to information asymmetries.53 Sooner or later, it
is predicted, legal standards of lower ‘quality’ will drive out terms implying
a more comprehensive and thus more costly set of contractual rights for the
counterparty. Such a development can only be prevented if counteracting
mechanisms such as compulsory fairness rules exist.
The example of standard terms shows that a discursive relation between
the two parties is largely non-existent under conditions of mass contracting.
Analysed either way, this means that the contractual interpretation is prompted
to shift the focus from ensuring the integrity of this relation to explicitly
50 Bundesgerichtshof [BGH] [Supreme Court] NJW 2011, 2643 (concerning the eBay user agree-
ment); NJW 2010, 2877.
51 Basedow, n 49 above, n 34.
52 C. -P. Gillette, ‘Standard form contracts’ in G. de Gees (ed), Contract Law and Economics vol 6
(Cheltenham: Edward Elgar Publishing, 2011) 115; H. -B. Schäfer and P. C. Leyens, ‘Judicial
Control of Standard Terms and European Private Law’ in P. Larouche and F. Chirico (eds),
Economic Analysis of the DCFR (München: Sellier, 2010) 97.
53 G. A. Akerlof, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’
(1970) 84 The Quarterly Journal of Economics 488.

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Dan Wielsch
preserving well-known functional requirements of the market as another insti-

tutional precondition for private autonomy. Eventually, the law has to construe
a standardised contract with respect to its actual normative effect that extends
not just to the concrete counterparty but to all the transactions within the
market share of the issuer. The instruments of objective interpretation and
contra proferentem interpretation align the text of the standardised contract with
its relevant institutional context.
The institutional normativity of context as elucidated through objective in-
terpretation can even influence the standard for testing the fairness of the terms.
According to section 307(2) no 2 BGB, a standard clause unreasonably disad-
vantages a party if it limits essential rights or duties inherent in the nature of
the contract to such an extent that attainment of the purpose of the contract is
jeopardised. Courts are therefore prompted to investigate what parties typically
aim at with a contract of that kind. This typical purpose can be ascertained with
respect to the effective expectations of actors in a particular market segment,
which in turn are shaped by business custom and contractual practice itself.54
As a consequence, the public standard of control becomes responsive to the
very practice that is to be controlled, ie the private normative claims whose
legitimacy is in question.55 This phenomenon is not as unusual as it may seem
since there are other instances where state law engages with social norms, most
obviously in the general clauses of contract law about immorality (section 138
BGB), good faith (section 242 BGB) and the interpretation maxim to consider
customary practice (section 157 BGB). Regarding the control of standard con-
tract terms, such an approach seems reasonable especially where contractual
practice supports novel forms of social cooperation whose normative require-
ments are not reflected in the statutory default rules on typical contracts. If
courts hastily judge innominate contracts against the justice standards incorpo-
rated in the codified contractual model, they will miss both the specific chances
and risks of the concrete cooperation, distorting the epistemic and normative
discovery procedures in the relevant market segments.
It appears that the argument for extending public justice standards strength-
ens when standard contract terms are not merely used by a single firm but when
multiple entities acting in the same sector all use the same standard terms. Such
‘multi-firm standardisation of contracts’ is often conducted through trade asso-
ciations or other standard-setting organisations based on procedures in which
the affected parties are able to participate, sometimes even involving pub-
lic agencies.56 However, the challenge for legitimation becomes harder since
these standards not only affect individual rights in a manner that is similar
to legislation, but may also provide for enforcement by private actors them-
selves. In a way, they can be regarded as substitute statutes, most notably in the
54 M. Renner, ‘Die Natur des Vertrages nach § 307 Abs 2 Nr 2 BGB’ (2013) 213 Archiv für die
civilistische Praxis 677, 690-696.
55 The categories of state law thus have to be conceived of as proceduralised when being applied
to private regulation through standard terms.
56 Some examples are discussed in M. Patterson, ‘Standardization of Standard-Form Contracts’
(2010) 52 Wm & Mary L Rev 327, 350-357.

(2018) 81(6) MLR 958–988 973

transnational sphere.57 Here, law is fabricated by cooperation among global

players who determine the rules of governance for a particular social sphere.58
They constitute transnational regulatory regimes.
With regard to the reflection of the contracting parties’ interests, this ra-
diation of private normativity within social sectors might appear as a biased
form of law-making that favours the particular interests of rule-makers at the
expense of third parties and the common interest. One example for favouring
the particular interests of rule-makers is collateralisation under the ISDA Master
Agreement. Here, the mechanism of taking collateral exclusively serves the in-
terests of the swap counterparties in the event that one of them goes bankrupt,
which contrasts with national bankruptcy law, where the system of priorities is
also concerned with the protection of the interests of third parties.59
Even if the standard contract terms are fair and reasonable in themselves, they
may be undesirable because their standardisation of terms prevents competition
with reasonable alternatives. In this way, markets in performing their role as an
external force are prevented from putting pressure on contractual normativity
in order to reflect comprehensively on environmental concerns. Therefore,
legal mechanisms must be in place to make sure that the resulting private
normative orders take into account a diversity of social references. In particular,
interests of third parties who are not (directly) engaged in contracting need to
be considered. Transnational regulatory regimes determine their own rules of
governance that are independent of national legal orders. However, even they
need a ‘touchdown point’60 in national private law regimes, since the regulatory
regimes’ functioning is backed up by national law.61 At ‘touchdown points’,
public rules of recognition can check whether private regimes provide adequate
justificatory elements. Here, a wider range of social references, ie third party
interests, may be taken into consideration.
Interpreting collective agreements
A more obvious example of the regulatory effect of contracts arises in the case
of collective bargaining agreements. Here, judicial interpretation has proved to
be very sensitive to the relevance of the peculiar institutional context for the
effective enjoyment of contracted freedoms.
57 Transnational standardisation of (financial) contracts can be studied in the activities of the

International Standards and Derivatives Association (ISDA). cf J. Braithwaite, ‘Standard Form
Contracts as Transnational Law: Evidence from the Derivatives Markets’ (2012) 75 MLR 779;
Wielsch, n 46 above, 1085-1091.
58 A. Riles, Collateral Knowledge (Chicago: The University of Chicago Press, 2011) 32.
59 ibid, 41. For a case study on the developing normativity of these far-reaching private legal regimes
see the section below headed ‘Constituting the normative infrastructure for global derivative
transactions: ISDA master agreement’.
60 R. Wai, ‘Transnational Liftoff and Juridical Touchdown: The Regulatory Function of Private
International Law in an Era of Globalization’ (2002) 40 Colum J Transnat’l L 209. For the idea
that touchdown points are ‘projects’ to global players which they need to work on, see Riles,
n 58 above, 46.
61 ibid, 265; K. Pistor, ‘A Legal Theory of Finance’ (2013) 41 J Comp Econ 315, 321. cf concerning
conflicting touchdown points, Wielsch, n 46 above, 1088-1091.

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Dan Wielsch
The US Supreme Court decision in Lewis v Benedict Coal Corporation62

(Lewis), for instance, concerned a collective bargaining agreement requiring
the employers to pay a stipulated royalty into a trust fund ‘for the sole and
exclusive benefit’ of the employees, their families and dependents. When sued
for payments, the employer attempted to set off damages resulting from strikes
by the union violating the agreement.
The general third party beneficiary rule in the USA states that the rights
of third-party beneficiaries are subject to defences based on counterclaims
that the promisor has against the promisee due to the promisee’s failure to
perform. The promisee’s performance of his duties under the same contract
is thus a condition precedent for payment by the promisor to the third party
beneficiaries.63 This rule is distilled to a great extent from court decisions
that were concerned with different types of third party transactions in contrast
to the collective agreement in the Lewis case. The rule does not reflect the
union’s statutory status as exclusive representative; nor does it safeguard the
individual from arbitrary collective action.64 The general interpretation of a
third-party beneficiary rule may be adequate for a contract for the benefit
of a third party where the promisor’s interest in or connection with the third
party, in contrast with the promisee’s, begins with the promise and ends with its
performance.65 In comparison, the promisor’s interest concerning the collective
bargaining agreement, as in Lewis, is distinct. Here, the promisor had assumed
joint responsibility with the union for a model of providing a social security fund
for the benefit of the employees in a long-term and industry-wide relationship.
Unlike in other industries, the employer (promisor) did not have to shoulder
the burden unconditionally and alone. Moreover, the regulatory function of
such funds created by the stakeholders had been approved by the legislator.
Federal labour policy explicitly supports institutions of self-regulation in the
industry. As contractual interpretation must be consistent with statutory law,
the law confers a mandate on contractual interpretation to preserve the newly
emerged institution of stakeholder solidarity. The Supreme Court therefore
held in Lewis that
regardless of the inferences which may be drawn from other types of third-party
beneficiary contracts, the parties to a collective bargaining agreement must express
their meaning in unequivocal words before they can be said to have agreed that
the union’s breaches of its promises should give rise to a defence against the duty
assumed by an employer to contribute to a welfare fund meeting.66
The Supreme Court’s decision in Lewis is one example of the need to consider
the context in which the contract is embedded. Rules such as the ‘third-party
beneficiary rule’ may not apply to all forms of contract in the same way.
62 Lewis v Benedict Coal Corp 361 US 459 (1960).

63 Restatement of Contracts § 140 (1932); Restatement of Contracts § 309 (1981).
64 C. W. Summers, ‘Collective Agreements and the Law of Contracts’ (1969) 78 Yale LJ 525,
540-541.
65 Lewis n 62 above, 467-468.
66 ibid, 460.

(2018) 81(6) MLR 958–988 975

Judge Frankfurter insisted on the applicability of the general law pertaining

to the construction and enforcement of contracts in his dissenting opinion in
Lewis. He saw no reason for discarding principles of justice and fairness that
would represent an accumulation of tested wisdom and instead create a new
law for collective agreements. The experience of the judges would ‘make them
much more sure-footed in applying principles pertinent to the enforcement of
contracts than they are likely to be in discerning the needs of wise industrial
relations’.67 This dissent is a matter of principle. Judge Frankfurter’s position is
unpersuasive because the allegedly ‘general’ rules on third party beneficiaries
are inferred from other types of transactions governed by different institutional
imperatives, in particular mostly from cases concerning intra-family gifts and
designation of beneficiaries of life insurance.68 Applying these rules, such as the
third-party beneficiary rule, to different transactions subjects the institutional
context of the affected transactions to a special logic. It is unfitting at best or
even in conflict with the integrity of the transaction in question, because they
are governed by distinct institutional imperatives. Instead of following fixed
rules, legal interpretation must be responsive to the institutional context of the
contract and as a result will vary in its outcome.
As a matter of fact, every individual right is situated in an institutional con-
text – even if ignored by judges who pursue a generalising approach in their
interpretation. Excluding context from the business of legal interpretation may
work without causing harmful side-effects under the conditions that sophis-
ticated commercial parties negotiate, that only the parties to the contract are
affected by its performance, and that competitive markets provide mechanisms
to introduce the perspective of both parties. Undoubtedly, this contracting
paradigm covers a lot of transactions that share these institutional requirements.
However, where law cannot take for granted the social preconditions for free-
dom protected by a contractual right and where the purpose of the contract
requires the integrity of institutions other than the market, interpretation has
to explicate and to take into account the relevant context.
INSTITUTION-CREATING INTERPRETATION
The more complex the contracting issue, the more uncertain its parameters,
the more novel the form of cooperation and the more global its reach, the less
likely is the existence of robust institutions that would be able to ensure the
preconditions for freedom protected by a contractual right. The general courts
of nation states are barely equipped to handle issues extending to different
jurisdictions. This is because they lack established normative models for these
complex contracts as well as expert knowledge about the parameters of the
relevant markets. Moreover, a court would have difficulties in referring to
an existing semantic convention between the particular parties. Under these
circumstances, the practice of contracting itself is forced to become reflective
67 ibid, 476 per J Frankfurter, dissenting.

68 n 64 above, 525, 540.

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Dan Wielsch
about its social effects. Here, the normativity of contract cannot just be linked to
the idiosyncratic perspectives of the parties. The contract must first of all create
a shared understanding of the parties in line with the institutional requirements
of novel transactions, including their social responsibility. Thus, contract cannot
just link up to a convention, but must create it.
With good reason Robert Cover argued that no set of legal institutions exists
apart from the narratives that locate it and give it meaning.69 He emphasised that
normative rules are placed in a rich contextuality that must be explored in order
to understand the law itself. By this argument, he shifted the focus from the
creation of prescriptive rules to the creation of legal meaning (‘jurisgenesis’) as
the true formation of normativity, taking place through an essentially cultural
process in which the normative register of society becomes related to the
various constructions of reality.70 There are instances, however, in which text
does process context, where contract practices create their own institutional
context and interpretation regime.
Constituting the normative infrastructure for global derivative transactions:

ISDA master agreement
One example for this institution building through contract is the ISDA con-
tract suite that provides the essential infrastructure for the over-the-counter
derivatives (OTC) market. It can also serve as an example of the multidimen-
sional social effects of bilateral contracts. The derivatives market in general is
characterised by the challenges of substantial uncertainty.71 Unlike other types
of derivatives which are traded on an organised exchange, eg Intercontinen-
tal Exchange or Eurex, OTC derivatives are traded outside those organised
systems between two market participants directly. Since they are traded inter-
nationally, they occur in a variety of currencies and link actors in a variety of
national jurisdictions. One subcategory of OTC derivatives builds the credit
default swap (CDS), which covers a swap that shifts the credit risk in connec-
tion with the debt obligations from the so called ‘credit protection seller’ to
the ‘credit protection buyer’. Where a ‘credit event’ in connection with the
debt obligation occurs, the seller promises to compensate the buyer.72 CDS
are used precisely in situations where risks are difficult to control, making
elaborated contracts impossible.73 Sovereign CDS contracts are notoriously in-
complete, unable to anticipate with specificity the core risks for which they
are designed.74 The transaction costs involved in drafting and agreeing to con-
tracts on financial derivatives are comparatively high. Without any institutional
frame for contracting, market participants therefore ‘fought about everything’
69 R. M. Cover, ‘The Supreme Court 1982 Term - Foreword: Nomos and Narrative’ (1983) 97
Harv L Rev 4.
70 ibid, 11.
71 Pistor, n 61 above, 318.
72 J. Armour, D. Awrey et al, Principles of Financial Regulation (Oxford: OUP, 2016) 467-468.
73 A. Verstein, ‘Ex Tempore Contracting’ (2014) 55 Wm & Mary L Rev 1869, 1911.
74 A. Gelpern and G. Mitu Gulati, ‘CDS Zombies’ (2012) 13 European Business Organization Law
Review 347, 351.

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in former days, and quite often ‘differences between the participants were too
great for a consensus to be reached’.75
The key to creating a reliable legal regime for transactions under these cir-
cumstances has been private standardisation. ISDA has successfully established
the Master Agreement throughout the global OTC derivatives market as an
umbrella agreement providing legal and credit protection and a close-out net-
ting mechanism for credit default. It includes clauses dealing with default events,
representation and warranties, jurisdictions, and other covenants. The Master
Agreement is referenced by the Confirmation that specifies the economic terms
of the trade, and that incorporates the Credit Derivatives Definitions (CDD) of
ISDA. Individual parties may choose to modify the Master Agreement, but the
incentives are against modification. Doing so would forfeit the gains in reduc-
ing transaction costs associated with standardisation, generate legal uncertainty
and raise compliance issues. In addition, it would interfere with after-market
trading in these financial instruments.
It seems fair to say that the Master Agreement frames the relationships among
market participants by supplying a kind of common language in which they
interact. A formally consistent catalogue of definitions and rules supports the
global reach of the derivatives market, where participants trade ‘as if’ instru-
ments and institutions reflected shared understanding.76 However, ISDA does
not just supply standard text but an institutionalised interpretation of mean-
ing. Faced with ever new financial products and changes in risk management,
ISDA documentation cannot adapt by anticipating every potential fact pattern
and determining responsibilities ex ante. It rather has to rely on numerous
underspecified terms even in its most important provisions such as ‘events of
default’. Normally, questions of interpretation of the ISDA Master Agreement
and the filling of potential gaps would then be up to state courts. This was for
example the case concerning the interpretation of the ‘events of default’ clause
in the decision of Lomas v JB Firth Rixson and others.77 Here as in many other
cases78 , generalist courts were called to decide on claims that are embedded
in complex financial arrangements and specific market conditions. However,
generalist judicial bodies cannot reasonably be expected to possess particular
expertise on the market conditions and to provide an expeditious resolution of
disputes arising under these arrangements. Therefore, ISDA is often involved in
cases concerning the interpretation of operations under the Master Agreement
through amicus briefs. As was outlined before, ISDA’s aim is the creation of a
reliable legal regime for OTC derivatives. Thus, ISDA has an interest in shap-
ing the interpretation of provisions of the Master Agreement in national courts
to retain the institutionalisation of meaning. Their role as intervener allows
ISDA to do so and to participate in the construction of their standard terms in
adding suitable expertise to the legal dispute over such claims. Moreover, for
75 J. B. Golden, ‘Setting Standards in the Evolution of Swap Documentation’ (1994) 13 Int’l Fin
L Rev 18, 18.
76 ibid (‘permit the market to negotiate in a common language’).
77 Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419.
78 The ISDA participates with amicus briefs in a number of cases, see https://www2.isda.org/
functional-areas/legal-and-documentation/amicus-briefs/ (last accessed 13 September 2018).

978 (2018) 81(6) MLR 958–988

Dan Wielsch
the UK a financial list exists which monitors the judicial bodies to ensure that
complex claims79 related to the financial sector are handled by a judge with
legal expertise in this particular field.80
Nevertheless, ex ante specification through bright-line rules in the course
of drafting as well as ex post determination through litigation in court are
both inappropriate for credit derivative contracts. Players in this field have
increasingly relied on what is succinctly called ‘ex tempore contracting’, where
the exact duties are determined on an ongoing basis during the lifecycle of the
contract.81
A major step in the institutionalisation of such ex tempore contracting
was the creation of Credit Derivatives Determinations Committees (DCs)82
through the 2009 Supplement to the Master Agreement. Because this revision
of the private framework also made auctions for CDS credit events the default
settlement method, ISDA needed ‘a formal, objective process for resolving
auction-related determinations’.83 This is achieved through the DCs that es-
tablish binding contractual determinations and therefore resolve uncertainty
over issues such as whether a credit event has occurred, or when a succession
event has occurred, or whether an auction will be held and what obligations
are deliverable for purposes of the auction.84 DCs contrast starkly with the
traditional adjudicative bodies due to the fact that they do not consider indi-
vidual relationships.85 In addition, they do not resolve party disputes based on
adversarial submissions. Instead, they act on behalf of the market as it were,
just answering standardised questions posed by the traders who can only pick
questions from a limited menu of issues concerning the standard agreement.86
Even more important, the decision of a DC is basically binding on all parties
to CDS trades under the new Supplement.87 The party-transcending, market-
wide character of the decision is one advantage of the DC procedure compared
to decisions made by courts – the decisions of which are restricted, first, to
the parties of the dispute and, second, to their territorial jurisdiction. In addi-
tion, the new DC mechanism ensures that decisions are made by people with
particular expertise in the market sphere. Since not all jurisdictions provide
79 According to CPR Part 63A, claims can be brought in the financial list either because the claim
is for more than £50 million or equivalent (63 A.1 (2)(a)), requires a particular expertise in
the financial market (63A.1(2)(b)) or raises issues of general importance to the financial market
(63A.1(2)(c)).
80 Point 1.2 Guide to the Financial list (October 2015). The benefits of specialised courts with
regard to institution creating interpretation will be discussed below under the heading ‘Building
Contextualising Regimes Through Specialised Courts’.
81 n 73 above, 1881, 1912.
82 For more information on the structure and work of the Credit Derivatives Determinations
Committees (DCs) see http://dc.isda.org (last accessed 13 September 2018).
83 ISDA, ‘ISDA Credit Derivatives Determinations Committees’ (May 2012) 8 at https://
www2.isda.org/attachment/NDM1NA==/AGM%202012_DC%20anniversary_appendix_
043012.pdf (last accessed 13 September 2018).
84 ISDA rules on DCs include a complex dispute resolution procedure, encompassing voting
thresholds, burden shifting and procedures for external arbitration.
85 n 74 above, 351.
86 ibid, 363.
87 D. Awrey, ‘The Limits of Private Ordering Within Modern Financial Systems’ (2015) 34 Rev
Banking & Fin L 183, 217.

(2018) 81(6) MLR 958–988 979

a special financial list and third party participations such as by ISDA increase
costs, the new DCs mechanism is particularly important for the interpretation
of the ISDA Master Agreement. According to the DC rules, there are five
regional DCs, each with 15 voting members. 10 out of the 15 voting mem-
bers are dealers, two from the regional and eight from the global market.88
The remaining five voting members are non-dealers. The reassessment of the
membership takes place on annual basis.
The identity of the voting members has caused some concern regarding
the neutrality of DCs decisions,89 as it was argued that there is the potential
risk that voting members will vote according to their own interests and not
with regard to the benefits for the market.90 It is crucial for the efficiency
of institutional settings such as ISDA that they are not subject to a potential
exploitation by special interests and that voting members remain neutral in
their decision-making. In the current DC mechanism, powerful dealers are
in a position to decide on particular questions of interpretation of the Master
Agreement that shape their businesses. There is at least the risk that voting
members will use the DC mechanism to serve their own interests. Therefore,
it may become necessary to discuss reforms concerning the DC mechanism.91
The change in the governance of financial intermediaries is still in progress.
In sum, ISDA has institutionalised a form of collective contractual interpre-
tation that derogates from privity of contract in response to the aggregate risk
of contracts that reference each other in their purpose of shifting individual
risk. As market participants enter into multiple contracts designed to cancel
out one another’s risk, the function of each contract depends on its consistent
interpretation with parallel contracts.92 ISDA therefore had reason to imple-
ment a market-wide interpretation of contracts that may fail to reflect some
individual understandings but on the other hand helps to prevent tail risk (ie
the probability of an extreme low return) and to minimise aggregate losses.
The 2009 Supplement therefore reinforced the role of the Master Agreement
as a kind of external regulation for the particular transaction. The Master
Agreement and its institutional interpretation form an intermediate structure
that operates as a hub for administering the network of decentralised CDS on
the market. It not only provides the covered contracts with a dynamic rule-
making capacity that proves to be essential in adapting the often long-term
CDS contracts to changing circumstances.93 It also enables the absorption of
high systemic risk resulting from the aggregate effect of CDS referencing each
other. In fact, apart from their meaning for any given party, CDS contracts
88 ibid, 217-218.
89 ibid, 221-222.
90 ibid, 221 seq, 249. Awrey draws parallels between the structure of DC and the one of LIBOR
(London Interbank Offered Rate). The latter has been subject to manipulations which led to a
substantial reform. He goes to argue for a reform of the DC system to cope with the conflicting
interests of the voting members in each regional DC.
91 cf ibid , 249-253.
92 n 74 above, 362: ‘If this could not be assured, the dealer or clearing house faced legal “basic
risk”: it might find itself paying out on some CDS but unable to collect on the offsetting ones.’
93 Through standardisation it makes visible – and publicly controllable – a huge network of bilateral
contracts that, due to the aggregate effect, brings about a high systemic risk.

980 (2018) 81(6) MLR 958–988

Dan Wielsch
have pivotal significance for the economy as a whole – a factor that also gives
them a substantial political dimension.94
The development of the ISDA standard for contract firmly illustrates the
multidimensional social effects of bilateral contracts. A single CDS contract
not only affects the expectations of the two parties but extends to third parties
concluding parallel contracts on the derivatives market and to the economic
system and eventually also to politics.95 These other social systems form the
environment of the interaction system and determine whether the freedoms
protected by a contractual right can actually be made use of and whether the
purpose of the transaction can be achieved. Therefore, the effect of standardised
CDS normativity on these systems and, in reverse, the constitutive function
of the environmental conditions for CDS contracts has to be reflected in the
interpretation of a concrete CDS contract. Under the circumstances present in
the market for derivatives, bilateral normativity has to be coordinated in order
to guarantee the preconditions for autonomous contracting.
Due to the global reach of markets for derivatives on the one hand and
the territorial fragmentation of the political system on the other hand, this
coordination is likely to be implemented not through state law but through
an institutional setting that emerges from the contractual practice itself. As
has been stated, the greater the number of traders engaged in the same kind
of transaction, the more likely the contracting infrastructure will be provided
jointly as a club- or industry-specific public good by a trade association or
any other private standard-setter, either alone or in collaboration with public
authorities.96 It is thus mainly up to a privately built legal regime to align the
individual transaction with the social environment it forms part of.
This requires knowledge about the social effects of derivative contracts that
is not given in advance but must be generated in the course of performance of
this type of contract. The development of those new interpretation regimes also
makes it necessary to reflect on the relationship between internal governance
and public regulatory intervention. At the core of this discussion lies the task
of ensuring the integrity and neutrality of the DC voting process to prevent
manipulations within the mechanism.97
94 n 74 above, 389.
95 Due to the industry-wide use of the Master Agreement most CDS contracts share the same
normative structure. Many of them also depend on each other as a matter of fact since they
reference the same entities. For the idea of establishing parallel contracts as a general category, cf
A. Bagchi, ‘Parallel Contract’ (2013) 75 Univ of Pittsburgh Law Review 139, limiting parallel
contract to situations where one party enters into a series of agreements with many other
individuals on terms that are substantially overlapping (ibid, 160). With good reason Bagchi
challenges ‘the notion that the content of rights and obligations between contracting parties is
set by reference solely to the acts and words of those parties in relation to each other’ (ibid, 159)
and instead requires courts to ask ‘how communications between the central party and other
contractees, and among contractees, reasonably affected a given contractee’s understanding of
her agreement with the central party’ (ibid, 162).
96 R. J. Gilson, C. F. Sabel and R. E. Scott, ‘Contracts and Innovation: The Limited Role of
Generalist Courts in the Evolution of Novel Contractual Forms’ (2013) 88 NYU L Rev 170,
199-200.
97 cf n 87 above, 249.

(2018) 81(6) MLR 958–988 981

The development of such institutionalised reflexivity in a contractual regime

is pushed periodically by exogenous shocks in the relevant business sector
that may be caused by changes in the firm, or the industry’s economic or
regulatory environment.98 These shocks question the efficiency of the former
arrangements. And in a more fundamental way, they challenge the reflexive
capacity of the parties to successfully pursue the purpose of the contract under
complex and changing conditions. As a consequence, such shocks may induce
innovation in the contractual forms that institutionalise the new transactional
arrangements.
Contextualising regimes: Collaborative agreements in rapidly innovating

industries
Knowledge problems also arise when there is a high level of uncertainty in a

business environment because, for instance, the exact specification of a new
and innovative product is not yet possible. The contract then is ‘obligationally
incomplete’ at the moment of its inception.99 Under these conditions, a pro-
cess of mutual information exchange through the course of performance must
be functionally substituted for ex ante specification of the desired product. A
contract cannot then just build on a given set of expectations but must take over
the function of establishing a framework for interaction that first of all allows
for the emergence of reasonable expectations. Parties use a formal contract
to create a ‘contextualising regime’ that supports ongoing collaboration and
facilitates the adjustment of the parties’ obligations under conditions of contin-
uing uncertainty.100 The primary idea of contract then shifts from warranting
a particular outcome to regulating a process of collaboration.101 Therefore, the
contract here commits to an ongoing exchange of private information and
contains a procedure for resolving disputes that arise during interaction. This
way the parties generate contract-specific knowledge and endogenise trust by
formalising the process that builds trust and supports informal contracting.102
They first of all create the very context that should govern their relationship.
The situation is therefore remarkably different from discrete contracting un-
der conditions of low uncertainty where parties can anticipate the environment
under which performance will occur. In these cases, the relevant context can
already be specified in the text of the formal contract.103 In contrast, under
conditions of missing background assumptions, the function of the text of the
98 In the case of ISDA the institutional innovations are clearly a response to the failures of large
financial institutions and market developments in the course of the global financial crisis. For
consequences of the global financial crisis on the CDS framework, cf J. Biggins, ‘“Targeted
Touchdown” and “Partial Liftoff”: Post- Crisis Dispute Resolution in the OTC Derivatives
Markets and the Challenge for ISDA’ (2012) 13 German Law Journal 1297, 1307 et seq.
99 For this characterisation, cf n 95 above, 159.
100 n 96 above, 173, 177.
101 ibid, 188.
102 ibid, 186.
103 cf the first section above for the idea that under these conditions interpretation can take text as
substituting for context to be explored.

982 (2018) 81(6) MLR 958–988

Dan Wielsch
contract is to initiate the creation of context – implying that interpretation by

courts must pay due respect to this self-contextualisation by the parties and can-
not simply apply general rules of interpretation. The task of filling ill-defined
contractual obligations by applying an interpretation regime that makes the
contract fit into a given set of coherent normative principles is different from
assisting the parties in developing guiding norms.
Similar problems of uncertainty arise concerning complex project-related,
long-term contracts such as international oil and gas exploration and exploita-
tion contracts or contracts about major construction works. These contractual
arrangements are characterised by high interdependencies between the respec-
tive contractual duties all geared to the purpose of the social project. Unlike
on-the-spot exchange contracts, long-term contracts require specific gover-
nance structures between market and hierarchy to address the dimensions of
duration and uncertainty – and therefore take the form of ‘hybrid’, ‘symbi-
otic’ or ‘organisational’ contracts.104 Drafting techniques often make use of
open-textured formulations of the contractual duties, sophisticated regimes for
the revision of terms, and arbitration clauses that serve to ‘complete’ (some-
times intentionally) ambiguous contracts.105 Among the novel forms of social
cooperation that are stabilised through these innovative contracting practices,
‘networks’ have received special attention since there is still dispute about their
appropriate legal categorisation. Modern patterns of production and distribu-
tion through franchising and just-in-time delivery are driven by an emergent
logic of cooperation between parties whose bilateral agreements form a net-
work of interdependent contributions. As the single contract lacks explicit
reference to other contracts, the difficult process of translating social findings
into adequate legal concepts can only be realised at the level of interpretation.
It is here that the law – with self-confidence about its autonomy106 – has to
carve out the normative significance of interrelated contracts as the basis for an
emergent private order.107
104 S. Grundmann, F. Cafaggi and G. Vettori, ‘The Contractual Basis of Long-Term Organization –
The Overall Architecture’ in S. Grundmann, F. Cafaggi and G. Vettori (eds), The Organizational
Contract: Form Exchange to Long-term Network in European Contract Law (Farnham: Ashgate, 2013)
3-38; E. Schanze, ‘Symbiotic Contracts: Exploring Long-Term Agency Structures Between
Contract and Cooperation’ in C. Joerges (ed), Franchising and the Law: Theoretical and Comparative
Approaches in Europe and the United States (Baden-Baden: Nomos, 1991) 67-104.
105 See, for example, International Seabed Authority, ‘Standard Clauses for Exploration Con-
tract’, Sections 24, 25 at www.isa.org.jm/files/documents/EN/Regs/Code-Annex4.pdf
(Last accessed 13 September 2018), and the Libyan model contract of exploration and
production sharing in the oil sector, Art 23 at http://www.eisourcebook.org/cms/
files/attachments/other/Libya%20Model%20E&P%20Agreement,%20Oil%20&%20Gas.pdf
(Last accessed 13 September 2018).
106 G. Teubner, ‘Piercing the Contractual Veil? The Social Responsibility of Contractual Networks’
in T. Wilhelmsson (ed), Perspectives of Critical Contract Law (Aldershot: Dartmouth, 1993) 211,
215 (role of the law not limited to merely ‘validate’ new contractual practices).
107 See, for example, on an obligation of the franchisor in a retail network to share profits from
discounts with franchisees, Bundesgerichtshof [BGH] [Supreme Court], NJW 1999, 2671, 2675
(Sixt); BGH, NJW-RR 2002, 1554 (Hertz); Betriebsberater 2003, 2254 (Apollo). Furthermore,
cf G. Teubner, Networks as Connected Contracts (2004, Oxford: Hart Publishing, Eng tr, 2011) 191
et seq.

(2018) 81(6) MLR 958–988 983

Building contextualising regimes through specialised courts
There is a tendency to create contextualising regimes with the help of ar-

bitration mechanisms and keep the regimes ‘self-contained’ in the normative
scheme established by the private standard setting institution. There also ex-
ists the option that contextualising regimes make use of courts as a means of
officially approved contract standardisation from the outset. Whereas parallel
contracts first develop in the course of a specialised private regime that later gets
tested against public standards, the idea here is that parallel litigation gives rise
to specialised public standards that inform contracting. Considering that a cor-
poration’s business environment and the evolution of the market for corporate
control are too uncertain to be specified in detail ex ante, shareholders regulate
substantial issues deliberately by standards that they know will be subject to a
specialised court’s interpretation. In contrast to the usual ex post determination
through litigation in generalist courts, parties avail themselves of the capacities
of a specialised court and indirectly create a contextualising regime for their
purposes through reiterative litigation of similar normative issues relevant to a
multitude of players in the same sector. The contracting parties are most likely
to do so if they use standard articles of association that often adopt default rules
of corporate law.108 They leave gap filling and concretisation of the articles to
courts they know to be equipped with the necessary experience and expertise
concerning the specific business context. Specialised courts are thus prepared
to construe the corporate contract of a concrete firm in the light of an accurate
picture of the normative standards characterising the firm’s business sector. In
such cases, the context emerges through subjecting indeterminate contracts to
the jurisdiction of particular courts that build up business-specific expertise
through cycles of litigation
For example, private actors may rely on the specialised knowledge that the
Delaware Court of Chancery has acquired in the course of innumerable paral-
lel actions on issues concerning fiduciary duties.109 Through its expertise, the
court is providing interpretation and supplementation of the statutory rules110
whilst considering the business context of the standard in question. The judicial
system of Delaware, especially the flexibility of Delaware Corporate Statutes
and the legal expertise at the Delaware Court of Chancery has attracted many
corporations to be incorporated in this state, though they do little business
there.111 An important reason for doing so is to benefit from the contract
standardisation happening at the specialised courts. Another example of courts
building contextualised regimes is the UK Financial List. This special list pro-
vides opportunities to channel cases of general importance for the financial
markets to judges with particular expertise. Thus, it ensures that contractual
108 J. Armour, H. Hansman and R. Kraakman, ‘What is Corporate Law?’ in R. Kraakman et al

(eds), The Anatomy of Corporate Law (Oxford: OUP, 2nd ed, 2009) 1, 23.
109 n 96 above, 208 et seq, arguing that through this specialisation ‘the Delaware Court of Chancery
itself becomes a type of contextualizing regime in which contractual innovation evolves’.
110 n 108 above, 27.
111 For a critical account of the Delaware model as depoliticising corporate law, cf D. Greenwood,
‘Democracy and Delaware: The Mysterious Race to the Bottom/Top’ (2005) 23 Yale L & Pol
Rev 381.

984 (2018) 81(6) MLR 958–988

Dan Wielsch
interpretation of standards such as the ones of the Master Agreement develop

into specialised public standards that inform contracting.
Enshrining collaborative normativity into contractual language: The GNU

General Public License
A reflexive coordination of contractual interpretation can also be found where

creative communities constitute themselves on the basis of open licences. Es-
pecially in the field of copyright, open licensing models have emerged that
share one main idea: creators use their exclusive rights granted by territorial
copyright law in order to extend the scope of permitted uses beyond the statu-
tory limitations of IP law.112 In particular, each contributor to a collaborative
project irrevocably grants anybody in the public broad rights to use his or her
contribution. The most important legal instrument by which the individual
contribution is levied for the sake of promoting the project is the ‘copyleft’
provision that requires each creative user of the publicly licensed work to li-
cense his follow-on innovation in turn under the same open licence terms.113
The social power of these licences is nested in the standardised terms that
commit the user of a work distributed under a copyleft licence to adopt the
same open access policy. In fact, open licences are not merely the expression
of individual preferences but form part of emergent social processes that are
grounded in peculiar ethical imperatives and get institutionalised to different
degrees.114 Through the distinctive form of reciprocity made binding by the
standard terms, open licences help to implement novel types of social institu-
tions. In particular, they enable collaborative developer networks that represent
emergent forms of cooperation involving self-interested interaction governed
by contracts and the collective pursuit of a common purpose governed through
partnership.115
Since many of the creative communities are spread around the world, each
user of an open source programme who needs a licence for the use intended
must conclude a licence contract with a number of licensors situated in a
112 With regard to open source software licensing models, cf the succinct characterisation by S.
Weber, The Success of Open Source (Cambridge: HUP, 2005) 84: ‘The principal goal of the OS
intellectual property regime is to maximize the ongoing use and development of free software.
To achieve that goal, this regime shifts the fundamental optic of IP rights away from protecting
the prerogatives of an author toward protecting the prerogatives of generations of users’ (emphasis
added).
113 cf § 2 (1)(b) GPLv2 (‘You must cause any work that you distribute or publish, that in whole or
in part contains or is derived from the Program or any part thereof, to be licensed as a whole at
no charge to all third parties under the terms of this License.’) and § 5 (c)(1) GPLv3 (‘You must
license the entire work, as a whole, under this License to anyone who comes into possession of
a copy.’).
114 cf R. Stallman, ‘Why Open Source misses the point of Free Software’ (2009): ‘Open source is
a development methodology; free software is a social movement. For the free software move-
ment, free software is an ethical imperative, because only free software respects the users’ free-
dom.’ at http://www.gnu.org/philosophy/open-source-misses-the-point.html (Last accessed 13
September 2018).
115 On the governance of open collaborative projects, cf D. Wielsch, ‘Governance of Massive
Multiauthor Collaboration’ (2010) 2 JIPITEC 96.

(2018) 81(6) MLR 958–988 985

number of different jurisdictions.116 This raises the question of the law that
applies to these licence contracts. At present there is no authoritative case law
on the applicable law to licence contracts, at least in Europe. The solutions
range from the law of the licensor, the law of the licensee, the law of the
protecting country as lex contractus to the incorporation of explicit choice of
law clauses and to the creation of national versions of the licences that comply
with the requirements of specific jurisdictions. However, the most important
open source licence – the GNU General Public License – pursues a different
strategy applying generic terms of a licence. The issuer of the terms of a licence,
the Free Software Foundation that functions as a steward of licences for the
myriad of bilateral licensing parties, adopted an approach to drafting which
might be called ‘supra-systemic’: the licence uses a vocabulary that deliberately
eschews terms of art in international copyright law in order to avoid the
importation of system-specific legal assumptions.117 As this drafting technique
places all legal readers at an equal distance from its vocabulary, it facilitates the
worldwide acceptance of the licences, irrespective of the applicable law in a
given jurisdiction.118 The licence thus works as a truly transnational regime for
creativity, as a lex informatica for international creative communities.
This approach permits users to understand the conditions of the licence that
define the scope of the grant in terms of the language of technology; a lan-
guage that incorporates and faithfully conveys the normativity of technological
engineering projects. In whatever national jurisdiction the rights are claimed
later on, these normative requirements for creative cooperation are preserved
because any interpreter of the licence provisions is forced to construe them in
a way that grasps the social function of the technical terms – comparable to a
transposition in the conflict of laws. The interpreting state legal organs are thus
compelled to respect the institutional imperatives of the transnational creative
community. The more artificial language that the contract deploys, the more
likely it is that courts refer to normative and institutional context in order to
make sense of the text.
CONCLUSION: SOCIETAL TURN OF INTERPRETATION
This article started with the suggestion of an institutional turn in the inter-
pretation of contracts. It was argued that legal interpretation must consider
the nexus between private rights and their social effects on institutions that
116 In fact, having concluded ‘a’ licence contract to use a free software program technically means
that the licensee has concluded a multitude of licence contracts. cf A. Metzger, ‘Transnational
Law for Transnational Communities’ (2012) 3 JIPITEC 361, para 7.
117 E. Moglen and M. Choudhary, ‘Software Freedom Law Center Guide to GPL Com-
pliance’ 2nd ed, 2014 at https://www.softwarefreedom.org/resources/2014/SFLC-Guide_
to_GPL_Compliance_2d_ed.html. cf also http://moglen.law.columbia.edu/911/Moglen-911-
Page10.html (Last accessed 13 September 2018).
118 ibid, para 13. The most advanced licence following this strategy is the GNU General Public
License Version 3, which was published in 2007. The GPLv3 uses artificial terms and defini-
tions instead of the commonly used terminology to avoid any hasty association with national
categories; for example, it uses the term ‘convey’ instead of distribute or make available.

986 (2018) 81(6) MLR 958–988

Dan Wielsch
condition the very freedom the contract is set to protect. If the law confines
itself to following the parties’ interpretation of the contractual context without
any control of their reflexivity, this could mean that interpretation might
arbitrarily privilege the requirements of a specific context – a specific party,
a specific institution, a specific social system. The task of the law instead
is to evaluate all autonomies affected through the exercise of contractually
stipulated rights, including institutional and social autonomy beyond the
bilateral interaction system. In order to meet the law’s own societal function
of deciding normative conflicts in an impartial way, the legal construction of
a contract must pay equal regard to all sources of normative meaning.119
If one grants this point, consideration of context is as indispensable for the
courts ex post as it was for the parties ex ante. The key question is therefore how
the courts should coordinate the different normative meanings of contract in its
social environment. As it is proposed here, if the institutional context for certain
types of transactions is well established and its main normative features are
known, courts should apply an institution-preserving interpretation. Precedent
and legislation then have already been able to determine the conditions that
permit the performance of the contract in a way that is consistent with its
personal and social environment. Here, interpretation has to ensure that the
intention of the parties does not contradict or circumvent the conditions for the
proper functioning of the transaction. Where a given contract can be linked to
a specific transactional paradigm, the courts can draw on previous knowledge
about the institutional requirements of such contracts. In other instances, it is
the mode of contracting that gives a reason for the courts to question parties’
interpretation of contract. Here, the courts narrow the scope for recognition of
societal interpretation by applying methods to independently assess the effect of
the contract on its institutional context. For example, courts apply an objective
interpretation of standardised contract terms in order to align the contract with
fairness regulation of specific markets.
However, the institutional context required for a specific transaction or
project may still have to evolve, and its normative requirements may still have
to be elucidated. It has been shown that the ISDA Master Agreement is one
scenario in which parties create their own institutional interpretation regime.
Another example for such developments are collaborative agreements in rapidly
innovating industries. The role of courts then changes from reconsidering
the neglected institutional context into supporting the very production of
such institutional context and the constitutionalisation of novel contractual
cooperation. It was argued that under these circumstances, courts are not in a
privileged position to evaluate the institutional context of a contract. On the
contrary, the proponents of a textual approach rightly criticise judicial activism
in contextual interpretation for completely surrendering the determination of
contractual obligations to ex post adjudication, prompting the judge to usurp
the role of the parties by replacing their will with policies inferred from what
the judge believes to be the relevant context. In contrast, an institution-creating
interpretation would have to acknowledge the primarily societal character of
119 n 5 above, 204.

(2018) 81(6) MLR 958–988 987

institutional development; and it would have to facilitate innovative contractual

practice in shaping a socially responsible institutional arrangement for novel
types of cooperation.
This approach would again move societal interpretation to the foreground
and extend private autonomy from contract formation to the standards of
contractual interpretation. Legal interpretation is not a matter of doctrine
alone, nor is it monopolised in the courts. It is also a social enterprise.120
For instance, privately crafted interpretation regimes reflexively support the
performance of contracts in situations where the institutional context for the
effective enjoyment of contracted freedoms is not yet established. With regard to
legal doctrine, this implies a need to refrain from sticking to uniform approaches
but rather to focus on the development of sector-specific rules of contractual
interpretation and on supporting private regimes that ensure a socially reflexive
construction of contract.
120 The passage from Cover, as cited in the epigraph, encapsulates this insight succinctly.

988 (2018) 81(6) MLR 958–988
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Contract Interpretation Regimes

Article in Modern Law Review · November 2018

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Contract Interpretation Regimes

Legal interpretation can never be ‘free’; it can never be the function of an

(RE-)FRAMING THE ISSUE OF LEGAL INTERPRETATION:

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interpretation is ubiquitous, the argument is underpinned by references to civil

A relational view of contracts

In order to grasp the social contextualisation of contract, the first step is to

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Institutional turn in contract interpretation

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In determining the limits of recognising the parties’ prerogative in the in-

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This determination of meaning happens independently of – and maybe in ig-

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with the capability of adequately recovering the commercial context.22 The

Struggle for recognition

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from a thoroughly negotiated contract between sophisticated commercial par-

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Institutional preconditions of private autonomy

28 n 13 above. For a critique of concluding rights from freedom, cf W. N. Hohfeld, ‘Some

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these institutional preconditions through iterative cycles of litigation concern-

Interpreting bargained contracts

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33 C-W. Canaris and H. C. Grigoleit, ‘Interpretation of Contracts’ in A. S. Hartkamp et al (eds),

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If one perspective gets neglected in the process of contracting so that its

Interpreting standard form contracts

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itself to a ‘ready-made legal order’.44 Under these circumstances, the ‘specific

44 As famously phrased by the German Reichsgericht in DR 1941, 1211.

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preserving well-known functional requirements of the market as another insti-

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transnational sphere.57 Here, law is fabricated by cooperation among global

Interpreting collective agreements

57 Transnational standardisation of (financial) contracts can be studied in the activities of the

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The US Supreme Court decision in Lewis v Benedict Coal Corporation62

62 Lewis v Benedict Coal Corp 361 US 459 (1960).

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Judge Frankfurter insisted on the applicability of the general law pertaining

67 ibid, 476 per J Frankfurter, dissenting.

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Constituting the normative infrastructure for global derivative transactions:

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The development of such institutionalised reflexivity in a contractual regime

Contextualising regimes: Collaborative agreements in rapidly innovating

Knowledge problems also arise when there is a high level of uncertainty in a

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contract is to initiate the creation of context – implying that interpretation by

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