Arbitration & Mediation

The Forthright Negotiator Principle? Who Knew?

By Victoria Pynchon

I don't purport to have been around longer than Moses, but I have been pretty actively engaged in the interpretation of contracts since the early 1980's.  So it comes as a little bit of a surprise to hear of a contract construction doctrine -- even one from out-of-state -- that I've never heard of before.  Particularly one with as compelling a name as the "forthright negotiator doctrine."

The Private Equity Law Review Blog brings this doctrine to our attention here as follows:

. . . under the forthright negotiator principle, “the subjective understanding of one party to a contract may bind the other party when the other party knows or has reason to know of that understanding. Because the evidence in this case shows that defendants understood this Agreement to preclude the remedy of specific performance and that plaintiff knew or should have known of this understanding, I conclude that plaintiff has failed to meet its burden and find in favor of defendants.”

“The forthright negotiator principle provides that, in cases where the extrinsic evidence does not lead to a single, commonly held understanding of a contract’s meaning, a court may consider the subjective understanding of one party that has been objectively manifested and is known or should be known by the other party.”

The only support for this principle cited by the court was a section of the Restatement of Contracts.

Without the feel-good moniker, this rule turns out to be pretty much the same as that codified in California Civil Code section 1649.

If the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it.

Calfornia case law supplies the remainder of the "forthright negotiator rule," i.e., that the Court may -- where the contract is ambiguous -- consider evidence demonstrating the parties' "objective manifestations" of their intent.  See e.g. De Anza Enterprises v. Johnson (2002) 104 Cal.App.4th 1307, 1315.)

I cannot intuit why the Restatement calls this the "forthright negotiator rule," though I bet Ken Adams knows!

I can tell you this:  I recently mediated a contract case with a lots and lots of lots of zeros following the first number at issue where the enforcement question hinged on what one contracting party believed the other contracting party did not know at the time of contracting. 

And though it's easy to say -- in 20-20 hindsight -- that party A should have included -- perhaps in a WHEREAS clause -- its understanding of the other party's understanding -- no one can ever predict the way in which the parties' deal could actually come to pieces.  

And you could "WHEREAS" yourself to death over matters that the bargaining parties believe to be important at the time, not to mention the fact that they are rarely, if ever, actually forthright with one another about all of the value to be exploited in the present, let alone in the future. 

So what's a careful but not paranoid negotiator to do?  Include in your contract -- at least in the WHEREAS clauses -- any central assumption you are making about the state of your bargaining partner's knowledge.  And when I say "central," I meean any assumption you're making that is key to your willingness to enter into the bargain in the first place. 

Better to consult someone like Ken Adams in the first instance than to find yourself picking up the telephone to call your outside litigation counsel, no?  

Full post as published by Settle It Now Negotiation Blog on January 05, 2008 (boomark / email).