Posted by: yarbel | 13th Oct, 2015

DIRECTV v. Imburgia and Interpretation vs. Construction — Greg Klass

Post by Greg Klass

I don’t know whether anyone else has noticed, but many of the Supreme Court’s recent arbitration cases raise the distinction between interpretation and construction. I do not think that the Court, which is not especially strong on contract doctrine, has noticed. But it’s lurking in the background. The distinction is especially relevant to understanding what is going on in DIRECTV v. Imburgia, which I blogged about last week.

If you’re not familiar with the interpretation-construction distinction, here’s Corbin’s summary, from the first edition of his treatise:

By “interpretation of language” we determine what ideas that language induces in other persons. By “construction of the contract,” as the term will be used here, we determine its legal operation—its effect upon the action of courts and administrative officials. If we make this distinction, then the construction of a contract starts with the interpretation of its language but does not end with it; while the process of interpretation stops wholly short of a determination of the legal relations of the parties.

In short, interpretation identifies the meaning of or intent behind the parties’ words or actions, whereas construction identifies their legal effect. Though I believe Corbin is the first Anglo-American jurist to clearly articulate the distinction, it is now receiving more attention from constitutional originalists than from contracts scholars. (Though you might see more posts from me on the subject soon. I’m writing about it.)

As I mentioned in my earlier post, if the Supreme Court concludes in DIRECTV v. Imburgia that the words “the law of your state” were ambiguous in the contract at issue, there are arguably two conflicting rules of construction that apply. The one is the ancient rule that ambiguities are interpreted against the drafter, which the California Court of Appeal relied on to find that a condition for arbitration was not satisfied. The other is the federal rule that “due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration.” Volt Info. Sciences, Inc. v. Board of Trs. of Leland Stanford Jr. Univ., 489 U.S. 468, 475-76 (1989)). Both are rules of construction, as neither (on its face) is based on interpretation of what the parties actually said or did. Neither is (one might think) designed to get at the parties’ actual intentions.

Here’s what’s interesting: When a contract is ambiguous or gappy, applying a rule of construction can run up against the more fundamental principle that arbitration “is a matter of consent, not coercion.” Volt, 489 U.S. at 681. According to that principle, arbitration should be ordered only when the parties have clearly consented to it. The above rules of construction, on the contrary, apply only when the parties have not clearly expressed their intent – either because their words are ambiguous or because their agreement did not address an issue. If arbitration requires clear proof of consent, it might seem that the proper rule of construction in cases of ambiguity would be against arbitration, not for it.

One sees this logic at work in Stolt-Nielsen S.A. v. AnimalFeeds International, in which the Court considered an arbitration clause that did not specify whether class arbitration was authorized. Justice Alito, writing for the Court, leaned heavily on the principle that “the parties’ intentions control” to conclude that the agreement to arbitrate did not authorize class arbitration. “The differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties’ mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.” 559 U.S. 662, 687 (2010). Stolt-Nielsen says that if parties don’t unambiguously agree to class arbitration, courts won’t force them into it.

So if arbitration is a matter of consent, when can the presumption in favor of arbitration ever kick in? I have not done an exhaustive study, but as far as I can tell the Court has applied the presumption only in cases in which its clear that the parties have agreed to arbitrate, but it remains unclear which claims are to be arbitrated. One might square this with the consent principle by arguing that the presumption is a majoritarian rule of construction: most parties who agree to arbitrate expect or would prefer to arbitrate more rather than less. (Whether this is correct is a factual question, on which I won’t speculate. I also won’t speculate on whether majoritarian defaults or other rules of construction should, when the parties’ intentions are unclear, ever satisfy the principle that the parties’ intentions control. That ship seems to have sailed.)

What about DIRECTV? The clause at issue is not about which claims are subject to arbitration. Rather, it is about whether a triggering condition of arbitration is satisfied –specifically, whether “the law of your state” requires class arbitration. Here, I think, the logic is different. There’s no reason to think that where there is an ambiguity about what conditions trigger arbitration, the parties are more likely to have wanted a broad reading of those conditions – one that made arbitration more likely.

Another way of putting my point: The Supreme Court is not in the business of interpreting contracts. When it decides an FAA case, it is typically announcing a rule of construction—usually how an ambiguity or gap is to be construed. But it would be a strange rule of construction to say that when the parties have not clearly agreed when arbitration is to happen (as distinguished from what claims are subject to arbitration) there is a presumption in favor of arbitration. Such a rule, as Stolt-Nielsen tells us, would fly in the face of the more fundamental principle that arbitration is a matter of consent.

I should say that a good chunk of the argument last Tuesday was about whether the clause was ambiguous at all — a threshold question for the above analysis. The California court found that it was in a decision that seems eminently sensible to me. But I wouldn’t venture to predict how five Justices will come out on that separate question.

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