Easterbrook on Contracts, Meaning and Schrodinger’s Cat

February 2, 2006

Under the prevailing will theory of contract, parties, like Humpty Dumpty, may use words as they please. If they wish the symbols “one Caterpillar D9G tractor” to mean “500 railroad cars full of watermelons”, that’s fine–provided parties share this weird meaning. A meaning held by one party only may not be invoked to change the ordinary denotation of a word, however. E.g., Skycom Corp. v. Telstar Corp., 813 F.2d 810, 814-16 (7th Cir.1987). Intent must be mutual to be effective; unilateral intent does not count. Still less may the parties announce that they “share” an unusual meaning to the detriment of strangers, who have no way of finding out what was in the contracting parties’ heads.

If TKO and C & G had written: “this document is either a sale or a lease, to remain our secret until we know which will give us the greatest benefit at the expense of strangers”, no court would enforce this “meaning”. In a famous gedanken experiment of quantum mechanics, Schrödinger’s cat remains suspended between life and death in a box, neither alive nor dead until the box is opened and uncertainty about the decay of a radioactive particle is resolved. TKO wants us to believe that its agreement with C & G is like Schrödinger’s cat, neither a sale nor a lease until uncertainty about C & G’s payments and solvency is resolved and TKO knows which characterization is more favorable. We doubt that Indiana would allow contracting parties such latitude. Just as a one-man corporation may not pierce its own corporate veil to endow the shareholder with the firm’s rights, Kush v. American States Insurance Co., 853 F.2d 1380, 1383-84 (7th Cir.1988), so the author of a lease may not pierce its form to get at a “substance” that it suddenly finds more lucrative.

TKO Equip. Co. v. C & G Coal Co., 863 F.2d 541, 545 (7th Cir. 1988).

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