Rules of the Road for Contract Interpretation

No one ever drafted a contract expecting that it would one day be handed to a judge with the expectation that the judge would then explain to the contracting parties what their contract actual means – but it happens.

Written contracts are merely the expression of the parties’ agreement; if you do that for me, I will do this for you. It really is that simple. History tells us, however, that nothing is really as simple as it first may seem. 

Assume you offer $25 to your child if the lawn is mowed, and your child agrees. Now reduce that offer and acceptance to a writing you both can sign. Who will do the mowing? Will it be your child as you thought, or will it be the neighbor as your child plans to do? When will the mowing happen? Will it be Saturday afternoon in time for the family cookout as you think, or will it be next week because that is when the neighbor is available? 

What exactly constitutes “the lawn” your child may ask? Does mowing include edging the sidewalk as you assume? Who prepares the lawn by picking up the sticks and the dog toys, a necessary step but one for which your child wants to be paid extra? Who provides the lawn mower and who pays for the gas? When is payment made? What happens if the job is not finished, at least to your satisfaction? You get the idea.

Contract drafting is a skill, one that is developed over time and often through painful trial and error. Watching experienced attorneys draft a contract is as much a lesson in negotiation as it is an exercise in artful authorship. The consistent expression of clear, unambiguous thoughts is by no means an easy task. The drafters’ choice of words, structure and even punctuation can focus a meaning or obscure it. 

Sometimes the parties’ own compromise may require a certain level of equivocation in contract drafting. However, in the main, attorneys strive for clarity because they know that future problems lurk in any ambiguity. Indeed, when disputes arise, and the contract upon inspection is unclear as to the point of dispute, interpretation can evolve into negotiation which sometimes devolves into litigation. 

In litigation, the court’s job will be determining and enforcing the parties’ intent. The aim is to look to, and apply, the contract language according to its plain and ordinary meaning. If the contract language is judged to be unambiguous, the court must interpret and enforce the contract as it was written, and as a matter of law because the chosen words are considered to be the true expression of the parties’ intent. An objective standard is used when evaluating the contract’s terms.

If, however, through an objective lens the chosen words are ambiguous – when provisions irreconcilably conflict or are equally susceptible to multiple meanings – deciding the parties’ “intent” becomes a question for the trier of fact which is either the judge or possibly a jury. 

The law permits the trier of fact to employ a variety of tools when construing a contract. Often a quite useful tool is the consideration of extrinsic evidence beyond the four corners of the written agreement. Consideration of the circumstances existing when the contract was formed, how the parties conducted themselves after the contract was signed, looking at the parties’ other agreements or course of dealings, or how similar questions have been handled in the industry can be persuasive evidence of what the parties intended their written words to mean. 

However, before extrinsic evidence is introduced, the courts typically follow various rules or maxims of contract construction. For example, one of the first rules is that the courts cannot impose an ambiguity when the contract language is otherwise clear. The parties’ chosen words must control if at all possible. Toward this end, the courts will not rewrite the parties’ contract under the guise of interpretation or construction.

When construing a contract it must be read as a “whole” document.  The court must give effect to every word, phrase, and clause the parties’ used, the assumption being that those provisions were written into the agreement for a reason. The corollary to that rule is equally true, any interpretation that renders any part of the contract language surplusage or nugatory should be avoided. However, if the only reasonable construction of a provision renders some other provision meaningless, that will not necessarily preclude the application of the rule.

The construction of the contract also must be reasonable. The courts will avoid construing contract language in a highly technical or strained way to reach a certain result. But understand that what is reasonable is not the same thing as it being fair. 

Courts typically will avoid judging the wisdom or equality of the parties’ agreement. It is not the court’s responsibility, nor is it within its authority, to excuse a party from what appears in hindsight to have been a bad deal.

Contract language typically must construe in context in which those terms actually were used. There is no place for hypothetical construction of the agreement. That means the contract must be interpreted in light of the relevant circumstances existing when the agreement was signed.

When construing a contract the courts also will presume that the parties knew and understood the state of the law when the contract was made. As such, the courts will adopt the contractual construction that is consistent with the existing law.  Even if consistent with the law, the courts will nonetheless avoid any construction the result of which would be contrary to public policy.

In certain contracts, when portions are hand written or printed and others are pre-printed or boiler-plate terms which are inconsistent, the hand written or typed part will control.

There also are certain general rules.  For example, matters that are specifically mentioned in a contract will control over matters discussed only generally. Matters that appear to have been specifically negotiated may control over standardized or boiler-plate terms.

When all other rules of construction fail to reveal the parties’ intent, including the consideration of extrinsic evidence, the courts may construe the contract against the party who drafted it. This rule is used only after all conventional rules and maxims of contract construction fail to answer to issue in dispute.

The goal in contract drafting is always to clearly express the parties’ intention. In my experience that happens most of the time; our business lawyers see to it. Our firm can help in those instances when, despite all best efforts, disputes arise.

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