Contract Interpretation: Everything You Need to Know
Contract Interpretation is important to construction disputes. Contract interpretation is when a court determines the meaning of the terms of a contract.3 min read
Contract Interpretation is important to construction disputes. Contract interpretation is when a court determines the meaning of the terms of a contract. Many contracts are neither drafted nor reviewed by an attorney. Unfortunately, this likely leads to unclear contracts.
Cases are won or lost based on how courts interpret contract terms. There are many rules and regulations governing contract interpretation.
Courts should always interpret contract terms with the goal of identifying the intention of the parties. Determining the intent of the parties should be an objective analysis. The court should not consider subjective intentions of the parties. The court, based on presented evidence and the language of the contract, should attempt to determine what a reasonable person, having all the background knowledge the parties had at the time of contract formation, would have understood the terms of the contract to be.
The contract should be viewed as a whole and all of the documentary, factual, and commercial context of the contract should be taken into account.
What a Court Should Consider in interpreting a contract:
1) the plain meaning of the language
2) the drafting of the language
3) other relevant terms that might help determine the meaning of the language
5) the purpose of the contract as a whole
6) the facts and circumstances around the parties at the time of contract formation
7) commercial common sense
8) a court may allow the parties to introduce extrinsic evidence, but may not
Extrinsic evidence includes
- Witness testimony describing what they thought the contract meant
- Emails or correspondence discussing contract terms
- how the parties acted if under a different contract together containing similar terms
Intention of the Parties: A court must interpret the contract in a way that reflects and promotes the intention of the parties at the time they entered into the contract.
As Expressed in the Document: A court should give effect to the intention(s) of the parties as expressed in the written document, if there is one. This is determined with the plain meaning of the words used in the contract.
Parol Evidence Rule
The parol evidence rule prevents extrinsic evidence from being considered unless the language of the contract is ambiguous. The court does not consider evidence extrinsic if the document is clear and unambiguous on its face.
A contract is ambiguous if the language is reasonably susceptible of more than one meaning. Difficulty in interpreting a contract is not ambiguity.
If ambiguity in the language of the contract is found, extrinsic evidence is admitted to clarify the meaning of the ambiguous words or phrases. The interpretation should promote a reasonable and sensible commercial result if possible.
Contra Proferentem: The presence of ambiguity will also allow a court to apply contra proferentem. Under this doctrine, a court interprets an ambiguous provision against the party who wrote it or requested its inclusion.
Contract as a Whole: A court must attempt to give effect to all of the provisions in a contract. A court must consider the contract as a whole. This “whole agreement” rule usually benefits owners over contractors in construction contracts. This is because this places an obligation on contractors to perform work if any clause or term of the contract can be construed to require performance of the work.
Conflicting Terms: If a court determines that there are conflicting terms in the contract, it should attempt to harmonize the conflicting terms in order to give effect to the contract as a whole.
Specific Over General
If a court tries to allow both conflicting terms by harmonizing them, the court will have specific terms qualify general terms. In other words, the conflicting general term will not extend beyond the scope or subject matter of the conflicting specific term.
Absence of Words: The absence of particular words in the contract should be considered in contract interpretation. This doctrine of contract interpretation is called Expressio Unius Est Exclusio Alterius. Translation of this latin is “inclusion of one is exclusion of the others.” Courts assume that if there is a list of items and an item was NOT included, then it should not be included. This rule applies when services are included in construction contracts.
Surrounding Circumstances: Surrounding circumstances or the relevant background of contract formation may be examined by a court.
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