Key Takeaways

  • Courts rely on established principles to interpret contracts, aiming to uphold mutual intent.
  • The 10 common rules of contract interpretation guide how ambiguous or unclear terms are evaluated.
  • Language is typically interpreted using its plain or technical meaning depending on context.
  • Extrinsic evidence is only allowed when ambiguity exists.
  • Contract provisions are interpreted in context of the entire agreement and its commercial purpose.

It is important to know what rules guide the courts in interpreting contracts in the event you have a dispute over the:

  • Terms
  • Wording
  • Definitions

If two parties fail to determine what the specific terms of a contract mean, they may seek to have the courts review the contract by filing a lawsuit. When this occurs, the court will then engage in contract interpretation to define the terms that would be closest to reflecting what the original intention of the parties was.

Contract Interpretation

The need for contract interpretation often arises out of a mutual mistake in which both parties were mistaken about the terms or definitions of a contract. Mistakes can also be unilateral meaning that only one party had been mistaken. An example of a unilateral mistake would be whether delivery refers to delivery by air or ground services.

Performing a contract interpretation often will involve finding a balance between both the technical uses of terms as well as their every day understood meanings. When performing the interpretation, the court will interpret the document as a whole to determine in what context the contract was made.

Ambiguity

When there are multiple contracts in force when deciding a matter, the court will often consider them together with the other contracts as one entity. During the process, the court will only look at the contract and not at anything outside of the contract unless they find some ambiguity in the drafting of the provisions of the contract. Ambiguity can occur due to vague language where the meaning can be interpreted in two ways.

The court may ask for assistance in the form of written, oral—also called parol— or other evidence that can help resolve any language ambiguity. There is the chance that the ambiguous language could be construed against the party who created it for causing the issue.

Sections of the contract may be disregarded if the provision in the contract failed to express the party's true intention either through:

  • Fraud
  • Mistake
  • Accident

When making the decision, the court will strive to determine the mutual intent of the contract and avoid making prejudices due to the interests of third parties to the contract.

What Does the Term Intention Mean?

Since the court will be determining mutual intention when interpreting contracts it is important to fully understand what intention means in contract law. The court will interpret the contract by deciding the mutual intention if:

  • The intention can be determined.
  • The intention is lawful.

The intention—why both parties entered into the contract—will need to be determined from the written terms listed in the contract. If this language is unclear and indiscernible, the court will look at the original dealings that occurred between the parties.

Ordinary Meanings

In the pursuit to determine the contract language, the court will give the words in the contract what is referred to as ordinary meaning unless the parties had clearly used it in a more technical sense. If it is apparent that the language was meant to be used in a technical sense, then the court will look at how those technical terms are often used in business and interpret that language in the way that it would most make sense for the contract.

Ordinary meaning is the standard that the court uses for determining the language of the contract. This is also known as the dictionary definition or common use. Unless the contract is shown to be using specific technical language, it will be interpreted using ordinary meaning.

Courts will often utilize the four corners rule, which means that the interpretation will only come from what is contained in the contract unless the language is ambiguous. Language can be determined to be ambiguous if it is possible that the plain meaning, as well as the meaning in context, can be different constructions.

Determining the Parties' Mutual Intentions

When determining the intentions of a contract the court will rely strictly on the provisions of the contract. For language that is clear and easy to define, the contract language will be deemed controlling.

10 Common Rules of Contract Interpretation

Courts apply a range of interpretive principles to ensure fair and consistent contract enforcement. Here are 10 common rules of contract interpretation often followed by U.S. courts:

  1. Give Words Their Plain Meaning: Terms are interpreted using their ordinary meaning unless defined otherwise in the contract.
  2. Read the Contract as a Whole: Courts interpret the agreement in its entirety to ensure consistency and coherence across all provisions.
  3. Specific Terms Prevail Over General Ones: When general and specific provisions conflict, specific terms typically control.
  4. Avoid Surplusage: Every word and clause should have effect; interpretations that render language meaningless are avoided.
  5. Interpret Contracts to Avoid Unlawful or Unreasonable Results: Courts strive to adopt interpretations that are lawful, reasonable, and practical.
  6. Harmonize Clauses: If provisions seem contradictory, courts aim to interpret them in a way that gives effect to both.
  7. Contra Proferentem Rule: Ambiguities are construed against the drafter, especially in standard form contracts or when there is unequal bargaining power.
  8. Course of Dealing, Usage of Trade, and Course of Performance: Courts consider how the parties have acted in the past or industry norms if terms are unclear.
  9. Effect Must Be Given to the Parties’ Intent: Courts prioritize enforcing what the parties objectively intended, inferred from the language and context.
  10. Handwritten or Typed Terms Prevail Over Printed Ones: If conflicts exist, courts generally favor negotiated (handwritten or typed) terms over boilerplate text.

These rules serve to promote consistency, fairness, and predictability in contract enforcement, aligning with both the letter and spirit of the agreement.

Commercial Purpose and Business Common Sense

Beyond linguistic analysis, courts often consider the commercial context of the agreement. If the literal meaning of a clause leads to absurd or commercially nonsensical outcomes, judges may interpret the contract in a way that aligns with what reasonable businesspeople would have intended. This approach—often called the "business common sense" rule—is especially useful in complex commercial contracts where rigid interpretations may defy practical realities.

Extrinsic Evidence and the Parol Evidence Rule

When contracts are clear and unambiguous, courts generally exclude external (extrinsic) evidence, per the parol evidence rule. However, if the language is ambiguous or incomplete, courts may consider:

  • Negotiation history
  • Preliminary drafts
  • Oral discussions
  • Industry customs

Such evidence helps clarify intent without altering the core terms. It's a critical tool in uncovering context, especially where standard terms could misrepresent the parties' original understanding.

Frequently Asked Questions

  1. What are the 10 common rules of contract interpretation?
    They include rules such as giving words their plain meaning, reading the contract as a whole, and interpreting ambiguities against the drafter.
  2. When can courts use extrinsic evidence in contract interpretation?
    Only when the contract terms are ambiguous or incomplete will courts consider external evidence like prior negotiations or trade usage.
  3. How do courts determine mutual intent?
    They examine the language of the agreement, the surrounding circumstances, and in some cases, how the parties have performed under the contract.
  4. What happens if parts of a contract contradict each other?
    Courts try to harmonize conflicting clauses, but specific terms usually override general ones. If irreconcilable, courts may void or reinterpret the provisions.
  5. Can courts change contract language if it seems unfair?
    Generally, courts do not rewrite contracts. However, if terms are unlawful or produce unreasonable results, courts may adjust their interpretation to align with legal standards and commercial logic.

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