What is Contract Interpretation?
Contract interpretation occurs if there is a dispute over the terms, words, or definitions in a contract. If the parties cannot agree on what a certain contract term means, they may need to file a claim in order to have the contract reviewed in court. If this happens, the court will engage in contract interpretation in order to resolve the disagreement.
The ultimate aim of contract interpretation is to arrive at a definition that most clearly reflects the original intentions of the parties. Thus a judge may have to “interpret” a contract in order to determine what the parties’ intentions or understanding was regarding a specific provision.
Contract interpretation usually becomes necessary due to a mutual mistake or unilateral mistake where only one party was mistaken. For example, in a shipping contract, the parties may be mistaken as to whether the word “delivery” means delivery by land or by air. The court will then perform contract interpretation to determine exactly what the parties meant by the word.
How are Contracts Interpreted?
The rules for interpreting contract may vary according to state laws, and according to the nature or subject matter of the contract. In general, most courts will follow a few basic principles during contract interpretation. Some of the basic principles involved in interpretation of a contract include:
- Determining the parties’ mutual intentions: As much as possible, courts will interpret contracts according to what the parties originally intended. If possible, the parties’ intentions will be determined strictly using the written provisions in the contract. If the contract language is clear and definable, then the contract language will be controlling. Sometimes, if the contract is unclear, external evidence besides the contract may be used for interpreting intent (such as a record of previous dealings between the parties).
- “Ordinary Meaning”: In order to determine if contract language is “clear and definite”, the court will usually use the ordinary meaning of the word or phrase. This is usually known as the “dictionary definition” of the word, or the “common usage”. Unless it is clear that the parties used the term in a technical or special way, the contract will usually be interpreted using ordinary meanings. For example, in a construction setting, the word “hammer” usually refers to a type of hand tool (as opposed to other more technical meanings, such as the hammer of a gun)
Thus, contract interpretation often involves a delicate balance between technical usages of terms and normal, everyday meanings of words.
Are There Any Other Aspects of Contract Interpretation That I Should Know About?
Besides these basic principles for contract interpretation, there are few other aspects that are helpful to know about:
- Contracts are interpreted “as a whole”: This means that definitions of one word or term should apply throughout the contract. Unless otherwise specified, the definition will be applied every time that word appears.
- “External evidence”: As much as possible, the court will only use the contract writing itself to determine the party’s intent. However, if the contract is “ambiguous” (leading to more than one interpretation), courts may choose to disregard the contract and use external evidence outside of the contract for assistance. The laws regarding the use of external evidence are very complex and depend on the reasons for interpretation
- “Parol evidence”: Parol evidence is evidence of agreements that were intended to supplement, or be integrated into the contract. This usually refers to oral agreements that may have occurred before the contract was fully written. As with extrinsic evidence, the rules regarding parol evidence can be complex.
Thus, it is best to make sure that all the terms are clear and precisely indicated in the contract. Also, the parties should make sure that everyone understands the terms and that they are on the same page when it comes to definitions of certain words. It also helps to have a lawyer review the contract and be present during negotiations. These steps can help eliminate the need for contract interpretation later on in court.
Do I Need a Lawyer for Help with Contract Interpretation?
Contract interpretation often requires skill and creativity on the part of the court or judge. The court may have to examine many different underlying factors when determining the parties’ intentions. A lawyer can help you draft, review, and edit a contract in order to make sure the parties are in full agreement. Also, if a lawsuit is filed, your lawyer can help explain how contract interpretation might effect the outcome of the case.
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Last Modified: 11-04-2011 11:27 AM PDT
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