Contract Interpretation

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 What is a Contract?

A contract is an agreement between two or more private parties which creates mutual legal obligations. Contracts can be written or oral but oral contracts are more challenging to enforce and should be avoided whenever possible.

It is important to note that there are certain types of contract which are required to be in writing in order to be valid, including contracts involving a significant amount of money, over $500. Contracts form the basis of everyday dealings in many aspects of life.

Because of this, it is important to have a basic knowledge of the rules which govern contracts in order to ensure that a contract is valid. Valid contracts are required to have certain elements to be enforceable, including:

  • An offer;
  • Acceptance of the offer; and
  • Consideration.

Most contracts also contain provisions regarding a time or event when performance must be made as well as the terms and conditions for performance. As previously noted, a court will not enforce certain types of contracts unless those contracts are in writing.

These types of contracts are governed by the Statute of Frauds and are required to be in writing. Examples of contracts that fall under the Statute of Frauds include:

  • Marriage contracts;
  • A contract which will not be performed within 1 year;
  • Contracts for an interest in land;
  • A contract to pay a decedent’s debt; and
  • The sale of goods over a certain amount.

The majority of contracts are governed by the statutes of the state in which it was formed. Therefore, it is essential to review the local laws when a contract issue arises.

What Are There Different Types of Contracts?

Unilateral contracts involve a promise in exchange for a specific performance. Bilateral contracts involve a promise in exchange for a promise.

There are also several other types of commonly used contracts, including:

  • Express contracts, which typically specify orally or in writing the exact terms of the contract;
  • Conditional contracts, which are based upon the completion of a condition;
  • Joint and several contracts, which involve multiple parties;
  • Implied contracts, where a court finds that a contract existed based on the situation;
  • Unconscionable contracts, which put one party at a greater advantage than another one and are considered unjust;
  • Adhesion contracts, which are considered to provide one party with more bargaining power than another and, therefore, result in a take it or leave it type situation;
  • Option contracts, which allow an individual to enter to another contract with another party at a later time; and
  • Fixed prices contracts, which involve a buyer and a seller who agree to pay a fixed price for a project.

It is important to note that contracts may come in many different forms and are something most individuals deal with on a daily basis. If an individual is unsure what type of contract they are involved in, they should consult with an attorney.

What is Contract Interpretation?

Contract interpretation may be necessary if a dispute arises over the terms of the contract or the language and definitions that were used in the contract. If the parties to the contract cannot reach an agreement regarding what the terms mean, it may be necessary to file a lawsuit in order to have the court review the contract.

If this occurs, the court will engage in contract interpretation in order to determine a resolution for the disagreement. For example, suppose a shipping contract is entered into where the parties are mistaken as to whether the word delivery means by air or by land.

In this case, a court would perform contract interpretation in order to determine exactly what the parties mean by the term delivery when they drafted the contract. The ultimate goal of contract interpretation is to come to a definition which most clearly reflects the original intent of the parties who created the contract.

Contract interpretation usually becomes necessary when a mutual mistake is made. A mutual mistake occurs when more than one party to the contract is mistaken.

In addition, contract interpretation may also be necessary if a unilateral mistake was made. A unilateral mistake is a mistake in which only one party to the contract is mistaken.

How Are Contracts Interpreted?

The laws which govern contract interpretation can vary by state. In addition, the nature of the contract or the subject matter of the contract may influence how the court interprets it. In general, the majority of courts follow certain basic principles when interpreting contracts, including determining mutual intentions and ordinary meaning.

When determining mutual intentions, the first step is to determine the intentions which are shared by both parties. A court will first attempt to interpret a contract according to what the authors originally intended.

When possible, the mutual intentions will be determined strictly by using the written provisions which were included in the contract. If the language of the contract is clear and definable, that language will control the interpretation.

If the language of the contract is unclear, external evidence may be used to interpret the intent. For example, a record of previous dealings between the parties may be used.

To determine whether the language of the contract is clear and indefinite, a court will, in general, rely on the ordinary meaning of the word or the phrase in dispute. This practice is also referred to as going by the dictionary definition of the term or the common usage.

Contracts will typically be interpreted by using ordinary means unless it is clear that the author or the contract used the term in question in a special or technical way. For example, in a construction setting, the work hammer refers to a specific tool but in other circumstances, it may refer to a gun part.

Other aspects of contract interpretation may include:

  • As a whole;
  • External evidence; and
  • Parol evidence.

A contract is, in general, interpreted as a whole. This means that the definition of one word or term in one part of the contract will apply to the rest of the contract unless otherwise specified.

Generally, the court will only use the contract itself when interpreting a disputed term and not external evidence. If, however, the terms in question are vague or ambiguous, a court may decide to disregard the contract and use an external document to interpret the contract. The laws governing the use of external evidence are complex and depend upon the reason the interpretation is necessary.

Parol evidence refers to evidence of an agreement which is intended to supplement the contract or to be integrated into the contract. This may include, for example, oral agreements which may have taken place before the contract was fully drafted.

In order to avoid a potential issue as well as the need for contract interpretation, it is always best to ensure that all of the terms of a contract are clear and precisely indicated in the contract. The parties involved should ensure that everyone who is involved in the contract understands the terms and that they are in agreement regarding the definitions of certain words.

Do I Need an Attorney for Assistance With Contract Interpretation?

It is essential to have the assistance of a contract attorney for any issues, questions, or concerns you may have related to contract interpretation. One simple way to avoid the future need for contract interpretation is to have an attorney review your contract prior to signing.

Your attorney can assist with all aspects of contracts, including drafting and review. This will help ensure that disputes do not arise in the future.

Should a dispute arise related to your contract, your attorney can provide you with guidance regarding how it may be interpreted, possible remedies, and represent you when you are required to appear in court.

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