Contract interpretation is needed 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 lawsuit in order to have the contract reviewed by the 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 were regarding a specific provision when that provision was originally agreed upon by the parties.
Contract interpretation usually becomes necessary due to a mutual mistake, where both parties were mistaken, 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 when they drafted the contract.
The rules for interpreting contracts may vary according to state laws, as well as 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: Courts will always attempt to interpret contracts according to what the parties originally intended as much as they can. 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 in question. 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.
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 the definition of one word or term in one part of the contract should apply throughout the rest of the contract. Unless otherwise specified, the definition will be applied every time that word appears.
- “External evidence”: The court will use only the written contract itself to determine the party’s intent as much as possible. However, if the particular terms of the contract in question are found to be ambiguous, 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 needing 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. Furthermore, the parties should make sure that everyone involved understands the terms and that they are on the same page when it comes to definitions of certain words at the time of contract formation. It also helps to have a lawyer review the contract before it is signed and be present during negotiations. These steps can help eliminate the need for contract interpretation in court later on.
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 contract 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.