Interpretation of Contract – Whose Meaning Prevails

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 How Are Contracts Drafted?

A contract is a legally binding agreement that is made between parties and acknowledges the rights and duties that govern the arrangement. Contracts can be formed through writing or created by oral agreement; however, throughout this article, the term only refers to written agreements.

Contract drafting is writing down the terms and conditions of an agreement, and the parties to a contract may go through several drafts and negotiation sessions before the official contract is finalized. The overall goal of contract drafting is to create a legally binding document in writing that is clear, concise, and as close to the parties’ intentions as possible.

While the parties to a contract will generally be the ones who decide how a contract will be drafted, it can also depend on the type of contract that is being created. An example of this would be how employment contracts contain specific provisions and terms that differ from the language found in confidentiality agreements.

Generally speaking, most contracts adhere to a basic format and include standard components. Examples of this include:

  • Important words that must be defined;
  • Legal terms that indicate the beginning and/or signal the end of a contract, such as a signature block;
  • The rights and duties of the parties;
  • How the parties can terminate the contract;
  • General provisions; and
  • Special clauses, such as insurance policies.

Additionally, regardless of the type of contract, all contracts must contain the following elements:

  • An offer;
  • The acceptance of that offer;
  • Consideration, which is usually money;
  • An identification of the parties, who must possess the legal capacity to enter into the agreement;
  • Legal subject matter;
  • Mutual agreement between the parties; and
  • A mutual understanding of the rights and duties under the contract.

Many contracts also contain specific terms and conditions. Some examples of common contract drafting terms and conditions include:

  • Force majeure;
  • Arbitration clause;
  • Indemnification;
  • Assignment;
  • Confidentiality;
  • Warranties;
  • Choice of law and forum selection;
  • Time is of the essence clause;
  • Severability; and
  • Liquidated damages clause.

The above terms and conditions are all associated with either:

  • Events that trigger conditional consequences;
  • Duties that the parties are legally obligated to perform; and/or
  • Duties that the parties must refrain from, or else they risk breaching the contract.

What Is A Contract Review?

Legal contract review refers to when one party to a contract hires an attorney to review the terms and conditions of their contract. It is recommended that an attorney conducts this review before a party signs the contract, or when there is a legal dispute associated with the contract. An attorney will be aware of what to look for, and likely understands the process of precisely how to review a contract.

Having an attorney review the contract can protect either party against future or current legal disputes. This is because the contract is generally the most important piece of evidence in a legal matter as it is usually the first document to be consulted, regardless of whether the matter is resolved before or outside of a court.

During a contract review, the attorney will look for specific items, such as whether the contract:

  • Is clearly written and provides unambiguous terms;
  • Contains straightforward language or defines technical jargon; and
  • Complies with the law.

An attorney can also ensure that a party understands all of their duties and obligations under the contract, and can change or amend provisions they did not intend to include in the agreement.

Whose Meaning Prevails When There Is A Disagreement Regarding What A Term In A Contract Means Between The Parties?

After two parties have entered into a contract, problems may arise if they cannot agree on what a specific term in the contract means. If both parties intended the same meaning on a specific term at the time they entered into a contract, that would be the meaning that the court would attach to such a term. However, this becomes complicated when the parties do not have the same meaning in mind.

How a contract will be interpreted will vary based on the specific facts at issue. If the parties attach an entirely different meaning to a specific term in a contract at its formation, and they do not know or have reasons to know of the other party’s meaning, it is most likely that a contract has not been made. Some courts will recognize the existence of a contract but will leave any disputed terms out of the contract.

If one party attaches a different meaning to a specific term, but also knows or has reasons to know that the other party only knows one meaning, the meaning of the lesser knowing party will prevail. An example of this would be if B enters into a contract with C. C only knows that the term of the contract means blue. B knows or has reasons to know that C only knows the term means blue, but the term can also mean green. The court will assign the meaning of blue to the term, even though B argues that the term actually means green.

Generally speaking, “to have reasons to know” means that the party should have known the other party’s meaning under the facts and circumstances of the case. This is determined by all of the facts of the case.

What Are The Advantages And Disadvantages Of Hiring A Lawyer To Draft Or Review A Contract?

There are several advantages and disadvantages to hiring a lawyer in order to draft or review a contract.

Some examples of the benefits of hiring a contract review attorney may include:

  • Preventing future breach of contract issues and other legal disputes;
  • Avoiding the chances of forming an illegal, unconscionable, and/or voidable contract;
  • Acquiring a clear understanding of the duties and obligations of all parties involved in the contract;
  • Ensuring that all terms and conditions in the contract are what the parties intended;
  • Incorporating additional terms and conditions in the contract that a party may have left out, and would be beneficial to them if they were included; and
  • Identifying protections or rights that a party has, which can be used either as a defense in a lawsuit or as grounds to take legal actions against another breaching party.

Alternatively, some of the drawbacks of hiring a contract review attorney may include:

  • Spending unnecessary funds on hiring an attorney in order to review a simple and straightforward agreement;
  • Waiting for an attorney to review a contract, which in turn, will delay signing it and moving forward with a business deal;
  • Creating a contentious atmosphere as opposed to making it a friendly agreement between business contacts;
  • Hiring the wrong type of attorney and risking that they do not understand the benefits of a deal or the nature of a business; and
  • Potentially drafting a contract that results in being longer and more complex than the parties’ original version.

Do I Need An Attorney For Interpretation Of Contract?

Contract negotiations, especially in the context of important financial contracts, can require a contract attorney who can assist you with negotiations so that your needs and requirements will be met.

Additionally, an attorney can help you with drafting and reviewing contracts, and explain to you your duties under the contract as they apply under your state’s specific contract laws. Also, your attorney will also be able to represent you in court, as needed.

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