For legal practitioners and general public alike, contract interpretation principles are important to understand in order to improve the quality of the contract, sharpen the provisions and otherwise provide for an effective contract. In the United States, courts engage in contract interpretation for contracts for goods governed by the Uniform Commercial Code and contracts governed under the common law of each U.S. state.
With respect to contracts for the sale of goods, the principles of law and equity, including the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake bankruptcy, and others apply to the contract unless displaced by particular provisions of the Uniform Commercial Code (UCC). In other words, contracts for the sale of goods are governed by Article 2 of the Uniform Commercial Code, and where the UCC does not apply the provisions are governed by the common law of the state.
When faced with questions of contract interpretation, courts in the United States commonly begin with an evaluation of facts for the purpose of deciding and enforcing the parties’ mutual intent. This is because the parties voluntarily enter into an agreement, choose the terms of the contract and acquire contractual obligations. Therefore, contract interpretation begins by seeking out the choices parties made.
However, sometimes parties enter into an agreement without having an intent or expressing an intent one way or another on some issues such as for example whether the seller warrants the quality of the goods or what the remedies for breach of contract are. As a result, it is important to understand the contract interpretation principles that would be applies to determine the parties’ contractual rights and obligations in the absence of evidence of their intent. Alternatively, the parties’ expression of intent can be ambiguous and the principles of contract interpretation apply to establish the parties’ intent.
When engaging in contract interpretation, courts first focus on the plain meaning of the words used by the parties the agreement. Plain meaning generally refers to the normal, accepted meaning of the words that an interpreter can extract from a writing by using a dictionary, his or her knowledge of English language and generic understanding of the social world. Second, where words are not spoken, the courts look at the context in which the words where used, to the extent that context provides information of what the words in the agreement can mean. Context includes the discussions and conduct of the parties when they negotiated the contract, their conduct in performing the contract after it was formed (course of performance), their conduct in prior comparable transactions with each other (course of dealing) and the customs and usages of the market in which they are dealing with each other (trade usage). Third, where parties cannot offer contextual evidence to determine what the words were intended to mean, the courts interpret the meaning of the language. Below we discuss evidence courts consider in order to determine the context in which the language was used in a contract.
Course of performance refers to systematic and uniform conduct in which parties engage after they enter into an agreement. If the parties began performing the contract before the dispute to be resolved by contract interpretation becomes an issue, their conduct in tendering, accepting or otherwise reacting to performance of the contract without objection can provide evidence of what was intended by the terms in the contract.
Course of dealing refers to any relationship the parties had in the period before the transaction in question. The parties to the contract may have dealt with each other on prior occasions, and the current transaction may be the latest in a series of similar transactions. If this is the case, conduct in prior dealings may provide evidence related to the term in dispute.
Trade custom or usage refers to when the parties deal with each other in a particular market or specialized trade or industry and if the market has a well-accepted custom or practice that explains the language in dispute, then the customary usage can provide evidence regarding the intent of the parties.
As presented above, contract interpretation can be rather complex and how courts apply these principles differ from state to state. It is important to contact an experienced attorney who weights the risks associated with contract drafting and contract interpretation by putting more often their litigator’s hats and constantly think about the “what-ifs.”
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