Contract Language Deciphered
Each word in a contract serves an important purpose. If the contract is meant to be binding, every provision must clearly state what is intended or agreed upon, and this means that every word should be used with the utmost precision. If a contractual provision is ambiguous (i.e., if the language is "vague and reasonably susceptible to more than one meaning" (Civ. Code, 1638; also see California Shoppers, Inc. v. San Francisco Local Joint Executive Board of Culinary Workers and Gaston, Machinists & Baker (1985) 175 Cal.App.3d 859, 865)), judicial interpretation of the ambiguity will be based on that which is determined to be "reasonable in the circumstances of the contract and the apparent purpose and intention of the parties concerned" (Coalition of Labor, Agriculture & Business v. County of Kern (2016) 244 Cal.App.4th 761, 781). In other words, if the contract language is not clear, the ambiguity may be interpreted multiple ways, depending on the situation and the reasonable intentions of the parties.
Now let’s think about some commonly misunderstood terms. For instance, take the term "non-exclusive." Perhaps as a child, you learned that "non-exclusive" means "inclusive," and you may have learned that the phrase "including but not limited to" refers to "also involving . " Not exactly: "including but not limited to" does not mean "also involving." Instead, the phrase "including but not limited to" has been interpreted to impose limits on the following list or term, and this list or term is in fact "constrained by its context" (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 750).
Even if the meaning is clear, the question may then become whether the language will be enforced. For example, with regard to: (1) whether an agreement is enforceable in California if it violates the statute of frauds, and (2) whether a restriction cannot be waived "absent express wording" in the contract that permits waiver, a court has stated: "If that interpretation seems unduly technical, it is because parties to a contract cannot substitute the roving concept of good faith for the definite rules of the statute of frauds or for the words of their contract" (Toscano v. Greene Music (2014) 215 Cal.App.4th 267, 271).
Remember that the code will get involved when there are issues regarding the proper interpretation of a contract. In California, such sections of the code that govern the interpretation of a contract include but are not limited to Civil Code sections 1635-1663.
Intent: The Driving Force in Interpretation
In addition to the other standards like the objective standard and the parole evidence rule, intent also helps guide contract interpretation. When contracting parties intend a modified or unique meaning of a contract clause, that intent may be given effect and thus alter the meaning of the language in the contract. Indeed, one of the purposes of a contract is to record the intention of the parties so that when a dispute arises, the intent can be determined. In cases interpreting contracts, courts may consider parties’ actions or inactions before or after execution of the contract to determine intent of the parties.
Literal and Contextual Interpretation
The role of the court is not to consent to the proposal but to determine what the agreement means and if legally it is binding on the parties. Some basic principles guide how the terms of a contract are interpreted. The courts value the literal interpretation of contracts. In fact, it has been said that this is the golden rule. What is written is what the parties meant, so The South African revenue services v SCA may apply here. "The intention of the parties to a contract must be determined from the language employed in the contract". However the parties may have expressed in their written contract, its meaning must be determined in context, and not just by words, it must be taken into account in the context of the whole of the agreement. This was the approach taken in the case of Hoffman v Andries, which held that when determining the meaning of a contractual term, it is imperative to examine the contract in its entirety. Here the relevant clauses were correctly interpreted when due regard was paid to the agreement as a whole and to the background of the transaction. Brewer SA requests only in cash and traded with a specified bank. However the second defendant was not satisfied with conventional trade and required payment in shares. Brewer SA refused and cancelled for breach. The court applied a contextual interpretation rather than a literal, but still found that the agreement was breached. The interpretation of the agreement remains an objective and not a subjective exercise. This means that the courts would focus on the general meaning of the words, not the parties’ intentions (an objective approach) and not the personal position of the parties involved (a subjective approach). This was confirmed in the case of Botha v Rich. The court of appeal set aside a deal that had been struck because the parties chose a badly phrased joint letter as their contract and had misinterpreted it. Another case establishing the context of the agreement came in the case of ex parte AA Mutual Insurance Association Ltd, the court held that where any doubt existed as to the extent of the liability of an insured party to an insurance company, the court preferred an interpretation that gave effect to the intention of the insured party when applying a restrictive clause. In this case the court agreed with the parties that strict adherence to the wording of the clause might cause the insured to be denied relief. Where parties can’t reach agreement on the meaning of the provisions, their conduct would show how the parties understood the provisions to have been interpreted. However in the case of South African Revenue Service v Mohamed, the court dismissed the parties’ respective explanations of the provisions and held that the respondent’s version conflicted with the language of provisions and the surrounding circumstances. The courts recognize a number of principles in interpreting agreements, but the starting point is always the contents of the agreement.
Contra Proferentem
A common principle of contract interpretation is a rule known as contra proferentem, which explains that ambiguous terms in a contract must be interpreted against the drafter. As such, where a consumer enters into a contract where the terms of that contract contain some form of ambiguity, courts will automatically interpret those terms in favour of the consumer as the drafter of the contract was chose the wording of the ambiguous term. Lowry noted that "a term in a contract is held to be ambiguous if it is capable of being read as one of two or more meanings". In Wilks , Lord Walker found that the court’s role in the interpretation process is to decide what a reasonable person would have understood by the words used in the contract considering the context of the agreement.
Courts will often consider illegibility of a contract as being ambiguous and will therefore interpret unclear wording in favour of the other party. Avoiding ambiguity in contracts Drafters can avoid the ramifications of contra proferentem by not entering into contracts when there is vagueness in the terms of the contract. It is important to ensure that you are both doing the same thing and that you are both on the same page when entering into a contract. Both parties must insert sufficiently detailed terms into a contract so both parties understand and agree to them.
Parol Evidence Rule
The parol evidence rule is a substantive common law rule governing written contracts and is designed to avoid surprises and litigation over unwritten understandings, whether they are spoken or agreed to in writing. It prevents the introduction of extrinsic (i.e. outside) evidence that contradicts the written terms of the contract. Parol evidence can take many forms, including oral statements or conduct of the parties, other writings, depositions and affidavits from witnesses. The rule also applies to notes and drafts as well, even if the unfinished or rough version is not signed.
Based on public policy against fraud and false retrospect, courts will not admit, under the parol evidence rule or otherwise, extrinsic testimony to contradict or modify the express written terms of a final agreement. Such evidence may only be admissible to establish an independent equitable claim (e.g. fraud) or the existence of an implied-in-fact contract (e.g. quantum meruit).
Courts will only consider extrinsic evidence in the following circumstances: In his textbook on Pennsylvania Contract Law, professor Robert J. Sharpe summarizes the parol evidence rule this way:
The parol evidence rule, and the common law of contracts generally, strive to safeguard the written contract as the most reliable available evidence of the intention of the parties. The written contract which is intended to embody the entire agreement of the parties is the end result of negotiations, offers and counteroffers made during deliberations which themselves are inadmissible as evidence of the intention of the parties to the final contract. Without this principle, parties would have room for argument and disagreement over possible understandings reflected in the pre-contractual negotiations. It is precisely because of the danger of such disputes that courts have in general confined their attention to the written contract as the final expression of purpose, meaning and intention.
Importance of Custom and Usage
The impact of custom and usage on contract interpretation is significant and must be acknowledged. Courts frequently look at the customary practice of an industry to interpret provisions of contracts arising in that industry. Both the U.C.C. and common law recognize the gap-filling power of customary trade practices and will look to the established usage of a particular industry to help define ambiguous terms or to fill in missing contract provisions. The established rules of any given industry or trade, when adhered to, may expedite the decision-making process and shorten the dispute resolution time. Courts determine that evidence of a long standing custom generally has inherent reliability. Trade customs and practices may condition the parties’ obligations or serve as standards of measurement in the interpretation of agreements . Indeed, the UCC has been described as "a statutory reflection of jurisprudentially developed commercial usages." Courts rely upon usage evidence when there is undesired ambiguity created by the language of the written agreement in terms of its performance and what it requires of the parties. Courts from all jurisdictions of the U.S. have found a trade custom for usages to be so well established as to be universally present, known to all, accepted and followed, so that the few who do not follow the usage may be considered outlaws and are themselves charged with notice of the custom. Trade customs and usages are admissible under both the UCC and common law contract rules to interpret the meaning of an agreement or clarify provisions. Specifically, UCC section 1-205 sets forth the admission of trade usage which must relate to the performance of the contract and is, thus, limited to the actual performance of the contract.