How to Read a Contract - Explained
Rules for Reading a Contract
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What rules or standards do courts apply when interpreting contracts?
Courts in different jurisdictions may employ unique standards when interpreting the meaning of contract terms. Common approaches include:
- Plain Meaning - The majority of jurisdictions interpret contract provisions based upon their plain meaning. That is, if a contract term is unambiguous, the court will apply the meaning commonly applied to the term or provision.
- Reasonable Person - Other jurisdictions interpret contract provisions based upon how a reasonable person in the applicable circumstances would interpret the contract. This is known as the objective standard.
- Subjective Intent - Some jurisdictions will look to any outside evidence to determine the subjective intent of the parties.
Next Article: Parol Evidence Rule Back to: CONTRACT LAW
What are some other rules or standards do courts apply when interpreting contracts?
Some other common approaches to interpreting contract provisions are as follows:
- Express Terms - Afford the greatest weight to the contracts express terms.
- Implied Terms - Look to implied terms originating from the course of dealing, course of performance, or trade usage.
- Specific Terms - Give greater weight to specific terms than general terms.
- Actively Negotiated Terms - Terms that are actually negotiated between the parties are given greater weight than standard terms or boilerplate.
- Totality of Circumstances - The court will take into consideration the overall circumstances of the agreement.
- Contract Purpose - The purpose of the contract, if ascertainable, should be considered in interpreting the intentions of the parties.
- All Writings - Interpret all parts of the contract as a whole (including when the contract consists of multiple writings).
- Context - Words are given their prevailing meaning in the context of the contract.
- Trade Terms & Course of Dealing - Specific trade terms are to be interpreted in accordance with their meaning in the trade. The parties intentions are interpreted consistently and in accordance with course of performance, dealing, and trade usage.
- Interpret Against Drafter - Ambiguous terms may be interpreted against the drafter.
Jurisdictions may employ any combination of these approaches when interpreting provisions or giving weight to conflicting terms.
Do you agree with this hierarchy of contractual interpretation? Why or why not?
Ben and Jerry enter into a contract for the sale and purchase of goods. The contract is very short and is written in plain language. Soon after business dealings begin, Ben and Jerry argue of the extent of Bens obligation to supply all of the goods that Jerry needs. Jerry sues Ben for breach of contract for failing to meet his supply demands. Ben argues that the contract did not obligate him to meet this level of supply demand. In interpreting the terms of the contract, what are some of the rules that a court will employ?
The courts may be guided by the following approaches when interpreting contracts:
- Reasonable person approach; also known as the objective standard. The courts interpret the terms of the contract based on how a standard normal person would interpret them. Here the court does not dwell on what the law states but on the objectivity of a reasonable persons interpretation of the contract.
- Subjective intent; the courts borrow from external sources where matters are similar to the matter before it so as to ascertain the real intent of the parties to the contract.
- Plain meaning; courts are bound to first rely on the plain meaning of the contract in their simplest meaning. This is so when the terms of the contract are straight forward and do not raise any reasons of contention.
- What is a Unilateral Contract vs a Bilateral Contract?
- What is an Express Contract vs an Implied Contract?
- What are the requirements to form a Contract (Offer, Acceptance, Consideration)?
- What is an Enforceable Contract vs. a Valid Contract?
- What is a Void Contract vs a Voidable Contract?
- Adhesion Contract
- What is Mental Capacity to contract?
- What is the requirement of a Lawful Purpose?
- What are common types of Voidable Contract?
- When does an offer to contact terminate?
- Counterparty Definition
- Mirror Image Rule?
- Rule for Sale of Goods
- Silence is Not Acceptance?
- Mailbox Rule
- Shrink-wrap Agreement Definition
- Click-Wrap Agreement Definition
- What is Consideration?
- What is Promissory Estoppel?
- When is a contract required to be in writing Statute of Frauds?
- What type of writing satisfies the statute of frauds?
- Exceptions to the Statute of Fraud
- Documents Under Seal
- Who Can Sign Contracts on Behalf of a Company?
- E-Sign Act
- Privity of Contract
- Who are third-party beneficiaries to a contract?
- What is assignment and delegation of a contract?
- What is Performance, Substantial Performance, and Breach of a contract?
- What is performance of a Divisible Contract?
- When is a party's duty of performance discharged?
- What is tender performance of a contract?
- What are Impossibility and Impracticability
- What is a Frustration of Purpose?
- Acceleration Clause (Contracts) Definition
- What is Efficient Breach?
- Organization of a Contract
- Contract Representations & Warranties
- Contract Covenants
- What rules does a court follow in interpreting a contract?
- What is the Parol Evidence Rule?
- What is a complete integration vs a partial integration?
- Exceptions to the Parol Evidence Rule
- Patent and Latent Ambiguity in a Contract
- Service Level Agreement Definition
- Offtake Agreement