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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.
Some other common approaches to interpreting contract provisions are as follows:
- Express Terms – Afford the greatest weight to the contract’s 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.
Discussion: Do you agree with this hierarchy of contractual interpretation? Why or why not?
Practice Question: 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 Ben’s 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 person’s 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.