A contract is an agreement between two or more people or entities to do or not to do something. It has often been said that an oral contract is not worth the paper it is written on. Without a written document, it is easy for the parties to recall differently each parties obligations and entitlements.
Writing down the terms of the contract can resolve many of these issues. But what happens when the parties agree on what the contract says but disagree on what it means? What happens when two distinctly different meanings can be taken from the same words?
- You look hot!
- Thief gets nine months in violin case.
The Rules of Contract Interpretation
When disputes about the meaning of a written contract arise, courts apply the general rules that govern contract construction. This post discusses some of the more common of these rules, including:
- The language used in the contract is the primary source of meaning.
In an agreement, words are assumed to have ordinary and natural meaning. Also, the courts will not go beyond the written text of the contract. Unless, however, there is an ambiguity in the language, or an ambiguous term, word or phrase. Courts also consider the context which words are used and other circumstances that may help clarify the contract’s meaning.
- The contract should be interpreted as a whole.
Each provision should be read in the context of the other provisions, and the contract should be construed as a single document. The court will look at the entire agreement to determine its purpose and intent. It will not interpret one provision in isolation from the rest of the contract. If multiple contracts were signed simultaneously, those contracts will be read and construed together, rather than in isolation.
- The court should give effect to the parties’ intentions as expressed in the contract.
The parties’ intentions are determined by looking at the contract’s language and surrounding circumstances when the contract was entered. The court will seek to give effect to the parties’ intentions as expressed in the agreement. It will not impose its own view of what the parties should have intended.
- Construction which will uphold a contract in every part is preferred. Otherwise, part of the contract will be ignored or contradicted.
- Where there are provisions in the same agreement that may conflict with one another, construction that allows both provisions to work in concert, rather than in conflict with one another, is preferred.
- Where provisions in the same contract conflict, a limited or specific provision will prevail over one that is broadly inclusive.
- If there is an irreconcilable conflict between two provisions of the same contract, the first of the two will prevail.
- Punctuation is to be used as a guide to resolve, not create, ambiguity.
- “And” may be substituted for “or” to effectuate the parties’ intent.
- Parties to a contract are presumed to have contracted with reference to relevant laws. Interpretation that would violate the law is to be avoided.
In construing the terms of a written contract, the court’s primary goal is to determine the intent of the parties. For example, what did the parties understand the deal to be?
Courts will look at the contract’s language, the context in which the words are used, and other circumstances to determine the parties’ intentions. Understanding these general rules is essential for anyone involved in drafting, negotiating, or interpreting a contract.
A Case Study
Let’s examine a 10-year commercial lease that gives the tenant the right to early termination “at the end of the 36th month of the term.”
A week or so into the 37th month, tenant gives landlord notice of early termination. Landlord states the early termination right existed for one day, at the end of the 36th month of the lease, and then expired. Tenant claims the right to terminate at any time, or at least for a reasonable time, after the end of the 36th month.
Which interpretation is correct?
Avoid Contract Ambiguity: A Quest for Meaning
Georgia’s courts routinely hear and resolve disputed contractual interpretations. The guiding principle is to determine the intent of the parties. What does the contract mean?
The court’s first task is to decide whether the contract is ambiguous. If the contract is clear and unambiguous, it must be enforced as written.
If the contract is ambiguous, then the judge must attempt to resolve the ambiguity. An agreement is ambiguous when the language may be fairly understood in more than one way. To resolve an ambiguity, judges apply the rules of contract construction.
If, by applying these and other rules, the ambiguity can be resolved, the judge enforces the contract as construed. If the judge cannot resolve the ambiguity in this manner, then the case is presented to a jury. The jury will decide which of the parties’ competing interpretations will carry the day.
Back to our Case Study
Applying these rules to the landlord-tenant dispute in this blog, Georgia’s courts have interpreted a similar provision. The courts found the word “at” to be a “term of considerable elasticity of meaning.”
As used in the lease context, “at” is more akin to “after” than “on.” One decision holds “the position that the election ought to have been made on the last moment of the last day is too absurd to seriously consider.” Given this precedent, the tenant would likely be permitted to terminate the lease any time after its 36th month.
Do you have a contract you need help interpreting? Please let me know if I can help.