A large part of every lawyer’s practice involves contracts. We draw up contracts for clients, review contracts prepared by other attorneys (or nonattorneys), and pursue or defend breach of contract actions in court. But contracts are part of everyone’s life, now more than ever before.
Every software update requires a user to select “I agree” on varying degrees of fine print. Car loans and real estate purchases require reams of contracts, and even the extended warranty agreement for that new flat screen television is a pretty hefty document. So interpreting contract language is part of everyday life.
So, how does it work?
First, a contract must be interpreted to mean the intent of the parties.
While intent isn’t always clear, courts look for it and read contracts accordingly. Intent can also be presumed, such as in homeowner’s insurance policies, where the assumption is that the purchaser wants coverage of the typical risks applicable to homes.
A fire insurance clause will not normally be construed to negate coverage for fires.
Second, words are interpreted in accordance with their normal (dictionary) meaning, except in cases where terms have special meanings in context, e.g., “Mint State” or “Uncirculated” for a coin.
Particular words have meanings imposed by law as well, such as the Uniform Commercial Code’s definitions of different types of damages a buyer can obtain from a seller for breach of a sales contract.
Third, where a contract term is ambiguous, the court will examine the entire contract, the so-called “four corners,” to determine its meaning.
Where that doesn’t work, the parties may be permitted to offer evidence of their intent.
Everything from precontract oral discussions to post-contract conduct can be examined to determine what the parties meant in their agreement.
What one means
Fourth, contracts drawn up entirely by one party, and that are not negotiable, are often construed against the drafting party, either as a consumer protection measure or on the common sense assumption that parties mean what they say and that if the party drafting a contract meant to say something other than what’s in the contract, the party would have written the contract differently.
Insurance contracts fall into this category, and in most states coverage provisions are construed broadly and exemptions construed narrowly.
To use a baseball metaphor, “ties always go to the insured.”
Fifth, certain provisions are “implied” in contracts even when the parties don’t put them there.
For example, a retail purchase of coins usually involves a warranty of merchantability by the seller, that the coins will be accepted in the marketplace as the seller has described them.
Such warranties can be disclaimed in writing, but otherwise they are there, even when the parties have no written agreement at all.
Sixth, courts will give effect to all provisions of a contract, and will not interpret a contract in a way that negates any words, causes an absurd result, or creates an unintended windfall for one side or the other. An example would be a coin advertised at 10 percent of its usual price because of a typographical error.
I’ll close with my father-in-law’s sage advice for installing appliances: “When in doubt, read the instructions.”
Armen R. Vartian is an attorney and author of A Legal Guide to Buying and Selling Art and Collectibles.