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Interpretation of Contracts

If there is a dispute as to the interpretation of a contract, Courts seek to enforce the intent of the parties to the contract.  The intent which will be enforced is what a reasonable person would believe that the parties intended.  The intent that will be enforced is the intent as it reasonably appears to a third person (e.g., the judge or jury).

In interpreting contracts, ordinary words are to be inter­preted according to their ordinary meaning.  Trade terms and technical terms are to be interpreted according to their trade or technical meaning.  Software, when referring to a computer, does not mean something that is soft, but it means the actual program.

The way parties have used terms in their prior relationships can also be used to determine what the parties meant by the words they used in a contract.

Sometimes a written contract is sent with additional printed material.  The question arises whether the additional material is part of the contract.  For example, when goods are purchased, the buyer often receives a manufacturer’s manual or various pamphlets.  When a worker gets a new job, the worker oftentimes gets an employee handbook.  Sometimes the original written document provides the answer as to whether or not the printed material is part of the contract.  Sometimes the contract will expressly refer to and incorporate into the contract the terms of the other written material.  For example, a contract for the sale of the inventory of a business may state that the seller does hereby sell to the buyer the goods described in Exhibit “A” attached hereto.  Exhibit “A” will then list specifically the items of inventory.  In that case, Exhibit “A” would be a part of the contract.

The provisions of a contract must be construed as a whole.  Provi­sions are not to be read out of context and interpreted out of context.

If an occurrence or a nonoccur­rence of an event has an effect on the existence of a contract, the event is called a condition. A condition precedent is the occurrence of an event that precedes the existence of an obligation to perform or the existence of a contract.  For example, in a fire insurance policy, there is no obligation on the insurance company to make a payment until there is a fire loss.  The occurrence of such a loss is therefore a condition precedent to the duty of the insurer to make payment.

The parties may agree that the contract will terminate if a particular event occurs or does not occur.  Such a provision is called a condition subsequent.  For example, in a contract for the purchase of land, the contract may contain a condition subsequent that cancels the contract if the zoning board turns down a buyer’s application to obtain a zoning permit to use a building for a particular purpose.  The contract may state something to the effect that this contract will be void if the buyer is unable to have the property rezoned from residential to commercial  within 90 days from the date of the agreement.

In some cases, a conflict can be solved by considering the form of the conflicting terms.  If a contract is partly printed or typewritten and partly handwritten, the handwritten part would prevail if it conflicted with the typewritten or printed part.  If there is a conflict between the printed part and a typewritten part, the typewritten part would prevail.  If there is a conflict between an amount or quantity expressed both in words and figures, as on a check, the amount or quantity expressed in words prevails.

Inside Interpretation of Contracts