Chapter 18: Interpretation of Contracts

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• Chapter 18 Interpretation of Contracts

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Intent

• Because a contract is based on the agreement of
  the parties, courts must determine the intent of
  the parties manifested in the contract.
• The intent that is to be enforced is the intent
  as it reasonably appears to a third person.
• This objective intent is followed, and the
  subjective or secret intent is ignored because
  recognition of secret intention would undermine
  the stability of contracts and open the door to
  fraud.

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Interpretation of Contracts

• In interpreting a contract, ordinary words are to
  be given their ordinary meanings.
• If trade or technical terms have been used, they
  are interpreted according to their technical
  meanings.
• The court must consider the whole contract and
  not read a particular part out of context.
• When different writings are executed as part of
  the same transaction, or one writing refers to or
  incorporates another, all the writings usually
  are to be read together as the contract of the
  parties.

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Conflicting Terms

• When provisions of a contract are contradictory,
  the court will try to reconcile or eliminate the
  conflict.
• If this cannot be done, the conclusion may be
  that there is no contract because the conflict
  makes the agreement indefinite as to a material
  matter.
• In some cases, conflict is solved by considering
  the form of conflicting terms.
• Handwriting prevails over typing and a printed
  form, and typing prevails over a printed form.

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Eliminating Ambiguity

• Ambiguity will be eliminated in some cases by the
  admission of parol evidence.
• Sometimes courts will interpret the ambiguous
  provision strictly against the party preparing
  the contract, especially if that party has
  significantly greater bargaining power.

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Reasonableness and Good Faith

• In most cases, the parties are held to their
  contract exactly as it has been written.
• In other cases, the courts will imply that
  performance is to be made within a reasonable
  time and that details of performance are
  reasonable when the contract fails to be specific
  on these points.
• Also, the law will imply an obligation to act in
  good faith.

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Conflict of Laws

• When a contract has interstate aspects, it is
  necessary to determine which states law governs
  it.
• The rules that govern that decision are called
  the law of conflict of laws.
• The parties may specify the jurisdiction whose
  law is to govern.
• If that jurisdiction bears a reasonable
  relationship to the contract, the choice will be
  given effect by the court.

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Conflict of Laws (Contd)

• In the absence of such a provision, some courts
  will apply the older rule that
• the law of the state where the contract was made
  prevails in most matters
• the law of the state where performance is to be
  made prevails in matters relating to performance
• The modern, or center-of-gravity, view is to
  choose the jurisdiction that has the most
  significant relationship to the parties, the
  contract, and its performance.

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Conflict of Laws
Place of Contracting Law of the state where the
contract was made. The state in which the last
act essential to the formation of the contract
was performed.

• contract validity as to substance
• satisfaction of requirements as to form

Place of Performance Law of state where the
contract is to be performed.

• performance of the contract
• excuse or liability for nonperformance
• measure of damages for nonperformance

Center of Gravity Law of the state with the most
significant contacts--place of contracting,
negotiating, and performing location of subject
matter of the contract domicile (residence),
states of incorporation, principal place of
business of parties--governs.
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Diversity of Citizenship

• When an action is brought in a federal court
  because it involves citizens of different states
  (diversity of citizenship), the federal court
  must apply the conflict of laws principles that
  would be applied by the courts of the state in
  which the federal court is sitting.