Many contract disputes don't involve clear breaches—instead, parties disagree about what the contract actually means. Contract interpretation disputes arise when language is ambiguous or parties have different understandings of their agreement. Understanding how courts interpret contracts helps you draft better agreements and argue interpretation disputes.
When Interpretation Disputes Arise
Interpretation disputes typically occur when contract language has multiple reasonable meanings, parties have different understandings of key terms, circumstances arise that the contract didn't clearly address, and industry custom differs from plain language meaning.
Well-drafted contracts minimize interpretation disputes, but even carefully written agreements can contain ambiguities.
The Parol Evidence Rule
The parol evidence rule limits what evidence courts consider when interpreting written contracts. If the contract is "integrated" (intended to be the complete agreement), prior or contemporaneous oral agreements cannot contradict the written terms.
However, parol evidence is often admissible to explain ambiguities, establish fraud or mistake, show conditions precedent, or demonstrate the agreement isn't integrated.
The Four Corners Rule
Many courts start with the four corners approach—looking only at the written document to determine meaning. If the language is clear and unambiguous on its face, courts enforce the plain meaning without considering outside evidence.
Some jurisdictions allow contextual evidence even for seemingly clear language to ensure the parties' actual intent is honored.
Canons of Construction
Courts use various canons of construction to interpret ambiguous contracts. Specific provisions control over general provisions. Handwritten terms prevail over typed terms. Every provision should be given meaning if possible.
Contra proferentem construes ambiguities against the drafter—the party who wrote the contract bears the risk of unclear language. This particularly applies to adhesion contracts (take-it-or-leave-it agreements).
Course of Dealing and Trade Usage
Courts may consider how the parties acted in past transactions (course of dealing), how they performed this contract (course of performance), and how terms are understood in the industry (trade usage).
If you've consistently acted as if a term meant something particular, that interpretation may bind you even if you now prefer a different meaning.
Interpreting Ambiguous Terms
Common sources of ambiguity include vague words like "reasonable," "satisfactory," or "timely," pronouns with unclear referents, missing terms or gaps in coverage, and inconsistency between different provisions.
Courts try to determine what reasonable parties intended at the time of contracting. Evidence of negotiations, drafts, and communications can illuminate intent.
Extrinsic Evidence
When contracts are ambiguous, courts often consider extrinsic evidence—evidence outside the four corners of the document. This includes negotiation history and drafts, communications between parties, industry practice, and the circumstances surrounding contract formation.
Some courts are more willing to consider extrinsic evidence than others. Know your jurisdiction's approach.
Reformation
If the written contract doesn't reflect what parties actually agreed to due to mistake, courts can reform (rewrite) the contract to match the true agreement. Reformation requires clear evidence that both parties intended something different from what was written.
Preserving Your Position
Document your understanding during negotiations. If you discuss the meaning of key terms, memorialize that understanding in writing. This evidence can be crucial if disputes arise later.
During performance, act consistently with your interpretation. Inconsistent conduct undermines your position in interpretation disputes.
Avoiding Disputes
Draft contracts with specific, clear language. Define key terms. Address foreseeable contingencies explicitly. Include entire agreement clauses, definitions sections, and clear allocation of risks.
Getting Legal Help
Contract interpretation involves legal analysis and evidentiary development. Attorneys can evaluate the strength of competing interpretations, identify relevant extrinsic evidence, and present persuasive arguments for your reading of the contract.