§ 8.01 Approaches to Contract Intepretation

The approaches used to determine whether a writing is an integration are also employed to determine what evidence may be referred in the interpretation of a contract as a whole or its individual terms.

1) "Plain meaning" rule – If a writing or term appears to be unambiguous on its face, it must be interpreted solely on the basis of such writing. The majority of jurisdictions apply this rule, despite growing criticism.

2) Williston's rules ("reasonable person" approach) – If a writing is an integration, the meaning given to it as a whole or any individual terms therein is that of a reasonably intelligent person in the circumstances that surrounded the making of the contract. If the writing is not an integration and is unambiguous, the terms are to be interpreted by an objective test – the interpretations that a reasonable person would give them. If the writing is not an integration and is ambiguous, subjective intent of the parties is relevant.

3) "Reasonable expectations of the parties" approach – This approach, espoused by Corbin and incorporated by the Restatement and UCC, allows all relevant extrinsic evidence to assist in interpretation, including the subjective intent of the parties.

§ 8.02 Course of Performance, Course of Dealing, and Trade Usage

In both common law and goods contracts, course of performance, course of dealing and trade usage may supply both additional terms and aid in construction of existing terms.

"Course of performance" represents a pattern in the performance of the contract. If a contract involves repeated occasions for performance by either party, and the other party knows of the nature of the performance and has an opportunity to object to such performance, any course of performance accepted or acquiesced to without objection is relevant to the meaning of the agreement. [UCC § 2-208(1)]

"Course of dealing" represents a sequence of previous conduct between the parties to a particular transaction which establishes a common basis of understanding for interpreting their expressions and conduct. [Restatement § 223; UCC § 1-205(1)]

"Usage of trade" represents a practice that is employed with regularity in a place, vocation or trade, justifying an expectation that the practice will be observed with respect to the agreement in question. [UCC § 1-205(2)]

§ 8.03 Rules of Interpretation

The following rules have developed to aid courts in interpretation:

1)  Words and conduct of the parties are to be interpreted in light of all circumstances, giving weight to the principal purpose of the parties in making the contract, if such purpose is ascertainable.

2)  A writing is to be interpreted as a whole, and if multiple writings pertain to the same transaction, all are to be interpreted together.

3)  Language is to be interpreted in accordance with its general prevailing meaning, if any.

4)  Technical terms and terms of art are to be given effect when used in relevant transactions.

5)  Wherever possible, the manifestations of the parties' intentions are to be interpreted as consistent with each other and with any relevant course of performance, course of dealing or trade usage.

§ 8.04 Standards of Preference

1)  An interpretation which gives a reasonable, lawful and effective meaning to terms is preferred to an interpretation which imparts an unreasonable, unlawful or null effect.

2)  In order of their significance and the weight to be given each are: express terms, course of performance, course of dealing and trade usage.

3)  Specific terms are to be given greater weight than general terms.

4)  Negotiated terms are to be given greater weight than standard terms.

5)  In some cases, such as adhesion contracts, ambiguous language may be construed against the drafter. [See Restatement § 203, § 206; UCC § 2-208]

§ 8.05 Certainty of Terms

Contract terms must be reasonably certain; terms are deemed reasonably certain if they provide a basis for determining the occurrence of a breach and an appropriate remedy.

[1] Open Terms

In goods contracts, even if terms are left open, e.g., regarding price, time and place delivery, the contract does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. [UCC § 2-204(3)] Unspecified terms can be supplied by course of performance, course of dealing, trade usage, and "gap fillers," provided in UCC § 2-305 through § 2-311.

[2] Omitted Terms

Where a contract is sufficiently defined but omits an essential term, the court may supply a term which is reasonable under the circumstances. [Restatement § 204]

[3] Terms Set by One Party

A contract may provide that one of the parties is to specify a term of performance. Both the common law and the UCC provide that such a term may be enforced as long as the discretion is exercised in good faith and "within limits set by commercial reasonableness." [UCC § 2-311(1)]

§ 8.06 Different Meanings Intended by the Parties

Where the parties attach different meanings to a term, the interpretation that prevails is that of the party that did not know (or had no reason to know) of any different meaning attached by the other, and the other knew (or had reason to know) the meaning attached by the first party. [Restatement § 201]

§ 8.07 Adhesion Contracts

An adhesion contract is a contract drafted by one party and reduced to a form agreement that generally presents no opportunity for negotiation. While not per se objectionable, adhesion contracts are subject to greater scrutiny than contracts that result from negotiation between the parties. To protect the non-drafter, who is often in an inferior position, the Restatement provides that only those contractual provisions that a reasonable person would anticipate and agree to should be considered part of the contract. [Restatement § 211(3)]