INTERPRETING CONTRACT TERMS Flashcards
INTERPRETING CONTRACT TERMS RULE
Objectively reasonable meaning of a contract term will prevail over subjective understandings
Exceptions to INTERPRETING CONTRACT TERMS RULE
a) If one party has a subjective understanding of the term that differs from the objective meaning and the non-mistaken party knows about the other party’s mistake, the mistaken party will prevail
b) Where evidence shows that both parties shared the same subjective understanding
2) Ambiguous terms will be interpreted against the party who supplied the term (contra proferentem)
3) Reasonable expectations doctrine: even unambiguous terms may be interpreted against the drafting party if they conflict with the reasonable expectations of the other party
a) Often applied to insurance contracts
b) Unreasonable boilerplate language won’t be enforced. Dickered terms are considered enforceable
Four Corners Approach to interpreting contract:
give weight to what is contained within the four corners of the written document, little weight to outside evidence
Use everything Approach to interpreting contract:
Bring in parol evidence (CA, Traynor)
a) This creates the right outcome in individual cases, but as a general rule it will increase the cost of contracting because written agreements aren’t as meaningful
1) Restatement § 201(1)
where the parties attach the same meaning to the terms used in their agreement, the interpretation of the agreement should be in accordance with their interpretation
Lack of mutual assent
(like Peerless):
nullify outstanding obligations, no breach on defendant’s part, but plaintiff need not accept further goods/services under the contract
If the contracting parties attach different meanings to the same term
then neither is bound by the understanding of the other unless one of them knew or had reason to know what the other understood the disputed term to mean
Trade Usage
Terms having a particular meaning within a trade or industry and which may be considered to determine the parties’ understanding of the terms of the written agreement.
Nanakuli Paving v. Shell
Nanakuli bought asphalt from Shell under requirements contract with “posted price at time of delivery” as the price term, Shell upped the price after the Arab Oil Embargo and Nanakuli sued for not price protecting. Judgement for Nanakuli.
a) UCC §2-208: an exception to the parol evidence rule.
(i) Course of performance and course of dealing may be used to aid in interpreting terms of an agreement (without regard to the level of ambiguity of the terms)
(ii) Course of performance or dealing is not to conflict with the express terms
b) UCC §2-305: Open Price Term—an open price term must be set in good faith. A posted price usually fulfills good faith
(i) Comment 3 defines good faith as normal price (all the same prices for all customers)
c) Wash Shell’s price protection two previous times enough to establish course of performance/dealing?
(i) Court says one instance is not enough, but two is in this case
d) Court cites Columbia Nitrogen: trade usage and course of performance create limited exceptions to the express terms of a contract
e) Takeaway: if you don’t want trade usage to apply, you have to say so in the actual contract
RULE: Trade usage and course of performance will be implied into contracts if there is evidence that it is not inconsistent with the terms of the contract, and the purported trade usage is so prevalent that the parties would have intended to incorporate them.
Pacific Gas and Electric
Traynor says that language is imprecise and cannot show intent
1) Allow outside evidence from either party to convince the court whether there is an ambiguity
2) We will always take individually negotiated terms over boilerplate language
