Interpreting the Terms of the Contract

August 15, 2020

Interpreting the Terms of the Contract
1. One of the CENTRAL PROBLEMS courts face is whether to force an interpretation onto disputed words (by resorting to “plain meaning”) or to accept the guidance of additional evidence provided by the parties themselves.
  1. The latter trend is gaining ground, and has been notably propelled by the UCC (which has broadened the concept of the contract itself).
    1. It is commonly said that the primary goal of interpretation is to get at what the parties themselves meant by their promises, but this turns out to be misleading:
      1. The objective theory of contract requires that courts be concerned less with what the parties subjectively intended their words to mean than with what each might reasonably have understood the other party to have meant.
2. Definitions
  1. Four Corners – the doctrine that requires that the meaning of a document be derived from its entire contents as they relate to one another, and not from its individual parts.
3. Restatements
  1. The restatements offer a lot of insight in interpretation.
  2. Restatement 2d §202– Rules in Aid of Interpretation
    1. Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight.
    2. A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together.
    3. Unless a different intention is manifested,
      1. Where language has a generally prevailing meaning, it is interpreted in accordance with that meaning
      2. Technical terms and words of art are given their technical meaning when used in a transaction within their technical field
    4. Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted to acquiesced in without objection is given great weight in the interpretation of the agreement.
    5. Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade.
  3. Restatement 2d §203(a) – an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect.
4. Principles of Construction – 5 Principles (from City of Philadelphia v. Philadelphia Transportation Co., PA SC)
  1. The entire contract should be read as a whole and every part is a piece of the whole
  2. The contract itself must be read in light of the circumstances under which it was made.
  3. Where a public interest is affected, an interpretation that favors the public is preferred
  4. Specific provisions ordinarily will be regarded as qualifying the meaning of broad general words in relation to a particular subject
  5. Unless contrary to the plain meaning of the contract, an interpretation given by the parties themselves will be favored.
5. Random House, Inc. v. Rosetta Books LLC
  1. Facts: This is a “New Use” case. Random House has licensing contract with certain authors to “print, publish and sell works in book form”. Rosetta enters into contract with authors to publish works as Ebooks. Random House seeks prelim. injunction.
  2. Issue: Is book form ambiguous? Is it plain meaning or should extrinsic evidence be considered?
  3. Analysis: Court says language is ambiguous, because there is no definite and precise meaning of book form.
    1. Are Ebooks in book form?
      1. Court uses industry custom to define “book form”
      2. Publishing industry says “book form” is a hardcover trade book for distribution in English in North America.
    2. Court also looks at language of contract:
      1. Rights are specifically enumerated to include book club versions and other versions.
        Court says if various book versions are not assumed to be included in term “book form” that suggests Ebooks are not included.
    3. 2 cases cited hold that “motion picture” is a broad enough term to include television, other motion picture forms.
  4. Result: Motion denied.
  5. Hypo: Is book form broad enough to cover graphic novelization of books?
    1. Under industry custom and language of contract arguments made above, answer would seem to be no.
    2. Random House would argue that graphic novel is included within “abridged version” or other versions they have rights to.
6. W.W.W. Associates, Inc. v. Giancontieri
  1. Facts: Π entered a contract to purchase land from Δ. K called for $25k up front, $225k upon closing, and $500k to be mortgaged. K contained a clause allowing either party to cancel if the litigation on Δ was not settled by a certain date. Standard merger clause present. Δ dallied on the litigation waiting for the cancellation date. Π sues for specific performance.
  2. Issue: Π wants the court to interpret the cancellation clause as one way, in that it was intended to protect him from the buyer’s continued litigation.
  3. Analysis: The court held clear, complete writings should generally be enforced according to their terms, and rejected plaintiff’s reading of the contract.
    1. “Before looking to evidence of what was in the parties’ minds, a court must give due weight to what was in their contract.”
      1. When parties set down a clear & complete document, the writing should be enforced according to its terms
      2. Court determines there is no ambiguity as to the cancellation clause in issue, especially read in context of the whole document, and that it confers a reciprocal right on both parties to the contract.
      3. Furthermore, extrinsic evidence should not be allowed in to create ambiguity: “extrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.”
    2. When interpreting documents, courts have developed a laundry list of standard principles–see CB 261.
      1. In addition to those principles, an important one is found in 2^nd Rst., Sec. 203(a): “An interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful or of no effect.”
  4. Result: Π had exclusive rights in certain clauses immediately surrounding the offending clause, implying that the two parties knew what they were doing. They had done it before, so their omission here suggests they intended this clause to be different. No specific performance. Restatement 2d §§202(5), 203(d), 203(a)
7. Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co.
  1. Facts: Δ promised to purchase insurance “to indemnify [Π] against all loss, damage, expense, and liability resulting from … injury to property, arising out of or in any way connected with the performance of this contract.” Δ damages the equipment, and Π sues for the insured damages. TC ruled for Π.
  2. Issue: How should the court interpret the indemnity clause? Specific to 3^rd parties’ damages, or inclusive of Π’s?
  3. Analysis:
    1. Justice Traynor wants to make sure that the contract reflects the intent of the parties. Whereas Judge Hand doesn’t care what meaning the parties attach to the language: if the language is plain and generally “means” one thing under the law, and the parties intended something completely different, too damn bad for the parties.
    2. Traynor holds that even when the language of a clause or contract is apparently unambiguous on its face, extrinsic evidence should be considered when relevant to prove a meaning to which the language in a written instrument is reasonably susceptible.
      1. The test of admissibility of extrinsic evidence is not whether it appears to the court that the written instrument is unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.
      2. Although extrinsic evidence is not admissible to add to, detract from, or vary the terms of a written contract, these terms must first be determined before it can be decided whether or not extrinsic evidence is being offered for a prohibited purpose.
        If a court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, is reasonably susceptible of more than one interpretation, extrinsic evidence relevant to prove either meaning is admissible.
      3. The trial court erred in refusing to consider extrinsic evidence offered to show the indemnity clause was reasonably susceptible of the meaning contended for by D; AND, because the clause WAS reasonably susceptible of that meaning, the offered extrinsic evidence was also admissible to prove that the clause had that meaning and did not cover injuries to P’s property.
    3. The Restatement view:
      1. 2^nd Rst., Section 212, comment b: “It is sometimes said that extrinsic evidence cannot change the plain meaning of a writing, but meaning can almost never be plain except in a context…Any determination of meaning or ambiguity should only be made in the light of the relevant evidence of the situation and relation of the parties, the subject matter of the transactions, the course of dealing between the parties…But after the transaction has been shown in all its length and breadth, the words of an integrated agreement remain the most important evidence of intention.”
        Illus. 4: “A and B are engaged in buying and selling shares of stock from each other, and agree orally to conceal the nature of their dealings by using the word ‘sell’ to mean ‘buy’ and using the word ‘buy’ to mean ‘sell.’ A sends a written offer to B to ‘sell’ certain shares, and B accepts. The parties are bound in accordance with their oral agreement.”
  4. Held: Traynor: The exclusion of Π’s equipment could be justified only if it were feasible to determine the meaning the parties gave to the words from the instrument alone. Looking only at the plain meaning of contractual language ignored the possibility that the parties had contrary intentions.
  5. Criticism: Kozinski of the 9^th C complained that even when the transaction is sizeable and the parties are sophisticated, and the result is unambiguous, costly litigation cannot be avoided if one party has a strong enough motive to challenge the K.
8. Z.R.L. Corp. v. Great Central Insurance Co.
  1. Facts: ZRL (P) owns a restaurant; they ejected patrons and got sued for discrimination. P bought an insurance policy from D, with a term that included they would be covered for “wrongful eviction”. D says, no, we will not cover you, that’s not wrongful eviction. P brings a declaratory judgment action to figure out what the meaning of wrongful eviction is.
  2. Analysis: The court decides to use the doctrine of noscitur a sociis (it is known from its associates), or in other words, look into context and not just decide what “wrongful eviction” means in the abstract. D brings up a case that says that it means relieving a tenant out of possession; but it was in the context of property. The phrase in this case was included in a list of torts against patrons; so in this case, it’s a tort that the insurance company should cover.
    1. Courts usually say that ambiguity of the language in a contract is a question of fact; but in the instant case, although “wrongful eviction” is ambiguous, the Court says the interpretation of the language is a matter of law.
      1. How and why is it that the court is deciding, even in the face of ambiguity, that the court can decide this matter? “The construction of an insurance policy is only a question of law. Therefore, interpreting an insurance contract provision ‘is an appropriate issue for determination by means of summary judgment.’”
        As such, if an insurance policy is constructed in an ambiguous way, it’s held against the draftsman–it is a rule of contracts interpretation.
        Court establishes three principles in this case: Interpreting insurance contracts is a matter of law; this practice allows for more systematic appellate control; and the court invokes the overarching principle of interpretation that ambiguous language will be interpreted in favor of the insured (contra proferentum). (This is pretty much across-the-board practice).
  3. Held: Where language in an insurance policy is subject to different interpretations, such ambiguity is to be construed to favor the insured (Π) not the insurance company, which drafted the policy.
  4. Note: Even under contra proferenutm, there are limits; the “plain meaning” of insurance contracts is often upheld.
9. Nanakuli Paving & Rock Co. v. Shell Oil Co., Inc.
  1. Facts: The asphalt case; Shell raised the price of asphalt; N argued that price protection, as a usage of the asphalt paving trade in Hawaii, was incorporated into the 1969 agreement between the parties, as demonstrated by the routine use of price protection by suppliers to that trade, and reinforced by Shell’s actual performance of the contract up until 1974; trial court granted jnov to Shell; appellate court reversed.
  2. Issue: Can local customs imply terms in a contract?
  3. Analysis: Court held based either on usage of trade or the requirements of good faith and fair dealing, Shell was required to price protect N.
    1. One of three underlying policies of the UCC is to “permit the continued expansion of commercial practices through custom, usage, and agreement of the parties.” (1-102). The Code also provides that it shall be “liberally construed.”
      1. Trade usage is “any practice or method of dealing have such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question” (1-205(2)).
        “A course of dealing between parties and any usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware give particular meaning to and supplement or qualify terms of an agreement” (1-205(3)).
        Course of performance v. course of dealing(Prof. notes this distinction): course of performance under the Code is the action of the parties in carrying out the contract at issue (and although a “single occasion of conduct” does not constitute a course of performance under the Code, the Code doesn’t give further delineation as to how many instances do constitute course of performance–the trial court was justified in finding that the two previous instances of price protection by Shell under the 1969 contract with N amounted to course of performance).
        “Performance, usages, and prior dealings are important enough to be admitted always–only if they can not be reasonably reconciled with the express terms of the contract are they not binding on the parties. When such construction is unreasonable, express terms control BOTH course of dealing and usage of trade; course of performance controls dealings & usage; and course of dealing controls usage of trade.” (Prof. points out the hierarchy).
      2. UCC 2-103(1)(b): “Good faith” in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.
        UCC 2-305(2): “A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.”
        In the instant case, Chevron’s conduct in 1974 offered enough evidence of commercially reasonable standards of fair dealing in the asphalt trade in Hawaii in 1974 for the jury to find that Shell’s failure to give sufficient notice and price protect N after the imposition of the new price did not conform to the good faith dealings in Hawaii at that time.
  4. Held: Yes. There was overwhelming evidence that it was customary to practice price protection in the asphalt industry in Hawaii (Trade Practices). In past dealings, Δ had price protected and given warning when the price was to go up. (Course of Performance). Ruled for Π. UCC §2-202
  5. Note: now the question becomes how prevalent must a practice be before it becomes a trade practice?
  6. Hierarchy of Practices
    1. Express terms of the agreement
    2. Course of Performance – how a company had performed the contract so far can imply the meaning of how the contract was meant to be performed.
    3. Course of dealing – how a party has performed on similar contracts in the past can imply the meaning of how the contract was meant to be performed.
    4. Trade practice – local customs can imply terms in a contract.
  7. The risks of waiving your performance on express terms of the contract are great. If you do it systematically, it becomes your course of dealing.
10. MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova D’agostino, S.p.A
  1. Facts: Π entered oral negotiations and agreed with Δ on price, quality, quantity, delivery, and payment in 10/90. K memorialized by Δ’s standard form. When Δ did not satisfy orders in 4/, 5/, and 8/91, Π sued for breach. Δ responded that it was under no obligation to satisfy the order because Π hadn’t paid for some previous shipments. Π responded that the shipments they had received were of lower quality than requested, and the CISG allows them to pay less for them. Δ responds that terms for dealing with lower quality receipts are on the back of the form, in Italian. Π responds that they had never intended those terms, just the oral terms.
  2. Analysis: Held, the parol evidence rule, which bars evidence of an earlier oral contract that contradicts or varies the terms of a subsequent or contemporaneous written contract, is NOT applicable in a contract dispute governed by the United Nations Convention on Contracts for the International Sale of Goods (CISG).
    1. CISG contains no express statement on the role of parol evidence, but it appears the drafters were comfortable with the concept of permitting parties to rely on oral contracts: there is no statute of frauds provision and the CISG expressly provides for the enforcement of oral contracts (CISG Article 11)
      1. Article 8(3) expressly directs courts to give “due consideration…to all relevant circumstances of the case including negotiations…” to determine the intent of the parties.
        “The language of Article 8(3)…seems adequate to override any domestic rule that would bar a tribunal from considering the relevance of other agreements…”
      2. This is not to say that parties to an international contract for the sale of goods cannot depend on written contracts or that parol evidence will always prevent a party relying on a written contract from securing summary judgment:
        In most cases, Article 8(2) will apply: This subsection instructs courts to rely on objective evidence of the parties’ intent, and that subjective intent of the parties will be measured against “the understanding that a reasonable person…would have had in the same circumstances.”
        Parties can also insert a merger clause into their agreement that extinguishes any and all prior agreements and understandings.
      3. MCC produced affidavits that discuss not only MCC’s intent but also discuss the intent of D’Agostino’s reps and their knowledge that MCC’s rep did not intend to agree to the terms on the reverse of the form contract.
        That puts the case squarely within Article 8(1) of the CISG and requires the court to consider MCC’s evidence as it interprets the parties’ conduct.
        Article 8(1) of the CISG instructs courts to interpret the “statements…and other conduct of a party…according to his intent…” as long as the other party “knew or could not have been unaware” of that intent.
  3. Result: CISG Article 8(1): courts must interpret the “statements … and other conduct of a party … according to his intent” as long as the other party “knew or could not have been unaware” of that intent. Thus, CISG cases can include parol evidence.

Interpreting the Terms of the Contract

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