The Meaning of the Agreement: Principles of Interpretation and the Parole Evidence Rule
INTERPRETATION
I. General Approach.
When interpreting contract meaning, typically contract language, the courts seek the meaning that was actually attached by the parties.
If the meaning attached by one party is not in accord with the meaning attached by the other party, the courts seek the meaning that would be attached by a reasonable person in the position of the parties to the contract.
This test is not one of what reasonable people would think in general about the contract language, but is from the perspective of the knowledge, goals, and incentives of the particular parties to the contract.
Courts strive to find the more reasonable meaning of ambiguous terms. However, if two competing meanings are equally plausible, the court has no choice but to decline to enforce the contract. This seldom happens.
II. Sources of Interpretation.
There are a number of general rules of construction applied by the courts when interpreting contracts. The following are among the more frequently invoked:
A. Contract construed in its entirety.
Contracts will be construed as a “whole.” A clause will be construed so as not to make it a nullity. Clauses will be, when possible, interpreted to conform to the contract’s general intent.
B. Plain meaning rule.
The traditional rule is that if the language of a clause is unambiguous, extrinsic evidence is inadmissible to alter the plain meaning of the language.
The courts will construe words according to their “ordinary” meaning unless it is clearly shown that they were meant to be used in a technical sense.
There is some tendency by courts to be more liberal in admitting extrinsic evidence than the plain meaning rule would have it.
Example: Ken contracts with Barbie to buy “all of Barbie’s chickens at $1 per bird.” At the time of delivery, Ken refuses to accept delivery of any roosters, claiming that the parties intended that “chickens” only meant egg-laying chickens. The example shows the uneasy relationship between the parol evidence rule and rules of contract interpretation. When Ken alleges that Barbie promised that only hens were being sold, the promise might be barred by even the UCC’s relaxed parol evidence rule. The better course for Ken is to allege that both parties subjectively intended that “chickens” meant “hens.” Some courts would reject the argument, reasoning that roosters fall within the plain meaning of chickens. Other courts, however, would allow the evidence.
C. Courses of conduct and usages of trade.
The following sources of interpretation are listed in the order of their importance.
1. Course of performance.
If the parties have partially performed the agreement, the manner of their performance is important evidence of how they construe the contract.
2. Past dealings.
If the parties have contracted with one another in the past, how those contracts were treated by the parties is relevant to how the current agreement should be interpreted.
3. Usage of trade.
The meaning given to contract terms by the trade or vocation is relevant to interpreting contract terms. UCC § 1-205.
Trade usage may vary by time or location and may thus be contestable.
Trade usage will not bind someone outside the trade unless she knows of the usage or is consciously aware of her ignorance.
The parties can negate trade usage.
Example: Mammoth Corporation has 9,500 salespersons nation-wide. The centerpiece of a new training program is a DVD instructing the salespersons about Mammoth’s products and how to market them. Mammoth contracted with a company to design the DVD content and contracted with DVD-Replicators to produce 9,600 DVDs. The contract with DVD-Replicators specified that 9,600 DVD’s would be delivered at a price of $39,000. When the DVDs were delivered, there were only 9,000. At considerable expense, Mammoth hired another replica
eement on all the terms of the contract, then it is a complete integration. If it is a final agreement on only some of the terms, the document is partially integrated.
III. Tests for Integration.
A. Plain meaning or 4-corners test.
A document is integrated if, when viewed by a reasonable person, it appears on its face to be complete. This test is associated with Professor Williston.
Restrictive View
Evidence of prior negotiations maybe used for interpretation only upon a finding that some language in the contract is unclear, ambiguous, or vague.
Danger here, is that what appears plain and clear to one judge may not be so plain to another
B. Any relevant evidence test.
All relevant evidence is admissible to determine whether these particular parties actually intended the document to be a complete integration. This test is associated with Professor Corbin.
Corbin View
The court considers all of the proffered evidence to determine its relevance to the parties’ intent and then applies the parol evidence rule to exclude from the fact finder’s consideration only the evidence that contradicts or varies the meaning of the agreement.
The understand the agreement, the judge cannot be restrained to the four corners of the agreement.
C. Naturally contained test.
Extrinsic evidence to prove a term is barred only if the term, if it existed, would naturally have been put in the document.
D. Certainly contained test.
Extrinsic evidence to prove a term is barred only if the term, if it existed, would certainly have been put in the document.
