Interpretation

     There are a variety of reasons why one party to a contract may fail to do what the other party believes the contract requires.  Of the many we explore in these materials, likely the most common stems from disagreement about what the contract requires, because language of the agreement is vague, ambiguous, or otherwise is an imperfect expression of the intention of the parties.  On the causes for such disagreements, the following observations by two intellectual giants in the history of the development of contract law are especially insightful and pithy:

It can hardly be insisted on too often or too vigorously that language at its best is always a defective and uncertain instrument, that words do not define themselves, that terms and sentences in a contract, a deed, or a will do not apply themselves to external objects or performances, that the meaning of such terms and sentences consists of the ideas that they induce in the mind of some individual person who uses or hears or reads them, and that seldom in a litigated case do the words of a contract convey one identical meaning to the two contracting parties or to third persons.  3 A. Corbin, Contracts § 536, at 27-28 (1960). 

A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used.  U.S. Supreme Court Justice Oliver Wendell Holmes, Towne v. Eisner, 245 U.S. 418, 425 (1918). 

    When the parties cannot resolve or accommodate disagreements about the meaning of terms of an agreement, a court may be required to decide what the contract requires.  If the agreement of the parties is silent, the court will supply the appropriate default term to determine what the contract requires.  If the agreement speaks, the court must interpret the language of the agreement to determine what the contract requires.  Here we consider this process of interpretation.

     Interpretation requires the court to ascribe meaning to language that the parties have used in expressing their agreement.  Occasionally both parties to a contract (or all parties if there are more than two) will have attached the same meaning to the language of the contract at the time the contract was formed.  Of course, if the parties attached the same meaning to the language of the agreement at the time the contract was formed there should be no dispute for the court to resolve, unless the present recollection of one party is imperfect or one party is not being truthful.   In the event of such an unresolved dispute, the prevailing view is that the court shall interpret the language in accordance with the meaning shared by the parties.  R.2d Contracts 201(1).  This view is a sensible remnant of the mostly discarded "subjective" theory of contract, a theory that a court should focus on the actual intention of the parties in determining whether a contract has been formed and in interpreting contracts.  

     In the more common case of disagreement about meaning the parties either will have attached different meanings to the language of the contract at the time of its formation or they may not have anticipated whether or how particular language would apply to an unforseen situation arising thereafter.  When the parties have attached different meanings to the language of the contract at the time of its formation, the court shall interpret the language in accordance with the meaning of one of the parties in some cases.  Those cases are described in R.2d Contracts 201(2).  In all other cases, neither party is bound by the meaning attached by the other party, R.2d Contracts 201(3), and in some of these other cases the absence of shared meaning is so fundamental that a court may conclude that no contract was formed in the first place, a possibility that we explore elsewhere. 

     If a contract is formed, the court must apply other rules (sometimes referred to as guidelines or preferences) in aid of interpretation in cases not resolved by the common law rules expressed in R.2d Contracts 201, including cases in which the parties have not anticipated whether or how particular language would apply to an unforeseen situation that thereafter arises.  R.2d Contracts 202, 203, 222, and 223 express some of these other common law rules of interpretation.  Cal. Civ. Code 1635-54 exemplify a statutory formulation of rules of interpretation, and U.C.C. 1-205 and 2-208 define and state the relevance to interpretation of usage of the trade, prior course of dealing between the parties, and course of performance of the contract. U.C.C. 1-205 applies to all contracts governed by the Commercial Code (not just to contracts governed by Article 2 of the Commercial Code) and U.C.C. 2-208 applies to contracts for the sale of goods (Article 2 of the Commercial Code).  We see application of many of the rules in Bond Drug Co. of Illinois v. Amoco Oil Co. (a real estate subsidiary of Walgreen's seeks to enforce an agreement to purchase the site of a contaminated gas station from Amoco), in The Prytania Park Hotel, Ltd. v. General Star Indemnity Co (involving a claim against an insurance company for hotel furniture destroyed by fire), and in Frigaliment Importing Co. v. B.N.S. International Sales Corp. (exploring the question of what is a chicken), but the discretion that courts exercise in choosing among the veritable smorgasbord of rules of interpretation makes prediction of outcome in particular cases extremely difficult.  In using rules of interpretation, bear in mind the caution of the Washington Supreme Court:  " . . .the various principles of interpretation should not be applied as absolutes. They 'are to be taken as suggestive working rules only . . . They will be harmful if they are taken as dogmatic directions that must be followed, or if they mislead us into thinking that language has only one meaning, the one absolutely correct.'"  Berg v. Hudesman, 115 Wash.2d 657, 664 (Wash. 1990), quoting 3 A. Corbin, Contracts § 535, at 21 (1960).

    These materials segregate for separate consideration the rules governing the use of extrinsic evidence, including parol evidence, for the purpose of interpretation.  See Tahoe National Bank v. Phillips (widow Beulah Phillips beats the bank). 

    Supplementary reading:  Farnsworth, 7.1, 7.7-7.11, 7.13-7.14; White & Summers 3-3.