Generally it’s the parties’ mutual intent that controls a contract’s interpretation. But that intent isn’t always easy to figure out. When the parties dispute a contract’s interpretation and it goes to court, the court applies certain statutory principles. Don’t wait for a dispute to learn these principles—be aware of them and let them guide you as you draft every agreement.
Whenever possible, courts will interpret a contract to (1) give meaning to all its provisions (CC §1641; CCP §1858) and (2) be lawful, operative, definite, reasonable, and capable of being given effect (CC §1643).
Here’s how that breaks down:
- Technical words are interpreted according to their technical meanings, and nontechnical words are interpreted according to their ordinary meanings. CC §§1644–1645.
- A contract is construed according to the law of the place where it’s to be performed or, if that place isn’t indicated, where it was made (except that the parties can choose to have California law apply for many contracts involving more than $250,000). CC §§1646–1646.5.
- Ambiguous or uncertain promises are interpreted according to what the promisor believed that the promisee understood the promise to be. CC §1649.
- Written terms control printed terms, and printed terms added to a contract control terms on a preprinted form. CC §1651; CCP §1862.
- Uncertainties are construed against the party that caused the uncertainty (usually the drafting party). CC §1654.
- Promises of multiple parties who benefit from the agreement are presumed to be joint and several. CC §1659.
- Particular provisions control general provisions. CC §1650; CCP §1859.
- If two constructions of a provision are equally proper, the provision is construed in favor of the party for whose benefit the provision was made. CCP §1864.
- The courts consider trade usage to interpret agreements governed by the Commercial Code. Express terms of an agreement and the course of dealing or trade usage are construed to be consistent when possible but, if not, express terms control. Com C §1303.
- A contract subject to the Statute of Frauds isn’t valid if an essential term is missing, and parol evidence may not be used to provide that essential element. On the other hand, parol evidence may be used to clarify an ambiguity regarding the essential term.
Once you know and understand these principles, you can draft contracts that will ultimately be construed in your client’s favor. And don’t forget that there are specific provisions you can include to alter these basic principles.
Get specific drafting guidance in CEB’s Drafting Business Contracts: Principles, Techniques and Forms. And for details on the statutory rules of contract interpretation, turn to CEB’s California Law of Contracts, chap 5.
Other CEBblog™ posts you may find useful:
- 4 Ways to Avoid Ambiguity in Your Writing
- Contract Drafting 101
- 7 Contract Damages Provisions to Bargain Over
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