When a contract dispute arises, there may be differing interpretations of the contract terms. A court asked to construe the disputed terms will look to statutory principles. But don’t wait for a dispute to learn these principles—be aware of them when drafting an agreement to ensure that they won’t counteract your client’s intent.
Here are 11 of the most common principles that the courts use in interpreting contracts:
- If possible, a contract is interpreted to give meaning to all its provisions (CC §1641; CCP §1858) and to be lawful, operative, definite, reasonable, and capable of being given effect (CC §1643).
- 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 the place of performance is not 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.
- 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 is not valid if an essential term is missing. However, because the Statute of Frauds mainly serves to prove that a contract exists, it’s only necessary that the writing mention the essential terms of the parties’ agreement. Any ambiguities usually can be resolved by extrinsic evidence, which constitutes a reliable indicator of the parties’ intent in commercial or other arm’s-length transactions. Marriage of Benson (2005) 36 C4th 1096, 1108. The writing must contain the essential elements of the agreement, and what’s essential depends on the circumstances, including the agreement and its context, the subsequent conduct of the parties, and the remedy sought. Sterling v Taylor (2007) 40 C4th 757, 770.
These statutory rules of contract interpretation are all reviewed in detail in CEB’s California Law of Contracts, chap 5. Also check out CEB’s Drafting Business Contracts: Principles, Techniques and Forms, chap 3 for preliminary considerations before you start drafting.
Other CEBblog™ blog posts on contract drafting:
- Contract Drafting 101
- 10 Steps to Take Before Drafting a Contract
- Review This Before Drafting a Contract
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