5.4 Contract Interpretation & Canons of Construction

Contract Interpretation & Canons of Construction

I. General Canons of Contract Interpretation

When interpreting ambiguous contractual provisions, courts apply established secondary rules of construction:

1. Whole Contract Interpretation: Contracts are construed as a harmonious whole; provisions are read in context with each other rather than in isolation to give purpose to all parts.
2. Contra Proferentem (Construing Against the Drafter): Ambiguous terms are strictly construed against the party who drafted or selected the contractual language.
3. Specific vs. General Terms: Specific terms or descriptive clauses govern over general boilerplate language.
4. Handwritten vs. Typed vs. Preprinted: Handwritten alterations control over typewritten terms, and typewritten terms control over preprinted standard form boilerplate.
5. Ejusdem Generis: General words following an enumeration of specific items are construed to include only items of the same general class or nature as those enumerated.
6. Expressio Unius Est Exclusio Alterius: The express mention of one or more items of a particular class implies the exclusion of all other items not mentioned.

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II. Comprehensive Integration & Extrinsic Evidence Summary

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III. The Objective Standard and the Hierarchy of Sources

Interpretation is objective. The question is never what a party privately intended but what a reasonable person in the position of the other party would have understood the language to mean. A secret, uncommunicated meaning binds nobody.

When sources of meaning conflict, courts apply a settled hierarchy. UCC § 1-303(e) codifies it — the rule formerly stated in § 2-208, which revised Article 1 folded into § 1-303 — and the common law follows the same order:

1. EXPRESS TERMS of the agreement
        ↓ control over
2. COURSE OF PERFORMANCE   (how these parties performed THIS contract)
        ↓ control over
3. COURSE OF DEALING       (how these parties behaved in PRIOR contracts)
        ↓ control over
4. USAGE OF TRADE          (how the INDUSTRY generally understands the term)

The ordering is intuitive once stated: the more specific the evidence is to this deal and these parties, the more weight it carries. A term expressly bargained for beats a habit; a habit between these two parties beats an industry-wide convention.

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IV. Patent and Latent Ambiguity

Latent ambiguity produces the most famous rule in this area. Where a term has two equally plausible meanings, neither party knows or has reason to know of the other's meaning, and each attaches a different one, there is no mutual assent and no contract is formed — the two-ships-Peerless problem. Two corollaries follow, and both are tested:

• If one party knows or has reason to know of the ambiguity and the other does not, the contract is enforced according to the innocent party's understanding.
• If both parties know of the ambiguity and each silently attaches their own meaning, again there is no contract.

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V. Additional Rules of Construction

• Interpret the contract as a whole. Individual clauses take their meaning from the entire document, and no provision is read in isolation.
• Prefer validity. Where one reading makes the contract enforceable and another makes it illegal or void, the enforceable reading is preferred.
• Prefer reasonableness. A reading producing a fair and reasonable result is preferred over one producing an absurd or oppressive one.
• Ordinary meaning governs, except that technical terms are given their technical meaning where both parties are in the trade.
• Omitted terms are supplied by the court where the parties clearly intended a contract, using a term reasonable in the circumstances, and for sales of goods using the Article 2 gap fillers.

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VI. Whose Meaning Prevails: The Three-Step Sequence

Most interpretation questions on this exam reduce to a sequence drawn from Restatement (Second) of Contracts § 201, and working it in order prevents the usual mistakes:

1. Did both parties attach the same meaning? If so, that shared meaning governs — even an unusual meaning, and even if the words would mean something different to an outsider. Private codes are enforceable when both sides speak them.
2. Did they attach different meanings, but one party knew or had reason to know of the other's meaning while that other party did not? The contract is then enforced according to the innocent party's meaning. The party who could have cleared up the confusion and stayed silent bears the loss.
3. Did each attach a different meaning with neither knowing nor having reason to know of the other's? Neither meaning controls, and the result may be no contract at all.

Worked example — the "what is chicken?" problem. A buyer orders 75,000 pounds of "chicken" expecting young broiling birds; the seller ships older stewing fowl, which the trade, the federal grading regulations, and the dictionary all also call chicken. The term is genuinely ambiguous, so the buyer — the party urging the narrower meaning — carries the burden of showing that the seller knew or had reason to know of it. Failing that, the broader ordinary meaning stands, the shipment conforms, and the buyer's rejection is itself the breach. Notice the structure: the objective standard does not ask which meaning is better, it asks which party should have spoken up.

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VII. Interpretation Is Not the Parol Evidence Rule

Candidates lose points by collapsing two questions that arrive together on the facts but are decided by different doctrines:

A completely integrated writing still gets interpreted. Evidence offered to explain an existing term is not barred by the parol evidence rule, because it adds no obligation — it tells the court what the agreement already says. Evidence offered to add an obligation the writing does not contain runs straight into the rule. Sorting each offered item into "explaining" or "adding" disposes of most of these questions, and it explains why UCC § 2-202 lets trade usage in even against a completely integrated writing.

Two canons candidates misuse.

• Noscitur a sociis reads a doubtful word in light of the words surrounding it; ejusdem generis is its narrower cousin, applying only to general words that follow an enumeration.
• Contra proferentem is a tie-breaker of last resort. Courts reach for it only after the ordinary tools — the whole document, the parties' conduct, trade usage, the preference for a lawful and effective reading — leave the ambiguity standing. An answer choice that construes against the drafter as its first move is usually wrong, and it is unavailable altogether where both parties negotiated the clause.