Sometimes a contract dispute will end up in court. A court must examine and interpret the contract in order to determine what the parties intended. This lesson explores how courts determine the parties’ intent.

Contract Disputes

There are times when the parties disagree on the terms of the contract, or on how the contract should be enforced. A breach of contract suit is a fairly common type of civil lawsuit. A breach of contract is a cause of action that will be brought when one party fails to complete a duty that is required by the contract.

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Whenever a contract dispute ends up in court, the court’s primary concern is to determine and to give effect to the intentions of the parties. The court will examine and interpret the contract according to certain rules of construction, so that the court can facilitate the wishes of the parties. Rules of construction are laws and policies that a court uses when resolving a dispute between the parties of a contract.

For example, let’s say that you and I agree that I’ll sell you my car. I say that I’ll sell you my car for $100, and you accept. I deliver my 1984 Honda to you. You’re angry, because you don’t want this car. You thought I was selling my new, 2013 Cadillac. When you sue me for breach of contract, the court will follow certain guidelines, or rules of construction, in an attempt to determine what each of us intended.

Principal Purpose

When a court must step in and interpret a contract, the court will follow several rules of construction. Let’s take a look at each of these rules. First, the court will attempt to determine the principal purpose of the parties in the making of the contract. The court will look at the contract itself, as well as the parties’ words and conduct.

Let’s take a look at the contract we made to sell my car. My principal purpose is to unload my old car, and hopefully make a little bit of money on it. Your principal purpose was to acquire reliable transportation for as little money as possible. The court will look at our contract to determine if our purposes were met. If not, then the court will determine what needs to be accomplished so that we can each meet our purpose. In our agreement, for the most part, our purposes are met even if you end up with the Honda.

Contract Construction

The court will also look at the construction of the contract. The contract will be interpreted as a whole. This means that if the parties disagree on the meaning of one portion of the contract, the court will look to the other portions of the contract for answers. If the contract is written, the court will examine the actual contract in its entirety.

Sometimes a contract is constructed of several different writings. When this is the case, the court will examine and interpret those writings together. The court will consider each part in relation to the rest of the contract. This is done so that the court can determine the effect of each part on the other parts.

Let’s say that I wrote a letter to you, stating that I’ll sell my car to you for $100. I then sent you a copy of the title to my car. The title clearly states that the car is a 1984 Honda. These two documents will be read together to show that I intended to sell you the Honda. This contract will be interpreted to show that we had a valid agreement regarding the Honda.

Interpretation

The court will interpret the language of the contract and assign meaning to the various terms. Generally, contract language is interpreted according to the most common and prevailing meaning. Courts sometimes call this the plain, ordinary, and generally accepted meaning.

According to the Texas case of Birnbaum v. Swepi, courts should use the plain meaning unless the contract shows that the parties used the term in a technical or different sense. This is the law in most states, because many contracts use technical terms, or terms of art. When a contract is specific to a specialized area, any technical terms will be interpreted according to that specialization.

The court will determine whether or not there are any ambiguities in the language of the contract. An ambiguity is a vague or uncertain term. Note that an ambiguity doesn’t necessarily arise when the parties disagree on an interpretation. An ambiguity exists only when both interpretations are reasonable. When the court finds an ambiguity, the court will interpret the term against the party that drafted the contract.

Let’s look at our contract again. I said that I’d sell you my car. Is car an ambiguity? I meant one car, and you thought I meant a different car. We disagree on the interpretation. The court will need to decide whether or not both interpretations are reasonable, considering the circumstances. It’s likely that both interpretations are reasonable, but if I’ve specified the Honda by sending you the title, then you should reasonably know that I intend to sell you the Honda.

Parties’ Intent

The court will also need to determine the parties’ intent. The court will look at any demonstrations of a party’s intent and interpret those actions in accordance to the terms of the contract.

Courts use the objective theory when interpreting a party’s intent. This means that a party’s intent isn’t judged by what the party thought, but by what another person would think. A party’s intent is judged by this test: what would a reasonable person have believed the other party’s intentions to be? It doesn’t matter what the other party actually intended.

For example, let’s say that I offer to sell you my car for $100. I’m only joking and didn’t intend to make a real offer. You say that you accept, mail me $100, and then sue me for breach of contract when I refuse to turn the car over to you. How will the court interpret my intent? If you reasonably believed that I intended to make a valid offer, then you will win. In this scenario, $100 isn’t usually a reasonable amount of money in which to purchase a car. A reasonable person probably wouldn’t believe that I intended to make a valid offer.

Normally, if both parties intend the same thing, then the parties’ wishes will be enforced. This means that if both parties intend and desire that their contract be valid and enforceable, it usually will be. If both parties want the contract to be unenforceable, then the court will not enforce the agreement.

Sometimes it’s difficult for a court to determine what the parties intended. Sometimes courts must rely on certain presumptions. A presumption is a conclusion that is taken to be true and used as the basis for other decisions. For business contracts, a court will presume that the parties intended their agreement to be legally enforceable. If this isn’t true, the parties can present evidence otherwise.

For example, let’s say that I sell copy machines in my store. I tell you that I’ll sell you a certain copy machine for $100. When you try to enforce this agreement, I say I was only joking. The court will presume that I meant to make a valid offer. You won’t have to prove that you reasonably believed that I was making a valid offer. This is the type of offer that a court might uphold.

Let’s revisit the contract you and I made one more time. A court isn’t likely to uphold your intent to buy my new Cadillac for $100. This price is far too low for a new car, and I’ve expressed my intent to sell my old Honda. A court will probably agree that I’ve sufficiently expressed my intent to sell the Honda. So, enjoy your new ride!

Lesson Summary

Let’s review. Parties sometimes disagree on the terms of a contract, or on how the contract should be enforced. A breach of contract suit is a fairly common type of civil lawsuit. When a court must step in and interpret a contract, the court will follow several general rules. First, the court will attempt to determine the principal purpose of the parties in their making of the contract. Second, the contract will be interpreted as a whole. Next, the court will interpret the language of the contract and assign significance to various terms according to the most common and prevailing meaning.

If the court finds an ambiguity, the court will interpret that term against the party that drafted the contract. The court will then determine the parties’ intent by using the objective theory. This means that a party’s intent isn’t judged by what the party thought. Instead, it is judged by what another reasonable person would think. For business contracts, a court will presume that the parties’ intended their agreement to be legally enforceable.

Learning Outcomes

Upon finishing this lesson, you should be ready to:

  • Define breach of contract, rules of construction, ambiguities, and presumption
  • Summarize the rules of construction a court will follow in a breach of contract suit
  • Describe how a court uses the objective theory to determine the parties’ intent