Three steps of contract interpretation
1. Is the K ambiguous
Option 1: strict, four corners approach
option 2: Traynor's approach in pacific gas (S. Rest 212)
2. If the K is ambiguous under the approach you choose, then extrinsic evidence is admissible to resolve the ambiguity.
3. Analyze the extrinsic evidence with the interpretive hierarchy.
Traynor's Test for ambiguity
Extrinsic evidence must always be considered in order to determine if a K's terms are ambiguous. This is bc words always derive their meanings from context.
Four corners approach
if the language of the K is unambiguous on its face, then no extrinsic evidence is allowed.
Rationale: Failure to follow the four corner's approach limits parties ability to define K's in writing; lengthens the litigation process; threatens the rule of law by undermining the fundamental premise that words have a fixed meaning.
Interpretive hierarchy of extrinsic evidence
1. Contract language
2. course of performance
3. Course of dealing
4. trade usage
5. rules of construction
6. gap filling with defaults
Parole evidence rule
S rest 213
NOTE: this decides what the TERMS of a K are. The rules of K interpretation then decide what those terms mean (and that usually means it is interpreted in light of extrinsic circumstances like trade usage and course of dealing)!.
1. is the K an integrated agreement?
2. If the K is completely integrated, then no additional terms are provided by oral agreements.
If, however, an agreement is only partially integrated, orally agreements can still provide consistent additional terms if
1) the oral agreement was agreed to for separate consideration, or
2) it is such a term as in the circumstances might naturally be omitted from the writing.
when applicable the rule renders unenforceable oral agreements entered into prior to the adoption of a written contract.
Rationale: the formal writing reflects the parties' minds at the point of maximum resolution, hence the provisions that do not appear in the document were not intended to survive; protects from outright fraud.
Whose interpretation of the terms prevails?
1) when parties have attached different meanings to a promise, if there is one party that knew or had reason to know of a different interpretation attached by the other party, the meaning of the party with inferior information prevails.
The common usage meaning of words prevails unless parties specify otherwise.
the course of dealing and course of performance and usage of trade are all considered.
defaults in interpretation
An interpretation that gives effect to all terms is preferred
Interpretive hierarchy prevails
specific terms are given greater weight than general terms.
separately negotiated terms are given greater weight than standardized terms.
K's have an implied duty of good faith
K's are interpreted against the draftsman.
when parties have failed to supply an essential term--price, quantity--courts will supply it for them based on the circumstance.
Ex. Wood v. Lucy
Course of performance
A sequence of conduct after or under a particular agreement
If X performs in a particular way and Y acquiesces, it suggest that X was conforming to the agreement with Y
Course of dealing
Sequence of conduct between parties previous to the agreement AND the pre-K negotiations.
rules of construction
consistency of the document; interpret against surplus terms; interpret against drafter.