Understanding Contract Interpretation: A Practical Guide

Contract disputes often hinge on interpretation. When parties disagree about what their agreement means, courts apply a set of principles developed over centuries to determine the contract’s meaning. Understanding these principles can help you draft clearer contracts and anticipate how disputes might be resolved.

The Plain Meaning Rule

The starting point for contract interpretation is the text itself. Courts begin with the assumption that words should be given their ordinary, everyday meaning. If a contract says “delivery within 30 days,” that phrase is interpreted as thirty calendar days from the relevant date, not some specialized meaning.

This principle serves an important function: it promotes predictability. Parties can rely on the common understanding of words when entering agreements, without worrying that a court will later impose unexpected meanings.

However, the plain meaning rule isn’t absolute. Context matters enormously.

Trade Usage and Course of Dealing

When contracts operate within specific industries, technical terms often carry specialized meanings. A “gross” in the jewelry trade might mean 144 units, while the same word in everyday usage means something quite different.

Courts will consider:

• Trade usage: How terms are commonly understood within the relevant industry
• Course of dealing: How the parties have conducted themselves in previous transactions
• Course of performance: How the parties have behaved under the current contract

These contextual factors can override ordinary meaning when the evidence supports a specialized interpretation.

The Parol Evidence Rule

One of the most frequently litigated contract principles is the parol evidence rule. In essence, it prevents parties from introducing evidence of prior or contemporaneous oral agreements to contradict the written contract.

The logic is straightforward: if parties reduce their agreement to writing, that writing should be treated as the complete and final expression of their intent. Allowing either party to later claim “but we also agreed to X” would undermine the reliability of written contracts.

There are important exceptions:

1. Ambiguity: If the contract language is reasonably susceptible to multiple interpretations, courts may consider extrinsic evidence to resolve the ambiguity
2. Fraud or mistake: Evidence can be introduced to show the contract was induced by fraud or based on mutual mistake
3. Condition precedent: Evidence that the contract was never intended to become effective unless certain conditions occurred

Practical Takeaways

For those drafting contracts, these principles suggest several best practices:

Be specific. Avoid vague terms where precision is possible. Instead of “prompt delivery,” specify “delivery within 14 business days of order confirmation.”

Define terms. If you’re using technical language or want a specific meaning, include a definitions section. Don’t assume the reader shares your understanding.

Address contingencies. Think through what could go wrong and address those scenarios explicitly. Courts can only interpret what you’ve written.

Review with fresh eyes. Before signing, read the contract as if you were the other party. What arguments might they make based on the language?

Understanding how courts interpret contracts doesn’t just help in disputes—it helps prevent them in the first place.