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The Importance of Unambiguous Contract Terms: Part 3


It may be hard to believe that there is so much to say about contract interpretation that it necessitates multiple blog entries, but the content of these particular installments is really just the tip of the iceberg. Contracting is a routine part of business operations, and even though it has gone on for centuries, it continues to be a complicated process, frequently subject to confusion and disagreements. And, more often than not, these disputes center on conflicting interpretations of a contract's terms. So, here is a continuation of the discussion on the principles of contract construction.

The Whole is Greater Than The Sum of Its Parts

Most people are likely familiar with the maxim that the whole is greater than the sum of its parts. This expression is applicable to contracts because the document is meant to summarize the terms of an agreement between two or more parties. Thus, it is generally impossible to read and interpret distinct terms within a contract in isolation because it is the context and the instrument in its entirety that must be considered to truly discern the intended meaning. In some cases, terms may even appear to conflict, which is all the more reason that the document as a whole must be examined. As a result, when called upon to settle a contract dispute, judges and arbitrators generally look at any disputed provisions and how it fits into the larger agreement to ascertain meaning.

Course of Performance

In part two, we discussed the fact that the parties' intent could factor into the interpretation process. This is particularly useful when the parties do not have a longstanding business relationship. However, in some cases, the adjudicating body can actually take that analysis a step further and examine the actual course of performance between the parties, when applicable. There are plenty of companies that contract with each other for years or enter multiple contracts, either of which may be related or unrelated matters to the dispute at hand. In these instances, the adjudicator may be able to assess the normal course of performance between the parties to ascribe meaning to the disputed wording.

For example, if the parties had always engaged in a certain practice or had always included a certain provision, and there appeared to be a sudden departure from that practice or provision, from either side and for whatever reason, this may signal to the judge or arbitrator that something untoward underlies that change. Thus, this can help guide the manner in which the terms should be interpreted.

Industry Custom

In addition to looking at the intent and actions of the specific parties, it is often necessary to look at the broader business environment to facilitate contract interpretation. There are plenty of industries in which certain norms and customs prevail. Even though parties usually are not legally required to abide by any such standard practices, it can still be useful in assessing the "normal" or "ordinary" meaning of contract terms.

Clearly, the need for a neutral party to interpret disputed contract terms has been and continues to be such a regular occurrence that a system of principles has been developed to guide the process. However, rather than allow things to get to that point, it would behoove companies to work diligently to strike an accord that is abundantly clear and free of ambiguity.

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