Introduction:
One reason contract wording often seems stilted and redundant is the effort of drafters to avoid any confusion in the mind of the court or arbitrator as to what the parties meant to agree upon. Such confusion may be caused by ambiguous terms or conflicting terms and quite often a court, arbitrator or jury is asked to determine what the parties meant years or even a decade earlier when the parties, themselves, disagree as to their past intentions. Such disagreement by the parties may be based on real confusion or an effort by a party to evade an obligation.
The issue of ambiguity in contracts is an ancient one and commonly litigated in the courts. Ideally, the parties will utilize terms that are clear and concise with no possible ambiguity. But in the common situation in which terms may be interpreted in numerous ways, the courts have developed rules as to interpretation that are applied when the terms are considered ambiguous by the court.
This article shall discuss the various doctrines used in California to resolve ambiguous terms in contracts.
The Basic Law:
The well written agreement provides for clear definitions of key terms and, often, provides methodology for resolving possible ambiguities. The parties are entirely free to insert into the agreement appropriate language to confront avoidance of ambiguity and if so, that language in the contract will be utilized by the court in determining resolution of any possible ambiguity. Often there will be a section of the contract defining terms. At times, the contract provides that the terms shall be interpreted according to the usage of the particular industry.
But for those contracts which do not provide adequate language, the California Civil Code has a series of statutes that provide methods to resolve possible ambiguity.
California Contract Interpretation Provisions
If the contract does not include a clause that aids in the interpretation of disputes concerning the contract terms, the parties must use the interpretation rules that have been by enacted by the Legislature. These statutes can be found starting at section 1635 of the California Civil Code. They set out rules of interpretation were enacted as early as 1872.
One of the interpretation statutes provides that for the purpose of ascertaining the intention of the parties to a contract, if otherwise doubtful, the statutory rules are to be applied. Some of the exact language of some of the more relevant statutes and a possible brief comment about court cases that may address the principle set forth in the statute are as follows:
1. Civil Code ' 1635. UNIFORMITY OF INTERPRETATION. All contracts, whether public or private, are to be interpreted by the same rules, except as otherwise provided by this Code.
Comment: Public entities sometimes seek to have contracts interpreted in their favor based on the "public interest." This section has been held to defeat such arguments.
2. Civil Code ' 1636. CONTRACTS, HOW TO BE INTERPRETED. A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.
Comment: Appellate courts have held that the courts can ascertain the parties' intentions by reviewing their conduct relative to the clause in question.
3. Civil Code ' 1638. INTENTION TO BE ASCERTAINED FROM LANGUAGE. The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.
Comment: This provision emphasizes that if the contract can be interpreted from its language, it will be. Section 1639 goes on to state that in such cases, other evidence will be disregarded. The exception for cases of fraud, mistake or accident is stated in Civil Code § 1640. The term "mistake" however is a legal one and refers to mistakes of fact made by both parties or caused by one party, not to a promisor’s errors in judgment.
4. Civil Code '1641. EFFECT TO BE GIVEN TO EVERY PART OF CONTRACT. The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other.
Comment: The attachments, exhibits and all the related contract documents must be construed together.
5. Civil Code '1642 SEVERAL CONTRACTS, WHEN TAKEN TOGETHER. Several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together.
6. Civil Code '1643. INTERPRETATION IN FAVOR OF CONTRACT. A contract must receive such an interpretation as will make it lawful, operative, definite, reasonable, and capable of being carried into effect, if it can be done without violating the intention of the parties.
7. Civil Code '1644 WORDS TO BE UNDERSTOOD IN USUAL SENSE. The words of a contract are to be understood in their ordinary and popular sense, rather than according to their strict legal meaning; unless used by the parties in a technical sense, or unless a special meaning is given to them by usage, in which case the latter must be followed.
Comment: There are a number of trade organizations that publish trade standards, which should be reviewed to determine the custom and practice in a particular industry. If the contract, plans or specifications do not reference such standards and there is a custom and usage dispute, the parties should review those standards.
8. Civil Code '1645. TECHNICAL WORDS. Technical words are to be interpreted as usually understood by persons in the profession or business to which they relate, unless clearly used in a different sense.
9. Civil Code '1646. LAW OF PLACE. A contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made.
Comment: This rule may relevant to the construction industry since the climate and building practices vary throughout the state. For example, roof design for a project in the Sierras will be different from a project in the desert. What may be a common practice in the Sierras will not necessarily be true in a desert community.
10. Civil Code '1647. CONTRACTS EXPLAINED BY CIRCUMSTANCES. A contract may be explained by reference to the circumstances under which it was made, and the matter to which it relates.
11. Civil Code '1648. CONTRACT RESTRICTED TO ITS EVIDENT OBJECT. However broad may be the terms of a contract, it extends only to those things concerning which it appears that the parties intended to contract.
12. Civil Code '1649 INTERPRETATION IN SENSE IN WHICH PROMISOR BELIEVED PROMISEE TO RELY. If the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it.
13. Civil Code '1650. PARTICULAR CLAUSES SUBORDINATE TO GENERAL INTENT. Particular clauses of a contract are subordinate to its general intent.
14. Civil Code '1651. CONTRACT, PARTLY WRITTEN AND PARTLY PRINTED. Where a contract is partly written and partly printed, or where part of it is written or printed under the special directions of the parties, and with a special view to their intention, and the remainder is copied from a form originally prepared without special reference to the particular parties and the particular contract in question, the written parts control the printed parts, and the parts which are purely original control those which are copied from a form. And if the two are absolutely repugnant, the latter must be so far disregarded.
Comment: If a contract is comprised of a pre-printed form and handwritten or typed modifications, the handwritten or typed material will prevail. Integrated, Inc. v. Alec Fergusson Elec. Contractors (1967) 250 Cal.App.2d 287.
15. Civil Code '1652. REPUGNANCIES, HOW RECONCILED. Repugnancy in a contract must be reconciled, if possible, by such an interpretation as will give some effect to the repugnant clauses, subordinate to the general intent and purpose of the whole contract.
Comment: where two clauses of contract appear to be contradictory, the court should attempt to reconcile conflicting clauses so as to give effect to whole of instrument, assuming that is possible within framework of general intent of the contract.
16. Civil Code '1653. INCONSISTENT WORDS REJECTED. Words in a contract which are wholly inconsistent with its nature, or with the main intention of the parties, are to be rejected.
17. Civil Code '1654. INTERPRETATION AGAINST PERSON CAUSING. In cases of uncertainty not removed by the preceding rules, the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist.
Comment: Some contracts include a clause that modifies this statutory interpretation rule. Such clauses will state, in part, that the contract should be construed as though both parties to the agreement drafted it.
18. Civil Code '1655. REASONABLE STIPULATIONS, WHEN IMPLIED. Stipulations which are necessary to make a contract reasonable, or conformable to usage, are implied, in respect to matters concerning which the contract manifests no contrary intention.
Comment: For example, California law implies a covenant of good faith and fair dealing in every contract to ensure one contracting party does not unfairly frustrate the other party's right to receive the benefits of their agreement. It should be noted that a court can neither add nor reject material stipulations in contract.
22. Civil Code '1656. NECESSARY INCIDENTS IMPLIED. All things that in law or usage are considered as incidental to a contract, or as necessary to carry it into effect, are implied therefrom, unless some of them are expressly mentioned therein, when all other things of the same class are deemed to be excluded.
Comment: An example is when two parties entered into a contract whereby the contractor undertook to construct a dwelling house for owner, the law implied a promise on the part of owner to permit the plaintiff to build and according to the details of the contract. (Armstrong v. Smith (1942) 49 Cal App. 2nd 258)
Integration Clause:
Many contracts include an "integration clause" that states that the contract is intended to be a complete and final expression of the parties' agreement. That clause to a certain extent sets forth California law, but is also subject to exceptions. Under California law, when a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible but subject to certain exceptions.
The exceptions exist when, through fraud, mistake, or accident, a written contract fails to express the real intention of the parties and in such cases such intention is to be regarded, and the erroneous parts of the writing disregarded. Otherwise, an integration clause will usually prevent either party from raising any pre-contract statements or negotiations to vary, contradict, or even supplement the written agreement.
CONCLUSION:
Good drafting practices are to utilize words that, however stilted and redundant, make it crystal clear as to the meaning in the agreement and if that cannot be achieved, a section of the agreement defining terms makes good sense. If the parties cannot agree in the drafting stage as to definitions, then it is good to find out prior to reliance on the agreement that such differences exist and adjust the relationship or understanding so that risk is minimized.
In short, the drafting process is critical in determining if there is a true meeting of the minds between the parties so that an effective and efficient relationship can be developed.
In those situations in which the parties failed to so draft the agreement, the rules above are the tools utilized by the courts (and most arbitrators) to interpret the agreement. The rules often require findings of fact and intent by the courts which is an expensive and prolonged exercise. Once again, good drafting avoids later expensive contests.