Contract content and meaning - Interpretation

Learning Outcomes

After reading this article, you will be able to identify and apply the key principles of contract interpretation for the MBE. You will understand the objective approach, how ambiguity is resolved, the role of extrinsic evidence, and the rules for interpreting contract terms. You will be able to answer MBE questions on contract meaning and content with confidence.

MBE Syllabus

For MBE, you are required to understand how courts determine the meaning and effect of contract terms. This includes the rules for interpreting written and oral agreements, resolving ambiguities, and the use of extrinsic evidence. In your revision, focus on:

• The objective approach to contract interpretation.
• The rules for resolving ambiguous or conflicting terms.
• The admissibility and limits of extrinsic evidence (parol evidence rule).
• The hierarchy of interpretive tools (express terms, course of performance, course of dealing, usage of trade).
• The effect of custom, usage, and prior conduct on contract meaning.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. When interpreting a contract, courts primarily use:
   1. The subjective intentions of the parties
   2. The objective meaning of the words used
   3. The parties’ secret hopes
   4. The dictionary definition of every word
2. Which of the following is generally admissible to explain an ambiguous contract term?
   1. Prior negotiations
   2. Course of performance
   3. The parties’ undisclosed intentions
   4. Evidence of unrelated contracts
3. The parol evidence rule prohibits:
   1. All evidence outside the written contract
   2. Evidence of subsequent modifications
   3. Evidence of prior or contemporaneous agreements that contradict a final written contract
   4. Evidence of fraud or mistake
4. If contract language is ambiguous, which interpretive tool has the highest priority?
   1. Usage of trade
   2. Express terms of the contract
   3. Course of dealing
   4. Course of performance

Introduction

Contract interpretation is a core topic for the MBE. When a dispute arises over what a contract means, courts apply a set of rules to determine the parties’ rights and obligations. The MBE tests your knowledge of the objective approach, the handling of ambiguity, the use of extrinsic evidence, and the hierarchy of interpretive sources. Understanding these principles is key for answering MBE questions on contract content and meaning.

The Objective Approach

Courts interpret contracts based on the objective meaning of the words and conduct, not the parties’ private intentions. The focus is on what a reasonable person in the position of the parties would understand the contract to mean.

Key Term: Objective Approach The principle that contract terms are interpreted according to the meaning a reasonable person would give them, not the parties’ undisclosed intentions.

Resolving Ambiguity

If a contract term is ambiguous—reasonably susceptible to more than one meaning—courts use a hierarchy of interpretive tools to resolve the ambiguity:

1. Express Terms: The actual language of the contract controls.
2. Course of Performance: How the parties have performed under this contract.
3. Course of Dealing: How the parties have acted in previous contracts with each other.
4. Usage of Trade: The meaning commonly given to terms in the relevant industry.

Key Term: Ambiguity A situation where contract language is reasonably open to more than one interpretation.

The Parol Evidence Rule

The parol evidence rule restricts the use of evidence outside the written contract to alter or contradict its terms. If the parties have reduced their agreement to a final written contract (a "complete contract"), prior or contemporaneous statements cannot be used to contradict or vary the writing. However, extrinsic evidence may be admitted to clarify ambiguous terms, show fraud, mistake, or a condition precedent, or to prove subsequent modifications.

Key Term: Parol Evidence Rule A rule that prohibits the use of prior or contemporaneous external evidence to contradict or vary the terms of a final written contract.

Extrinsic Evidence and Interpretation

Extrinsic evidence—evidence outside the contract—may be used to interpret ambiguous terms, but not to add to or contradict clear, unambiguous terms in a fully integrated contract. Courts may consider course of performance, course of dealing, and usage of trade to supply missing terms or clarify meaning.

Key Term: Extrinsic Evidence Evidence from outside the contract, such as prior negotiations, conduct, or industry custom, used to interpret contract terms.

Hierarchy of Interpretive Tools

When interpreting a contract, courts apply the following hierarchy:

1. Express terms of the contract
2. Course of performance (if the contract has been partly performed)
3. Course of dealing (prior contracts between the parties)
4. Usage of trade (industry standards)

If there is a conflict, the higher-ranked source prevails.

Rules of Construction

Courts apply several rules of construction to resolve disputes:

• Words are given their ordinary meaning unless the contract shows a special meaning.
• Specific terms prevail over general terms.
• Handwritten or typed terms prevail over printed terms if there is a conflict.
• Ambiguities are construed against the party who drafted the contract (contra proferentem).

Worked Example 1.1

A supplier and a retailer enter into a contract for "100 units of Model X widgets, delivery in June." The supplier claims "June" means any time in June; the retailer claims it means by June 10, based on their prior dealings.

Question: How should the court interpret "June"?

Answer: The court will first look at the express term ("June"). If ambiguous, it will consider the parties' course of dealing. If prior contracts between these parties always required delivery by June 10, the court may interpret "June" to mean by June 10.

Worked Example 1.2

A contract states, "Seller will deliver goods to Buyer’s warehouse." The parties dispute whether "delivery" means unloading the goods or just bringing them to the warehouse.

Question: Can the court consider industry custom?

Answer: Yes. If "delivery" in this industry customarily means unloading at the warehouse, the court may use usage of trade to interpret the term.

Exam Warning

Ambiguity must be reasonable. Courts will not find ambiguity just because the parties disagree. Only if the language is fairly open to more than one meaning will extrinsic evidence be considered.

Revision Tip

Always start with the contract’s express terms. Use course of performance, course of dealing, and usage of trade only if the language is unclear.

Key Point Checklist

This article has covered the following key knowledge points:

• Contract interpretation uses the objective approach—what a reasonable person would understand.
• Ambiguity is resolved using a hierarchy: express terms, course of performance, course of dealing, usage of trade.
• The parol evidence rule bars prior or contemporaneous external evidence that contradicts a final written contract.
• Extrinsic evidence may be used to clarify ambiguous terms, show fraud or mistake, or prove subsequent modifications.
• Courts apply rules of construction, including construing ambiguities against the drafter.

Key Terms and Concepts

• Objective Approach
• Ambiguity
• Parol Evidence Rule
• Extrinsic Evidence