PastPaperHero | Contract content and meaning

Learning Outcomes

This article explains contract content and meaning, including:

How courts interpret contract terms using an objective, reasonable-person standard rather than the parties’ undisclosed, subjective intentions, and why that distinction regularly appears on the MBE.
How to spot and classify patent and latent ambiguity, and how ambiguity is resolved using express terms, course of performance, course of dealing, and usage of trade, in the correct priority order.
How and when extrinsic evidence is admissible under the parol evidence rule, including the difference between partial and complete integrations, the evidentiary effect of a merger clause, and the continued admissibility of evidence of fraud, mistake, or other formation defects.
How to distinguish interpretation questions from modification questions, and how to analyze whether proffered evidence alters the terms of a final writing, merely explains ambiguous language, or proves a separate collateral agreement.
How rules of construction (such as specific over general, preference for interpretations that avoid forfeiture, and contra proferentem) influence the meaning and enforceability of contract terms, especially in close cases.
How courts use the implied duty of good faith when interpreting satisfaction clauses, conditions, and standard-form or insurance contracts, and when they apply subjective versus objective satisfaction standards.
How to apply these interpretation tools systematically to MBE-style fact patterns involving conflicting language, missing terms, parol evidence, and disputes over the effect of conditions and warranties.

MBE Syllabus

For the MBE, you are required to understand how courts determine the meaning and effect of contract terms, with a focus on the following syllabus points:

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.
The interaction between interpretation and conditions, including satisfaction clauses and the duty of good faith.

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.

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
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
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
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 exam frequently tests the objective approach, the handling of ambiguity, the use of extrinsic evidence, and the hierarchy of interpretive sources. Understanding these principles allows precise analysis of contract meaning issues on fact patterns that may look deceptively simple.

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

Key Term: Extrinsic Evidence
Evidence from outside the written or oral contract language itself—such as prior negotiations, the parties’ conduct, or industry custom—used to interpret, explain, or supplement contract terms.

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, given the surrounding circumstances known to both sides.

This has several practical consequences:

A party cannot escape a term by saying, “I secretly meant something else,” if their words and conduct reasonably conveyed a different meaning.
Courts read words in context, not in isolation. The entire agreement, including structure and purpose, informs the reasonable meaning.
Courts prefer interpretations that avoid absurd results and that make commercial sense.

On the MBE, if one party testifies that they “thought” a term meant something idiosyncratic, but the language has a clear, ordinary meaning in context, the objective meaning will control unless the other party knew (or had reason to know) of the unusual meaning and nonetheless agreed.

Ambiguity and When It Matters

Key Term: Ambiguity
A situation where contract language is reasonably open to more than one interpretation to a reasonable person in the circumstances, not merely because the parties now disagree.

Ambiguity is central to whether extrinsic evidence can be used and how far interpretation can go.

If language has only one reasonable meaning in context, courts generally enforce that meaning and exclude extrinsic evidence offered to change it in an integrated writing.
If language is reasonably susceptible to more than one meaning, courts may consider extrinsic evidence to select the correct meaning.

Courts recognize two common types of ambiguity:

Key Term: Patent Ambiguity
An ambiguity that is apparent on the face of the contract—for example, contradictory clauses or vague terms like “appropriate quantity.”

Key Term: Latent Ambiguity
An ambiguity that appears only when the contract language is applied to external facts—for example, a contract to sell “Seller’s boat, the Seagull” when the seller owns two boats with that name.

For latent ambiguity, extrinsic evidence may be used to identify what the parties intended the words to refer to. If the language is simply unclear to begin with (patent ambiguity), courts often turn to the interpretive hierarchy described below.

Exam Warning

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

Hierarchy of Interpretive Tools

If a contract term is ambiguous, courts use a hierarchy of interpretive tools to resolve the ambiguity:

Express terms
Course of performance
Course of dealing
Usage of trade

Key Term: Course of Performance
A pattern of conduct between the parties concerning repeated occasions for performance under the same contract, used to clarify what the parties understood the contract to require.

Key Term: Course of Dealing
A pattern of conduct in prior contracts between the same parties, used to clarify the meaning they ordinarily give to particular terms.

Key Term: Usage of Trade
Any practice or method of dealing regularly observed in a particular industry or trade that justifies an expectation that it will be observed in the transaction at issue.

Courts generally apply the following hierarchy:

Express terms of the contract have first priority.
Course of performance (how the parties have actually performed under this specific contract) is next.
Course of dealing (prior dealings between these parties) follows.
Usage of trade (industry custom) is last.

Key Term: Interpretive Hierarchy
The ordered ranking of interpretive sources: express terms, then course of performance, then course of dealing, then usage of trade. Higher-ranked sources prevail when they conflict with lower-ranked ones.

The goal is to read these sources consistently if possible. Only when consistency is impossible will a lower-ranked source yield to a higher-ranked one.

The Parol Evidence Rule

Key Term: Parol Evidence Rule
A rule that limits the use of prior or contemporaneous external evidence to alter, contradict, or supplement the terms of a written contract that the parties intended as a final expression of their agreement.

The parol evidence rule (PER) is an evidence rule about what terms may be proved; it does not apply to subsequent agreements or modifications.

PER analysis usually proceeds in steps:

Determine whether there is a writing the parties intended as a final expression of at least some terms (a final writing).
Decide whether the writing is a partial or complete final writing.
Apply PER to exclude barred evidence and admit permissible evidence.

Key Term: Final Writing
A writing (or series of writings) that the parties intended to be a final expression of at least some terms of their agreement.

Key Term: Partial Final Writing
A writing that is final as to the terms it contains but does not include the parties’ entire agreement; consistent additional terms may be admitted, but contradictory terms are barred.

Key Term: Complete Final Writing
A writing that the parties intended as a complete and exclusive statement of all contract terms; prior or contemporaneous evidence that adds to or contradicts the writing is barred.

Key Term: Merger Clause
A clause stating that the written contract is the complete and final agreement of the parties (e.g., “This writing constitutes the entire agreement between the parties.”), often strong evidence of a complete final writing.

Under PER:

Prior or contemporaneous agreements or statements that contradict an integrated writing are inadmissible.
For a partial final writing, consistent additional terms may be admitted.
For a complete final writing, additional terms are not admitted to supplement the writing.

Importantly, PER does not bar extrinsic evidence offered to:

Show that no valid contract was formed (e.g., fraud, misrepresentation, duress, mistake, lack of consideration).
Establish an oral condition precedent to the contract’s effectiveness.
Interpret ambiguous terms.
Show subsequent modifications or agreements.
Prove a separate, collateral agreement that does not contradict the writing and would naturally be made separately.

Exam Tip (PER vs. Modification)
PER bars only prior or contemporaneous evidence. Evidence of a later modification is never barred by PER (although it must satisfy any modification rules, including Statute of Frauds where applicable).

Extrinsic Evidence and Interpretation

Extrinsic evidence—evidence outside the contract—plays a key role in interpretation, especially when ambiguity exists.

Extrinsic evidence may be used to:

Explain or clarify ambiguous terms.
Demonstrate course of performance, course of dealing, or usage of trade.
Supply missing terms (e.g., reasonable time, reasonable price under the UCC).
Show the existence of an oral condition precedent to effectiveness.

However, in a fully integrated contract, extrinsic evidence may not be used to:

Contradict clear, unambiguous express terms.
Add new terms that would naturally have been included in the writing.

The UCC is relatively liberal: it assumes contracts for the sale of goods are at most partially integrated and allows course of performance, course of dealing, and usage of trade to explain or supplement terms, even when the writing looks complete. But even under the UCC, express terms prevail over inconsistent course or usage.

Revision Tip

Always start with the contract’s express terms. Only if those terms are unclear or incomplete should you turn to course of performance, course of dealing, and usage of trade as interpretive aids.

Rules of Construction

Courts apply several default rules of construction when interpreting contracts, especially when other tools do not resolve ambiguity:

Words are given their ordinary meaning unless the contract clearly assigns a special meaning.
The contract is read as a whole; specific clauses are interpreted to fit with the overall purpose.
Specific terms prevail over general terms when the two conflict.
Handwritten or typed terms prevail over pre-printed boilerplate if there is a conflict.
Interpretations that give effect to all provisions are preferred over interpretations that render any clause meaningless.
Where possible, interpretation will avoid forfeitures (especially interpreting doubtful language as a promise rather than a strict condition).
Ambiguities are construed against the party who drafted the contract (contra proferentem), particularly in standard-form or consumer contracts.

Key Term: Contra Proferentem
The rule that ambiguous contract language is interpreted against the party who drafted it, especially when that party had superior bargaining power or used standard-form language.

Key Term: Condition
An event that must occur (or fail to occur) before a party has a duty to perform, or that will discharge an existing duty if it occurs; conditions modify promises and affect when duties become due.

Interpretation often decides whether language creates a condition or a promise. Courts look at wording (e.g., “on condition that,” “provided that”), prior practices, and fairness, and they tend to prefer interpreting doubtful language as a promise rather than a condition to avoid harsh forfeitures.

Interpreting Satisfaction Clauses and Good Faith

Some contracts make one party’s duty conditional on that party’s satisfaction (e.g., “subject to the buyer’s satisfaction”).

Key Term: Satisfaction Clause
A provision making one party’s performance conditional on that party’s satisfaction with the other’s performance.

Key Term: Implied Duty of Good Faith and Fair Dealing
An implied obligation in every contract that each party will act honestly and in good faith, and will not destroy the other party’s right to receive the benefits of the contract.

Interpreting satisfaction clauses involves two main approaches:

If the subject is one of personal taste or judgment (e.g., a portrait), courts usually apply a subjective standard: the party must be honestly, in good faith, dissatisfied.
If the subject is commercial quality or utility (e.g., marketable title, proper construction), courts often apply an objective “reasonable person” standard.

In either case, the implied duty of good faith prevents a party from manufacturing dissatisfaction merely to escape a deal.

Interpreting Insurance and Standard-Form Contracts

Insurance policies and other standard-form contracts frequently generate interpretation questions on the MBE. Courts typically:

Apply the objective approach to the language, asking how a reasonable insured would understand the provision.
Resolve genuine ambiguities against the drafter (usually the insurer) under contra proferentem.
Prefer interpretations that preserve coverage reasonably expected by the insured, so long as the language can fairly bear that meaning.

This explains why courts often read clauses requiring truthful statements by an applicant as requiring truthfulness to the best of the applicant’s knowledge, rather than strict liability for unknown inaccuracies.

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”). Standing alone, it could reasonably mean any day in June, so there is ambiguity about the exact delivery date. The court may then look to course of dealing. If prior contracts between these parties always required delivery by June 10 and both parties knew and followed that pattern, the court may interpret “June” to mean delivery by June 10. Express language controls, but here it is ambiguous, so course of dealing is an appropriate interpretive tool.

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. The term “delivery” is ambiguous in this context. If, in the relevant industry, “delivery to buyer’s warehouse” customarily means unloading at the warehouse, the court may use usage of trade to interpret the term. Usage of trade is admissible to explain or supplement ambiguous terms, so long as it does not contradict clear express language.

Worked Example 1.3

An applicant for life insurance completes an application that asks, “Have you ever had any heart disease?” The applicant answers “No.” The application and policy both state: “The applicant warrants the truthfulness of all answers, and these answers are conditions to coverage under this policy.” Unknown to the applicant, she had a mild, undiagnosed heart condition years earlier. She later dies of a sudden heart attack, and the insurer refuses to pay, arguing that the answer was false and a condition failed.

Question: How is this clause likely to be interpreted?

Answer:
The language “warrants the truthfulness” and “conditions to coverage” suggests an express condition. However, under the objective approach, courts interpret the provision as a reasonable person in the applicant’s position would understand it. It would be unreasonable to expect an applicant to disclose conditions she does not know about. A court is likely to interpret the clause as requiring truthfulness to the best of the applicant’s knowledge and belief. Because the applicant honestly believed her answer was true, the condition is satisfied and coverage is not forfeited.

Worked Example 1.4

A written contract for the sale of a car states the price as “$15,000” and makes no mention of any additional warranties. Before signing, the seller allegedly promised orally to include an extended warranty at no extra cost. After the sale, the buyer sues to enforce the alleged oral warranty. The written contract contains a merger clause stating: “This writing is the complete and exclusive statement of the parties’ agreement.”

Question: Is evidence of the oral extended warranty admissible?

Answer:
The writing is clearly a final expression of the parties’ agreement and, given the merger clause, will likely be treated as a complete final writing. The alleged prior oral warranty is a prior agreement that adds a term not contained in the writing. Under the parol evidence rule, prior or contemporaneous evidence that adds to or contradicts a completely final writing is barred. Because an extended warranty would naturally be included in a complete written sales contract, the buyer cannot introduce the oral promise to vary the final writing.

Worked Example 1.5

Over a year, a buyer and seller enter into monthly contracts for the sale of goods. Each written contract states, “Delivery by the 1st of each month.” For the first six months, the seller consistently delivers on the 5th, and the buyer accepts without objection. In the seventh month, the seller again delivers on the 5th, and the buyer claims breach for late delivery.

Question: How will a court likely interpret the delivery term?

Answer:
The express term “Delivery by the 1st” suggests a deadline. However, the parties’ course of performance under this ongoing arrangement shows that both treated delivery by the 5th as acceptable. Under the interpretive hierarchy, express terms normally control, but course of performance can be used to explain what “by the 1st” practically meant to these parties, especially when the same language is repeatedly performed against. A court is likely to interpret the clause, in light of course of performance, as allowing delivery by the 5th and to reject the buyer’s attempt to treat the 7th contract as breached.

Worked Example 1.6

A homeowner contracts with a builder to “complete construction of a garage using premium-grade materials, provided that all materials are approved by the owner.” The homeowner later refuses to pay, arguing that one brand of lumber used was not specifically approved.

Question: Is “provided that all materials are approved by the owner” more likely to be interpreted as a strict condition or as a promise subject to a reasonableness limitation?

Answer:
The phrase “provided that” points toward a condition. But courts, especially where substantial performance is rendered, prefer interpretations that avoid forfeiture and that fit the implied duty of good faith. A reasonable interpretation is that the owner’s approval must be exercised in good faith and not withheld arbitrarily, and that minor deviations from explicit approval do not defeat payment if the work is otherwise satisfactory. Courts often treat such language as creating a condition that must be satisfied in good faith, not as a trap allowing forfeiture for trivial deviations.

Common MBE Pitfalls in Interpretation Questions

Several recurring issues cause errors on the MBE:

Treating any outside evidence as barred by PER, without asking whether there is a final writing and what the evidence is offered to show.
Assuming that any disagreement proves ambiguity; remember the reasonable person standard.
Ignoring the hierarchy of interpretive tools by jumping straight to usage of trade without checking express language and course of performance.
Confusing interpretation with modification: changing the deal requires a valid modification, not “interpretation.”
Over-reading literal language in a way that produces unreasonable or harsh forfeitures, contrary to common construction principles.

Careful attention to the purpose of the evidence (formation defect, interpretation, modification, collateral agreement) and to the objective meaning of the words will keep these pitfalls in check.

Key Point Checklist

This article has covered the following key knowledge points:

Contract interpretation uses the objective approach—what a reasonable person in the parties’ position would understand, given the context.
Ambiguity exists only when language is reasonably susceptible to more than one meaning; mere disagreement is not enough.
Latent and patent ambiguities are both resolved using extrinsic evidence, guided by the interpretive hierarchy.
The parol evidence rule applies to prior or contemporaneous agreements and limits their use to contradict or supplement an integrated writing.
Final-writing analysis distinguishes partial from complete final writings; merger clauses are strong (but not absolute) evidence that a writing is complete.
Extrinsic evidence remains admissible to interpret ambiguous terms, prove formation defects, show oral conditions precedent, and prove subsequent modifications.
Courts interpret ambiguous terms using a hierarchy: express terms, course of performance, course of dealing, and usage of trade.
Rules of construction favor ordinary meaning, reading the contract as a whole, giving effect to all clauses, and interpreting ambiguous language against the drafter.
Courts often interpret doubtful language as a promise rather than a strict condition to avoid forfeiture, subject to the implied duty of good faith.
Satisfaction clauses are interpreted in light of subject matter (subjective vs objective standards) and constrained by good faith.

Key Terms and Concepts

Objective Approach
Extrinsic Evidence
Ambiguity
Patent Ambiguity
Latent Ambiguity
Parol Evidence Rule
Final Writing
Partial Final Writing
Complete Final Writing
Merger Clause
Course of Performance
Course of Dealing
Usage of Trade
Interpretive Hierarchy
Contra Proferentem
Condition
Satisfaction Clause
Implied Duty of Good Faith and Fair Dealing

Contract content and meaning - Interpretation