Definition of Contract Interpretation
Interpretation of a contract involves determining the meaning of the terms or words used by the parties in their agreement. It is the act of making intelligible what is ambiguous, unclear, or not obvious. Interpretation aims to ascertain the parties' intent. This process is considered a question of law.
Cardinal Rule: Intent of the Parties
The cardinal rule in contract interpretation is that the intention of the contracting parties should always prevail. Their will has the force of law between them. All other rules of interpretation are auxiliary to ascertaining the meaning intended by the parties. Once the true intention is determined, it becomes an integral part of the contract as though it was originally expressed unequivocally.
Literal Meaning vs. Evident Intention
If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. Clear and unequivocal terms bind the parties, and their meaning should be determined without reference to extrinsic facts or aids. In such cases, there is no room for construction.
However, if the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. When terms conflict with the manifest intention, the intention governs.
Judging Intention: Contemporaneous and Subsequent Acts
In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. While intentions involve a state of mind, the parties' acts and surrounding circumstances can reflect their intent.
Scope of General Terms
However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree. As a rule, special intent prevails over a general intent when the two cannot stand together.
Stipulations with Several Meanings
If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. This warrants adopting an interpretation that renders the contract valid or effective over one that makes it illegal or meaningless.
Interpretation of Various Stipulations Together
The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. A contract must be read and interpreted as a whole, not in isolation, and the intention is gathered from the entire instrument. All provisions should harmonize with each other and be given effect. If the contract is in several documents, they must all be taken together.
Words with Different Significances
Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract. This aligns with the cardinal rule that the intention of the parties must prevail.
Usage or Custom of the Place
The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established. Usage or custom may explain what is doubtful or ambiguous, but it does not supersede or vary the plain terms.
Interpretation of Obscure Words
The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. This rule, contra proferentem, interprets ambiguity strictly against the drafting party.
Interpretation When Doubts Cannot Be Settled
When it is absolutely impossible to settle doubts by the preceding rules:
- If the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail.
- If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.
- If the doubts are cast upon the principal object of the contract in such a way that the intention cannot be known, the contract shall be null and void.
Interpretation vs. Reformation
Interpretation determines the meaning of terms, while reformation is a remedy in equity to make a written instrument conform to the parties' true intention when that intention is not expressed due to mistake, fraud, inequitable conduct, or accident. In interpretation, a contract exists, and the focus is on understanding what was written. In reformation, there was a meeting of the minds, but the written document does not reflect it. If there was no meeting of the minds due to mistake, fraud, etc., the remedy is annulment, not reformation.