A contract is a legal agreement between two or more parties, which documents their promise to either buy/sell goods or perform services. Although some contracts can be oral, it is generally recommended that you put the terms of any contractual agreement in writing.
The purpose of putting a contract in writing is to decrease the potential for legal disputes associated with what each party agreed to do. When a contract dispute arises in which one party alleges that the other has failed to fulfill their obligation under the contract, the other party may sue the party that failed to fulfill their obligations for a breach of contract.
In order for a contract to be considered valid, the contract must fulfill all of the legal requirements for a valid contract. The requirements for forming a valid contract are set forth by state and federal laws. Although the exact elements for forming a valid contract will differ by jurisdiction, in general, a legal contract should meet the following requirements:
- Offer and Acceptance: One party needs to make an offer, and the other party must accept that offer.
- Importantly, both the offer and acceptance must be done in such a way that is clear and unambiguous;
- Assent: Both parties must then mutually assent to the terms of the contract.
- Additionally, both parties should be clear as to the terms, words, and definitions that are used in the agreement; and
- Consideration: Lastly, each party must then exchange something of value.
- For example, one party may be providing a service or goods in exchange for monetary payment.
As noted above, many contracts must be in writing in order to be considered legal by law. For example, contracts for the sale of real property and contracts for the sale of goods that are worth over a certain amount (generally $500) must be in writing to be considered valid and enforceable.
What Is “Contract Meaning”?
Contract meaning is a legal term that refers to the way a term is defined in a contractual document. For example, if the word “bow” appears in a contract, it may have different meanings. For instance, the word “bow” may refer to a clothing item, such as a ribbon, or it may refer to a weapon (i.e. a bow and arrow). As such, if the contract is referring to the clothing ribbon type of bow, that is the contract meaning of the term “bow” for whenever it appears throughout the contract.
In most cases, words that may have multiple meanings will be defined at the beginning of a contract in a definitions section. The word may also be defined in the first place that it appears in the contract. For example, Buyer A agrees to buy 100 clothing ribbons, hereinafter referred to as “bows,” for a price of X dollars.
However, sometimes a formal definition for a term will not be given in the contract. While the parties might have a history of using certain words in specific ways, not providing for a definition for a contract term may lead to misunderstandings and mistakes later on down the road. Because of this it is important for any contract term that may have different meanings or interpretations to be clearly defined in the contract.
What Is an Ambiguous Contract Term?
An ambiguous contract term is a term present in a contract that could have more than one meaning. Continuing the above example, the term “bow” could have multiple meanings. Another common ambiguous contract term is the word “dollar” or “money.” Both “dollar” or “money” can refer to U.S. dollars, or to dollars or currency from other countries.
Also, words that refer to subjective principles may also be difficult to define in a contract. For example, if a buyer is seeking “top grade” materials or “Grade A” materials, this can cause contract interpretation problems. As such, unless there is a formal or industrial definition of “top grade” or “Grade A,” contract disputes over such terms may occur.
How Are Contract Disputes Involving an Ambiguous Term Handled?
After two parties have entered into a contract, contract problems may arise if the parties cannot agree on what a specific term in the contract means. Importantly, if both parties intended the same meaning on a specific term at the time they entered into a contract, that would be the meaning that the court would attach to such a term. However, resolving contract disputes becomes complicated when the parties do not have the same meaning in mind.
How a contract will be interpreted will vary based on the specific facts at issue in each case. If each party attaches an entirely different meaning to a specific term in a contract at the contract formation stage, and they do not know or have reasons to know of the other party’s meaning, it is most likely that a valid contract has not been made.
In short, there was no mutual assent to the terms of the contract. In some cases, courts will still recognize the existence of a contract, but will leave any disputed terms out of the contract.
If one party attaches a different meaning to a specific contract term, but also knows or has reasons to know that the other party only knows one meaning, the meaning of the lesser knowing party will prevail.
In general, “to have reasons to know” means that the party should have known the other party’s contract meaning under the facts and circumstances of the case. Once again, this will be determined by all of the facts of the case.
If there is legal dispute over a contract term, the parties can usually file a civil lawsuit to have the courts determine the best interpretation of the contract term in dispute. When attempting to determine the contract meaning of a term, courts will employ several factors, including:
- The written documents themselves;
- External evidence, such as emails or memos between the parties;
- Various definitions of terms, including common trade usages and ordinary definitions;
- Oral communications between the parties that may have been recorded; and
- Prior dealings of the parties.
In most cases, courts will try to adhere to the original contract as closely as possible. In fact, most judges subscribe to the “four corners” rule of contract interpretation. The term “four corners” refers to the four corners of the contractual document. Essentially the four corners rule implies that the only legal parts of the contract are within the four corners of the document itself.
As such, if there is any evidence that exists outside of the four corners of the contract, such evidence cannot be used in court if it directly contradicts the terms of the written contract. Thus, reliance on outside sources such as additional documents is not always an option in every case.
Courts will however factor in whether or not both parties knew about a mistaken term, or if only one party knew about it. Courts will then strive to reach an interpretation that is fair for both parties given the specific facts and circumstances of the case.
Do I Need A Lawyer for Help With Contract Meaning Issues?
If you are a party to a contract agreement, and there is a dispute as to the interpretation of a contract term, it is in your best interests to consult with an experienced contract lawyer.
An experienced contract attorney will be able to assist you in understanding the meaning of all contract terms, as well as assist you in disputing ambiguous contract terms.
Additionally, an attorney can also help you with drafting and reviewing contracts, prior to signing any contract. An attorney can also explain to you your duties under the contract as they apply under your state’s specific contract laws. Finally, an experienced contract attorney will also be able to represent you in court, should legal action be required to clarify terms of a contract.
