Our first goal of the new semester is to understand how contracts are interpreted when there are disputes. For instance, parties may initially agree on the words, but later disagree on the meaning of those words. Consequently, this article and the next (for Contracts II) will go over ways the courts have resolved this issue. We begin by discussing some of the principles of interpretation.
Restatement of Contracts (Second) §200, 201, 203, 211
The old rule was to ensure that there was a “meeting of the minds.” If there was no meeting of the minds, there was no contract. However, this subjective approach changed over time into a completely objective approach. In this new approach, if a reasonable third party could see that a contract was formed, then that would be the result. However, this created a problem where neither party would agree, but a contract could still be formed by which both are bound.
To remedy this issue, the courts created a modified modern approach. Below outline some of those rules:
- If there is mutual understanding in a contract, a contract is formed, even if the words are unusual.
- If there is no mutual understanding in a contract, then the court will determine if one party knew or should have known the meaning of the other. If this is the case, then the party who should have known will be bound.
- Finally, both parties did not know the meaning of the other, then we resort to the old rule where a contract is not formed.
Holmes is the one who transitioned from the subjective approach to the objective approach. This approach was “what does the reasonable person see when they hear the term”?
However, there are some rules for the modified approach following §201 “Whose Meaning Prevails”
- When the parties agree, that is the meaning.
- When the parties disagree, we will go for A’s meaning if A did not know of B’s meaning, and B did or have reason to know of A’s meaning.
- If no-one knows or has reason to know, then there is no contract.
- Where parties agree, that is the meaning. That means, that if the parties understand the meaning that is different from the usual meaning, then the parties meaning applies.
Joyner v. Adams
361 S.E.2d 902 (N.C. App. 1987).
Joyner is the plaintiff. Lost in trial court, but won in the appellate court. The case was remanded for further proceedings and the plaintiff won in the trial court on that occasion. Adams appealed.
Was there mutual agreement between the parties? If not, what is the definition of “developed”? Was the final lot “developed” in time?
If there is no mutual agreement between the parties, and when the parties have equal bargaining power, then the court must use fact-finders to determine one party knew or had reason to know of the intent of the other.
There was no mutual agreement, remanded to determine if either party knew or had reason to know of the intent of the other.
Joyner owned property and leased it out for development. This lease included a statement that the rent would increase annually according to the Wholesale Price Index (WPI). However, the developer became ill and the lease transferred to Adams. At this point, the rent increase was paused and a fixed amount of rent each year replaced the clause. This applied as long as Adams developed all the lots of the land by a certain date. By that date, all the lots except one were developed with people in those homes. Of the one that was not completed, it had all the necessity completed before the home was to be built. This home was completed two years after the agreed upon period.
Consequently, Joyner sued Adams for the difference between the fixed and the WPI.
The issue then becomes, was there mutual assent as to the meaning of the contract? The answer to this is no. Joyner argues that their interpretation is the only true interpretation and so does Adams. The court determined that neither interpretation could be seen as the only true interpretation because the facts presented shows that it could have gone either way. The land either had to be “completely developed” or “developed.”
Because there was no agreement, this must be remanded to gather more facts as to whether the defendant knew or had reason to know the plaintiff’s intent. If the answer to this is yes, he is bound. If the answer to this is no, then he is not bound (if the plaintiff did not know or had reason to know of the defendant’s intent).
Ultimately, it outlines the rules mentioned at the beginning. If there is no agreement, see if one party knew or had reason to know the intent of the other. The trial court needs to determine this, so the case was remanded.
The trial court had followed a rule where the party who wrote the document is the one where it is decided against. The appellate court disagreed because there this rule is used when there is unequal bargaining power. Here there was equal bargaining power, so the rule should not apply.
When we write a contract we want to make sure that it is written in a way where it’s “Gotta be this or that”. Otherwise, there is ambiguity which could lead to other issues if we disagree on a term. So, we want to write terms to mean “specifically this thing, not this.”
§201(1)(6) Definitions outline that throughout the remainder of the agreement, a term will have an assigned meeting. Although you can assign terms to a different meaning, you should do your best to assign a meaning to the classic meaning. This keeps things simple. This is true especially if you run into a judge where they rule that the “plain meaning” prevails.
Frigaliment Importing Co. v. B.N.S. International Sales Corp.
190 F. Supp. 116 (S.D.N.Y. 1960).
What is chicken?
When one party is not a member of the trade, then the other party must know that the party knew or had reason to know of the meaning. Things the court can use to discover whether they knew include:
- Witness testimony as to the meaning
- Plain language of the text
- Ordinary meaning of the text
- Relevant market prices
- Dictionary meaning, if provided in the contract
Judgment for the defendant, chicken is defined more broadly than that requested by the plaintiff.
The plaintiff and defendant agreed on two contracts for “chickens”. Upon receiving the first shipment of “chickens” the plaintiff found that many of the birds were too old and not suitable for frying, but only for stewing. Consequently, they argue that their meaning in the contract was “young chickens” and provide evidence to show they meant this at the time of contract formation.
The defendant disagrees, saying that they specified what kinds of birds and did not receive any pushback against older larger birds. In fact, the definition provided in the contract listed the government regulations for what birds would be allowed after inspection.
Because the defendant was relatively new to the profession of selling chickens, the plaintiff must show that the defendant needed to know or have reason to know of the intent. They failed to do so because it is clear that the defendant had provided a definition of what it understood “chicken” to be which was not refuted until reception of the first shipment.
The court says that although the defendant’s subjective belief is not sufficient, the combination of the belief with an objective definition gives the argument merit.
We learn from this case some of the ways the court determines whether one party knew or had reason to know the intent of the other.
The court said the the word in this context, standing alone, was ambiguous. Thus, the term needs to be defined.
As a result, the plaintiff wanted the chickens to be young and understood the word “chicken” to be young and thought the defendant should have known that because everyone in the business knew it to mean “young chicken.” However, the defendant was new to the business.
On the other hand, the plaintiff’s adopted the USDA typology of different kinds of chickens into the contract. Additionally, the defendant argued that the price of chickens showed that they could not mean young chickens because then they would have been operating on a loss. The plaintiff shouldn’t expect the defendant to operate on a loss. In a practical sense, this argument is not as strong.
Another whole point of this discussion is that you should define the term.
C & J Fertilizer, Inc. v. Allied Mutual Insurance Co.
227 N.W.2d 169 (Iowa 1975).
Plaintiff (C&J Fertilizer) lost in trial court and appealed.
Is the plaintiff entitled to recover for a contract that defined burglary in a way that the plaintiff was not informed about?
A standardized contract must have reasonable expectations for terms that plaintiffs do not and are not expected to read (unless otherwise informed).
The clause here was not a reasonable exception for a definition of burglary.
The plaintiff owned a fertilizer plant and had purchased two insurance policies from the defendant. In these policies, there was a definition of burglary which stated that visible damage to the property had to be seen at the point of entry. The plaintiff was burglarized and there was damage shown in the interior of the building. However, due to the ability of the burglar, there was no damage to the exterior, at the point of entry. Consequently, the claim was denied.
Interestingly, the agent of the insurance company was surprised the claim was denied, having seen the damage to the interior. He believed this was a clear cut case where the claim would be accepted and a remedy provided.
In the trial court, the court reasoned that the policy stated clearly that damage had to be to the exterior. Because that evidence was lacking, the complaint was denied.
The Iowa Supreme Court disagreed with the trial court. This is an instance where forms have been standardized and consequently, nobody reads the contracts they sign. If they do read them, there is little to be done to change any of the definitions among them. As a result, many people accept the terms without reading them.
Due to this fact, the court requires that the terms be based around a reasonable expectation for the term, unless the insured is otherwise informed of their meaning.
Here, this term is not a reasonable expectation because it does not follow the format of a legal, or a layman’s definition of burglary. Therefore, because the defendant was not informed, and there was no reasonable expectation, the court reversed.
The reasonable expectation doctrine articulated in this opinion is the broad version of the doctrine. Many other states have adopted the doctrine with modifications to make it more narrow. These modifications include that the provision in question needs to be ambiguous or hidden.
The above is all based on Restatement (Second) of Contracts § 211.
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.