Fundamental principles of contract interpretation – part 3

Fundamental principles of contract interpretation

Contract Interpretation

This is the third in a series of articles about contract interpretation. (Read part one here and part two here.)

In this article, we will examine three more rules of contract interpretation.

Construing several instruments together.

Often, parties to a transaction will sign several contracts at the same time. A loan closing is a good example of this.

At a loan closing, a buyer may sign a promissory note, a deed of trust, and other agreements with the lender.

If one of the documents lacks necessary information, the court can look at the other documents to find that information. In this type of situation, all of the documents are treated as if they were a single contract.

So, assume the deed of trust failed to include the amount of the loan, but the promissory note did. Here, the court will treat the deed of trust as if it had properly stated the amount.

Interpretation by implying terms of a contract.

Even when the parties did not include certain terms in the contract, the law will” imply” those terms. That means the law will treat the terms as if they had actually been written in the contract.

The most common implied term is called the covenant of good faith and fair dealing. In Mississippi, every contract is deemed to include this covenant.

Good faith is the faithfulness of an agreed purpose between two parties. It is a purpose which is consistent with justified expectations of the other party. The breach of good faith is bad faith characterized by some conduct which violates standards of decency, fairness or reasonableness.

The implied covenant of good faith and fair dealing, however, cannot be used to override a clear, express provision in the contract.

For example, assume the contract gives Party A the right to cancel for any reason and without advance notice to Party B.

Also assume Party B has spent a lot of money preparing goods for delivery to Party A. Thus, cancellation without advance notice costs Party B a lot of money.

It may not seem “fair” for Party A to cancel the contract in this manner. But, if Party B expressly agreed to the cancellation provision, he cannot sue Party A for breach of the implied covenant.

Courts will also imply into a contract the existing law at the time the parties entered into their agreement.

Prior performance by the parties helps resolve ambiguities.

When parties get into a lawsuit about the meaning of a contract, courts often look at how the parties were performing prior to the time their dispute arose.

Using an example from our first article, assume the contract requires Party A to make monthly payments of $1000 to Party B. The parties continue their business relationship for two years.

Then, a dispute arises as to whether payments must be made at the beginning of the month or at the end of the month. Party B insists that payments are due at the beginning of the month. Party A says they are due at the end of the month.

In this situation, the court will look at how payments were made during the first two years of the business relationship. If Party B accepted payments at the end of each month for two years, that is significant evidence that Party A is correct.

If you need a contract drafted or reviewed, contact the Panter Law Firm at 601-607-3156 for a consultation.

Panter Law Firm, PLLC, 7736 Old Canton Road, Suite B, Madison, MS 39110

Craig Painter