CONTRACTS Chapter 4. Contract Interpretation

1. CONTRACTSChapter 4. Contract Interpretation Interpretation

2. Contract Interpretation • Interpretation Aids: • Dictionary definition • Inferences from other terms in the contract • Trade custom/usage • Inferences from market conditions/surrounding circumstances • Course of performance • Course of dealing • Parol evidence • Interpretive presumptions: i.e., contra proferentem • Burden of proof (?)

3. Contract Interpretation Cases • PG&E “indemnify” • Soper “wife” • Frigaliment “chicken” • Amtel “directly or indirectly solicit, recruit, or attempt to persuade…to leave” • Beanstalk 35 percent of “gross receipts…on License Agreements” • Oswald “Swiss Coin Collection”

4. Frigaliment Importing Co. v. B.N.S. International Sales Corp. • What is at issue? • What evidence is considered? • Is parol evidence permitted? • Do pre-contractual discussions shed any light on the issue? • What does the court find? Interpretation

5. Using other terms in the contract to help US Fresh Frozen Chicken, Grade A, Government In-spected, Eviscerated 2 1/2-3 lbs. and 1 1/2-2 lbs. each all chicken individually wrapped in cryovac, packed in se-cured fiber cartons or wooden boxes, suitable for export 75,000 lbs. 2 1/2-3 lbs........ @$33.00 25,000 lbs. 1 1/2-2 lbs........ @$36.50 per 100 lbs. FAS New York scheduled May 10, 1957 pursuant to instructions from Penson & Co., New York

6. § 201. Whose Meaning Prevails (1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning. (2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made (a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or (b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party. (3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.

7. Frigaliment v. BNS • But what if they do not agree a meaning? “Assuming that both parties were acting in good faith, the case nicely illustrates Holmes' remark „that the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs- not on the parties' having meant the same thing but on their having said the same thing.’”

8. Knew or Should have Known “Plaintiff stresses that, although these and subsequent cables. . . were predominantly in German, they used the English word “chicken”; it claims this was done because it understood “chicken” meant young chicken whereas the German word, “Huhn” included both “Brathuhn” (broilers) and “Sup-penhuhn”(stewing chicken), and that defendant, whose officers were thoroughly conversant with German, should have realized this.”

9. Why does this argument fail?

10. Why does this argument fail? “Whatever force this argument might otherwise have is largely drained away by Bauer's testimony that he asked Stovicek what kind of chickens were wanted, received the answer “any kind of chickens,” and then, in German, asked whether the cable meant “Huhn” and received an affirmative response.”

11. Knew or should have known “Defendant makes a further argument based on the impossibility of its obtaining broilers and fryers at the 33¢ price offered by plaintiff for the 2 1/2-3 lbs. birds. There is no substantial dispute that, in late April, 1957, the price for 2 1/2-3 lbs. broilers was between 35 and 37¢ per pound, and that when defendant entered into the contracts, it was well aware of this and intended to fill them by supplying fowl in these weights. It claims that plaintiff must likewise have known the market.”

12. Knew or should have known “Plaintiff must have expected defendant to make some profit- certainly it could not have expected defendant de-liberately to incur a loss.”

13. §202. RULES IN AID OF INTERPRETATION (1) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight. (2) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together. (3) Unless a different intention is manifested, (a) where language has a generally prevailing meaning, it is interpreted in accordance with that meaning; (b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field.

14. Frigaliment v. BNS “Plaintiff says the 1 1/2-2 lbs. birds necessarily had to be young chicken since the older birds do not come in that size, hence the 2 1/2-3 lbs. birds must likewise be young.”

15. Frigaliment v. BNS “Defendant notes that the contract called not simply for chicken but for “US Fresh Frozen Chicken, Grade A, Government Inspected.‟ It says the contract thereby in-corporated by reference the Department of Agriculture's regulations, which favor its interpretation;”

16. §202. RULES IN AID OF INTERPRETATION (4) Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement. (5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade.

17. Frigaliment v. BNS “Plaintiff's next contention is that there was a definite trade usage that “chicken” meant “young chicken.””

18. §202. RULES IN AID OF INTERPRETATION (4) Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement. (5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade.

19. Frigaliment v. BNS “Finally, defendant relies on conduct by the plaintiff after the first shipment had been received.” The cables back and forth.

20. Frigaliment v. BNS • So how does the court decide?

21. Frigaliment v. BNS “When all the evidence is reviewed, it is clear that defendant believed it could comply with the contracts by delivering stewing chicken in the 2 1/2-3 lbs. size. Defendant's subjective intent would not be significant if this did not coincide with an objective meaning of “chicken.”

22. Frigaliment v. BNS Here it did coincide with one of the dictionary meanings, with the definition in the Department of Agriculture Regulations to which the contract made at least oblique reference, with at least some usage in the trade, with the realities of the market, and with what plaintiff's spokesman had said. Plaintiff asserts it to be equally plain that plaintiff's own subjective intent was to obtain broilers and fryers; the only evidence against this is the material as to market prices and this may not have been sufficiently brought home.

23. Frigaliment v. BNS In any event it is unnecessary to determine that issue. For plaintiff has the burden of showing that “chicken” was used in the narrower rather than in the broader sense, and this it has not sustained.”

24. §203. STANDARDS OF PREFERENCE IN INTERPRETATION In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable: (a) an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect; (b) express terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade; (c) specific terms and exact terms are given greater weight than general language; (d) separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated.

25. §206. INTERPRETATION AGAINST THE DRAFTSMAN2 In choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the party who supplies the words or from whom a writing otherwise proceeds.

26. §207. INTERPRETATION FAVORING THE PUBLIC • In choosing among the reasonable meanings of a promise or agreement or a term thereof, a meaning that serves the public interest is generally preferred.

27. Evidence and Aids to Interpretation • Hierarchy of evidence of a term’s meaning • Express terms • Negotiations • Course of Performance • Course of Dealings • Trade Usage • Dictionary or equivalent • Interpretative Aids • Contra Proferentum(read against drafter) • Burden of Proof Interpretation