55 Contract Interpretation

Context

Imagine you sign a multi-year eResource license agreement that provides:

“Computational research is permitted only as authorized.”

In year two, the vendor complains that you are breaching that provision because your users are engaging in text and data mining, and the vendor did not receive any authorization requests. You check the agreement and see that it preserves fair use rights, and you tell the vendor they’re mistaken: The authorized users are relying on fair use, so computational research is authorized by the agreement itself, and doesn’t need to be separately authorized by the vendor.

If you cannot resolve the disagreement and the matter escalates, how would a court determine whether the “authorization” requirement for computational research is covered by the authorization for fair uses?

This section addresses the processes and tools a court will rely on to determine and interpret the terms of the agreement.

What does a term mean?

Courts try to protect reasonable expectations of the parties.^[1] To determine what those expectations were, a court interprets the parties’ intentions without any extraneous help—meaning, it just looks at the agreement, itself—if the terms are “clear on their face.” ^[2]

A court’s first inquiry is simply whether the terms are clear, that is: Are the terms unambiguous? As explained in American Jurisprudence, Contracts, courts use the language of the agreement to determine that:

• A contract is unambiguous “if it can be given a definite and precise or certain legal meaning concerning which there is no reasonable basis for a difference of opinion. A contract is unambiguous when its terms are not susceptible to more than one equally reasonable construction.” ^[3].
• A contract is “ambiguous” where it cannot be given a definite legal meaning, the terms are inconsistent on their face, the terms are reasonably susceptible to more than one interpretation, or the phraseology can support reasonable differences of opinion as to the meaning of the words employed and the obligations undertaken.^[4].

Just because the parties disagree on the meaning of the terms does not render a contract ambiguous. Rather, “Any ambiguity in a contract must emanate from the language used in the contract rather than from one party’s subjective perception of its terms.” ^[5] Specifically, the “face of the contract” (i.e. the words used and syntax employed) or the “four corners of the agreement” (a historical reference to the single sheet of paper on which contracts were written) ^[6] must render genuine uncertainty as to which of two or more meanings is proper for ambiguity to be found.^[7].

At this point we get into a bit of a philosophical loop because: How can a court tell from the “face of the contract” whether the language is ambiguous without looking at the context (in the form of extrinsic evidence beyond the face of the agreement) in which the parties created that language?

• Some courts hold firm that only once finding ambiguity may a court look externally to “the character of the contract, its purpose, and the facts and circumstances of the parties at the time of execution” in order to arrive at the intent of the parties.^[8].
• However, other courts evaluate the initial question of ambiguity according to “the ‘interpretational principle that a contract must be understood with reference to the circumstances under which it was made and the matter to which it relates. (Civ. Code, § 1647.)” ^[9]. And such courts would allow reliance on extrinsic evidence for the preliminary determination of ambiguity. These courts provisionally examine extrinsic evidence not for its truth but rather to see whether the term or agreement is reasonably susceptible to multiple interpretations. If it is, then the court will find ambiguity and formally admit or examine extrinsic evidence to try to resolve the ambiguity.

The contracts maestro Corbin explains it well: “A court is called upon to interpret the agreement when a term is ambiguous. If it is not ambiguous, most courts will not allow extrinsic evidence to find an ambiguity, but some states will consider extrinsic evidence to assess whether there is an ambiguity.” ^[10] Courts that stand firm against the consideration of extrinsic evidence to determine ambiguity are referred to as “textualists,” while those who admit it are referred to as “contextualists.” Typically courts applying New York law tend toward textualism, while those applying California law tend toward contextualism. But there is even variation within jurisdictions. ^[11].

If the court looks to extrinsic evidence, what evidence does it consider?

Though there may be disagreement across and even within jurisdictions on the threshold question of considering extrinsic evidence to assess ambiguity, we can say that: If a court does find ambiguity, then the court tries to resolve the ambiguity through extrinsic evidence of various kinds. ^[12]. For instance, preliminary negotiations and pre-formation communications may demonstrate the parties’ intent as to the meaning of a term, as could post-contractual performance. To that end, as long as these sources are not inconsistent with the terms of the written instrument, courts will look to the following to help interpret or explain an ambiguous contract’s terms:

• Express meaning
• Course of performance (what the conduct of the parties in performing this contract reveals about their understanding of the term)
• Course of dealing (what the performance of the parties’ past arrangements reveals)
• Usage of trade or custom (how others in the trade or community do it)

^[13]. And in the event any of the above-bulleted extrinsic sources conflict, courts typically give weight or preference to them in the above order, in keeping with the Uniform Commercial Code^[14]

Courts also apply state statutes as well as various general maxims of interpretation. For instance:

• Pursuant to California statute and general contract interpretation rules, “Where general and specific provisions are inconsistent, the specific provision will control.” ^[15].
• When choosing among reasonable meanings, a court will interpret a contract against the interests of the party who drafted it, and in consideration of what each party knew or should have known the other party to understand.
• Contracts drafted by one party and reduced to non-negotiable form (“adhesion contracts”) are also generally construed against the drafter’s interests.

Let’s now return to the agreement you signed that provides “computational research is permitted only as authorized.” Tensions have escalated and the vendor has filed a lawsuit. You would like to use e-mail communications between you and the vendor to show that the vendor subsequently learned shortly after the agreement that text and data mining was being undertaken but never previously complained. So, that course of performance must (you argue) mean the vendor believed that the fair use clause served as the “authorization” referenced in the computational research clause. But, as explained above, courts also apply maxims of interpretation—one of which is that more specific language controls over more general. ^[16] So the court may give weight to the fact that the very inclusion of a “computational research requires authorization” clause is more specific than the general fair use clause—suggesting that the parties intended the authorization required for computational research to be separate.

How can you draft an agreement to ensure that the court interprets it in line with the parties intentions? Not every term of every agreement can be future-proofed against litigation, but if there is any lesson here, it is that the challenges of contractual interpretation make it worthwhile to ensure that you spend time negotiating for clarity on rights that are particularly important for your users.

One final distinction: Integration vs. Interpretation

Let’s say you were so fascinated by the subject of contract interpretation that you wanted to read more. You poke around on the internet and see references to courts’ consideration of “parol evidence”—loosely described as extrinsic evidence—to interpret a term. Please tread carefully with careless Internet explanations! Parol evidence, and the parol evidence “rule”^[17] may be relevant for determining whether a contract is integrated—that is, the final expression of the parties’ complete understanding—but it must not be conflated with the consideration of extrinsic evidence for interpretation—which follows the rules set forth above.

Maestro Corbin explains:

To fully understand what interpretation is, it is important to understand what it is not. The parol evidence rule is very often mistaken as an aid to interpreting contracts. It is nothing of the kind. Professor John E. Murray wrote: “The most significant test of one’s understanding of the parol evidence process may be the ability to distinguish it from situations to which it does not apply.” [citation] The parol evidence rule and its closely allied concept “integration” should be treated as separate an distinct from interpretation. To conflate them can result in injustice…”

^[18]. Corbin goes on to address, with understandable ire, the fact that many courts themselves get these concepts confused. 

We don’t think we need to cover integration here, but just try to bear in mind (in a way that many courts forget to!) that for contract interpretation, you are best suited by referencing the explanations above, and avoiding discussions of “parol evidence.”