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Contract interpretation

i Fundamentals of contract interpretation

The threshold question governing contract interpretation is whether a contract is ambiguous. If a contract is found to be clear and unambiguous, New York courts will strictly enforce the contract 'according to the plain meaning of its terms'. A contract will be considered unambiguous if the language has 'no reasonable basis for a difference of opinion'. New York's Court of Appeals has long held that:

[W]hen parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms. Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing . . . That rule imparts 'stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses . . . infirmity of memory . . . [and] the fear that the jury will improperly evaluate the extrinsic evidence.

This is commonly referred to as the parol evidence rule.

The question of whether a contract is ambiguous is a legal one for a court to decide. If the contract is ambiguous, a court will consider evidence of what the parties intended the ambiguous provision of the contract to mean. Such evidence may take the form of exchanged drafts of contracts, communications between the parties, common definitions or industry-specific usage of the terms, but generally courts will not consider the subjective intent of a party that was not communicated to the other side before the contract was executed. Generally, New York courts are inclined to stringently apply the parol evidence rule when commercial contracts are negotiated by sophisticated businesspeople.

New York courts will follow additional rules to aid in the interpretation of contracts. For example, it is a basic principle of contract interpretation that a court should 'examine the contract as a whole and interpret its parts with reference to the whole'. Courts must also avoid interpretations that 'render contract provisions meaningless or superfluous'. Another canon of construction provides that where 'there is an inconsistency between a specific provision and a general provision of a contract . . . the specific provision controls'. Parties should consider these kinds of interpretation rules carefully when drafting their agreements.