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Contract interpretation

Fundamentals of contract interpretation

California law requires that unambiguous contractual terms be applied as they are written. If, however, a contractual term is ambiguous, meaning it is capable of more than one reasonable interpretation, a California court will attempt to determine the parties' intent at the time they entered into the contract, taking into account the surrounding circumstances. The subjective state of mind of a party entering into a contract is generally irrelevant, however. What matters is what they said or did, and what those words or actions would lead a reasonable person to believe about their intentions.

As an initial matter, the judge, not the jury, will decide whether a contract's terms are clear or need clarification. To make this determination, a California court may look to evidence outside the plain language of the contract, including prior drafts of the agreement and communications exchanged by the parties during the drafting process. This extrinsic evidence, which is called parol evidence, is not admitted formally until the court determines that the contractual term is ambiguous. But a California court will provisionally consider parol evidence in the course of deciding whether the contract's meaning is 'reasonably susceptible' to the interpretation being urged. This is unlike some other jurisdictions in the U.S., which decide whether a term is ambiguous with reference to the contractual language alone.

When construing the language of an agreement, California courts are guided by several principles of construction. For example, they will assume words have their 'ordinary and popular' meaning, unless they are used in a special or technical sense, in which case those terms will be interpreted as understood by persons in the relevant field. Moreover, the contractual language will be interpreted in the context of the whole agreement, including other contracts executed by the same parties as part of the same transaction. California law also prefers that courts interpret contracts in a manner that gives each term effect, rather than rendering it superfluous or void. So, for example, if a term has two reasonable interpretations, and one would render the term unenforceable, the court will generally adopt the other interpretation. In addition, as a general matter, if the court determines that one party is responsible for creating an ambiguity during the drafting process, it will interpret the ambiguity against that party. A California court may also consider how the parties acted after the agreement was executed, but before a dispute arose, to determine what was meant by an ambiguous term.

If the judge concludes the contract is unambiguous, after construing the relevant language in light of the extrinsic evidence, he or she will instruct the jury on what the contract means. But if ascertaining the intent of the parties at the time the contract was executed turns on the credibility of the parol evidence, the jury will weigh that evidence and determine for itself what the parties meant.