A Guide to Contract Interpretation - February 2013

by Reed Smith
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Introduction -

Transactional attorneys and litigators often take a very different approach toward contracts. Transactional attorneys focus on the ex ante — the relationship between the parties before there is a dispute. Sometimes their sole concern is making sure that the contract “works” sufficiently so that the deal gets done. More-conscientious transactional attorneys weigh the various risks associated with contract drafting by regularly thinking about the “what-ifs.”

But transactional attorneys would do well to put on their “litigator’s hat” more often. Litigators think about what happens when things go south. When called upon to analyze a contract in the context of a burgeoning litigation, many litigators turn immediately to the “boilerplate” or “miscellaneous provisions.” That’s where the contract-interpretation and contract-construction “rules” hide, which, in addition to statutes, case law, and doctrine, will inform the contract reader how to interpret the provision at issue.

But if principles of contract interpretation and contract construction are so important for assessing who “wins” (or who at least has the better argument in the context of) a dispute, then why do transactional attorneys too often neglect to consider them?

One possibility is that formal training among transactional attorneys is lacking. Perhaps transactional attorneys bump up against the occasional contract-interpretation principle when analyzing a given contract. But we are rarely taught those principles in a systematic fashion.

Another possibility is that transactional attorneys are focused on “getting the deal done.” They are viewing the contract as a manual for telling the parties what they can and can’t do, what they are or are not asserting as true. To be sure, contracts serve that function. But contracts — and quality contract drafting — also serve to protect the parties from disputes down the road if things don’t go as planned. For sophisticated transactional attorneys, it’s not enough that the parties “get the idea” of what a contract is “supposed to do”; a contract must also guard against the “1% case.” Of course, no contract can be completely air-tight and drafting compromises must often be made (sometimes from the onset of the drafting process). However, at a minimum, the drafter should - with respect to each provision in a contract - strive to consciously be making a decision as to whether or not that provision is subject to risk, misinterpretation, or ambiguity and then, in connection with the drafter’s client, assess whether or not to address that issue.

To effectively accomplish this, a contract drafter needs to seek to understand principles of contract interpretation and contract construction. An understanding of these principles will serve to not only improve the quality of an attorney’s drafting; it will also serve to sharpen his or her ability to analyze contracts and provisions that have been entered into.

PURPOSE OF THIS GUIDE -

This guide is meant to serve several purposes. First, it is meant to educate transactional attorneys (like the authors) regarding principles of contract interpretation so that they can draft contracts with these principles in mind. Second, it is meant to serve as a resource for analyzing contracts that have already been drafted or that are already effective, whether that analysis precedes or is in response to a specific dispute. Finally, and in the same vein, the case law cited in this guide is meant to serve as a helpful starting point to those conducting research on the interpretation of a given contract or provision (from a positive or normative standpoint).

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Reed Smith
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