Contracts are essential to business, and we enter into a variety of contracts every day-with customers, vendors, and even the government. If you buy a cup of coffee, you are entering into a contract-your promise to pay for a bever-age once it is delivered to you in a cup.
Despite the essential nature of business contracts, many people do not understand how courts interpret contracts. While contract interpretation would seem straightforward, it is not necessarily so simple. What if there is an ambiguity in the contract or a provision is left out?
As our Supreme Court recently said in the case of Broadwater Development LLC v. Nelson, 352 Mont. 401 (2009), "contracts are not created in a vacuum" and a court can hear "the circumstances under which the agreement was made or the matter to which it relates." Similarly, in Richards v. JTL Group, Inc., 350 Mont. 519 (2009), it was said that, in certain circumstances, courts may look outside the four corners of the contract to determine what the contract was supposed to mean.
These cases may lead you to wonder whether a written contract is worth the paper on which it is printed. The an-swer to that question is that courts actually look outside the four corners of the contract to determine the parties' intent in only limited circumstances. Generally, courts interpret the language of contracts according to their plain, ordinary meaning. Where the contract's language is unambiguous, courts only enforce what is agreed by the parties. Put another way, the written contract governs if the language is clear.
Contracts receive an interpretation by the courts that make them lawful, definite, and reasonable. In interpreting contracts, the whole of a contract is considered with each clause helping to interpret the other; contracts are not dis-sected with certain words and phrases considered separately. Courts also do not like to interpret contracts in a way that makes a provision meaningless. Instead, the goal is to reconcile the whole of a contract so as to give effect to every part.
In cases where there is uncertainty to a contract, there is also a judicial rule that the contract should be interpreted against the party who caused the uncertainty. That party is typically the drafter of the document. In addition, where a contract is unambiguous, evidence of prior oral negotiations is inadmissible in court, and the intention of the parties is ascertained from the writing alone. So, if you drafted a contract that creates uncertainty with respect to the duties and obligations of the parties, or leaves a provision out, you may lose in the court.
But what if a contract is ambiguous? If the language of a contract is ambiguous in the eyes of the court (and it is the court that makes this determination), other facts may be considered to determine the parties' contractual intentions. Ambiguity, however, does not exist just because someone claims ambiguity. An agreement is ambiguous only where the terms are susceptible to at least two reasonable but conflicting meanings.
Where a contract is ambiguous, extrinsic facts may be shown to the judge to help interpret the document. In resolv-ing ambiguities or interpreting contracts, the Supreme Court has held that the parties' course of conduct under an agreement is entitled to great weight in determining what the parties understood the terms the contract to mean. Therefore, if two parties have acted a certain way under a contract, one party cannot suddenly turn around and say that the contract has a different meaning.
To conclude, it is important that the terms of a contract convey the meaning of the parties and avoid ambiguity or the omission of important terms. It is generally much easier and less expensive to spend a little extra time making certain that the contract language is right than it is to litigate a poorly drafted agreement.
Eric Nord works for the Crist, Krogh & Nord law firm in Billings, specializing his practice in the area of business law and litigation with a special emphasis on commercial transactions, employment law, real estate, construction law, and corporate relations