Interpretation of Contracts: Intent and Conflict of Laws

1. Chapter 17Interpretation of Contracts Twomey, Business Law and the Regulatory Environment (14th Ed.)

2. Conflict of Laws [17-1] Place of Contracting: Law of the state where the contract was made. The state in which the last act essential to the formation of the contract was performed. determines Traditional Rule • contract validity as to substance • satisfaction of requirements as to form Place of Performance: Law of state where the contract is to be performed. • performance of the contract • excuse or liability for nonperformance • measure of damages for nonperformance governs Rule Gaining Acceptance Center of Gravity: Law of the state with the most significant contracts—place of contracting, negotiating, and performing; location of subject matter of the contract; domicile (residence), states of incorporation, principal place of business of parties—governs. Chapter 17

3. Chapter 17 Summary Because a contract is based on the agreement of the parties, courts must determine the intent of the parties manifested in the contract. The intent that is to be enforced is the intent as it reasonably appears to a third person. This objective intent is followed, and the subjective or secret intent is ignored because recognition of secret intention would undermine the stability of contracts and open the door to fraud. Chapter 17

4. Chapter 17 Summary[2] In interpreting a contract, ordinary words are to be given their ordinary meanings. If trade or technical terms have been used, they are interpreted according to their technical meanings. The court must consider the whole contract and not read a particular part out of context. When different writings are executed as part of the same transaction, or one writing refers to or incorporates another, all the writings are to be read together as the contract of the parties. In some cases, the reverse is done, and a contract is held divisible. Chapter 17

5. Chapter 17 Summary[3] When provisions of a contract are contradictory, the court will try to reconcile or eliminate the conflict. If this cannot be done, the conclusion may be that there is no contract because the conflict makes the agreement indefinite as to a material matter. In some cases, conflict is solved by considering the form of conflicting terms. Chapter 17

6. Chapter 17 Summary[4] Handwriting prevails over typing and a printed form, and typing prevails over a printed form. Ambiguity will be eliminated in some cases by the admission of parol evidence or by interpreting the provision strictly against the party preparing the contract, particularly when that party has significantly greater bargaining power. Chapter 17

7. Chapter 17 Summary[5] In most cases, the parties are held to their contract exactly as it has been written. In other cases, the courts will imply certain terms to preserve the contract against the objection that essential terms are missing or to prevent hardship. The law will imply that performance is to be made within a reasonable time and that details of performance are reasonable when the contract fails to be specific on these points. Also, the law will imply an obligation to act in good faith. Chapter 17

8. Chapter 17 Summary[6] When a contract has interstate aspects, it is necessary to determine which state’s law governs it. The rules that govern that decision are called the law of conflict of laws. The parties may specify the jurisdiction whose law is to govern. If that jurisdiction bears a reasonable relationship to the contract, the choice will be given effect by the court. Chapter 17

9. Chapter 17 Summary[7] In the absence of such a provision, some courts will apply the older rule that the law of the state where the contract was made prevails in most matters and the law of the state where performance is to be made prevails in matters relating to performance. The modern, or center-of-gravity view is to choose the jurisdiction that has the most significant relationship to the parties, the contract, and its performance. Chapter 17

10. Chapter 17 Summary[8] When an action is brought in a federal court because it involves citizens of different states (diversity of citizenship), the federal court must apply the conflict of laws principles that would be applied by the courts of the state in which the federal court is sitting. Chapter 17