a guide to contract interpretation - Reed Smith LLP

Jul 2, 2014 - meaning....” HSBC Bank USA v. Nat'l Equity Corp., 279 A.D.2d 251,. 253, 719 N.Y.S.2d 20, 22 (N.Y.App. Div. 1st Dep't 2001). See Sayers, 7. F.3d at 1095 (stating that “[b]y examining the entire contract, we safeguard against adopting an interpretation that would render any individual provision superfluous”).
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A GUIDE TO CONTRACT INTERPRETATION July 2014 by Vincent R. Martorana

© July 2014 Reed Smith LLP All rights reserved.

This guide is intended for an audience of attorneys and does not constitute legal advice – please see “Scope of this Guide and Disclaimer.”

TABLE OF CONTENTS PAGE

CONTENTS

I.

INTRODUCTION .................................................................................

1

A.

Purpose of this Guide ............................................................

1

B.

Scope of this Guide and Disclaimer .......................................

2

C.

Author Bio ......................................................................... ….

3

II.

CONTRACT-INTERPRETATION FLOW CHART ..............................................

4

III.

CONTRACT-INTERPRETATION PRINCIPLES AND CASE-LAW SUPPLEMENT ........

5

A.

Determine the intent of the parties with respect to the provision at issue at the time the contract was made ............

5

B.

Defining ambiguity ...............................................................

6

1.

A contract or provision is ambiguous if it is reasonably susceptible to more than one interpretation ......................... a.

b.

Some courts look at whether the provision is reasonably susceptible to more than one interpretation when read by an objective reader in the position of the parties ................

8

Some courts factor in a reading of the provision “by one who is cognizant of the customs, practices, and terminology as generally understood by a particular trade or business”...

10

i. ii.

c. d. e. f.

6

Evidence of custom and practice in an industry is admissible to define an unexplained term ................ When the plain meaning of a word lends itself to only one reasonable interpretation, that interpretation controls ..........................................

10 11

The contract should be viewed in light of the circumstances under which it was made ................................................

13

As between two interpretations, the court will not adopt an interpretation that produces an absurd result ....................

14

Contracts should be construed in a commercially reasonable manner ........................................................................

15

A provision is not ambiguous simply because the parties disagree as to its construction or urge alternative interpretations .............................................................

16

i

PAGE

CONTENTS

C.

Assessing whether a provision is ambiguous ........................

17

1.

Whether a contract or provision is ambiguous is a determination of law for the court to make on a claim-byclaim basis ..........................................................................

17

2.

Parol evidence cannot be used to create an ambiguity ..........

18

3.

Principles for determining whether a provision is ambiguous

19

a.

19

b.

c.

Holistic Principles ........................................................... i.

Read the contract as a whole; do not read provisions in a vacuum ........................................................

19

ii.

Provisions and terms should not be interpreted so as to render any provision or term superflu