CHAPTER 11: NATURE AND TERMINOLOGY 15
accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.
(4) Where an agreement involves repeated occasions for performance by either party with knowledge of the
(5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are
interpreted as consistent with each other and with any relevant course of performance, course of dealing, or
usage of trade.
Comment:
a. Scope of special rules. The rules in this Section are applicable to all manifestations of intention and all
transactions. The rules are general in character, and serve merely as guides in the process of interpretation.
contract was made. When the parties have adopted a writing as a final expression of their agreement,
interpretation is directed to the meaning of that writing in the light of the circumstances. See §§ 209, 212.
b. Circumstances. The meaning of words and other symbols commonly depends on their context; the
meaning of other conduct is even more dependent on the circumstances. In interpreting the words and
Illustrations:
1. A contracts with B to do concrete work on a bridge, to be paid for according to “the number of square yards
of concrete surface included in the bridge deck.” An estimate included in the proposal for bids and an
2. In a written agreement between A and B it is stated that B owns half of the stock of C Company, that “A has
rendered valuable services to C Company for which B desires to compensate A in the sum of $25,000
the parties have a principal purpose in common requires interpretation, but if such a purpose is disclosed
modification needed to make it consistent with such a purpose.
c. Principal purpose. The purposes of the parties to a contract are not always identical; particularly in
business transactions, the parties often have divergent or even conflicting interests. But up to a point they
commonly join in a common purpose of attaining a specific factual or legal result which each regards as
16 UNIT THREE: CONTRACTS AND E-CONTRACTS
Illustrations:
3. A promises B as follows: “In consideration of your supplying my nephew C with china and earthenware
during the coming year, I guarantee the payment of any bills you may draw on him on account thereof to the
4. A agrees with his divorced wife B and C, trustee, to pay to C $1,200 each year for the benefit of D, the 10–
year-old son of A and B, until D enters college, and to pay $2,200 each year for the period of D’s higher
agreement is to be interpreted as not requiring payments during D’s military service.
d. Interpretation of the whole. Meaning is inevitably dependent on context. A word changes meaning when it
becomes part of a sentence, the sentence when it becomes part of a paragraph. A longer writing similarly
Illustrations:
properties.” It is shown that A refused to sign the agreement until the last sentence was added. The
5. A written agreement between A and B for the exchange of real estate provides that A and B will each pay a
$200 commission to C, a broker, “upon the signing of this agreement by both parties hereto.” The last
6. A agrees to appoint B exclusive distributor in a specified area for a new product to be manufactured by A,
and B agrees to use his best efforts to promote sale of the product. The written agreement includes an initial
7. A contracts in writing to build a house for B according to specifications, and C, a surety company,
guarantees A’s performance. After completion and acceptance the house and its contents are damaged by
e. General usage. In the United States the English language is used far more often in a sense which would be
generally understood throughout the country than in a sense peculiar to some locality or group. In the
CHAPTER 11: NATURE AND TERMINOLOGY 17
departure from normal grammar, punctuation, or word order.
Illustrations:
9. A leases restaurant premises to B. The lease provides that A will pay for electricity and that B will “pay for
f. Technical terms. Parties to an agreement often use the vocabulary of a particular place, vocation or trade,
in which new words are coined and common words are assigned new meanings. But technical terms are
Illustrations:
10. The facts being otherwise as stated in Illustration 9, there is a local usage in the restaurant trade that
“fuel” includes electricity used in cooking. In the absence of contrary indication, “fuel” may be read in
11. A contract for the sale of horsemeat scraps calls for “minimum 50% protein.” As both parties know, by a
g. Course of performance. The parties to an agreement know best what they meant, and their action under it
is often the strongest evidence of their meaning. But such “practical construction” is not conclusive of
meaning. Conduct must be weighed in the light of the terms of the agreement and their possible meanings.
Illustrations:
conduct strongly negates the contention.
12. A discloses to B a secret formula for an antiseptic liquid and B agrees to pay monthly royalties based on
13. Several railroads agree in writing to share working expenses and taxes of X, another railroad, on a
18 UNIT THREE: CONTRACTS AND E-CONTRACTS
payments in proportion to stock ownership.
“wheelage basis.” For several years they pay shares in proportion to their stock ownership in the other
railroad. Then all but one agree that they have been mistaken and that future payments will be made on a
§ 203. Standards of Preference in Interpretation
In the interpretation of a promise or agreement or a term thereof, the following standards of performance are
generally applicable:
(a) an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an
interpretation which leaves a part unreasonable, unlawful, or of no effect;
Comment:
a. Scope. The rules of this Section are applicable to all manifestations of intention and all transactions. They
apply only in choosing among reasonable interpretations. They do not override evidence of the meaning of
the parties, but aid in determining meaning or prescribe legal effect when meaning is in doubt.
b. Superfluous terms. Since an agreement is interpreted as a whole, it is assumed in the first instance that no
part of it is superfluous. The parties may of course agree to supersede prior manifestations of intention;
CHAPTER 11: NATURE AND TERMINOLOGY 19
20 UNIT THREE: CONTRACTS AND E-CONTRACTS
c. Unreasonable and unlawful terms. In the absence of contrary indication, it is assumed that each term of an
agreement has a reasonable rather than an unreasonable meaning, and that the agreement is intended to be
lawful rather than unconscionable, fraudulent or otherwise illegal. But parties are free to make agreements
Illustration:
1. A licenses B to manufacture pipes under A’s patents, and B agrees to pay “a royalty of 50 cents per 1,000
feet for an output of 5,000,000 or less feet per year, and for an output of over 5,000,000 feet per year at the
d. Priority of express terms. Just as parties to agreements often depart from general usage as to the meaning
of words or other conduct, so they may depart from a usage of trade. Similarly, they may change a pattern
e. General and specific terms. People commonly use general language without a clear consciousness of its
full scope and without awareness that an exception should be made. Attention and understanding are likely
contract is normally to be interpreted as consistent with other terms, but in cases of inconsistency a
f. Superseded standard terms. The rule stated in Subsection (d) has frequent application in cases of
standardized documents. Printed forms are often misused, and there may be a question whether the parties
manifested assent to a printed term on a writing. A printed provision that is clearly part of an integrated
Illustrations:
2. A, an agent of C, authorized to make contracts for C, writes a letter to B beginning “We offer,” and stating a
proposal in detailed and clear language, signed “C by A, Agent.” At the bottom of the office stationery which
CHAPTER 11: NATURE AND TERMINOLOGY 21
were not part of the letter and that it is therefore an offer will not be set aside.
vessel shall be loaded promptly.
3. A charter party contains the printed provision “vessel to have turn in loading.” There is written below this,
4. A’s agent B draws checks on the C bank, imprinting the amounts with perforations made by a checkwriting
§ 206. Interpretation Against the Draftsman
In choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is
generally preferred which operates against the party who supplies the words or from whom a writing
otherwise proceeds.
Comment:
a. Rationale. Where one party chooses the terms of a contract, he is likely to provide more carefully for the
protection of his own interests than for those of the other party. He is also more likely than the other party to
have reason to know of uncertainties of meaning. Indeed, he may leave meaning deliberately obscure,
them into use.
b. Compulsory contract or term. The rule that language is interpreted against the party who chose it has no
TEACHING SUGGESTIONS
1. In introducing the subject of contracts, ask students under what circumstances they believe the law
22 UNIT THREE: CONTRACTS AND E-CONTRACTS
should enforce a promise that the promisor does not wish to keep. Begin the discussion by asking students
to recognize contracts that they recently entered into—buying a textbook, buying a cheeseburger, buying a
compact disc. Under what circumstances do they think that they should be held to these contracts?
Under what circumstances do they think that they might be excused? Concepts that can be woven into
the discussion include:
a. Although it is a good idea to keep promises, there are times when they should be excused.
b. Some duties arise from consensual acts, but some duties are nonconsensual.
d. There are costs as well as advantages to requiring that society enforce promises.
e. There may be reasons for forcing a person to enter into a commitment.
2. Divide students into small groups (four to five persons) and require each group to think of a contract for
each of the following combinations:
a. Bilateral, informal, executed contract.
b. Bilateral, informal, executory contract.
c. Unilateral, informal, executed contract.
d. Bilateral, formal, executed contract.
Have each group share their ideas with the entire class.
4. Students often confuse implied-in–fact and implied-in-law contracts. They might find it easier to
Cyberlaw Link
Are contracts entered into over the Internet enforceable? If so, are they express or implied
contracts? Formal or informal? What other issues discussed in this chapter must be considered for
online contracting?
DISCUSSION QUESTIONS
CHAPTER 11: NATURE AND TERMINOLOGY 23
1. What is the objective theory of contracts? Intent to enter into a contract is important in the contract’s
2. What distinguishes a bilateral contract from a unilateral contract? Every contract has an offeror and an
offeree. The offeror promises to do or not to do something. What the offeree must do to accept the offer determines
3. What is the difference between express and implied contracts? An express contract is one in which the
terms are expressed in words, oral or written. An implied contract is one that is implied from the conduct of the par-
4. How does a quasi contract differ from an express or an implied-in-fact contract? A quasi contract is not
based on an express promise or on conduct implying a promise; in other words, a quasi contract is not based on a
5. What might be the most important term of an implied contract to perform work? In a contract for work,
6. What is the difference between a formal contract and an informal contract? Formal contracts are
7. How does a party distinguish between an executed and an executory contract? This is a contract
8. What are the differences among valid, void, voidable, and unenforceable contracts? A valid contract
results when all elements of contract formation exist—through an offer and an acceptance, two or more parties agree
24 UNIT THREE: CONTRACTS AND E-CONTRACTS
9. What is the plain meaning rule? When the law attempts to enforce a contract, it attempts to enforce the
10. What are some of the other rules regarding the interpretation of contracts? (1) When a writing is
ambiguous, a court will interpret its language to give effect to the parties’ intent as expressed in their contract. (This
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Have each student keep track of all contracts entered into within a given three-day period. At the end of the
three days, discuss the contracts made by the students with the class.
2. Ask students to bring to class copies of written contracts into which they have entered. In discussing these
contracts, have students classify them according to the types of contracts outlined in the text. As students study
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 2: Pan Handle Realty, LLC, and Robert Olins signed a one-year lease for a new luxury home.
The day before Olins was to move in, however, he reneged. Pan Handle was unable to secure a new tenant for the
term of the lease, and filed a suit in a Connecticut state court against Olins. The court ruled in Pan Handle’s favor.
Olins appealed. In Pan Handle Realty, LLC v. Olins, a state intermediate appellate court affirmed. “There is no
evidence in the record to support the defendant’s contention that he did not intend to be bound by the lease when he
signed it * * * . The defendant’s apparent unilateral change of heart regarding the lease agreement does not negate
CHAPTER 11: NATURE AND TERMINOLOGY 25
The defendant never moved into the house. Why then did the court find that he breached the lease?
Under the lease, Pan (the plaintiff) was obligated to make modifications to the premises—specifically, for example, by
On finding that the defendant breached the lease, what did the court impose as a sanction? How was
this determined? On finding that the defendant (Olins) breached the lease, the court awarded the plaintiff (Pan)
“compensatory damages in the amount of $146,000–$138,000 in unpaid rent for the term of the lease and $8,000 in
utility fees incurred by the plaintiff during the lease period—plus interest, and attorney’s fees.” On Olins’s (the
Did the measure of damages assessed in this case place Pan in the same position that it would have
been in if the lease had been fully performed? Yes, the measure of damages imposed on Olins (the defendant) in
this case placed Pan (the plaintiff) in the same position that it would have been in if the lease had been fully
performed. And that is the standard measure of compensatory damages. On finding that the defendant breached the
Footnote 5: The Hopkinses hired Uhrhahn Construction & Design, Inc., to work on their home. Each
project’s proposal stated that any changes would be only “upon written orders.” During the work, the Hopkinses orally
asked for changes, which Uhrhahn implemented and the Hopkinses paid for. At one point, the Hopkinses asked
Uhrhahn to use Durisol blocks instead of cinder blocks, as specified in the written contract, asserting that the cost
26 UNIT THREE: CONTRACTS AND E-CONTRACTS
Given that the parties agreed to the rest of the work that was performed, does it appear that Uhrhahn,
the experienced contractor, misled Hopkins into thinking the Durisol blocks could be used instead of cinder
block? There was no evidence that Uhrhahn misled the Hopkinses about anything. He had no experience with
If Uhrhahn had not done the orally agreed-to work, could the Hopkinses have recovered for breach of
What might be the most important term of an implied contract to perform work? In a contract for work,
Should a court accept without proof a party’s assertion that something was or was not done “by
Suppose that Hopkins and Uhrhahn had not agreed to deviate from the contract on previous
occasions and that Hopkins had not paid for any additional work performed by Uhrhahn. How might this have
changed the court’s ruling in this case? The outcome would probably not have been different. The dispute, and
the court’s decision and reasoning, would still have centered on the cinder blocks and their cost, and whether there
Would the outcome of this case have been different if the parties had communicated by e-mail for all
details regarding changes in the work performed? Why or why not? E-mail would most likely have constituted
Footnote 6: Seawest Services Association operated a water distribution system that served a residential
area. The Copenhavers owned a home within the area. They did not have an express contract with Seawest, but they
If the Copenhavers had not known when they bought their home that Seawest provided the water,
CHAPTER 11: NATURE AND TERMINOLOGY 27
In recognizing quasi contracts, does the law try to correct for unethical behavior? Discuss. Quasi
contracts do often help to correct for unethical behavior. Unlike express and implied contracts, quasi contracts do not
Could the Copenhavers have successfully argued that by forcing them to pay a price to which they