Texas Contract Interpretation

January 17th, 2014

The most basic principal of contract interpretation is that a contract is interpreted objectively and not subjectively. This idea originated at Harvard Law School, but still holds true in Texas today.

The formal view of contract interpretation ignores what the contracting parties thought the bargain to be and instead asks what a reasonable third party would interpret the words of the contract to mean. This approach is reflected in the following quotation from Federal District Judge Learned Hand:

A contract has, strictly speaking, nothing to do with the personal or individual intent of the parties. A contract is an obligation attached by the mere force of law to certain act of the parties, usually words, which ordinarily accompany and represent a known intent.

A contract requires a meeting of the minds. A determination of whether there was a meeting of the minds is based on objective standards of what the parties said and did, not on their alleged subjective states of mind. In re Hudgins, 188 BR. 938, 942 (E.D. Tex. Bankr. 1995), cited in Spectrum Creations L.P. v. Carolyn Kinder Int’l LLC, 2008 WL 416246, *45 (W.D. Tex. 2008).

An integrated agreement may be either fully integrated or only partially integrated. A fully integrated contracted is a final and complete expression of all terms agreed upon between or among the parties. A partially integrated contract is a final and complete expression of the terms regarding an agreement, but not a final and complete expression of all terms agreed upon between the parties. Some of the terms agreed upon are not contained in the written agreement.

Under the Parole Evidence Rule, if the parties have integrated their agreement into a single written contract, all prior negotiations and agreements with regard to the same subject matter are excluded from consideration, whether written or oral. Parole evidence is admissible to supplement or explain a partially integrated contract, but is not admissible to contradict it.

The primary duty of a court when considering the validity of a contract is to ascertain the intent of the parties from the contract as a whole, known as the “four corners rule,” not from isolated parts of the contract. This rule requires the court to look at the words of the contract, not prior drafts or exchanges of letters or other documents or testimony to determine the intent of the parties. To achieve this goal, the court must examine the entire document and consider each part with every other part so that the effect and meaning of one part on any other part may be determined. No one phrase, sentence or section of a contract should be isolated and considered apart from the other provisions.

Terms of a contract are given their plain, ordinary and general meaning unless the instrument shows that the parties used them in a technical or different sense. Words should be taken in their immediate context.

The expression of one thing is the exclusion of another. This is used to control, limit or restrain the otherwise implied effect of an instrument, and not to annex incidents to written contracts in matters with respect to which they are silent.

When words of a general nature are used in connection with the designation of particular objects or classes of persons or things, the meaning of the general words will be restricted to the particular designation. In some cases a list of consistent terms will include an overly-broad term that seems to reach beyond the scope of the other things listed. Ejusdem generis will limit an overly-broad term to be consistent with the list. However, the doctrine is not limited to lists. It can also apply to sentences in a paragraph.

When a contract is unambiguous, the court should apply the pertinent rules of construction, apply the plain meaning of the contract language, and enforce the contract as written.

It is a generally accepted rule of contracts that where several contracts are executed contemporaneously or at different times and pertain to the same transaction, they will be read together although they do not expressly refer to each other.

There are other general rules such as: Specific terms will prevail over general terms. Earlier terms will prevail over later terms, except in the instance of a Will. Handwritten terms will prevail over typed terms and typed terms will prevail over preprinted terms. Words prevail over number or symbols. Courts are required to follow elemental rules of grammar for a reasonable application of the legal rules of construction.

It is also a rule universally recognized that if an instrument admits of two constructions, one of which would make it valid and the other invalid, the former must prevail.

There is a presumption against illegality. When a contract by its terms, construed as a whole, is doubtful, or even susceptible of more than one reasonable construction, a court will adopt the construction which comports with legality. It is presumed that in constructing contracts the parties intend to observe and obey the law.

Finally, when agreements between parties are reduced to writing, the written instrument is presumed to embody their entire agreement, and the court should not read into the instrument additional provisions unless this is necessary to effectuate the intention of the parties as disclosed by the contract as a whole. Danciger Oil & Ref. Co. v. Powell, 154 S.W.2d 632, 635 (Tex. 1941).

Do you need a business contract reviewed by a Dallas attorney? Contact Dallas business contract attorney Mark Nacol today!

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