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How does a court interpret a contract that is in dispute?

Many Michigan residents prefer to be taken at their word, and they do the same with others. However, in the business world, significant deals are often not done solely on one's word, but through a written contract.

Last week, this blog discussed how important it is for businesses to understand that a written contract may not be the only thing gives rise to liability, as implied warranties may arise even if they are not stated in the contract. And yet, even when it comes to looking strictly at what is in the written contract, there can be disputes between the parties about what a particular contract provision means after problems arise.

When parties dispute their business contracts, there are certain contract law rules of construction that apply in order to direct a court in resolving the dispute. Typically, the court begins by examining the plain language of the contract, rather than looking at other evidence introduced by the parties. However, often times, the plain language of the contract can be read in more than one way, which gives rise to ambiguities about what was intended by the parties.

If the contract is ambiguous, the court may be able to look at other evidence to determine the parties' intent. There are rules that govern when this evidence may be introduced, and what kinds of evidence may be introduced.

Ultimately, whether the court is looking at the plain language of the contract or extrinsic evidence, it is trying to determine what the parties intended. It is essential that individuals have well-drafted contracts in the first place to spell out this intent as clearly as possible. When disputes arise, individuals need to know how the court will interpret the contract and how they can best demonstrate to the court what was actually intended.

Source: American Bar Association, "But is it clear? Avoiding ambiguous contracts," Gregg L. Weiner, July/August 2001

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