Legal-Ease: Determining contract signers’ intentions beyond the literal words

When disputes arise between people or businesses (parties) who have entered into contracts, the law’s primary goal is to determine the parties’ intentions in that contract and hold the parties to those intentions.

Usually, parties’ intentions in a contract are straightforward, particularly for written contracts. However, sometimes the literal words in a contract that appear definitive are actually legally unclear or ultimately unenforceable.

First, the context of the contract can change the literal terms in the contract.

For example, I may sign a contract to sell my only S-10 pickup truck to a buyer to whom I have shown the truck. However, after the contract is signed, the buyer and I might uncover that the truck is actually a 1987 model. As long as the buyer and I understood that the truck that is the subject of the contract was my only S-10 pickup truck, the contract between the buyer and me is for that 1987 model truck, despite the contract’s literal terms.

However, a material condition of the buyer buying the truck might have been that the truck was a 1986 model, because the buyer wanted to restore the buyer’s own 1986 model truck with authentic 1986 model parts. In that instance, once the buyer and I determine that my truck is a 1987 model, the contract might be voidable by the buyer, because a material condition of the purchase in the context of when the contract was originally signed was not satisfied.

Second, course of dealing may redefine a contract. Thus, a farmer may purchase feed from a grain elevator for decades under the same annual, renewed contract. The soybean meal portion of the feed might have always been discounted by 10% off the market price for decades. After decades of the discount, if the grain elevator later ends the discount, the course of dealing between the parties, even though each year there is a new contract, may trump the literal contract terms in determining the parties’ intentions.

Third, the course of performance may amend a contract. For example, I may sign a business loan agreement to repay $500 per month for 30 years to a lender. The loan agreement may provide for a 5% charge for any late payment. I may make late payments for 25 years without late charges. The lender may later begin to try to collect late charges. In this context, the lender could be bound by the course of my performance under the contract between the lender and me over the 25 year history.

To avoid having certain circumstances later changing the literal language in a contract, good contracts will include multiple, detailed “recitals”, which are statements identifying all of the material, factual understandings of the parties, which definitively define the context of the contract.

Similarly, good contracts will include provisions like “no waiver,” which means that if one party to a contract concedes some right (like accepting an untimely payment without penalty) in the past, that party is not bound to concede the same right in the futures.

Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.

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