Contract definitions are generally not static. While certain terms and phrases in a contract have become defined as an industry standard, courts construe many terms in contracts using numerous sources, including the law, conduct of the parties to the contract and other documents besides the contract itself. Contract law varies by jurisdiction; people with questions about the language of a specific contract should seek legal help.
Many contracts seek to avoid problems by explicitly defining their language. Typically, such contracts contain a "Definitions" section that defines any terms in the contract that might be unclear and that might change down the road during the contract's period of operation. When a valid, signed and fully executed contract contains a Definitions section, courts rarely construe contract terms in any manner other than that of that section.
When a disputed term has no clear definition in the contract itself, courts look to several sources in an attempt to define it. Among other considerations, courts might turn to: the typical meaning of such terms in the industry of the parties to the contract; the typical meaning of the term in the contract locality; and the "ordinary" meaning of the words (unless the contract is highly technical and specialized). As a rule, when a contract states its general intent, courts attempt to define words in a way that furthers the general intent of the contract.
A "latent ambiguity" occurs when a contract appears entirely straightforward at the time it's executed but certain facts that were not apparent at the time of execution later make the contract language ambiguous and open the entire contract to multiple meanings. Typically, if both parties (or neither party) knew about the ambiguity at the time of the contract, courts will not enforce the contract unless both parties intended an identical meaning. But if only one party knew about the ambiguity, courts try to enforce the contract in a way that furthers the intent of the party that had no knowledge of it.
Parol Evidence Rule
Sometimes parties creating a contract have oral agreements or other written documents that deal with the contract subject but are not included in the contract. When a contract is clearly intended to be the full and complete description of the agreement between the parties, the aforementioned extraneous objects are known as "parol evidence." Typically, parol evidence is only admissible to define terms in the contract if the contract itself references the parol evidence, or if terms in the contract, taken alone, are ambiguous. In either of these scenarios, courts might consider parol evidence in defining the contract language.
- contract 20309 image by pablo from Fotolia.com