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Articles Tagged with Contract Interpretation

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DSCF0815-300x225How do you know exactly what is included in your contract, and what is not? If your company enters into a contract to supply services, for example, the contract will include a provision for when and how you will be paid. What happens, though, if that provision, as it often does, includes a long list of terms, some very specific, some more general, and some catch-all?  How do you determine, pursuant to New York law, what will have to happen for you, or your business, to be paid?

As we recently discussed, it is important to know how to determine what your contract means, either before you sign it, so you can credibly try to avoid potential liability once the contract comes into existence; or, after the parties are bound and a dispute arises, so you can resolve it or perhaps limit your liability for it. One way to do that is to apply the rules of contract interpretation to the particular language of your contract.  In this article, we will examine how one such principle, ejusdem generis, is used to help determine exactly what a contract term means, or, even more likely, how a court will enforce it.

Ejusdem generis is a legal principle, which was defined, among other places, in 242-44 E. 77th St., LLC v. Greater New York Mut. Ins. Co., 31 A.D.3d 100, 103–04, 815 N.Y.S.2d 507, 510 (1st Dept. 2006):

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IMG_0912-225x300The rules of contract interpretation are best learned from seeing how they are applied.  To use them, successfully, is to know them.  In our last article, we discussed some of the basic rules.  We will now see how one of them, giving the words of the contract their plain and ordinary meaning, is applied by courts to common situations faced by New York businesses.

In Lake Const. & Dev. Corp. v. City of New York, 211 A.D.2d 514, 621 N.Y.S.2d 337 (1st Dept. 1995), a contractor sued the City of New York to be compensated for the additional work it said it performed to complete the brickwork on a public works construction project.  In preparing its winning bid, it had relied on the City Engineer’s cost estimate, which it said showed one brick wall of 972 square feet, rather than the two free-standing walls the contractor claimed were necessary to complete the job.  It obviously cost more to finish the job than the contractor estimated, so it tried to recoup at least some of its losses from the City.  Though that might seem like a reasonable approach for a business to take, it did not work.

The mere fact that the contractor claimed the contract was ambiguous did not make it so.  In upholding the lower court’s grant of summary judgement to the City dismissing the complaint, the First Department held that the relevant contract was clear and unambiguous that the contractor’s compensation was not based on the number of walls that needed to be constructed.  As the court noted, at Lake Const. & Dev. Corp. v. City of New York, supra, 211 A.D.2d 514, 515, 621 N.Y.S.2d 337, 338 (1st Dept. 1995), “the parties’ contract unambiguously provided that the quantity of brickwork to be paid for under the contract ‘shall be based on the number of square feet of free-standing brickwall installed in accordance with the plans and specifications and directions of the Engineer’.”

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DSCF0806-300x225What does your contract actually mean? You know what it says.  You know what you meant when you signed the contract and committed your business to it.  You thought it was clear and unambiguous.  What do you do when the other party claims you breached the contract and wants damages?  You know you fulfilled all your promises, duties, and obligations under the contract, and that the only way you breached it was if you promised something more, or different, than you thought you did.  So how, exactly, do you read a contract to determine what it means?

The rules of contract interpretation for contracts governed by New York law are fairly straight forward, even if the contract language they are used to decipher can appear to be opaque or misleading   For example, if the obligations of your New York business rested on the meaning of the phrase “face amount” as used in a commercial contract, with potential liability for hundreds of thousands of dollars of damages at stake, where would you start?

An interesting, if fairly old, case from the Appellate Division, First Department addressed that issue.  In Am. Exp. Bank Ltd. v. Uniroyal, Inc., 164 A.D.2d 275, 277, 562 N.Y.S.2d 613, 614–15 (1st Dept. 1990), the court set out the relevant rules for contract interpretation: