Contract law has developed some very specific rules that you should be aware of and understand as a business owner who, no doubt, will need to enter into contracts from time to time.

At the very least, a contract must clearly express the intent of the parties, particularly, as to the fundamental terms such as price or compensation and quantity of goods to be delivered or type of services to be performed.  Unless a contract defines the basic intent of the parties, it may be held invalid and unenforceable by a Court.

A contract need not be in writing, except for certain agreements which are required by law to be in writing, as long as there is a meeting of the minds as to its terms.   However, if you think a written contract can be full of holes, just imagine what a mess an oral contract can make.   Oral contracts are never recommended and should not be used except for the most rudimentary purposes.

Now that you know why a well-written contract is so important, here are some basic rules regarding the legal construction or interpretation of contracts.

Only where the language of a contract is ambiguous, uncertain, or susceptible to more than one interpretation may a Court interfere to reach a proper construction by construing uncertainties and considering extrinsic evidence.   In the event of doubt or ambiguity as to the meaning of the terms of a contract, the language must be construed most strongly against the party who prepared it or supplied a form for the contract.

The cardinal rule in the interpretation of contracts is that the intention of the parties is to be ascertained and effect is to be given to that intention if it can be done consistent with legal principles.   In ascertaining the intent of the parties to a contract, the purpose to be accomplished and the object to be advanced may be considered by the Court.

In the process of the construction of a contract, words will be given their ordinary meaning when nothing appears to show that they are used in a different sense.   A Party to a contract will ordinarily be held bound to the usual meaning which the law places upon the words the party has used, even though it is proved that one party intended something other than the usual meaning.

The Court will look to the entire contract to determine the intent of the parties and will attempt to give meaning to every provision as long as it can consistently and reasonably be done.  For example, if two clauses of a contract are completely inconsistent with each other, the Court will enforce the first clause and reject the second clause.

If the parties to a contract do not make their intent clear within the contract, the Court will use the basic rules of construction to attempt to impose terms it believes the parties intended.   A well-written contract better serves the needs of the parties and is far less costly than a contract that requires interpretation by a Court.

Again, always consult with an attorney before entering into any contract.



An ounce of prevention is worth a pound of cure.   This old adage has never been more appropriate then when discussing the importance of a well-written and well-thought-out contract.

In any contractual relationship, whether it is for personal or business purposes, the more details and contingencies that are covered in the contract the less that is left to chance or subject to interpretation by the other party’s attorney or the Courts.   The world of contracts can best be summed up by this one phrase: “If you create a loophole, they will find it!”

There can never be a contract, no matter how well written and thorough, that could resolve or anticipate every conceivable, potential dispute; therefore, every contract must rely on the good faith performance of the parties.

The goal, however, when drafting a contract, is to eliminate as many potential disputes as possible so that you minimize the likelihood or need for costly and time consuming litigation.

Most contractual litigation is the result of poorly worded or inartfully drawn contracts that create confusion and misinterpretations rather than from a willful disregard of a party’s contractual obligations.   These lawsuits drain the resources of all concerned and never accomplish for the parties what a well drawn and faithfully executed contract can accomplish.

Whenever a poorly drafted contract sends the parties to the courthouse, the Court determines what is best for the parties and the outcome is rarely as good as what the parties could have determined for themselves if they had taken more care to create a better contract.

Since entering into and enforcing a contract can be full of pitfalls and hidden traps for the unwary, it is highly recommended that you invest the time and money needed to obtain sound and experienced legal advice before signing any contract.   If you don’t do this, just remember, the cure is always more expensive then the prevention.

In the next installment, we will look at some of the specific principles of contract law.