Restat 2d of Contracts, § 201

• Restatement of the Law, Second, Contracts
• Chapter 9- The Scope of Contractual Obligations
• Topic 1- The Meaning of Agreements
• § 201 Whose Meaning Prevails

(1)  Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.
(2)  Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made

(a)  that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or

(b)  that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.
(3)  Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.

Comment:

a.  The meaning of words.  Words are used as conventional symbols of mental states, with standardized meanings based on habitual or customary practice. Unless a different intention is shown, language is interpreted in accordance with its generally prevailing meaning. See § 202(3). Usages of varying degrees of generality are recorded in dictionaries, but there are substantial differences between English and American usages and between usages in different parts of the United States. Differences of usage also exist in various localities and in different social, economic, religious and ethnic groups. All these usages change over time, and persons engaged in transactions with each other often develop temporary usages peculiar to themselves. Moreover, most words are commonly used in more than one sense.

b.  The problem of context.  Uncertainties in the meaning of words are ordinarily greatly reduced by the context in which they are used. The same is true of other conventional symbols, and the meaning of conduct not used as a conventional symbol is even more dependent on its setting. But the context of words and other conduct is seldom exactly the same for two different people, since connotations depend on the entire past experience and the attitudes and expectations of the person whose understanding is in question. In general, the context relevant to interpretation of a bargain is the context common to both parties. More precisely, the question of meaning in cases of misunderstanding depends on an inquiry into what each party knew or had reason to know, as stated in Subsections (2) and (3). See § 20 and Illustrations. Ordinarily a party has reason to know of meanings in general usage.

c.  Mutual understanding.  Subsection (1) makes it clear that the primary search is for a common meaning of the parties, not a meaning imposed on them by the law. To the extent that a mutual understanding is displaced by government regulation, the resulting obligation does not rest on "interpretation" in the sense used here. The objective of interpretation in the general law of contracts is to carry out the understanding of the parties rather than to impose obligations on them contrary to their understanding: "the courts do not make a contract for the parties." Ordinarily, therefore, the mutual understanding of the parties prevails even where the contractual term has been defined differently by statute or administrative regulation. But parties who used a standardized term in an unusual sense obviously run the risk that their agreement will be misinterpreted in litigation.

Illustrations:

1. A and B agree that A will sell goods to B "f.o.b." the place of destination. Prior correspondence shows that the price has been adjusted on the assumption that B's insurance policies will cover the goods during shipment. Notwithstanding the normal meaning of the "f.o.b." term declared in Uniform Commercial Code § 2-319, it may be found that the parties have "otherwise agreed" under that section and that B bears the risk in transit.

2. A signs a negotiable promissory note payable to B's order, and C signs his name on the back without more. Under Uniform Commercial Code § 3-402, C's signature is an indorsement, and evidence of a contrary understanding is not admissible except for the purpose of reformation of the instrument. This conclusion does not rest on interpretation of the writing.

3. A agrees to sell beer to B at a specified price per barrel. At the time of the agreement both parties and others in their trade use as standard barrels wooden barrels which originally hold 31 gallons and hold less as they continue in use. A statute defines a barrel as 31 1/2 gallons. The statute does not prevent interpretation of the agreement as referring to the barrels in use.

d.  Misunderstanding.  Subsection (2) follows the terminology of § 20, referring to the understanding of each party as the meaning "attached" by him to a term of a promise or agreement. Where the rules stated in Subsections (1) and (2) do not apply, neither party is bound by the understanding of the other. The result may be an entire failure of agreement or a failure to agree as to a term. There may be a binding contract despite failure to agree as to a term, if the term is not essential or if it can be supplied. See § 204. In some cases a party can waive the misunderstanding and enforce the contract in accordance with the understanding of the other party.

Illustrations:

4. A agrees to sell and B to buy a quantity of eviscerated "chicken." A tenders "stewing chicken" or "fowl"; B rejects on the ground that the contract calls for "broilers" or "fryers." Each party makes a claim for damages against the other. It is found that each acted in good faith and that neither had reason to know of the difference in meaning. Both claims fail.

5. A orders goods from B, using A's standard form. B acknowledges the order, using his own standard form. Each form provides that no terms are agreed to except those on the form and that the other party agrees to the form. One form contains an arbitration clause; the other does not. The goods are delivered and paid for. Later a dispute arises as to their quality. There is no agreement to arbitrate the dispute.

The Section covers matters treated in former §§ 227, 230-34. The rules are entirely rewritten to follow the terminology in new § 20 on the effect of misunderstanding. See 4 Williston, Contracts §§ 603-14 (3d ed. 1961); 3 Corbin, Contracts §§ 535-44 (1960 & Supp. 1980). Compare former § 233(a) and (b).

Comment a.  See Farnsworth, "Meaning" in the Law of Contracts, 76 Yale L.J. 939 (1967) and authorities cited therein; Della Ratta, Inc. v. American Better Comm. Devs., 38 Md. App. 119, 380 A.2d 627 (1977).

Comment b.  Holmes wrote: "A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used." Towne v. Eisner, 245 U.S. 418, 425 (1918). On a party's knowledge and reason to know the meaning attached to a term by the other party, see Perry and Wallis, Inc. v. United States, 192 Ct. Cl. 310, 427 F.2d 722 (1970); Emor, Inc. v. Cyprus Mines Corp., 467 F.2d 770 (3d Cir. 1972).

Comment c.  This replaces former § 234. Illustration 1 is new; cf. Madeirense Do Brasil S/A v. Stulman-Emrick Lumber Co., 147 F.2d 399 (2d Cir.), cert. denied, 325 U.S. 861 (1945). Illustration 2 follows the official Comment to Uniform Commercial Code § 3-402; compare Illustration 3 to former § 234. Illustration 3 is based on Harvard Brewing Co. v. Killian, 222 Mass. 13, 109 N.E. 649 (1915); compare Wahlenmaier v. American Quasar Petroleum Co., 517 S.W.2d 390 (Tex. Civ. App. 1974), ref. n.r.e.

Comment d.  Illustration 4 is based on Frigaliment Importing Co. v. B.N.S. Internat'l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960); see 3 Corbin, Contracts, § 543B (Supp. 1964). Illustration 5 is based on In re Doughboy Indus., Inc. (Pantasote Co.), 17 A.D.2d 216, 233 N.Y.S.2d 488 (1962).

ALR Annotations:

Modern status as to duration of employment where contract specifies no term but fixes daily or longer compensation. 93 A.L.R.3d 659.
Doctrine of unconscionability as applied to insurance contracts. 86 A.L.R.3d 862.
Validity and construction of contract between hospital and physician providing for exclusive medical services. 74 A.L.R.3d 1268.
Validity and construction of "No Damage" clause with respect to delay in building or construction contract. 74 A.L.R.3d 187.
Construction and effect of tenure provisions of contract or statute governing employment of college or university faculty member. 66 A.L.R.3d 1018.
Validity, construction, and effect of clause in franchise contract prohibiting transfer of franchise or contract. 59 A.L.R.3d 244.
Construction and effect of provision in contract for sale of realty by which purchaser agrees to take property "as is" or in the condition in which it is. 97 A.L.R.2d 849.

Digest System Key Numbers:

Contracts 147