4.2 Construction and Interpretation

• Library: Contract Law in Virginia (Virginia CLE) (2019 Ed.)

4.2 CONSTRUCTION AND INTERPRETATION

4.201 In General. Two terms the courts commonly use when examining contracts are "construction" and "interpretation." The common meanings of these words are quite different, and in theory, this distinction should provide valuable insight into the judicial process.

The word "interpretation" depicts a fairly passive procedure whereby courts give meaning and shape to the contractual language expressing the intentions of each party. ⁵ In contrast, "the province of construction lies wholly within the domain of ambiguity." ⁶ A court thus may take a more active role when "construing" ambiguous contract provisions by examining both the facts and the surrounding circumstances to ascertain the parties' intentions. ⁷

Decisions suggest, however, that this may merely be a matter of semantics, and it is debatable whether "interpretation" or "construction" is the more intensive process. ⁸ In practice, Virginia courts use the words "interpretation"

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and "construction" interchangeably to describe a systematic frame-work of common-law rules. ⁹ For example, the Court of Appeals of Virginia has referred to the "same rules of construction and interpretation applicable

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to contracts generally," ¹⁰ while the Virginia Supreme Court has held that when "interpreting" ambiguous real estate contracts, courts will "construe" contracts to sell land by the acre, not by the tract. ¹¹ Circuit courts in Virginia have also used these terms interchangeably. ¹²

This paragraph discusses familiar common-law rules of "construction" and "interpretation" that Virginia courts have employed when deciding contract cases. These general standards have been applied not only to typical contracts for the sale of goods and services but also to (i) insurance policies; ¹³ (ii) investment account agreements; ¹⁴ (iii) separation agreements; ¹⁵ (iv) property

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settlement agreements; ¹⁶ (v) leases; ¹⁷ (vi) corporate charters and bylaws ("contracts" between corporations and their shareholders); ¹⁸ (vii) prenuptial

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agreements; ¹⁹ (viii) bank loan agreements; ²⁰ (ix) child support agreements; ²¹ (x) attorney-client fee agreements; ²² (xi) promissory notes; ²³ (xii) covenants not to compete contained in employment contracts; ²⁴ (xiii) spousal support awards; ²⁵ (xiv) divorce settlement agreements; ²⁶ (xv) plea bargain agreements; ²⁷ (xvi) civil settlement agreements; ²⁸ (xvii) deeds; ²⁹ (xviii) consent

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decrees; ³⁰ (xix) cooperation and immunity agreements; ³¹ (xx) wills; ³² (xxi) arbitration agreements; ³³ (xxii) patent claims; ³⁴ (xxiii) releases; ³⁵ (xxiv) offers

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of judgment; ³⁶ and even (xxv) criminal indictments. ³⁷ However, it should be noted that the various "'canons of construction need not be conclusive and are often countered . . . by some maxim pointing in a different direction.'" ³⁸

4.202 Intent.

A. In General. When construing or interpreting any contract, Virginia courts will first attempt to discover the intentions of the parties ³⁹

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and then give effect to these objectives. ⁴⁰ However, they will not implement them if the parties intended their contract to commit a "fraud on the law." ⁴¹

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The Virginia Supreme Court has held that the "polestar for the construction of a contract is the intention of the contracting parties as expressed by them in the words they have used." ⁴² It has similarly ruled that the "guiding light in the construction of a contract is the intention of the parties as expressed by them in the words they have used, and [that] courts

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are bound to say that the parties intended what the written instrument plainly declares." ⁴³

Hence, the true intentions of the parties are revealed within the four corners of the contract, ⁴⁴ and courts will attempt to harmonize conflicting provisions to reflect what the parties themselves had originally

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intended. ⁴⁵ Three basic guidelines explain how intent guides courts when they construe and interpret written contracts.

B. Intent to Be Bound by Express Terms. Contracts describe relationships between two or more parties whereby each consciously gives up something of value in return (theoretically) for something of equal or greater value. ⁴⁶ A document serves to memorialize and make legally enforceable the rights, duties, and obligations expressed therein. ⁴⁷ Accordingly, Virginia courts presume that parties intend to be bound by the express terms of their contracts. ⁴⁸ They similarly have held that parties intend to be bound by their omissions. ⁴⁹ a couple executed a pre-marital agreement. Although under Virginia law a surviving spouse had certain property rights in a deceased spouse's estate, the couple waived this right by stating in their premarital agreement that "it is the intent of each party, by this Agreement, to relinquish certain of such property rights and interests in such assets" of the other. During their marriage, the wife executed a will, leaving all of her tangible personal property to the husband, except for the property that he had relinquished in their premarital agreement. This other property was left to her daughter. When the wife died, the husband filed claims for an elective share of her augmented estate, a family allowance, and exempt property. The Virginia Supreme Court affirmed that he could not use any of the property that he had renounced in the premarital agreement to satisfy these claims. The court unanimously found that the premarital agreement was clear on its face; the court held that it is "duty bound to consider the contract as a whole, considering every word and every paragraph, if there is a sensible construction that can be given." Because the husband had waived certain property rights in the premarital agreement, the court held him to that waiver.

It is also well settled that a party's undisclosed intentions "cannot defeat the unambiguous terms of the agreement into which he entered voluntarily." ⁵¹ This is especially important in arbitration disputes because it is well settled that "a 'party cannot be required to submit to arbitration any

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dispute which he has not agreed so to submit.'" ⁵² However, although a material breach by the other contracting party can excuse an entity from performing its obligations under their agreement, ⁵³ a minor breach will not. ⁵⁴ The parties can include a severability clause in their contract, so that unenforceable provisions can be invalidated without voiding the entire agreement. ⁵⁵

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As a corollary, the law presumes that parties have not altered or waived any contractual rights unless their contract clearly manifests this intention. ⁵⁶ In Hutter v. Heilmann, ⁵⁷ groups of shareholders included express language in their indemnification agreement that "this Agreement be liberally construed and broadly interpreted, consistent with its declared intents and purposes." Since they had written this provision into their agreement, the court ruled that the plaintiffs had not waived their rights to indemnification by subsequently exercising "put options" that conveyed their remaining stock to a third party. ⁵⁸

The parties also have the ability to incorporate by reference other documents into a contract as if their content were included in the document itself. In Bala v. Virginia Department of Conservation and Recreation, ⁵⁹ a Settlement Agreement stated clearly that it applied to a previously filed grievance and hearing officer's decision. These documents were found incorporated by reference into the Settlement Agreement, with the Fourth Circuit Court of Appeals quoting from a previous Virginia Supreme Court decision "[w]ritings referred to in a contract are construed as a part of the contract for the purpose and extent indicated." ⁶⁰

To the extent that parties later challenge the validity of their contracts, they "have the burden of overcoming the express contents of those instruments by clear and convincing evidence." ⁶¹

C. Mutual Assent to Material Terms (Meeting of the Minds). The Virginia Supreme Court has deemed it an "elementary" rule of law that a valid contract requires the minds of the parties to "meet in mutual agreement

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on every material phrase constituting the alleged agreement." ⁶² This is true even if the agreement in question is not reduced to writing. ⁶³ Otherwise, a

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lack of mutual assent to reasonably certain terms will render a contract void for vagueness. ⁶⁴

The Virginia Supreme Court has emphasized this "materiality" element in another context, holding that a plaintiff Internet provider failed to state a breach of contract claim because the alleged breach did not involve a material term that went "to the 'root of the contract.'" ⁶⁵ Whether a "meeting of the minds" has occurred presents a question of fact. ⁶⁶

However, in Hunter Investment Group, Inc. v. Breschel, ⁶⁷ a state trial court noted that because "Virginia courts are reluctant to declare a contract void or unenforceable for indefiniteness or lack of certainty, . . . there must be mutual assent . . . to terms reasonably certain under the circumstances in order to have an enforceable contract."

The United States Court of Appeals for the Fourth Circuit has held that "[u]nder Virginia law, which the parties agree applies here, 'until the parties have a distinct intention common to both and without doubt or difference, there is a lack of mutual assent and, therefore, no contract' . . . . '[I]n the absence of circumstances from which an acceptance may be implied, an acceptance will not be presumed from a mere failure to decline a proposal.'" ⁶⁸

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In short, "'if an ambiguity renders the alleged agreement too indefinite-even after the consideration of extrinsic evidence-for the court to determine the parties' intent, the contract cannot be enforced due to the absence of any discernible meeting of the minds.'" ⁶⁹

D. Intentions Presumed from Material Terms. Courts presume that the...