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Contract Interpretation Legal Standards

Contract Interpretation Legal Standards

The Supreme Court of New York County recently issued a decision in the case of Metropolitan Suburban Bus Authority v. County of Nassau. This case was in part unusual and in part very familiar. The unusual aspect of the case was the fact that both plaintiff and defendant were public entities – in other words part of the local government of this particular area of New York. The familiar portion of the case was that it was an action for breach of contract that hinged on interpretation of contract language.

Contract Interpretation – Generally

As our dedicated and faithful readers may note, we cover a wide variety of topics under the general concept of breach of contract. We pick cases specifically designed to illustrate the subtleties of the law while also elucidating basic concepts designed to be accessible to the layperson. One topic we have not overemphasized is contract interpretation. Yet in practice the vast majority of disputes over contracts hinge on how a few key words or paragraphs are interpreted. This is simply because most contracts are very important to the entities who sign them, particularly if these entities are corporations or government agencies. The ordinary problems of offer, assent, consideration, etc that we’ve touched on generally aren’t at issue when attorneys from both sides carefully examine the contract. However, one item that does commonly slip through is ambiguous or otherwise unclear language. Of course, the language may be perfectly clear and one party may still dispute it in an effort to get what they want. The court is the final arbiter of contract language, and as said previously, a huge number of disputes over valuable contracts hinge on interpretation.

Background of the Case

The plaintiff contracted to provide bus service for the defendant, Nassau County, located on Long Island, NY. This contract was signed in 1978 and the relationship progressed for nigh on 40 years. In 2011 the plaintiff told defendant that because of financial issues, they were terminating the relationship effective 12/31/2011. The dispute arose out of what was known as the “wind-down” process.

Generally whenever a relationship is terminated, various matters have to be taken care of before a complete severance is possible. For example, two people getting a divorce “wind-down” their relationship by splitting their assets, moving into separate homes, deciding custody, etc.

Here, the Bus Authority had various transit employees it needed to pay off and otherwise take care of on or after 1/1/2012. However, it was unable to do so, as once the bus service was terminated, it had no source of income. Instead, the Bus Authority pointed to language in Section 13 of the contract and claimed it obligated the County to pay these expenses – which amounted to about $11 Million. The County refused to pay a cent, and the two parties went to court. The only source of dispute was over the interpretation of Section 13.

Analysis

The general rule, affirmed by the court, is that a court must interpret contract language to give effect to the parties’ true intentions at the time of signing. A court cannot engage in rewriting of the contract or any other action that goes too far afield from this basic premise. One of the key issues is whether a contract is ‘ambiguous’ – if so, a court has more latitude in interpretation. A court should analyze the entire contract to determine if ambiguity exists. If ambiguity does not exist, a court’s job becomes quite simple: give effect to the unambiguous reading of the contract.

Here the court stated that the contract was “inartfully drafted” but not ambiguous. This is a very, very common occurrence. Contracts are written poorly – they fail to be shining beacons of clarity capable of instant comprehension. Poor writing is by no means a fatal defect, but it can be a costly one. If the opposing party has no other choice but to fork over $11 Million that it does not have, it is highly likely they will seize upon inartfully drafted language and argue that it is ambiguous. Such was the case here by the plaintiff.

Reading Section 13 as a whole, and not just the excerpts highlighted by plaintiff, it was clear to the court that the point of the Section was to provide for the takeover of the bus service by the County, if the County wished to do so. [In this case the County did not take over, but instead went with a private entity to provide bus service.] The County would have been responsible to pay the plaintiff’s employees only if it had in fact retained them after 12/31/2011 – which it did not do so. The plaintiff’s lawsuit was dismissed, but the takeaway message is that if the County had drafted the contract better in the first place, it could have avoided being dragged into court whatsoever. The best contracts are the ones that are so well-written that no one ever dares to litigate them!

Contract drafting and interpretation are matters best left for seasoned professionals with a great deal of experience. Please don’t hesitate to contact our office for a consultation.

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