[NOTE: This discussion is offered for general informational and educational purposes. It is not offered as, and does not constitute, legal advice or a legal opinion. These materials should not be utilized as a substitute for professional services in a specific situation. If legal advice or other expert assistance is required, the services of an appropriate professional should be sought.]

INTERPRETING CONTRACTS UNDER PENNSYLVANIA LAW


(A) Paramount consideration

Absent illegality, unconscionableness, fraud, duress, or mistake the parties are bound by the terms of their contract. Mellon Bank, N.A. v. Aetna Business Credit, 619 F.2d 1001, 1009 (3d Cir. 1980).

The paramount consideration in the interpretation of any contract is the determination of the intention of the parties. Hutchison v. Sunbeam Coal Corp., 519 A.2d 385, 389 (Pa. 1986). As observed by the Third Circuit in Mellon Bank, N.A. v. Aetna Business Credit, 619 F.2d 1001, 1009 (3d Cir. 1980), in discerning the intent of the parties it would be helpful if judges were psychics who could delve into the parties' minds. Because they are not, and in order to interpret contracts with some consistency, and to provide contracting parties with a legal framework which provides a measure of predictability, the courts must eschew the ideal of ascertaining the parties' subjective intent and instead bind the parties by the objective manifestations of their intent. Id. In so doing, the court is to adopt an interpretation which, under all circumstances, ascribes the most reasonable, probable, and natural conduct of the parties, bearing in mind the objects manifestly to be accomplished. Metzger v. Clifford Realty Corporation, 476 A.2d 1, 5 (Pa. Super. 1984).

(B) Going beyond the four corners of the contract

Contracts can be ambiguous or unambiguous. When the terms of the contract are clear and unambiguous, the intent of the parties is to be ascertain solely from the writing, Hutchison, 519 A.2d at 390, by the court as a matter of law without reference to any external testimony or other evidence.

Where the writing is ambiguous the factfinder may examine evidence extrinsic to the contract to determine intent. Duquesne Light Co. v. Westinghouse Electric Corporation, 66 F.3d 604, 613 (3d Cir. 1995). See also Metzger v. Clifford Realty Corporation, 476 A.2d 1, 5 (Pa. Super. 1984) (noting that courts are responsible for deciding whether, as a matter of law, written contract terms are either clear or ambiguous).

Therefore, as a preliminary matter in any contract dispute, the court must make a legal determination as to whether the writing is ambiguous.

(C) Determining whether a writing is ambiguous

A contract will be found to be ambiguous:
[I]f, and only if, it is reasonably or fairly susceptible of different constructions and is capable of being understood in more senses than one and is obscure in meaning through indefiniteness of expression or has a double meaning. A contract is not ambiguous if the court can determine its meaning without any guide other than a knowledge of the simple facts on which, from the nature of language in general, its meaning depends; and a contract is not rendered ambiguous by the mere fact that the parties do not agree upon the proper construction.
Metzger, 476 A.2d at 5.

Ambiguities may be either patent or latent. Id. A patent ambiguity appears on the face of the instrument and arises from the defective, obscure, or insensible language used. Id. Latent ambiguities arise from extraneous or collateral facts which render the meaning of a written contract uncertain although the language, on its face, appears clear and unambiguous. Id. In the case of a latent ambiguity, a court is permitted to go outside of the writing to make the initial determination of whether an ambiguity exists. Id., at n.2. In the case of a patent ambiguity it is unnecessary to consider extrinsic evidence to determine if the writing is ambiguous since the ambiguity is clear on the face of the document. In the case of a patent ambiguity, the court can allow the parties to present extrinsic evidence to the fact finder for the purpose of determining intent.

The Third Circuit describes the court's ability to entertain extrinsic evidence in order to determine if there is a latent defect as follows:
Pennsylvania law permits courts to examine certain forms of extrinsic evidence in determining whether a contract is ambiguous. But lest the ambiguity inquiry degenerate into an impermissible analysis of the parties' subjective intent, such an inquiry appropriately is confined to determining "the parties' linguistic reference." [Citation omitted.] In other words, "extrinsic evidence may be utilized to demonstrate the existence of a latent ambiguity."
Duquesne Light, 66 F.3d at 614. Accordingly, this extrinsic evidence is presented to the judge to aid in the legal determination of whether there is an ambiguity. The burden on the party is not to establish intent, but rather to establish the existence of the ambiguity.

The Third Circuit, in Mellon Bank, provided examples of latent ambiguities. 619 F.2d at 1011-12 n.12.
For example, a contract might provide for a party to pay "$10,000 for 100 ounces of platinum." A judge might state that the quoted words are so clear and unambiguous that parol evidence is not admissible to vary their meaning. That judge might never learn that the parties have a consistent past practice of dealing only in Canadian dollars and follow a standard trade practice of measuring platinum in troy ounces (12 to the pound instead of 16). This is because that judge's linguistic frame of reference includes the dollars and the ounces he or she encounters in daily life. That is not the linguistic frame of reference of the commercial parties.

There are many other examples which demonstrate the necessity of the approach [the Court] outline[s]. A "pound" of caviar is always 14 ounces. One can readily see the difficulty counsel might have convincing a judge who never has eaten caviar that a "pound" can be 14 ounces. The case could also come before a judge who was a lifelong gourmet and consumer of caviar. To the gourmet judge it might be "clear and unambiguous" that a pound of caviar is 14 ounces. Similarly, in the lumber business a "two by four" is never really two inches by four inches, but somewhat smaller. The background of some judges might make them aware of this, the background of others might not.
Because of the fact that the judge may have a different linguistic frame of reference than the parties, the Third Circuit concluded that the "four corners" approach, i.e., one where the court simply reviewed the writing in chambers and determines from his point of view whether the written words are ambiguous, is incorrect. Instead, the Court determined that the proper procedure:
is for the judge to hear the proffer of the parties and determine if there is objective indicia that, from the linguistic reference point of the parties, the terms of the contract are susceptible of differing meanings. . . .

It is the role of the judge to consider the words of the contract, the alternative meaning suggested by counsel, and the nature of the objective evidence to be offered in support of that meaning. The trial judge must then determine if a full evidentiary hearing is warranted. If a reasonable alternative interpretation is suggested, even though it may be alien to the judge's linguistic experience, objective evidence in support of that interpretation should be considered by the fact finder.
Mellon Bank, 619 F.2d at 1011.

The Third Circuit's approach does not authorize a trial judge to demote the written word to a reduced status in contract interpretation. Although extrinsic evidence may be considered under proper circumstances, the parties remain bound by the appropriate objective definition of the words they use to express their intent.
Generally parties will be held to definitions given to words in specialized commercial and trade areas in which they deal. Similarly, certain words attain binding definitions as legal terms of art. [Citation omitted.] Dates, numbers and the like generally cannot be varied. [Citation omitted]. . . . Trade terms, legal terms of art, numbers, common words of accepted usage and terms of a similar nature should be interpreted in accord with their specialized or accepted usage unless such an interpretation would produce irrational results or the contract documents are internally inconsistent.
Mellon Bank, 619 F.2d at 1013.

In summary, if the writing is patently ambiguous, the interpretation becomes a question of fact for the finder of fact and the parties may submit extrinsic evidence on the intent of the parties. If the writing has a latent ambiguity, i.e., the words make sense as written but the words used have more than one interpretation, the court considers extrinsic evidence (in the form of a proffer) in order to determine if the alternative definitions are reasonable, and if so, can submit the matter to the finder of fact with extrinsic evidence. If the alternative definition is not reasonable under the circumstances, there is no latent ambiguity and the court resolves the interpretational dispute as a matter of law.

(D) Extrinsic Evidence

Extrinsic evidence used to ascertain intention may include the surrounding circumstances, the situation of the parties, the objects they apparently have in view, and the nature of the subject-matter of the agreement. International Organization Master Mates and Pilots of America, Local No. 2 v. International Organization Master Mates and Pilots of America, Inc., 439 A.2d 621, 624-26 (Pa. 1981) (taking into consideration nature of dispute, damages sought by plaintiff, and what would have been reasonable for plaintiff to have agreed to, in interpreting terms of consent decree).

(E) General rules of construction

There are a number of general rules of construction utilized by the courts such as the rule that an ambiguity is resolved against the drafter, the contract is to be interpreted as a whole, the specific controls the general, all provisions are assumed to have significance, and the contract should be interpreted in a way so as to not render any provision a surplus, etc. Where these rules fit into the determination of the existence of ambiguities is unclear.

As discussed in Restatement (Second) of Contracts §202 comment a, the rules do not depend upon any determination that there is an ambiguity, but are used in determining what meanings are reasonably possible as well as in choosing among possible meanings. This indicates that rules may be used by the court in its determination of whether there is an ambiguity, and may also be used by the finder of fact in deciding among competing interpretations.

However, in Pennsylvania, the rules of construction can be used to resolve an interpretational dispute only if the examination of extrinsic evidence proves fruitless. Hutchison, 519 A.2d at 390 n.5. Accordingly, in Pennsylvania it appears that the court may consider rules of construction in determining whether there is an ambiguity, but may not find the existence or absence of an ambiguity based solely on the rules of construction. Furthermore, a finder of fact may consider the rules of construction in determining the intent of the parties, but may not decide the case based on the rule unless the extrinsic evidence of the intent of the parties is inconclusive.

For example, in Burns Manufacturing Company, Inc. v. Boehm, 356 A.2d 763 (Pa. 1976), the Court expressed displeasure with a lower court's disposition of a contract dispute based soley on the fact that the ambiguity would be resolved against the drafter. As discussed by the court:
the rule [of construction] is not intended as a talismanic solution to the construction of ambiguous language. Rules of construction serve the legitimate purposed of aiding courts in their quest to ascertain and give effect to the intention of parties to an instrument. They are not meant to be applied as a substitute for that quest. Where a document is found to be ambiguous, inquiry should always be made into the circumstances surrounding the execution of the document in an effort to clarify the meaning that the parties sought to express in the language which they chose. . . . It is only when such an inquiry fails to clairify the ambiguity that the rule of construction relied upon by the [court] should be used to conclude the matter. . . .
356 A.2d at 766 n3.

(1) General rule regarding time of completion

It is exceedingly well settled that where no time is agreed upon for the completion of a contract, an agreement for a reasonable time will be inferred. See, e.g., Field v. Golden Triangle Broadcasting, Inc., 305 A.2d 689, 694 (Pa. 1973), cert. denied, 414 U.S. 1158, 94 S.Ct. 916, 39 L.Ed.2d 110 (1973); Lefkowitz v. Hummel Furniture Co., 122 A.2d 802, 804 (Pa. 1956); P.L.E.Contracts §244; 17A C.J.S. Contracts §503(1). As set forth in C.J.S.:
Where a party to a contract undertakes to do some particular act, the performance of which depends entirely on himself, and the contract is silent as to the time of performance, the law implies an engagement that it shall be executed within a reasonable period of time, without reference to extraordinary circumstances. The promisor cannot postpone the time for performance of his obligation by preventing the event from occurring. So, where the agreement is to pay a certain sum over a fixed price received from the sale of certain property, there is an implied obligation to sell within a reasonable time after which the agreement to pay becomes absolute.
17A C.J.S. Contracts §503(1), p. 782-83.

Ordinarily, the question of what is a reasonable period of time is one of fact. However, if the facts are undisputed, it becomes a question of law and can be decided upon summary judgment. Frederes v. Ferguson (In re Frederes), 108 B.R. 419, 421 (Bankr. W.D.N.Y. 1990). Some of the factors which a court must look at to decide what is a reasonable time include: the nature and object of the contract, the presence or absence of good faith, what the parties contemplated at the time it was entered into, and the time that a person of ordinary diligence and prudence would use under the circumstances. Id at 420-21.

(2) General rule regarding manner of performance

Where there is no expressed agreement as to how a contract will be performed, there is implied a duty to proceed in good faith, using due diligence, to effect the purpose of the agreement. See, e.g., Somers v. Somers, 613 A.2d 1211 (Pa. Super. 1992) (holding that employee entitled to percentage of profits on a job stated a claim for breach of contract where he alleged employer failed to act in good faith, using due diligence, to negotiate for payment on job, although there was no expressed provision in employment contract to do so). Pennsylvania cases often refer to this obligation to proceed in good faith, using due diligence, as the "doctrine of necessary implication." Somers, 613 A.2d at 1214. The doctrine has been stated as follows:
In the absence of an express provision, the law will imply an agreement by the parties to a contract to do and perform those things that according to reason and justice they should do in order to carry out the purpose for which the contract was made and to refrain from doing anything that would destroy or injure the other party's right to receive the fruits of the contract.
Id (citing Frickert v. Deiter Bros. Fuel Co., Inc., 347 A.2d 701 (Pa. 1975)(Pomeroy, J., concurring)). As observed in Somers, a complete catalogue of types of bad faith is impossible, but it is possible to recognize certain strains of bad faith which include: evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party's performance. 613 A.2d at 1213 (citing Restatement (Second) of Contracts, §205(d)).

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