This article deals with how courts interpret contract terms in a written contract between businesses. In Pennsylvania, the general rule is a court will enforce a contract using the “ordinary meaning” of the words in the contract and will not consider evidence outside the “four corners” of the contract. There are, however, significant exceptions to that rule.
One exception is “custom in the industry” or “usage in the trade” which is relevant to construe all commercial contracts in Pennsylvania. In Sunbeam Corporation v. Liberty Mutual Insurance Company, 781 A.2d 1189, 1193 (Pa. 2001), the Pennsylvania Supreme Court said in a contract, members of an industry are presumed to use words which have meanings as understood in the industry. Id. If a certain term has a special meaning to people in a particular industry, the court could adopt that special meaning when construing the contract.
As an example, assume a contract for the sale of software provides for the seller to install the software by using a “standard installation method.” There are different software installation methods. If the purchaser and seller disagree over the method and enough money is at stake, they could end up in court.
The court could look to testimony of “experts” as to the industry’s understanding of the meaning of “standard installation method.” Typically in such a dispute each side will provide testimony of their own expert on the meaning. The court could decide on the meaning of “standard installation method” by accepting the most persuasive testimony of the experts. That can happen even if each side truly had a different understanding as to the meaning.
The interpretation of a contract term based on industry use of words should be avoided. It can be costly, time consuming and risky. The key terms should be specifically defined in the contract. A court will follow a specifically defined term in a contract over industry meanings. In the example, the contract should not have said “standard installation method” but could have said something like the software will be installed by “manual software installation.” Better yet, the contract should provide a precise type of manual software installation.
A contract should have definite terms that reveal the intent of the parties. A review of a contract should resolve disagreements and not result in a dispute over the meaning of a term.