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Objective Interpretation:
An interpretation that a reasonable person standing in the shoes of the person the contract is addressed to would give to an ambiguous statement in the contract.

Extrinsic Evidence:
Evidence relating to a contract but not appearing on the face of the contract because it comes from other sources, such as statements between the parties or the circumstances surrounding the agreement.

Oftentimes, language used in negotiations is ambiguous so that one party believes that there is a contract while another party does not. 

In such instances, the courts will be forced to interpret the ambiguous language to try and determine whether or not there really is a binding contract.

The general rule of interpretation is that, where the interpretation of an expression is in question, the expression should be given an objective interpretation. That is to say, the expression should be given the interpretation that a reasonable person standing in the addressee’s shoes would give it. For example:

The Boston Red Sox offer Ramon Garcia $500,000 to play for them for one season which runs from April 1st to October 1st. Garcia accepts the offer. On September 1st, one month before the end of the season, Garcia goes to the team and says “please let me know if you plan on signing me for next season because, if you are not, I have to start looking for another team to play with.” The team answers Garcia by saying “don’t worry Ramon. You’re ok.” Garcia thanks the Red Sox and leaves the meeting. Garcia is under the impression that their discussion is an agreement on a new contract. The Red Sox do not believe that there is an agreement on a new contract. In this case, the court would probably find that there is an agreement on a new contract because Garcia’s interpretation of the conversation is more reasonable than the team’s interpretation. See Embry v. Hargadine McKittrick Dry Goods Co., 105 S.W. 777 (Mo. 1907).

There are two major exceptions to this rule. 

The first exception is where the parties to the contract have different interpretations of the expression but each interpretation is equally reasonable. It such an instance, no contract is formed. For example:

The London Tea Company and Boston Brew, Inc., enter into a contract in which London Tea agrees to sell ten thousand pounds of tea to Boston Brew for $5 per pound. The parties agree that the tea will be shipped to Boston on the S.S. Titanic. On October 1st, the S.S. Titanic pulls into Boston Harbor but there is no tea in the cargo for Boston Brew. Boston Brew sues London Tea. Meanwhile, on December 1st, another S.S. Titanic pulls into the Boston Harbor, this time loaded with tea for Boston Brew. During the trial, Boston Brew testifies that they had no idea that a second S.S. Titanic existed and that, when they made the contract with London Tea, they assumed that the shipment was coming on October 1st. London Tea testifies that they had no idea that another S.S. Titanic existed and they assumed that when they made the contract, they were going to ship the tea on the Titanic arriving in Boston on December 1st. In this case, no contract has been established because each party had a reasonable interpretation of the expression at issue. 

The second exception is where one party knows that the second party attaches a certain meaning to an expression and the second party has no idea that its interpretation is different from the first party’s interpretation. In such a case, a valid contract is formed, and the court will use the second party’s interpretation of the expression as governing the contract. So, in our last example:

If London Tea knew that Boston Brew thought that the tea would be shipped on the first Titanic and Boston Brew had no idea that London Tea was going to ship on the second Titanic, there is a valid contract here that will be governed by Boston Brew’s interpretation. That being the case, London Tea is in breach for not shipping the tea on the first Titanic.

Finally, there is a question as to whether or not extrinsic evidence (evidence outside the contract itself) can be admitted for the sake of interpreting a written contract. The modern trend is that courts are becoming more liberal with extrinsic evidence and they are using this evidence more often to demonstrate what the parties intended by their words.

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