Contracts allocate risk. But when the rubber hits the road, how is that risk actually divided? Ultimately, through courts or arbitrators. When a contract is enforced, adjudicators must determine what it says, whether it was breached, and what remedies apply. The real question is how they make those determinations.
Because most contracts never get litigated, many parties sign deals without understanding what will actually matter if things go wrong. This post examines what actually matters—and what doesn’t—when a contract gets litigated. In practice, adjudicators follow a predictable hierarchy. Here it is:
- Text. Courts generally begin and often end with the plain meaning of the text. The four corners of the document often provide clear answers. If the contract states, “payment shall be made within thirty (30) days from receipt of the corresponding invoice,” payment 31 days after receipt is a breach. If an order form mentions blue t-shirts, red ones would be non-conforming.
- Structure. Contract structure can give clear answers when text doesn’t. Imagine that a framework contract says DDP shipping, but a purchase order (PO) says FCA. Many courts will treat the PO as more transaction-specific and thus apply its shipping terms. By contrast, if there is an explicit “order of precedence” clause that favors the framework, a court will enforce terms on the basis of that hierarchy.
- Commercial Context. When the plain language and structure don’t provide answers, the commercial context can. In U.S. commercial disputes, most courts apply the Uniform Commercial Code (UCC) §1-303 framework:
- Course of Dealing. Courts look to prior conduct between the parties. If a contract is silent on shipping terms, the court will read in how shipping was handled in prior deals between the parties.
- Course of Performance. If the parties have not dealt with one another previously—or prior dealings do not provide sufficient guidance—courts will look to prior performance under the same contract. Using our shipping example, courts will look at prior shipments under the same contract to infer the requirements for this shipment.
- Usage of Trade. When there is insufficient data, courts will look to industry standards. Even at the bottom of the hierarchy, “usage in trade” is invoked frequently. What is “reasonable quality,” after all? What is an industry “best practice”? A usage of trade—meaning any practice or method sufficiently regular in a given trade or vocation to justify an expectation of observance—can supply meaning where a contract does not.
- Evidence of Intent. Merger, or “Entire Agreement,” clauses exclude evidence of intent when a contract is unambiguous. After all, “thirty (30) days” means 30 days. But what if a contract says “ten (30) days” (trust me, it’s happened!). This is where courts may look at the initial draft, the comments, and the amendments. If one side changed the written number to “ten” and the other side responded “okay,” this would indicate that the parties intended for ten-day payment terms to apply. When words fail, courts look to what the parties meant.
When contracts unravel, courts and arbitrators are often left to pick up the pieces. They must make sense of ambiguous and often conflicting contract documents. By understanding the hierarchy—and drafting accordingly—you increase the likelihood that your priorities will be enforced. As we’ve long advocated on this blog, clarity beats verbosity.
Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Reading or interacting with this content does not create an attorney–client relationship. You should consult a qualified attorney for advice regarding your specific situation. Mehaffy, PLLC disclaims all liability for actions taken or not taken based on this blog.