Arizona Rules of Contract Interpretation

This article discusses principles of contract interpretation in Arizona. “Interpretation is the process by which [courts] determine the meaning of words in a contract.” Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 152 (1993). Interpretation of a contract is a question of law, or at most, a mixed question of law and fact. United Cal. Bank v. Prudential Ins. Co. of Am., 140 Ariz. 238, 257 (Ct. App. 1983).

We will first discuss the “primary rules” of interpretation that courts apply to interpret a contract. The article will then discuss the “secondary rules” that courts apply when the primary rules do not resolve a dispute over the meaning of a contract. Finally, this article will discuss the application of the parol evidence rule in Arizona.

Intentions of the Parties

The “cardinal principle” of contract interpretation is “the intention of the parties should control.” Dairyland Mut. Ins. Co. v. Andersen, 102 Ariz. 515, 517 (1967). However, it is the parties’ objective intent, not their hidden subjective intent that is relevant. Wippman v. Rowe, 24 Ariz. App. 522, 525 (1975) (noting evidence of subjective intent is immaterial). This “objective theory of assent” provides greater “reliability of contractual commitments” because allowing inquiry into subjective intent could “enable a promisor to fraudulently undermine otherwise perfectly clear agreements by generating and preserving extrinsic evidence of ambiguous or conflicting intentions.” Bretz v. Portland Gen. Elec. Co., 882 F.2d 411, 413 n.4 (9th Cir. 1989).

To determine the parties’ intention as expressed in the contract, courts first “look to the plain meaning of the words as viewed in the context of the contract as a whole.” United Cal. Bank, 140 Ariz. at 259. Courts must determine what the parties intended at the time they entered into the contract. Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 393 (1984).

The Plain Meaning and Special Meaning

Courts must give words their ordinary meaning and give technical terms their technical meaning. Phelps Dodge Corp. v. Brown, 112 Ariz. 179, 181 (1975).

The Four Corners of the Contract As a Whole

Courts determine the character of a contract “by what is within the four corners thereof,” and not, for example, just the name given to it. Kintner v. Wolfe, 102 Ariz. 164, 167 (1967). This means that courts should first look to the document itself to interpret the document. Id. Additionally, the contract “will be read as a whole, and every part will be interpreted with reference to the whole,” which means terms should not be taken out of context and considered apart from other provisions. Ash v. Egar, 25 Ariz. App. 72, 75 (1975). “A written contract will, if possible, be construed so as to give effect to all its parts.” Id. at 76.

The Surrounding Circumstances

In Arizona, the court seeks to determine what a “reasonably intelligent person” would have intended after considering “all operative usages and knowing all the circumstances prior to and contemporaneous with the making of the integration, other than oral statements by the parties of what they intended it to mean.” Ariz. Land Title & Tr. Co. v. Safeway Stores, Inc., 6 Ariz. App. 52, 57 (1967) (quoting Restatement (First) of Contracts § 230 (1932)). Surrounding circumstance, the court may consider include negotiation, prior understandings, subsequent conduct, and the like. Darner Motor Sales, 140 Ariz. at 393.

If, after application of the primary rules, the meaning of the contract is still unclear, the court may resort to the secondary rules of interpretation discussed below. See Restatement (Second) of Contracts § 202 (1981).

Interpretation Should Not Render Language Superfluous

If possible, courts will interpret contracts in such a way to ensure words and provisions are given meaning rather than rendering parts of the contract meaningless. Taylor, 175 Ariz. at 158 n.9 (1993) (holding “contract should be interpreted, if at all possible, in a way that does not render parts of it superfluous”).

Interpretation Should Render Contract Lawful and Reasonable

If there are lawful and unlawful ways in which a contract can be interpreted, courts will interpret the contract in the manner that would make the contract lawful. Saavedra v. Donovan, 700 F.2d 496, 500 (9th Cir. 1983). Likewise, courts will prefer interpretations of a contract that would be more reasonable as opposed to interpretations that “a prudent person would not normally contract under such circumstances.” Elte, Inc. v. S. S. Mullen, Inc., 469 F.2d 1127, 1131 (9th Cir. 1972).

Ambiguities Are Interpreted Against the Drafter

When there is an ambiguity in a contract, it is construed against the person who drafted the contract. Polk v. Koerner, 111 Ariz. 493, 495 (1975). Courts have found that this rule is often necessary because “the drafter [of the contract] may leave the meaning deliberately obscure, intending to decide at a later date what meaning to assert” and this rule prevents such a scenario. Bjornstad v. Senior Am. Life Ins. Co., 599 F. Supp. 2d 1165, 1172 (D. Ariz. 2009).

Handwritten Words Prevails Over Pre-Printed Words

When there is a pre-printed or standard form contract, any written words deliberately added will prevail over the printed terms. Deuel v. McCollum, 1 Ariz. App. 188, 190 (1965). This rule generally applies to handwritten words, but the words “may also be typed or stamped.” 11 Williston on Contracts § 32:13 (4th ed. 1999).

The reason behind this rule is that handwritten terms usually reflect terms that the parties have openly negotiated, sometimes referred to as the “dickered deal.” Darner, 140 Ariz. at 390. Courts give greater weight to negotiated terms than to boiler-plate terms and will not allow fine print terms to “cut under the reasonable meaning of those dickered terms which constitute the dominant and only real expression of agreement.” Id.

Placement of Terms

If two provisions in a contract contradict each other, courts may adopt the earlier provision as more clearly reflecting the intentions of the parties. 11 Williston on Contracts § 32:15 (4th ed. 1999). However, because this rule is “arbitrary and artificial,” “it is not universally followed and will only be accepted as a rule of last resort.” Id.

Importance of Terms

If there are two conflicting provisions in a contract, courts may adopt the provision that the court determines is more important to the purpose of the contract. Smith Stage Co. v. Eckert, 21 Ariz. 28, 39 (1919) (rejecting clause in contract that would nullify important provision).

Specificity of Terms

When specific terms conflict with more general terms, the court should apply the specific terms. Autonumerics, Inc. v. Bayer Indus., Inc., 144 Ariz. 181, 188 (Ct. App. 1984).

Exculpatory Clauses Are Strictly Construed

Courts will strictly construe against the party seeking the benefit of any provisions in contracts that attempt to limit a parties’ liability, limit the ability of a party to sue, or otherwise attempt to exculpate a party. See Bisso v. Inland Waterways Corp., 349 U.S. 85, 90 (1955); Marr Enterprises, Inc. v. Lewis Refrigeration Co., 556 F.2d 951, 956 (9th Cir. 1977); 11 Williston on Contracts § 32:20 (4th ed. 1999).

Blue Pencil Rule

Arizona has adopted the “blue pencil rule,” which allows courts to remove “grammatically severable, unreasonable provisions” yet enforce the remainder of the contract. Valley Med. Specialists v. Farber, 194 Ariz. 363, 372, ¶ 30 (1999). However, courts cannot rewrite the agreement to make it enforceable. Id.

“The parol evidence rule prohibits the use of extrinsic evidence to vary or contradict a written contract.” Higginbottom v. State, 203 Ariz. 139, 142, ¶ 12 (Ct. App. 2002). Though this rule may seem simple, “its application is complex, enigmatic, perplexing, and confusing.” 11 Williston on Contracts § 33:1 (4th ed. 1999). The “rule is designed to prevent parties to an integrated written contract from varying or contradicting the terms of their bargained-for agreement.” Estate of Calligaro v. Owen, 159 Ariz. 498, 503 (Ct. App. 1988). The parol evidence rule limits what evidence, “other than the writing, is admissible in the interpretation process, bearing in mind that parol evidence rule prohibits extrinsic evidence to vary or contradict, but not to interpret, the agreement.” Taylor, 175 Ariz. at 152.

Under Arizona’s liberal version of the parol evidence rule, “there is no need to make a preliminary finding of ambiguity before the judge considers extrinsic evidence.” Id. (emphasis in original).

The better rule is that the judge first considers the offered evidence and, if he or she finds that the contract language is “reasonably susceptible” to the interpretation asserted by its proponent, the evidence is admissible to determine the meaning intended by the parties. The meaning that appears plain and unambiguous on the first reading of a document may not appear nearly so plain once the judge considers the evidence. In such a case, the parol evidence rule is not violated because the evidence is not being offered to contradict or vary the meaning of the agreement.

Id. at 154 (emphasis in original).

Courts should follow a two-step process in applying the parol evidence rule. Id. “First, the court considers the evidence that is alleged to determine the extent of integration, illuminate the meaning of the contract language, or demonstrate the parties’ intent.” Id. at 153 (emphasis in original). The court’s goal is to “eliminate the evidence that has no probative value in determining the parties’ intent.” Id. During this first step, “the judge may properly decide not to consider certain offered evidence because it does not aid in interpretation but, instead, varies or contradicts the written words,” like when “the asserted meaning of the contract language is so unreasonable or extraordinary that it is improbable that the parties actually subscribed to the interpretation asserted by the proponent of the existence evidence.” Id. In the second step, the court finalizes its understanding of the contract and “the parol evidence rule applies and precludes admission of the extrinsic evidence that would vary or contradict the meaning of the written words.” Id. (emphasis in original).

Arizona has many rules that govern contract interpretation, including primary rules, secondary rules, and the parol evidence rule.