Considerations Governing Form of Agreement
and Principles of Construction

forms of agreement and contract construction
  1. Factors to consider in determining the form that an agreement should take include who the parties are (do the parties have an extensive business history with each other and a strong mutual sense of trust?), what they intend to accomplish (including the value of the agreement), their level of sophistication, and the money they are willing to invest in the transaction.
  2. An agreement can take one of a number of forms, including: (a) a letter agreement such as a term sheet or a letter of intent that outlines the major points of a transaction; (b) a pre-printed form agreement (caution – these forms will not typically address unusual or specific provisions that the parties may want or need, and the cost and inefficiency of supplementing a pre-printed form agreement may make a custom-drafted document a better alternative); (c) custom-drafted agreement (despite being more time-consuming and extensive to prepare, over the course of the transaction, the cost may be justified by the complexities of the business deal, the need to tailor provisions to the parties’ particular needs, and the ability to service the contract without further modifications; and (d) oral agreements.
  3. Under California law, the intent of the parties controls the interpretation of contracts. However, this intent may often be difficult to ascertain. Courts call on a number of common principles of contract construction for purposes of interpreting contracts. These principles include:
    1. Where possible, contracts are interpreted to give meaning to all their provisions, and to be lawful, operative, definite, reasonable and capable of being given effect.
    2. Technical words are interpreted according to their technical meanings, and nontechnical words are interpreted according to their ordinary meanings.
    3. Contracts are construed according to the law of the place where they are to be performed, or, if the place of performance is not indicated, where it was made, except that the parties can choose to have California law apply for many contracts involving more than $250,000.
    4. Ambiguous or uncertain promises are interpreted according to what the promisor believed the promise understood the promise to be.
    5. Written terms control printed terms, and printed terms added to a contract control terms on a preprinted form.
    6. Uncertainties are construed against the party that caused the uncertainty (usually the drafting party).
    7. Promises of multiple parties who benefit from the agreement are presumed to be joint and several.
    8. Particular provisions control general provisions.
    9. If two constructions of a provision are equally proper, the provision is construed in favor of the party for whose benefit the provision was made.
    10. Courts consider trade usage to interpret agreements governed by the Commercial Code. Express terms of an agreement and the course of dealing or trade usage are construed to be consistent when possible but, if not, express terms control.

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