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Court of Chancery Explains Contract Interpretation Rules

United Rentals Inc v. RAM Holdings Inc. C.A. No. 3360-CC (December 12 and 21, 2007)

In these two decisions the Court of Chancery sets out how it will interpret a contract. Following the objective theory of contract interpretation, the court searches for the "common understanding" of the parties. It will not hear evidence of a party's subjective mental impressions or unilateral understandings.

However, the court will apply the "Forthright Negotiator Principle" when a contract is ambiguous. Under that approach, a reasonable interpretation of contract language of one of the parties will be binding on the other party to the contract if he knew or should have known of the other party's understanding and did not object to it when the contract was signed. Silence then may be fatal.

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