The Use of Custom and Usage in Interpreting Commercial Contracts Under New Jersey Business Law

Enforceable contracts are the bedrock of a strong economy. If contracts were not enforced, parties could not rely on the other side performing because there would be no remedy if they breached. Therefore, commerce would break down. Enforceable contracts are so important to the economy, in fact, that the freedom to contract is included in both the New Jersey and United States Constitutions. Before a contract can be enforced, however, the parties and the reviewing court must figure out what the contract means. When the terms are clear this normally isn’t a problem. However, when the contract is ambiguous, or even just a part of it is unclear, the question becomes what evidence may be admitted to determine the meaning and intent of the contract.

As I’ve written earlier, New Jersey courts generally adhere to the “parole evidence rule,” which holds that when there is a clear, unambiguous contract, extrinsic, or external, evidence beyond the four walls of the contract is inadmissible to prove what the contract means. However, in New Jersey business law, the exceptions come close to swallowing the rule. Indeed, the New Jersey Supreme Court held as far back as 1953, in the case of Atlantic Northern Airlines v. Schwimmer, that all evidence is relevant if it will assist the trier of fact in determination what the parties to a contract intended and what the contract means – even if that evidence is extrinsic.

The question, then, is what sort of extrinsic evidence is admissible? In the case of commercial contracts, one source of evidence is custom and usage.

New Jersey courts have long held that general practice or knowledge within an industry can be admissible to give meaning to a contractual term. When courts are faced with an ambiguity in a contract, in other words where they face a contractual term which could have more than one possible meaning, the courts may admit and use knowledge common to the industry – and parties to the contract may use industry knowledge to persuade the fact-finder, be that a judge, jury or arbitrator, that their interpretation is correct.

Commercial contracts for the sale of goods are covered by New Jersey’s Uniform Commercial Code, known as the UCC. The UCC has an entire section devoted to the use of extrinsic evidence to determine the meaning of contracts and the intent of the parties. The section defines the types of extrinsic evidence allowed:

a. A “course of performance” is a sequence of conduct between the parties to a particular transaction that exists if:

(1) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and

(2) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.

b. A “course of dealing” is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

c. A “usage of trade” is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.

d. A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties’ agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance.

The UCC then establishes the general priority of evidence for use in interpreting commercial contracts:

f. …the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable:

(1) express terms prevail over course of performance, course of dealing, and usage of trade;

(2) course of performance prevails over course of dealing and usage of trade; and

(3) course of dealing prevails over usage of trade.

One of the questions then is how to prove industry custom and usage? This generally involves the use of experts. Experts are necessary, and allowed by New Jersey’s Rules of Evidence, because the general lay juror or judge will have at best limited knowledge about what the customs and practices are in a particular industry. Therefore the parties will normally bring in experts in the field to testify about what the particular practice is.

Beyond the custom and usage of the particular industry in general, New Jersey courts have held that it is often appropriate to look to the practices by which the particular parties have operated in the past under the same contractual language, even in commercial contexts not governed by the UCC. This is generally done by fact witnesses with knowledge of how these particular parties operated, rather than expert witnesses.

McLaughlin & Nardi’s New Jersey business attorneys represent parties negotiating commercial contracts, and litigating business disputes. Call us at (973) 890-0004 or email us to schedule a consultation.