In contract disputes, courts are often called upon to tell the parties what their contracts say and mean. This occurs when parties dispute how a contract should be construed and the language is deemed ambiguous.
When the contract language is clear, the court’s role is simple and limited. Interpretation of an unambiguous contract begins and ends with the actual words the parties used. When construing an unambiguous contract, except in very limited circumstances, courts cannot modify or rewrite the agreement to fit their sense of what is fair or reasonable. Doing so invades the parties’ freedom to allocate their respective risks, rights and responsibilities.
Ambiguous contracts are treated differently. Contracts can be patently or latently ambiguous. A patent ambiguity exists if the uncertainty arises on the face of the contract from the use of defective, obscure, inconsistent or insensible language. A latent ambiguity arises not on the words used but rather how those words apply to the object or to the subject they describe. A contract is latently ambiguous when a facially clear term cannot be applied without requiring a choice, the outcome of which is not specified in the agreement. Whether either type of ambiguity exists is a threshold legal matter for the court to decide.
To resolve an ambiguity once it is found the courts employ various tools. The first step is to look for clues in the contract when read in its entirety. The courts will strive to give purpose to each word used and to avoid any construction that requires ignoring portions of the writing or renders them superfluous. Words and phrases are given their plain and ordinary meaning; strained constructions are avoided.
How words or phrases are structured may be telling. For example, specific terms typically control over more general terms. The same words used in different sections of an ambiguous contract will tend to be given the same meaning. Courts may also consider how items are grouped or listed. Similarly, whether items have been intentionally included or excluded may signal that similar items should be treated the same. Handwritten terms may control over conflicting typed provisions. Courts may also resort to grammatical rules if doing so helps to identify the parties’ intention.
After considering the contract language, courts may consider extrinsic evidence to determine the parties’ intent. Extrinsic evidence is anything outside of the four corners of the contract, including what the parties previously said or did, how the contract was performed, and even how the parties dealt with each other in prior agreements.
Courts examine the circumstances existing when the contract was made, as well as its original purpose. If helpful, courts may also consider specific market or industry practices or interpretations. Industry specific terms are routinely viewed as persuasive evidence of what the parties meant when including such terms their contract.
When all else fails, courts may resort to the doctrine of contra proferentem, which is a rule of last resort, requiring that an ambiguous agreement be construed against its drafter.
This is but a partial treatment of how courts resolve ambiguous contracts. Care should be taken in the individual case because unique rules may also apply to specific types of contracts, including those for insurance, real property, sales of goods, trusts and estates, arbitration and a host of others.
Written by Matthew J. Boettcher
Matthew J. Boettcher
Partner
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