Contracts define and govern the rights and obligations of their parties, and they provide critical guidance when disputes arise.
However, because contracts are only enforceable if they are clear and meet the requirements of applicable law, any inconsistencies or ambiguities can greatly threaten one party’s ability to enforce.
Without a clear and unambiguous contract, disputes that arise between parties – whether due to disagreement about the terms of a contract, or over one party’s interpretation of a poorly written provision – may become issues for the court, arbitrator, or jury to decide.
What Is Contract Ambiguity?
Cases involving contract interpretation often begin with one party arguing that a contract is ambiguous. Contract ambiguities arise for various reasons: The parties may have lacked the foresight to anticipate every contingency; the parties may not have felt the stakes were worthy of detailed and lengthy negotiations to carefully address all the issues; or the parties simply used a poor choice of words.
Just because the parties disagree over the terms of the contract does not make it ambiguous. According to Black's Law Dictionary (11th ed. 2019), “A contract or a provision in a contract is ambiguous if it is reasonably susceptible to more than one interpretation or construction.” In other words, if both parties’ interpretation is reasonable given the written language of the agreement, the contract may be ambiguous.
Who determines ambiguity? In a dispute, the question of whether a contract is ambiguous is a question of law and must be decided by the court.
There are two approaches to determining contract ambiguity:
- Textualism: The court will only consider the plain meanings of the words used in the agreement, as a whole, to determine ambiguity.
- Contextualism: The court will focus on the text of the agreement as well as extrinsic evidence of contractual intent, such as preliminary drafts of the contract, statements made at the time the contract was executed, and any previous business dealings between the parties.
Unfortunately, neither approach to determining contract ambiguity is accepted as the majority rule and inconsistent precedents abound, including in Texas.
How Texas Courts Determine If a Contract Is Ambiguous
In Texas, there is no clear ruling as to whether contextual evidence of the circumstances surrounding a contract is admissible while determining ambiguity and, if it is, which types of evidence are admissible.
Existing case law highlights the differing views held by Texas courts. Some courts will consider surrounding circumstances to determine whether a provision is ambiguous (contextualism); others will only consider what is contained within the “four corners” of the page (textualism).
Regardless of the court’s approach, if a contract is deemed unambiguous, then the contract will be enforced based on the plain language of the agreement, and extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract, or create an ambiguity.
Is an Ambiguous Contract Enforceable?
Yes. Once a trial judge determines that a contract contains an ambiguity – meaning the contract or a provision within the contract is susceptible to two or more reasonable interpretations – the court will look beyond the language of the contract itself to resolve the ambiguity and enforce the contract.
Both parties may present evidence of the surrounding circumstances of the contract’s development and negotiation to assist the jury in interpreting the contract. This extrinsic evidence or “parol evidence” is anything other than the written terms of a contract and may include:
- Verbal or written communication exchanged between parties prior to the contract’s formation;
- Prior drafts of the agreement, including deleted contract language;
- Past dealings between the two parties; or
- Industry customs and practices.
Because these factors can be at issue in future disputes over interpretation or performance of a contract, it is wise for parties to retain records of negotiations and communications that transpired both before and during a contractual term. Prior drafts of contracts can serve as valuable evidence regarding intent should they be needed to bring or defend against future claims.
Take Away: Avoid Ambiguity With the Counsel of an Experienced Contract Lawyer
Though it may not be possible or feasible to eliminate all potential for dispute or anticipate every contingency, it is possible to reduce the probability of a disagreement and, at the same time, strengthen your position should a dispute become unavoidable. A qualified attorney experienced in contract law can help draft clear and enforceable contracts and review existing agreements to ensure they plainly state the parties’ intentions and limit exposure for disputes over contract interpretation or performance. At Hendershot Cowart P.C., we specialize in business contracts and contract disputes, handling thousands of such matters each year.
Here are a few ways we help our clients avoid contract ambiguity:
- Clearly define key terms, timelines, and provisions, and avoid vague terms such as “reasonable expenses” or “standard quality”
- Include all terms of the deal in the contract or include supporting documents via reference
- Use plain English; avoid industry jargon
A well-drafted contract tailored to your specific needs can also address other areas of potential downside risk beyond disagreement over the language. As a business law firm with a long-standing litigation practice, we are familiar with the loopholes and weak points that others may try to leverage against your business. We use our litigation experience to protect you against risks and exposures other firms may not consider.