What happens when two parties to a contract disagree about what the contract language means? How are ambiguities in a contract resolved?
Utah courts and judges should interpret and enforce each contract in a way that is in line with the intent of the parties who signed the contract. Usually, the parties’ intent is determined by reading and giving effect to the plain terms of the written contract. When a contract is clear and unambiguous, the parties are usually bound to the contract terms as written. However, when a contract is unclear or ambiguous, evidence outside the written contract becomes relevant because that evidence can help illuminate the parties’ intent and a proper interpretation. This article discusses these contract principles in more depth below.
The Purpose of Contract Interpretation is to Fulfill the Parties’ Intent
Under Utah law, judges should interpret and enforce each contract in a way that accomplishes the intent of the parties who agreed to and signed the contract. This is because the parties’ intent is controlling and a contract should be enforced according to its plain terms to respect and fulfill that intent. A judge does not substitute his or her own ideas of what a contract might mean. Nor does a judge interpret the contract in a way that conflicts with the contract terms just to reach a fair result.
Rather, judges are required to respect freedom of contract. People are free to negotiate good and bad deals in contracts, and a judge will not (or at least should not) take on a paternalistic role to rescue a party from a bad deal unless there are legally justifiable reasons to do so, such as an unconscionable or illegal terms or agreements formed as a result of fraud, duress, undue influence, or a mistake. Stated plainly, rewriting a contract to relieve a party from a bad deal is not legally justifiable. If a person intended to enter a contract that ultimately turns out to be a bad deal, that person must generally live with the consequences of that contract.
Contract Language is the Best Evidence of the Parties’ Intent
The intent of the parties to a contract is best determined by considering the express terms of the contract, generally only reading the language within the “four corners” of a contract. A proper interpretation gives meaning to each contract term, ignoring none. If the language within the four corners of a contract is clear and unambiguous, the parties’ intent and their contract duties are determined from that clear and unambiguous language, and the contract is enforced under those plain terms.
The written contract is king, so what the parties agree to in writing is generally controlling and trumps any other factor, including what each party may have been thinking or intending but did not state or agree to in the written contract. Almost always, no weight is given to undisclosed and subjective desires, understandings, and intent. Nor is much weight generally given to prior discussions and negotiations that are not stated in the written contract or that conflict with the written contract. After a contract is signed, no weight will generally be given to what the parties thought the contract said, especially if that understanding conflicts with the express terms of the contract.
Also, parties are bound to the natural and normal meaning of words used in a contract, not special, technical, or strange meanings of the terms used. For instance, if a party agrees to make lease payments “on the first day of each month,” that provision almost certainly means just what is says, and rent is due on the first day of the month, not any later. That provision does not mean rent is due on the first business day, the first day that isn’t a holiday, or the first day that is convenient to the tenant.
When the Parties’ Intent is Ambiguous
Often, the intent of the parties cannot be determined by reading the plain terms of the contract. Sometimes, contract terms are unclear, key terms are omitted, or two or more plausible and reasonable interpretations exist. When such is the case, ambiguity exits. For example, a real estate contract may state that a party is purchasing property “with the intent that it will be used for” a certain purpose, such as building a road. Does that provision mean that the purchaser must build the road or that both parties are merely acknowledging that the purchaser merely intends to build a road but does not want to contractually obligate itself to do so? A Utah court found such a provision in the circumstances stated above to be ambiguous.
Just because a party claims that a contract is ambiguous does not mean that the contract is indeed ambiguous. A party claiming ambiguity by claiming a different interpretation of a certain term, for instance, must prove that such an alternative interpretation is reasonable.
What happens if, in the end, a contract is truly ambiguous? If a judge determines that ambiguity exists, evidence outside the terms of the contract comes into play, which is referred to as “parol evidence” or extrinsic evidence. For example, prior negotiations or former drafts of the contract may become relevant. Also, each party to the agreement would likely be able to explain what he or she thought the agreement meant and what the parties intended.
Sometimes, when ambiguity exists, that ambiguity is interpreted in a way that favors the party who did not write the contract. The reasoning behind this rule is that the party who wrote the agreement had the opportunity to draft the contract clearly but failed to do so. This rule, however, is generally only allowed to come into play to break ties after extrinsic evidence does not help clarify the parties’ intent.
Obtaining Legal Help with Contract Issues
If you are involved in drafting a contract and want to avoid ambiguities, or if you are a party to a contract that appears to be or may be ambiguous, I can help. I offer a free consultation. My direct dial is 801-365-1021, and you can e-mail me at [email protected].