Given pressures of the COVID-19 pandemic, companies are reviewing their obligations and benefits under their existing contracts. The world has changed in a way that few companies may have anticipated. Yet the wording of the contracts remains the same and may now present challenges or opportunities for reinterpretation.
Although the pandemic is new, the general need for interpretation of ambiguous terms is not new. People often realize that they should have been clearer about what a specific term, word, phrase, or definition means. If a contract is ambiguous, the parties can often reach an agreement through further discussions. However, in some situations, the parties will find it necessary to ask the court to resolve the contract issue.
What Makes a Contract Ambiguous?
A contract is ambiguous when it is unclear what the intent of the parties was when they formed the agreement; and the contract is capable of more than one reasonable interpretation.
For example, assume that a small business enters into a contract with an electrician to conduct work throughout their new retail space. The contract indicates that the services must be rendered in April. The business owner interprets the language to mean that the services must be rendered and complete by April 30. Meanwhile, the electrician assumes the language means that he must begin the work in April. However, he does not interpret the term to require him to complete the work by April 30. Assuming that the business owner is hoping to open his business on May 3, the ambiguity surrounding the work completion date is likely to cause problems.
Avoiding Ambiguous Contracts
In the example above, the business owner and electrician could have avoided legal headaches by simply stating that all work performed under the contract must be completed by April 30, 2020. Below are several other tips to keep in mind when negotiating the terms of a contract:
- Make sure you put all contractual terms in writing;
- Define the key terms of your contract, particularly words/phrases that are capable of more than one meaning;
- Include supporting documentation, i.e. prior agreements or correspondence related to the negotiations that took place before the contract was formalized, which may prove useful if a court is later asked to interpret the contract;
- Review the contract with the other party prior to execution; and
- Retain an attorney to review all contracts to ensure that no ambiguous language is present, and the agreement is otherwise enforceable.
How Do Courts Interpret Ambiguous Contracts?
When a court is asked to interpret an ambiguous contract, the goal of the judge or jury is to interpret the contract so as to give effect to the parties’ intentions. In a breach of contract lawsuit, the plaintiff has the burden to prove what the parties intended the contract to mean.
Under New Jersey contract law, the following principles may be used when interpreting an ambiguous contract:
- Reasonableness: The relations of the parties, the attendant circumstances, and the result the parties sought to attain are often relevant when considering which interpretation is most reasonable. The contract must also be considered as a whole and its provisions must be read together. In addition, a supporting or less significant provision of the contract should not o be interpreted to conflict with an obvious, dominant, or principal purpose of the contract.
- Common usage: The terms of a contract should be understood in their plain ordinary sense.
- Industry usage: If any contract words or terms have a technical meaning, or as used in a trade or by custom mean something different from their ordinary meaning, they should be given their technical trade or custom meaning if (1) the contract was made in view of this technical meaning, trade or custom usage, and (2) the technical meaning or trade or custom usage was either generally used or was actually known to the parties.
- Conduct of the parties: The conduct of the parties, after they entered into the contract and before they discovered that they disagreed with one another, can be significant evidence of their agreed intent.
- Prior dealings: The manner by which parties to the contract have previously dealt with each other can, unless specifically rejected in the contract, can establish a basis for interpreting and giving meaning to the parties’ intention as it relates to the contract.
If the judge or jury is still unable to decide what the parties originally intended the disputed contract language to mean, it may look to whether the contract was drafted by just one of the parties. In such cases, the general rule is that ambiguity in a contract provision should be resolved against the drafter. However, it is also important to note that the ambiguous provision must still be read sensibly and consistent with the expressed intent of the parties.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Charles Yuen, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.