05 / 14 / 2019

Contract Ambiguity

Contract Ambiguity

Individuals, private corporations and partnerships, and government entities sign written leases, agreements and other types of contracts on a daily business.  Forming a contract is easy—under Texas law, a legally enforceable agreement—or contract—is formed when one party makes an offer, a second party accepts the offer, and where the two parties have agreed to exchange “consideration.” Consideration is a legal concept describing something of value (i.e., money) given in exchange for performance or the promise of performance.  For example, I form a legally binding contract with my neighbor when I offer to sell him my laptop computer for $100, and he accepts my offer by promising to pay me $100.  Most contracts for more significant sales are memorialized by a written contract, because the “Statute of Frauds” requires a written contract for the sale of an interest in land, securities, goods with a value of $500 or more, and several other types of exchanges. For example, an apartment lease is the sale of an interest in land, which is why it is always memorialized with a written contract. 

But what happens when two parties sign a contract, and they later disagree about the interpretation of some term or clause, or disagree regarding the performance of the contract? Sometimes, despite their best intent, parties sign a contract which is ambiguous, meaning that the interpretation or performance of the contract is susceptible to more than one interpretation.  Parties often have different interpretations of what a contract means. Traditionally, the “parol evidence rule” prohibited parties from introducing any verbal or written evidence to aid in the interpretation of the contract.  In contract law, parol evidence is anything other than the written terms of the contract. For example, under the traditional rule, parties were prohibited from introducing, for example, parol evidence of verbal or written discussions leading up to the formation of a contract, which might aid in the correct interpretation of the contract. 

As with most rules, there are well-established exceptions to the parol evidence rule, such as when a written contract is ambiguous. Under the modern rules of contract law, when a trial judge determines that a contract contains an ambiguity, the party may introduce parol evidence to assist the jury in contract interpretation. Parol evidence is then admissible regarding the subjective intentions of the parties when they entered into the contract.  Parol evidence is also admissible to show that a contract was not to become effective until some condition was met.

While it may be impossible to completely avoid the possibility of finding yourself (or your company) in a time-consuming and costly dispute over the interpretation or performance of a contract, there are definitely some time-proven methods in drafting contracts for reducing the probability of a contract dispute based on a disagreement over the interpretation of a term or clause in an agreement—such as by avoiding vague terms, timelines and provisions such as  “standard quality” or “reasonable expenses.”  

Benjamin Franklin’s axiom that “an ounce of prevention is often worth more than a pound of cure” is particularly true regarding legal matters. Seek and retain competent legal counsel for you or your company when negotiating and writing contracts.  The Vethan Law Firm, P.C. is ready to assist you in both the formation and enforcement of contracts.      

This overview is intended as general information on the subject only. If you would like to know more about the tailored counsel that we at VLF can provide for your specific executive compensation or severance situation, please do not hesitate to contact us directly.

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