The Ambiguity Question

the contract language fails to resolve the dispute before the court.4 If it thus fails, the court allows extrinsic evidence as relevant to resolving the ambiguity in accordance with the parties’ intention. Chapter 5 considers how the law allows fact-finders to resolve any ambiguities that appear.

§ 4.1. The Nature of Ambiguity

A contract or term commonly is said to be ambiguous if it is susceptible to more than one reasonable meaning.5 This definition of ambiguity is correct semantically but not quite accurate as a practical legal matter. A contract as a whole or a contract term may bear three, four, or more reasonable meanings (especially if it is drafted poorly). Usually, only two are advanced by the parties in litigation, each meaning favoring the party who advances it. The court’s job is described most accurately as determining whether the contract is ambiguous as between these two meanings and, therefore, in the contested respect. A third or fourth meaning is irrelevant to the case at hand, as are ambiguities in contract terms that are not disputed; “a contract may be ambiguous when applied to one set of facts but not another.”6 Accordingly, “ambiguity is detected claim by claim.”7 As a consequence of this, Professors Arthur L. Corbin and E. Allan Farnsworth missed their marks when they argued that we should dispense with the question of ambiguity because all language is infected with ambiguity.8 If one of the two contested meanings in the case is unreasonable, the contract is not ambiguous as a practical legal matter whatever other meanings the language might bear.

6Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d 168, 177 (2d Cir. 2004); see Dore v. Arnold Worldwide, Inc., 139 P.3d 56, 60 (Cal. 2006); Donoghue v. IBC USA (Publications), Inc., 70 F.3d 206, 215–16 (1st Cir. 1995); Bank of the West v.

Superior Court, 833 P.2d 545, 552 (Cal. 1992).

7World Trade Center Props., L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154, 184 (2d Cir. 2003).

83 ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 542 (1961); Farnsworth, supra note 4, at 965.

Courts generally recognize two kinds of ambiguity.9 The first is called intrinsic or patent ambiguity. This kind of ambiguity appears from the face of a contract document, viewed only within its four corners. It may be that a word or sentence has two contested meanings, or that two provisions have inconsistent implications in the case. No extrinsic evidence is needed to see an intrinsic ambiguity—only knowledge of the dispute, the proffered meanings, the relevant language, the whole contract, and common sense.

The second general kind of ambiguity is called extrinsic or latent ambiguity. This kind of ambiguity does not appear from the face of the document, which may seem perfectly clear to the judge. Upon a consideration of extrinsic evidence, a proffer of extrinsic evidence, a party’s contention, or an affidavit, however, the document can be seen to be ambiguous in the contested respect. It bears emphasis that an extrinsic ambiguity renders a document ambiguous even though the document appears on its face to have only one meaning.10 If it did not so appear, there would be no point to the concept of extrinsic ambiguity.

Some courts may find an extrinsic ambiguity, for example, if the contract includes words with both ordinary and extraordinary meanings, the latter of which can be established by a trade usage.11 In Hurst v. W.J. Lake & Co.,12 a pre-UCC case, a contract called for the purchase and sale of horsemeat scraps. The specifications provided that the scraps must be a minimum of 50 percent protein. The seller delivered scraps with between 49.5 and 50 percent protein. The court held that, due to custom and usage in the horsemeat trade, greater than 50 percent protein could mean greater than 49.5 percent protein.13 In such a case, the contract language is clear on its face mathematically, and evidence of the trade usage is extrinsic evidence. The usage, however, reveals the language to have an extraordinary meaning as well as an ordinary, mathematical meaning, the former in the language that the parties presumably used. The custom was to round up from 49.5 percent. Consequently, the contract term, as the parties used it, was extrinsically ambiguous.

9Friendswood Dev. Co. v. McDade & Co., 926 S.W.2d 280, 282–83 (Tex. 1996); Federal Deposit Ins. Corp. v. W.R. Grace & Co., 877 F.2d 614, 620–21 (7th Cir. 1989).

10Id.; Bache Halsey Stuart Shields, Inc. v. Alamo Savings Assoc. of Texas, 611 S.W.2d 706, 708 (Tex.App. 1980).

11Flying J Inc. v. Comdata Network, Inc., 405 F.3d 821, 833 (10th Cir. 2005).

1216 P.2d 627 (Or. 1932).

13Id. at 630.

Judge Richard A. Posner and others think that courts should recognize extrinsic ambiguities, at least when the relevant extrinsic evidence is objective and compelling.14 The reason is that:

a judge who, ignorant of the technical meaning, took the ordinary to be the intended meaning would be fooled. He would be like a judge who tried to interpret a contract written in French without knowing the French language.15

Most courts, however, recognize intrinsic but not extrinsic ambiguities.16 In Illinois, for example:

An agreement, when reduced to writing, must be presumed to speak the intention of the parties who signed it. It speaks for itself, and the intention with which it was executed must be determined from the language used. It is not to be changed by extrinsic evidence.17

Some courts recognize both intrinsic and extrinsic ambiguities.18 Courts that recognize extrinsic ambiguities sometimes put limits on

what they will consider when determining whether there is an ambiguity. For example, the United States Court of Appeals for the Third Circuit, applying Pennsylvania law, recognized extrinsic ambiguities but established four limitations. First,

[t]o determine whether ambiguity exists in a contract, the court may consider the words of the contract, the alternative meaning suggested by counsel, and the nature of the objective evidence to be offered in support of that meaning.19

14PMC, Inc. v. Sherwin-Williams Co., 151 F.3d 610, 614–16 (7th Cir. 1998).

15Id. at 614.

16E.g., Air Safety, Inc. v. Teachers Realty Corp., 706 N.E.2d 882, 884–86 (Ill. 1999); Shifrin v. Forest City Enterprises, Inc., 597 N.E.2d 499, 501 (Ohio 1992); Teitelbaum Holdings, Ltd. v. Gold, 421 N.Y.S.2d 556, 559 (N.Y. 1979); Lewis v. East Texas Finance Co., 146 S.W.2d 977, 980 (Tex. 1942).

17Air Safety, 706 N.E.2d at 884. ((quoting Western Illinois Oil Co. v. Thompson, 186 N.E.2d 285 (Ill. 1962)).

18E.g., Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 442 P.2d 641, 645 (Cal. 1968); McCarty v. Mercury Metalcraft Co., 127 N.W.2d 340, 344 (Mich. 1964); Atlantic Northern Airlines v. Schwimmer, 96 A.2d 652, 656 (N.J. 1953).

19Bohler-Uddeholm America, Inc., v. Ellwood Group, 247 F.3d 79, 93 (3d Cir. 2001) (in part quoting Mellon Bank, 619 F.2d at 1011) (emphasis added, internal quotation marks omitted).