Interpretation of Ambiguous contracts


A contract is ambiguous when it is uncertain what the intent of the parties was and the contract is capable of more than one reasonable interpretation.  Sometimes ambiguous terms can be explained by the admission of parol evidence.  Also, Courts abide by the rule that an ambiguous contract is interpreted against the party who drafted it.  In other words, the party who did not draft the contract will be given the benefit of the doubt so to speak.  Also, sometimes the background or circumstances surrounding the contract can eliminate ambiguity.  For example, in a Minnesota case, suit was brought in Minnesota on a Canadian policy of insurance.  The question arose as to whether the dollar limit of the policy referred to Canadian dollars or American dollars.  The Court concluded that Canadian dollars were intended since the insurer and the insured were both Canadian corporations, the policy was entered into in Canada, and over the years premiums had been paid in Canadian dollars, and a prior claim on the policy had been settled by using Canadian dollars.

Again, if two interpretations are reasonably possible, the contract will be interpreted in favor of the person who did not draft the contract and against the person who did draft it.  An example of this would be preprinted insurance policies.  Any clause which is capable of two interpretations will usually be interpreted against the insurer and in favor of the insured.

Sometimes a Court may imply a term to cover a situation where the parties fail to provide the term.  The Court may also imply a term if it’s necessary to give a contract a construction or meaning that is reasonable.  For example, if a contract does not state its duration, the Court may imply that the contract is to be performed or continue for a reasonable time — reasonable in relation to the type of contract that it is.  However, a term will not be implied in a contract when the Court concludes that the parties intended for the contract to be silent on a particular point.

In every contract there exists an implied covenant of good faith and fair dealing.  For example, when a contract to purchase a house is made subject to the condition that the buyer can obtain financing, the buyer must make a reasonable good faith effort to obtain the financing or be held in breach of the contract.  The implied duty to act in good faith means an honest, good faith effort to satisfy the condition of the contract.

As a general rule, a party is bound by a contract even if it proves to be a bad bargain.  However, if a court is called upon to interpret a contract, if possible, the court will interpret it in such a way as to avoid hardship, particularly when the hardship would hurt the party who had the weaker bargaining position.