Ambiguity and Contracts in Texas

Ambiguous Contracts

When parties seek to enter a contract, they typically negotiate or bargain for certain terms, intending both parties to be bound by those terms. These terms set out the parties’ rights and responsibilities with respect to the subject of the contract. But what happens when those terms are ambiguous? And when, exactly, are terms ambiguous, allowing for parol evidence to determine the parties’ intent?

In construing a written contract, the primary concern of a court is to determine the parties’ true intent as expressed in the instrument. If a written contract is worded in a way that it can be given a definite or certain legal meaning, then it is not ambiguous. Parol evidence (outside evidence) is not admissible for the purpose of creating an ambiguity. But, when a court determines that a contract is ambiguous, the meaning becomes a fact issue for the jury, and extraneous evidence can be admitted to help determine the language’s meaning.

A contract is not ambiguous if it can be given a definite or certain meaning as a matter of law. In other words, if the terms of the contracts are clear and there is only one meaning to the terms in the contract, the contract is unambiguous. On the other hand, if the contract is subject to two or more reasonable interpretations after applying the applicable rules of construction, the contract is ambiguous, creating a fact issue with respect to the parties’ intent. Texas courts hold that a contract is ambiguous if there can be more than one meaning or understanding to the terms of the contract. That is, the terms themselves must be ambiguous, or subject to multiple interpretations.

An ambiguity does not, however, arise simply because the parties advance conflicting interpretations of the contract. For an ambiguity to exist, both interpretations must be reasonable. The ambiguity must become evident when the contract is read in context of the surrounding circumstances, and not after parol evidence of intent is admitted to create an ambiguity.

Ambiguity is a Question of Law

Whether a contract is ambiguous is a question of law for the court to decide by looking at the contract as a whole in light of the circumstances present when the contract was entered. Only where a contract is first determined to be ambiguous can the courts consider the parties’ interpretation and thereby admit extraneous evidence to determine the true meaning of the instrument.

Furthermore, ambiguity can either be patent or latent.

Patent Ambiguity

A patent ambiguity is evident on the face of the contract.

Latent Ambiguity

A latent ambiguity is not readily visible, but arises when the language which is unambiguous is applied to the subject matter with which it deals, and ambiguity appears because of some external circumstances. For latent ambiguity, parol evidence may be used to ascertain the true intention of the parties as expressed in the agreement and thereby, understand the language of the latent ambiguity.

If a latent ambiguity arises from this application, parol evidence is admissible for the purpose of ascertaining the true intention of the parties as expressed in the agreement. When a latent ambiguity arises, the focus shifts to the facts and circumstances under which the agreement was made. A latent ambiguity exists when the contract appears to convey a sensible meaning on its face, but it cannot be carried out without further clarification.

Technical or specialized terms are especially prone to create latent ambiguities. As one court has described it, “[a] latent ambiguity will often arise when a term is being used within a technical or specialized field.” Thus, a word may have a meaning that is different from its ordinary meaning within a particular field, and the ambiguity will only be revealed when that word is applied in context.

The Parol Evidence Rule

The parol evidence rule prohibits extrinsic evidence of subjective intent intended to alter a contract’s terms but does not prohibit consideration of surrounding circumstances that inform, rather than vary from or contradict, the contract text. To give a well-known example, extrinsic evidence would be allowable to give meaning to the phrase “the green house on [a particular street]” but could not be used to show the parties’ motives or intentions apart from the language actually employed in the contract.

Parol evidence is only admissible after a court concludes that an agreement is ambiguous. Only where a contract is ambiguous may a court consider the parties’ interpretation and admit extraneous evidence to determine the true meaning of the instrument. No issue regarding the parties’ intentions is raised unless the contract is ambiguous—and evidence of those intentions cannot be used to create an ambiguity.

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