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?
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.
A patent ambiguity is evident on the face of the contract.
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.
Need assistance in managing the business tax audit process? Freeman Law’s representations include disputes involving a variety of claims, such as breaches of fiduciary duty, business torts and other commercial disputes, partnership disputes, misrepresentation, deceptive trade practices act (“DTPA”) violations, tortious interference, extortion, Texas Theft Statute violations, civil conspiracy, and cyber and computer violations. We offer value-driven services and provide practical solutions to complex tax issues. Schedule a consultation or call (214) 984-3000 to discuss our business litigation services.