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The BUSKLAW December Newsletter: Resolving the "Mental Mist" of an Ambiguous Contract

(Author's Note: Props to Kilroy J. Oldster for coining the term "mental mist.")

Contractual ambiguity - usually created when two provisions of the same contract irreconcilably conflict with each other - isn't pretty. At best, it's embarrassing to the lawyer who drafted the document; at worst, it thwarts the business purpose of the contract and may lead to litigation.

A typical case of contractual ambiguity results when a contract incorporates another document in the text that conflicts with one or more provisions. This scenario played out in Klapp v United Insurance Group Agency, a 2003 Michigan Supreme Court case. The decision prescribes how a Michigan court should resolve contractual ambiguity.

Craig Klapp was an insurance agent for United Insurance from 1990 to 1997. In 1990, he signed an "Agent's Agreement" that included a Vesting Schedule stating that on his retirement at an unspecified age and provided that he had worked at least two years for United, Klapp would be entitled to insurance policy renewal commissions. But the Agreement also incorporated an "Agent's Manual" that required Klapp to work at least ten years for United and not retire until at least 65 before he could receive renewal commissions. So the ambiguity was whether Klapp was entitled to the commissions. 

The Michigan Supreme Court observed that it's up to the trial court jury as the fact finder to perform the following decision-tree analysis (as directed by the trial judge's appropriate jury instructions):
  • First, to find that contractual ambiguity exists after giving effect to every word or phrase as far as practicable. 
  • Next, the jury must consider relevant extrinsic evidence, i.e., evidence outside of the "four corners" of the contract. In this case, Klapp showed that United had been paying renewal commissions to agents who were not 65 and hadn't worked at least ten years for United, as long as they had left the insurance industry. 
  • Finally, if the jury is still unable to determine what the parties intended, they should then interpret the ambiguity against the party who drafted the contract. There's a delicious Latinism for this doctrine: contra proferentem (literally, against him who offers.) But the rule is that the application of this doctrine should only occur when all conventional means of interpretation, including the consideration of extrinsic evidence, has been applied and found wanting. 
Some contract drafters routinely seek to negate the contra proferentem doctrine by including a provision like this: "Both parties drafted this agreement and share responsibility for its wording." But as Gonzaga University Law School Professor Scott Burnham points out in a 2013 Transactional Lawyer article, no case has been found that addresses a court's response to such a provision,...and the parties should be cautious in using it for 1) it might not work to avoid the doctrine, and 2) if it does work, the result may be worse than the application of the maxim.

In the end, the best way to avoid contractual ambiguity is to draft clearer contracts by first, thoroughly understanding the deal from a business perspective and second, by avoiding cutting and pasting from jargon-filled legacy documents. Most law firms can accomplish the former for a hefty fee but have no incentive to do the latter because of time and organizational pressures. However, as a sole practitioner with 34 years of experience in a major retailer's law department, I don't have these constraints.  And I charge under-market hourly (or fixed-fee) rates for my legal services.

Does mental mist permeate your contracts? You'll probably never know until you ask the other side to do (or not do) something and they respond with That's not in our contract. Next up is the considerable time and expense that it will take you (or your lawyer) to resolve the issue. Better to start with a clear and concise contract to begin with! 
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If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. And my email address is busklaw@charter.net. Thanks! 

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