How should ambiguous contract language be interpreted?

A reader asked the following question: Sometimes during the performance of a contract it becomes clear that one or more of the contract terms is ambiguous as to the parties' respective rights and obligations. How are ambiguities of this sort resolved? Are there general rules that the parties can apply for themselves?

The issue of ambiguity in a contract's terms is one that may arise in many different contexts. Fortunately the rules applicable to the interpretation of an ambiguous contract are relatively well-developed. As a consequence many of these problems can be resolved without the need for litigation. When litigation is required it can be focused on a specific issue and handled in a relatively economical and efficient manner.

The rules of contract interpretation start with the basic proposition that contract terms that are clear on their face should be given their literal meaning. Indeed under the "parol evidence" rule when a written contract is clear on its face the contracting parties may not ordinarily look outside the four corners of the contract in order to ascribe a different meaning to the terms therein.

On the other hand when a contract is ambiguous - that is susceptible to more than one reasonable construction - it may be necessary to resort to certain principles of contract interpretation. These principles are intended to objectively discover the parties' true intention. Where this is not possible the principles will be applied to reach a fair result.

In keeping with those goals the first rule of contract interpretation is to apply "intrinsic" evidence - evidence within the body of the contract itself - to determine the parties' intentions. (See U.S. Eagle Inc. ASBCA No. 41093 91-3 BCA Paragraph 24 371.)

In this exercise the contract should be interpreted as a whole giving meaning to all provisions therein. (See B.D. Click Co. v. United States 614 F.2d 748 Ct.Cl. 1980).

To the extent possible the contract should be interpreted consistent with its principal purpose. In general specific terms should be given their ordinary meanings. However technical or trade terms should be accorded their specialized meanings where appropriate.

If the use of such intrinsic evidence does not yield an objectively accurate assessment of the parties' intentions it may be necessary to bring "extrinsic" evidence into play. The most important principle in this regard is known as the doctrine of contra proferentum. Under this doctrine when a contract's terms are susceptible to more than one reasonable interpretation with one interpretation adverse to one party and another adverse to the other the ambiguity is ordinarily interpreted against the drafter of those terms. The doctrine is based upon the belief that the party who drafts a contract is in the best position to ensure that the terms can be applied under any reasonable circumstances during contract performance.

In most cases the drafter will be the government because the government typically drafts the solicitation and the resulting contract. In appropriate cases the doctrine may be applied against the contractor if the contractor drafted the provisions at issue.

Significantly the doctrine of contra proferentum includes an exception. If the contract term is so "patently" ambiguous as to put the nondrafting party on notice of the potential for a problem many courts will find that the nondrafting party has a duty to inquire as to the correct interpretation before entering into the contract.

In this regard it is especially worth noting that the government may be bound by the statements of its officials made during any preproposal conference. Moreover where the contract at issue is one of a series between the parties any "course of dealings" that sheds light on the issue at hand will be important in the interpretation of the contract.

Clearly ambiguities in a contract's terms can cause problems for everyone involved. The best way to avoid these problems is to ensure that the contract is well-written and clear with respect to each party's rights and obligations. But when problems arise there are rules to help.

Peckinpaugh is a member of the government contracts section of the law firm of Winston & Strawn Washington D.C.