Contractual Ambiguity or Contra Proferentem, The Ambiguity Doctrine

In Nevada, contractual ambiguity, also known as contra proferentem or the “ambiguity doctrine,” will determine how a court decides a contract dispute.  The doctrine does not apply absent a material ambiguity in the agreement at issue, and where the intent of the parties is impossible to ascertain by resort to the four corners of the document, plus all available extrinsic evidence, including the subsequent conduct of the parties.  Moreover, the doctrine is one of last resort;  it does not apply in cases involving sophisticated parties.

The prevailing rule is that contra proferentem does not apply to cases involving sophisticated parties.  See, e.g., Int’l Multifoods v. Commercial Union Ins. Co., 309 F.3d 76 (2d Cir. 2002) (commenting that contra proferentem is a doctrine of last resort and is “generally inappropriate if both parties are sophisticated.”); Terra Int’l, Inc. v. Miss. Chem. Corp., 119 F.3d 688, 692 93 (8th Cir. 1997) (“We decline to apply the doctrine of contra proferentem to this case due to the relatively equal bargaining strengths of both parties and the fact that Terra was represented by sophisticated legal counsel during the formation of the license agreement.”); Sentinel Prod. Corp. v. Scriptoria, N.V., 124 F. Supp.2d 115, 117 (D. Mass. 2000) (“The doctrine of contra proferentum is one of last resort in Massachusetts and is especially tenuous ‘when the parties are sophisticated businesses.’”); AMFAC, Inc. v. Waikiki Beachcomber Inv., 839 P.2d 10, 25 n.5 (Haw. 1992) (“When the contract has been negotiated between two parties of equal sophistication and equal bargaining power, the rule of interpreting ambiguities against the drafter has been held inapplicable.”).

Perhaps the most explanatory case on the issue is Joyner v. Adams, 361 S.E.2d 902 (N.C. Ct. App. 1987).  In Joyner, a landlord leased real property to a developer to build office space.  Once the property was subdivided into individual lots, these lots would be rented to take the place of the original lease.  According to the agreement, the developer/tenant would have a certain amount of time to complete development, and if he did not, the agreed upon fixed rent would be replaced by annual increased rent applied retroactively.  The developer had buildings on all lots save one, which was in the preparation stage for building.  The court found that the term “completed development” was not adequately accounted for in the lease documents, and thus, permitted extrinsic evidence and applied contra proferentem to the benefit of the landlord.

On appeal, the court found that the trial court “erred in awarding judgment based on the rule that ambiguity in contract terms must be construed against the party which drafted the contract.”  Id. at 905.  According to the court, when an ambiguity exists, the object is to ascertain the true meaning ascribed to the term.  When that meaning cannot be had through all available means contra proferentem applies.  “The rule is essentially one of legal effect, of ‘construction’ rather than ‘interpretation,’ since ‘it can scarcely be said to be designed to ascertain the meanings attached by the parties.’” Id. (quoting in part, Farnsworth, Contracts § 7.11, at 500 (1982)).   The following commentary provides the policy underlying the doctrine of contra proferentem and why it is inappropriate where the parties are at arms length and equally sophisticated:

The rule’s application rests on a public policy theory that the party who chose the word is more likely to have provided more carefully for the protection of his own interests, is more likely to have had reason to know of uncertainties, and may have even left the meaning deliberately obscure.

Restatement (Second) Contracts, section 206, comment a (1979); 3 Corbin supra, section 559. Consequently, the rule is usually applied in cases involving an adhesion contract or where one party is in a stronger bargaining position, although it is not necessarily limited to those situations. Id. In this case, where the parties were at arms length and were equally sophisticated, we believe the rule was improvidently invoked.

In the end, the court in Joyner found that both parties were experienced in the real estate business and that they bargained from essentially equal positions of power.  Id. at 906.


See elements for other claims at the Nevada Law Library



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