V.14. 1. When Is Contract Language Ambiguous?

• Jurisdiction: New York

1. When Is Contract Language Ambiguous?

Ambiguity can arise either from the language itself or from inferences that can be drawn from the language. Contract language is ambiguous when, as applied to facts at issue and in light of the contract as a whole, the language is reasonably susceptible to more than one reasonable meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire agreement and is cognizant of the customs, practices, usages and terminology as generally understood in the relevant trade or business. In contrast, contract language is unambiguous if it has a definite and precise meaning unattended by a danger of misconception as to its meaning and concerning which there is no reasonable basis for a difference of opinion.³⁴⁹ Ambiguity may be found only where reasonable minds could differ as to the meaning of contract language. A contract is not ambiguous merely because two interpretations of contract language are linguistically possible. Each interpretation also must be reasonable in light of the surrounding circumstances. Ambiguity in a written agreement does not arise from silence but from the imperfect expression that casts doubt on what the parties intended. ³⁵⁰

There are various types of ambiguity. Contract language can admit two different reasonable meanings and be ambiguous in all circumstances. The ambiguity may exist only in certain circumstances. The contract language may be clear and certain in some circumstances but unclear and susceptible of two meanings in others. An ambiguity may be latent. A latent ambiguity occurs when, at the time of contracting, the language employed is clear and suggests but a single meaning, but an event that occurs after the contract is formed creates a need to construe the language to choose among two or more possible meanings. The issue of latent ambiguity is illustrated by a case where a consultant entered into a contract with a corporation pursuant to which the consultant’s compensation would be calculated in light of the profitability of the corporation on a consolidated basis.³⁵¹ At the time of contracting, a determination on a consolidated basis would include the corporation, its corporate parent and the corporation’s affiliates. During the contract’s term, another company acquired the corporation, its parent and its affiliates. The acquired companies, consolidated on a stand-alone basis, were profitable such that a fee would be owed if...