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How Will a Judge Interpret Your Confusing Contract?

On Behalf of | Sep 20, 2017 | Business & Commercial Law |

On behalf of Snow Jensen & Reece, P.C. posted in . . .

People and businesses sign contracts all the time, from the terms of use agreement for a smartphone app to a loan agreement for a new home. However clear or unclear the terms of a contract seemed at the time of signing, they oftentimes seem more unclear as disagreements build and a lawsuit looms. Mind & Motion Utah Investments, LLC v. Celtic Bank Corp provides a great example of how to determine what a contract actually means and whether it is ambiguous. The case shows a conflict over a property and came before the Utah Supreme Court in 2016.

The Story: The seller defaults on a property contract

An unnamed developer ceased work on a condominium project on a plot in Huntsville, Utah. The property foreclosed, and Celtic Bank bought the land. The developer had begun construction but had not yet recorded and received approval for the plat, or plan, for phase 1 development. The phase 1 plans would need to be properly recorded before development could continue.

In May 2010, Mind & Motion purchased the property from Celtic Bank.

The contract provided that Celtic Bank was selling the property “as recorded” but also that Celtic Bank “shall” and “agrees to” record the Phase 1 plans by June 15, 2010. The recording process would require Celtic Bank to obtain approval from several different government groups.

June 15 rolled by and Celtic Bank had yet to obtain approval for the Phase 1 plans. Mind & Motion extended the deadline. The next deadline crept by and still nothing from Celtic Bank. Celtic Bank argued the approval of the plans was merely a condition for the contract whereas Mind & Motion said it was a covenant. So this time, Mind & Motion didn’t extend the deadline. Instead, they took Celtic Bank to court.

(In a condo dispute? Take a look at this.)

The Law: Covenants aren’t conditions

Contract law is developed primarily through common law. It can be quite nuanced. Let’s start with the basics and then dive deeper into the law relevant to this case.

As is commonly remarked, in order for a contract to exist, there must be

•● An offer

•● Acceptance, and

•● Consideration

For most practical purposes and in most cases, offer, acceptance, and consideration can be assumed to be present, especially in business transactions which are the subject of most contracts.

A contract is made up of various terms. Formally, two types of these terms are

•1. covenants; and

•2. conditions.

A covenant is what is ordinarily thought to make up the contract; these are the promised actions of each party. A condition is an event which must occur before a covenant becomes required. Conditions typically fall outside the control of the parties.

Utah courts should find a term to be a condition if:

(1) its completion was outside the control of the parties, and

(2) the parties used conditional language to describe the requirement.

Once the existence of a contract is determined, the court will determine the parties’ intent to discover which covenants and conditions the parties actually agreed upon.

In Utah, the court examines the text within the “four corners of the contract” and determines whether that is ambiguous.

The text is unambiguous if there is only one meaning. If it is unambiguous, the judge can then determine the intent of the parties by the ordinary meaning of the terms.

On the other hand, a contract is ambiguous if there is more than one plausible interpretation of the terms. It is very important to note here that a contract is not ambiguous simply because one party says it’s ambiguous; the alternative interpretation must be plausible and reasonable.

If a contract is found to be ambiguous, then additional evidence beyond the written contract may be admitted; otherwise, it is barred.

Even if this first type of ambiguity, often referred to as facial ambiguity, is absent, latent ambiguity may still be present. Latent ambiguity is present only where an event occurs outside the contract and renders the otherwise clear terms ambiguous. Here, the court is looking for objective, not subjective intent; in other words, intent observable by a third party.

(Dealing with restrictive covenants? Go here.)

The Ruling: Mind & Motion’s interpretation is the only plausible interpretation

In the case of Mind & Motion v. Celtic Bank, the court determined the provision requiring Celtic Bank to properly record the Phase 1 plans to be a facially unambiguous covenant.

The court agreed with Mind & Motion’s interpretation of the contract for three reasons

•1. The provision used mandatory language such as “shall” and “agree to” to describe the requirement. As is frequently done, the court turned to Black’s Law Dictionary to determine the meaning of these words.

•2. The parties used explicitly conditional language such as “conditioned upon” elsewhere in the contract, showing they knew how to use conditional language.

•3. The recording provision was attached to a specific date and an additional provision which stated all deadlines are “absolute requirements.”

The court determined the Celtic Bank’s interpretation did not hold up, and therefore the covenant was unambiguous, having only one plausible meaning.

The court also determined the recording provision was not latently ambiguous. Celtic Bank provided testimonies from their attorneys arguing they did not intend for the recording provision to be a covenant. The court found this to be irrelevant evidence since it did not suggest any collateral event that made the terms ambiguous, only subjective evidence that suggested what the party was thinking at the time.

The court ruled in favor of Mind & Motion.

The Takeaway: Get a great contract attorney

If a lot of money is on the line, make sure you have a great contract attorney on your side. Individualized contracts quickly become too complicated for a regular person to understand, and when there are hundreds of thousands or millions of dollars on the line, they aren’t something to mess around with. If it’s a standard form contract and less money is on the line it may be worth it to simply read it and understand it yourself.