Reprinted with permission of the Illinois Bar Journal, Vol. 87 #4, April, 1999. Copyright by the Illinois State Bar Association.
This article examines the methods Illinois courts use to resolve contractual ambiguities – i.e., applying the rules of contract construction and admitting parol evidence — and discusses when each applies and what contract ``ambiguity'' really means. The authors also argue for the adoption of a rule by which Illinois courts would resort to parol evidence only after the rules of contract construction have proven fruitless.
I. The Parol Evidence Rule
As any law student who stayed awake during first-semester contracts can attest, Illinois generally prohibits parties to a written agreement from introducing evidence of contractual intent. Under this ``parol evidence rule'' a trial court looks solely to the language of the document to determine the intent of the contracting parties, unless the court finds the written instrument ambiguous.1
The prohibition of extrinsic evidence to show the parties' intent extends, inter alia, to evidence of the parties' subjective intentions and to their negotiations prior to or contemporaneous with execution of the contract. The term ``parol evidence'' applies not only to oral testimony but to all forms of extrinsic evidence.2
In Armstrong Paint & Varnish Works v Continental Can Co.,3 an Illinois Supreme Court case from the 1920s, the court explained the rationale behind the parol evidence rule:
When parties sign a memorandum expressing all the terms essential to a complete agreement, they are to be protected against the doubtful veracity of the interested witnesses and the uncertain memory of disinterested witnesses concerning the terms of their agreement, and the only way in which they can be so protected is by holding each of them conclusively bound by the terms of the agreement as expressed in the writing. All conversations and parol agreements between the parties prior to the written agreement are so merged therein that they cannot be given in evidence for the purpose of changing the contract or showing an intention or understanding different from that expressed in the written agreement.4
This article reviews the methods for interpreting ambiguous contracts under Illinois law, considers what it means for a contract to be ``ambiguous'' (and discusses a recent Illinois Supreme Court case on point), and recommends that courts adopt a ``parol evidence as last resort'' approach to interpreting ambiguous contracts.
II. Recognized Methods to Interpret Ambiguous Contracts
If the trial court does find a contract ambiguous, it may choose one of two methods to determine the parties' intentions. One line of authority permits the court to apply various recognized rules of contract construction.5 A second line makes the interpretation of an ambiguous contract a question of fact and permits the trial court to admit parol evidence of the parties' intentions.6 Unfortunately, the reported decisions in Illinois offer little guidance for choosing one method over the other. Typical of this problem is Fox v Inter-State Assurance Co.,7 in which the second district held as follows:
If, from the language of the contract, the meaning is plain and unambiguous, the court has no necessity to resort to rules of construction to assist it. [Citation omitted]. However, when an ambiguity exists in the contract, the court will use rules of construction, and evidence of prior and contemporaneous transactions and other extrinsic facts may be introduced by the parties and considered by the court in ascertaining the true meaning of the contract.8
A. The Rules of Contract Construction
The rules of contract construction are, inter alia, that the words of an agreement be given their plain and literal meanings,9 that they produce reasonable rather than absurd results,10 that specific provisions be preferred over more general provisions,11 and that the contract be construed to render it enforceable rather than void.12 In addition, a contract is generally construed against its drafter.13 The rules of construction apply only after a finding that all or part of an agreement is ambiguous.14
B. Admission of Parol Evidence
If the court elects to admit parol evidence, it may hear extrinsic evidence regarding, among other things, the parties' subjective intentions, their definition of certain contract terms, and evidence of the negotiations leading up to the execution of the contract. The trial court may only consider parol evidence that is not inconsistent with a written instrument to explain or illuminate terms that are otherwise uncertain or ambiguous.15
III. What Constitutes Contractual Ambiguity?
Perhaps the single greatest source of contract litigation is confusion about the meaning of the term ``ambiguity,'' which is itself ambiguous. Although the appellate courts generate a seemingly endless stream of cases classifying contracts as ``ambiguous'' or ``unambiguous,'' few actually discuss the essence of the term. Likewise, we found scant discussion of what constitutes ambiguity in the published treatises on contract law, which generally focus on the effect of ambiguity.
Black's Law Dictionary defines ``ambiguity'' as follows: ``Doubtfulness; doubleness of meaning. Duplicity, indistinctness, or uncertainty of meaning of an expression used in a written instrument. Want of clearness or definiteness; difficult to comprehend or distinguish; of doubtful import.''16 Illinois appellate decisions employ a similar definition, finding a contract ambiguous when it is obscure through an indefiniteness of expression or when the language in question has a double meaning.17 In practice, a contractual ambiguity usually falls into one of two categories: either the instrument is capable of two or more conflicting interpretations18 or it lacks a critical term.19
A. Ambiguities Arising from Conflicting Interpretations
A contractual term capable of two or more irreconcilable interpretations may create an ambiguity. However, only conflicting reasonable interpretations will render the contract ambiguous. In Ford v Dovenmuehle Mortgage, Inc.,20 the first district recently addressed this issue, holding that ``[a]n ambiguity is said to exist in a contract when the contract contains language that is susceptible to more than one reasonable interpretation.''21 Accordingly, a specious second interpretation of a contract does not create an ambiguity.
Conflicting interpretations usually arise in one of two ways. First, if the contract does not define a term sufficiently, the parties may reach different reasonable conclusions about its meaning. The classic example of this problem is the venerable English Peerless case.22 The buyer in that case had agreed to purchase 125 bales of cotton from Bombay arriving upon the ship Peerless for a set price. Unfortunately, two ships named Peerless sailed from Bombay with loads of cotton several months apart. Since nothing on the face of the contract showed which ship was meant, the purchaser was allowed to introduce parol evidence to the effect that the parties envisioned different ships, and the court declared that there was no binding contract. Alternatively, an ambiguity may arise where the contract contains conflicting provisions.23 For example, consider a real estate sales contract containing both a legal description and a common address of the realty. If the legal description and address describe two different parcels, the contract may well be ambiguous as to its subject matter.
B. Ambiguity Arising from Missing Terms
The parties' omission of a crucial term may also render it ambiguous. For example, the parties may fail to include the price,24 the time for performance,25 or a description of the subject matter of the contract.26 If the missing term causes confusion about the parties' rights under the contract, it may create an ambiguity.
C. ``Patent'' and ``Latent'' Ambiguity
The commercial litigator must also consider whether the ambiguity arises on the face of the document or whether extrinsic matters create the ambiguity. A ``patent,'' or ``intrinsic,'' ambiguity appears upon the face of a contract (i.e., where the legal description and common address in a real estate contract describe two distinct parcels). By contrast, a ``latent,'' or ``extrinsic,'' ambiguity occurs where a writing that appears unambiguous on its face can be shown by extrinsic evidence to be uncertain27 (e.g., the Peerless case). By its nature, a latent ambiguity must be demonstrated and explained by parol evidence.28
D. Is the Contract ``Integrated''?
The term ``integration'' refers to the completeness of the agreement. A contract is ``integrated'' if it reflects the final agreement of the parties.29 Many commercial contracts contain a full integration clause, which generally states that the contract embodies the entire agreement of the parties and supersedes all prior negotiations between them.
E. Determining Ambiguity: ``Plain Meaning'' v ``Provisional Admission''
If a contract contains a patent ambiguity, the court can, of course, determine that it is ambiguous simply by looking at the face of the document.30 However, even determining the existence of a latent ambiguity may require the court to hear parol evidence. Not surprisingly, this threshold issue causes more than its share of confusion.
Whether or not a contract is ambiguous is generally considered a question of law for the trial court.31 Under the ``plain meaning'' doctrine, a court may not look outside the four corners of the contract to determine whether an ambiguity exists.32 In Country Service & Supply Co. v Harris Trust & Sav Bank, the second district stated the rule succinctly, holding ``[w]hether an ambiguity exists is a question of law to be initially determined by the court before any extrinsic evidence may be considered.''33
Alternatively, some courts in Illinois have adopted the ``provisional admission'' approach. In Keep Productions, Inc. v Arlington Park Towers Hotel Corp.,34 the first district ruled as follows:
In order to be able to enforce a contract according to the sense which the parties mutually understood at the time it was made, the court must give greater deference to the parties intent than to any particular words they may have used to express that in intent. [Citation omitted]. Initially, the court must determine whether this intent can be established by the words of the contract alone, or whether some recourse must be had to extrinsic evidence.
If the court is satisfied that the parties have expressed themselves and their intent clearly, the agreement is pronounced unambiguous and is enforced as written. However, to determine this lack of ambiguity, the courts frequently admit extrinsic evidence provisionally, not for the purpose of ``varying or contradicting'' the writing, but to determine the fact that it is indeed unambiguous. (Footnotes omitted.) 4 Williston, Contracts § 601, at 311 (3d ed. 1961).35
In simpler terms, this latter approach allows a court to hear parol evidence to determine whether parol evidence is necessary to understand the parties' contractual intent.
A recent decision by the Illinois Supreme Court, however, appears to dramatically limit the availability of the provisional admission approach. In Air Safety, Inc. v Teachers Realty Corp.,36 the supreme court ruled that extrinsic evidence may not be provisionally admitted to show that an explicitly integrated written contract is actually ambiguous.37 In reaching that decision, the Air Safety court held as follows:
During contract negotiations, a party may propose terms, conditions, and provisions which are ultimately rejected in order to reach a compromise with the other party. That other party, of course, may do the same. The integration clause makes clear that the negotiations leading to the written contract are not the agreement. Accordingly, considering extrinsic evidence of prior negotiations to create an ``extrinsic ambiguity'' where both parties explicitly agree that such evidence will not be considered ignores the express intentions of the parties and renders integration clauses null.38
Thus, where an ``integration'' clause appears in the contract, Air Safety unequivocally rejects the provisional admission approach. However, in a footnote the court expressly declines to rule on the existence of the provisional admission approach where the contract does not contain an ``integration'' clause.39
IV. Parol Evidence vs. Rules of Construction
The proper approach to interpreting a complete, unambiguous contract is well-settled.40 The court is obligated to consider the instrument as a whole rather than any isolated part.41 Where the language used is precise, the instrument speaks for its itself and there is no need for judicial interpretation42 or the admission of parol evidence.43
By contrast, interpreting an ambiguous contract presents an interesting and unsettled question — what method should the trial court use to determine the intentions of the parties? Should the court apply the rules of contract construction or admit parol evidence? Precious little authority exists on this point, and we submit that the answer may depend upon the source of the ambiguity.
A. Ambiguity Caused by Missing Terms
Section 204 of the Restatement of Contracts, which addresses essential omitted terms, reads as follows: ``When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.''44
Comment (e) to this section likewise states, in pertinent part: ``Where there is complete integration and interpretation of the writing discloses a failure to agree on an essential term, evidence of prior negotiations or agreements is not admissible to supply the omitted term, but such evidence may be admissible, if relevant, on the question of what is reasonable in the circumstances.''45
Applying the Restatement's reasoning, a trial court must determine whether the parties intended the instrument to be a complete memorandum of the agreement before allowing parol evidence to clarify a contractual ambiguity.46 Even if there was no such intention or understanding, the court should invoke the rules of contract construction before considering parol evidence.
Illinois case law follows the Restatement on this issue, and our courts generally avoid using parol evidence to supply missing terms wherever possible. For instance, in Dato v Mascarello,47 the trial court supplied an omitted term in a real estate contract by applying the rules of construction and without reference to parol evidence. The first district affirmed, citing Restatement Section 204, and held that ``a court may supply a term which it determines to be reasonable either by logical deduction from the agreed terms or on the basis of what comports with standards of fairness.''48
Similarly, a number of reported decisions involving ``missing term'' ambiguities, which do not specifically refer to the Restatement, nevertheless follow this ``parol evidence as a last resort'' approach. For instance, the first district has likewise held as follows: ``When reduced to a writing, an agreement must be presumed to speak the intention of the parties who signed it....in order to determine intent, the classic rule of construction requires that a court simply look to the contract as ultimately executed.''49
Accordingly, these appellate opinions express a strong preference not to rely on extrinsic evidence unless the court absolutely cannot determine the parties intent from the language of the document.
B. Ambiguity Caused by Conflicting Terms
The Restatement does not provide such clear direction where the ambiguity arises from conflicting terms. Accordingly, we found inconsistent results on this point. However, at least one recent decision favors the rules of contract construction over parol evidence where conflicting terms cause the ambiguity. In N.W.I. International, Inc. v. Edgewood Bank,50 the first district found a written note ambiguous because it contained conflicting terms regarding its due date. On the one hand, the appellate court recognized that the note contained the term ``payable on demand''; on the other, the court acknowledged that it contained ``fine print'' creating an acceleration clause triggered by the occurrence of certain specified events.
The first district initially looked to the rules of contract construction in an attempt to discern the intent of the contracting parties and applied the long-standing rule that handwritten terms control over typewritten and printed terms.51 Only then did the court find that the agreement was sufficiently ambiguous to allow parol evidence in the form of the litigants' informal course of dealing, holding as follows:
If the intent of the parties can be determined from facts not in dispute, then the meaning of the contract can be determined by the court as a matter of law. [Citations omitted.] However, if the ambiguity can only be resolved by resort to facts in dispute, then the contract must be construed by the trier of fact.52
Moreover, Illinois appellate decisions dealing with ambiguous contracts generally do not require the trial court to admit parol evidence. On the contrary, the common use of the phrase ``parol evidence may be considered'' in these appellate opinions indicates that the trial court has discretion to allow it.53
V. Approaching Contract Ambiguity: Observations and Recommendations
A. Resolution of Ambiguities in General
Parol evidence should be admitted only as a last resort, and courts faced with contractual ambiguities should exhaust the rules of contract construction before allowing parol evidence. Applying the Armstrong Paint54 rationale for the parol evidence rule, courts should avoid the dangers of biased or otherwise unreliable testimony unless absolutely necessary.
If a written contract exists, the best evidence of the parties' intent is the document they ultimately sign. By accepting this approach, courts will protect the integrity of written instruments and honor the intentions of the parties to the extent that they can be extrapolated from the contract. Simply stated, the written word has power under our legal system, and contracting parties must take care to ensure that the contract language accurately reflects their bargain. Otherwise, the document becomes meaningless.55
Most case law and other authority, sparse though it is, prefers the rules of contract construction to parol evidence. We believe that applying the rules of contract construction will most likely effectuate the intention of the contracting parties. After all, if the contract does not reflect the parties' agreement, why did they sign it? Only where the court absolutely cannot discern the parties' intent should it admit parol evidence.
B. Provisional Admissibility of Parol Evidence
Likewise, we believe that the supreme court ruled correctly in Air Safety.56 Where the contracting parties include an integration clause, they expressly assume the risk that they cannot prove a latent ambiguity through parol evidence, and a court should respect their choice. As the Air Safety court ruled, a contracting party ``cannot use the very evidence banned by the `four corners' rule to show that an exception applies which will allow the use of that evidence.''57
By contrast, however, we prefer the ``provisional admission'' approach for determining the existence of an ambiguity if the contract does not include an ``integration'' clause. Strict reliance upon the ``plain meaning'' doctrine may cause injustice, because it could prevent a party from proving a legitimate latent ambiguity. Moreover, the ``provisional admission'' of parol evidence occurs prior to trial or outside the presence of the jury, and minimizes the risk of jury confusion.
C. Recommendations
We urge the Illinois Supreme and Appellate Courts to adopt a parol evidence as last resort policy for interpreting ambiguous contracts. The currently unpredictable use of two distinct methods to resolve ambiguities produces erratic results in contract litigation.
Adoption of a uniform approach will permit commercial litigants and their counsel to anticipate the outcome of contract litigation more accurately and should reduce the amount of contract litigation. Moreover, limiting the admission of parol evidence will enable courts to interpret contracts as a matter of law more readily and expedite the resolution of cases.
1. Asher v Farb Systems, Inc., 256 Ill App 3d 792, 630 NE2d 443 (1st D 1993).
2. Michael L. Closen, The Parol Evidence Rule and Contract Interpretation, in Contracts and Sale of Goods, § 5.4 (IICLE, 1990).
3. 301 Ill 102, 133 NE 711 (1921).
4. Id, 133 NE at 713.
5. U.S. Trust Co. v Jones, 414 Ill 265, 111 NE2d 144 (1953).
6. Keep Productions v Arlington Park Towers, 49 Ill App 3d 258, 364 NE2d 939 (1st D 1977).
7. 84 Ill App 3d 512, 405 NE2d 873 (2d D 1980).
8. Id, 405 NE2d at 876.
9. Chicago Title & Trust Co. v Southland Co., 111 Ill App 3d 67, 443 NE2d 294 (1st D 1982).
10. NutraSweet Co. v American National Bank, 262 Ill App 3d 688, 635 NE2d 440 (1st D 1994).
11. Whalen v K-Mart Corp., 166 Ill App 3d 339, 519 NE2d 991 (1st D 1988).
12. Schiro v W.E. Gould & Co., 18 Ill 2d 538, 165 NE2d 286 (1960).
13. Cedar Park Cemetery Ass'n v Village of Calumet Park, 398 Ill 324, 75 NE2d 874 (1947).
14. See 12A ILP § 231; accord, Ricke v Ricke, 83 Ill App 3d 1115, 405 NE2d 351 (2d D 1980).
15. Borg-Warner Corp. v Anchor Coupling Co., 16 Ill 2d 234, 156 NE2d 513 (1958).
16. Black's Law Dictionary at 73 (West, 5th ed 1979).
17. See, e.g., Joseph v Lake Michigan Mortgage Co., 106 Ill App 3d 988, 436 NE2d 663 (1st D 1982).
18. White v White, 62 Ill App 3d 375, 378 NE2d 1255 (1st D 1978).
19. Lewis v Loyola University of Chicago, 149 Ill App 3d 88, 500 NE2d 47 (1st D 1986).
20.273 Ill App 3d 240, 651 NE2d 751 (1st D 1995).
21. Id, 651 NE2d at 754 (emphasis added) (citations omitted).
22. Raffles v Wichelhaus, 2 H&C 906, 159 Eng Rep 375 (1864).
23. White v White, 62 Ill App 3d 375, 378 NE2d 1255 (1st D 1978).
24. Ancraft Products v Universal Oil Products, 100 Ill App 3d 694, 427 NE2d 585 (1st D 1981).
25. United Nuclear Corp. v Energy Conversion, 110 Ill App 3d 88, 441 NE2d 1163 (1st D 1982).
26. Schiro v W.E. Gould & Co., 18 Ill 2d 538, 165 NE2d 286 (1960).
27. American Nat. Bank and Trust Co. of Chicago v Olympic Savings and Loan Association, 60 Ill App 3d 722, 377 NE2d 255 (1st D 1978).
28. Id.
29. John D. Calamari & Joseph H. Perillo, The Law of Contracts § 3-2 at 101-2 (west, 2d Ed 1977).
30. Kenny Const. Co. v Hinsdale Sanitary Dist., 111 Ill App 3d 690, 444 NE2d 510 (1st D 1982).
31. Groshek v Frainey, 274 Ill App 3d 566, 654 NE2d 467 (1st D 1995).
32. Saddler v Nat. Bank of Bloomington, 403 Ill 218, 85 NE2d 733 (1949).
33. 103 Ill App 3d 161, 166, 430 NE2d 631, 635 (2d D 1981).
34. 49 Ill App 3d 258, 364 NE2d 939 (1st D 1977).
35. Id, 364 NE2d at 943.
36. 1999 WL 23252.
37. 1999 WL 23252, *1.
38. 1999 WL 23252, *4.
39. 1999 WL 23252, *5.
40. Asher v Farb Systems, Inc., 256 Ill App 3d 792, 630 NE2d 443 (1st D 1993); accord, Kennedy, Ryan, Monigal & Assoc. v Watkins, 242 Ill App 3d 289, 609 NE2d 925 (1st D 1993).
41. Wilkin v Citizens Nat. Bank of Paris, 298 Ill App 38, 18 NE2d 251 (3d D 1939).
42. E.g., NutraSweet Co. v American Nat. Bank & Trust Co. of Chicago, 262 Ill App 3d 688, 635 NE2d 440 (1st D 1994).
43. Susmano v Associated Internists of Chicago, 97 Ill App 3d 215, 422 NE2d 879 (1st D 1981).
44. Restatement (Second) of Contracts § 204 (1981).
45. Id, Comment (e) (emphasis added).
46. Air Safety, Inc. v Teachers Realty Corp., 1999 WL 23252.
47. 197 Ill App 3d 847, 557 NE2d 181 (1st D 1989).
48. Id, 197 Ill App 3d at 851.
49. USG Interiors, Inc. v Commercial and Architectural Products, Inc., 241 Ill App 3d 944, 950-951, 609 NE2d 811, 816 (1st D 1993).
50. 291 Ill App 3d 247, 684 NE2d 401 (1st D 1997).
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