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Patent and Latent Ambiguities in a Contract

36. What is a “patent ambiguity” and “latent ambiguity”?

One important exception to the parol evidence rule is the use of extrinsic evidence to determine the meaning the parties attribute to certain terms or provisions. Generally, a court will give a term its common meaning or the meaning common in the context of the contract (such as a particular trade usage). Nonetheless, often a term or provision of the contract will be ambiguous. In such a case, ambiguities are broken into latent and patent ambiguities. Generally, outside evidence may be introduced to clear up an ambiguity that is obvious on the face of the document. This is known as a “patent” ambiguity. If a party claims that the contract contains an ambiguous term, but it is not obvious on the face of the contract, the party is claiming that a “latent” ambiguity exists. In such a case the party may be able to introduce outside evidence to show that an ambiguity exists. If the court determines that an ambiguity exists, it may consider extrinsic evidence to resolve the ambiguity. Many courts do not distinguish between patent and latent ambiguities. If an ambiguity exists, extrinsic evidence is allowed to the extent necessary to clear up the ambiguity. The parol evidence rule’s prohibition on the use of evidence to change or add to the contract remains intact.

•    Example: You and I enter into a contract. When a dispute arises, we ask the court to resolve the dispute. When interpreting the terms of the contract the court will use established rules for interpreting the meaning of words and clauses. If the court determines that a word or clause is ambiguous when reading it (a patent ambiguity), it may allow outside information to explain the term. If the court does not read a term as ambiguous, it may allow me to introduce outside evidence to demonstrate that it is ambiguous. If I am successful in demonstrating an ambiguity, the court will then consider outside information to explain the ambiguous term.

•    Discussion: Why do you think the court treats patent and latent ambiguities differently? Should the court consider all evidence and prior communications when determining the meaning or intent of the parties? Why or why not?

•    Practice Question: Alice enters into a contract with Hannah. They end up in court pursuant to an argument over the terms of the agreement. The contract contains an integration clause, so the court will not consider prior communications that contradict or add to the written agreement. Alice are arguing over the type of goods described under the contract. Hannah argues that the description of the goods is ambiguous. Under what conditions will the court review prior communications between Alice and Hannah?

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