We enter into written contracts to avoid uncertainty. One rule of contract law that solidifies the role of the written contract in governing the outcome is the so-called parol evidence rule. The parol evidence rule applies at trial on contract disputes and provides that where the contract is unambiguous regarding an issue, courts are not allowed to consider outside evidence as to how the contract should be construed. This rule prevents parties from introducing testimony or other evidence that undermines or modifies the plain language of the contract. Construction of an unambiguous contract is a question of law subject to de novo review, which means that no deference is given to a trial court's decision by the court of appeals.
An opposing rule of contract law though, arises when the court determines that the contract is ambiguous. When the language of the contract is ambiguous, outside evidence may be considered to determine the parties' intent, and interpretation becomes a question of fact, and the trial court's decision is given a higher level of deference. In other words, if the contract is ambiguous, the parties are at the mercy of the trial court regarding the outcome of their dispute.
A recent decision by the North Dakota Supreme Court presents a particularly harsh outcome from contractual ambiguity. Northstar Founders, LLC v. Hayden Capital USA, LLC, 2014 ND 200 (Oct. 21, 2014) (“Northstar Founders, LLC”).
In the Northstar Founders, LLC decision, Northstar sought equity and/or debt financing for a canola processing plant. Northstar entered into an agreement (the “Agreement”) with MDL Consulting Group, LLC and Hayden Capital USA, LLC (collectively “Hayden”), among others. Among other things, the Agreement provided that Northstar should pay a fee equal to 2% of the total amount of financing received in the event Hayden were to “first introduce” Northstar to another party, “and as a result of such introduction, a financing is consummated.”
Hayden introduced Northstar to Peter Williams (“Williams”) and Williams introduced Northstar to PICO Holdings, Inc. (“PICO”). PICO eventually contributed $60 million in capital and together with Northstar they obtained bank financing of an additional $100 million.
Hayden sought its 2% because it introduced Northstar to Williams and that introduction eventually resulted in financing from PICO. Unfortunately for Hayden, contractual ambiguity got in the way.
The trial court determined that the contract was ambiguous because, in addition to the language cited above, it provided that Hayden “may act as a finder of potential sources of financing.” The court reasoned that since in the same paragraph the Agreement provided that Hayden would find “sources” of financing and later referred only to financing as a “result” of the introduction, there was ambiguity as to whether the fee should result from merely making an introduction versus making an introduction to the “source” of financing. This reasoning, it seems to me, is a bit of a stretch since the Agreement itself provided specifically when the fee was earned and the “source” provision appears as merely a lead-in.
In any event, having found ambiguity, the court opened the door to testimony about what the parties meant by that provision. The court sided with testimony of witnesses who believed that the parties did not or should not have expected a fee in the circumstances at issue.
Ambiguities, the court noted, are to be construed against the drafter of the Agreement. This is another reason it is so important to be completely unambiguous in drafting an agreement. Furthermore, given the higher level of deference afforded district courts, the supreme court decided not to overturn the district court's determination because it was not “clearly erroneous.”
In short, Hayden lost out on a $3.2 million finder's fee potential because the Agreement it drafted was found to be ambiguous.