Be Ambiguous at Your Own Risk: Sloppy Draftsmanship Bites Again!

  • Published: November 2, 2009
  • By Mark Morfopoulos

In Giant Food Stores, LLC v. THF Silver Spring Development, L.P, 959 A.2d 438 (2008 PA Super 245), the tenant sued the owner of a shopping center alleging that the owner violated the non-competition restriction in its lease. The restriction stated that no space within a three-mile radius of the shopping center could be leased to another grocery store if the landlord had an ownership interest in the premises. After the lease was signed, the tenant and landlord agreed to modify the non-competition restriction by permitting an exception, or carve-out, to the exclusive use rights granted to the tenant. The carve-out stated as follows:

Notwithstanding anything to the contrary contained herein or in the Lease, the
Supermarket Restriction shall not apply to Wal-Mart, its successors or assigns.
(emphasis added).

The tenant sued the owner after the owner extended this carve-out beyond what the tenant believed was provided for in the lease amendment. The tenant claimed that the shopping center owner’s attempted lease of a portion of the retail space to a Sam’s Club [which is a subsidiary of Wal-Mart] should be prohibited despite the plain language in the lease amendment that would seem to extend the carve-out to a subsidiary of Wal-Mart. The lower court agreed with the tenant. It: (i) granted summary judgment in favor of the tenant [limiting the scope of the exceptions to the tenant’s exclusive use rights]; and (ii) enjoined the shopping center owner from violating the exclusive use rights given to the tenant in the lease.

The Superior Court of Pennsylvania upheld the lower court’s decision on both accounts. In doing so, did it make a giant mistake or was its ruling supported by the law?

Was the agreement ambiguous? The Court decided that the meaning of the lease’s language was unambiguous. But in coming to such a conclusion, it strictly construed the meaning of the exclusive use clause. Why did it arrive at such a conclusion? Would it have reached the same decision had the provision dealt with common area charges (where there is no public policy to strictly construe the language of such clauses) rather than dealing with an exclusive use provision (where courts generally narrowly construe the restrictions set forth in the lease)? Was the Court attempting to reform the contract to reach an equitable result? If that was the case, has the Court, by so doing, unreasonably interfered with the predictability of contract? Shouldn’t the parties be able to rely on a court construing contractual provisions to mean precisely what they say as opposed to interpreting the intent of the parties after the fact?

Sometimes it is obvious. First off, sometimes the language used in a lease or other agreement is clearly ambiguous and it is easy for a court to decide that using extrinsic evidence will enable it to determine the intent of the parties. In other cases, public policy concerns may dictate how a court may analyze an issue no matter what the document says. In both instances, the parties should be able to forsee that a court could reform their contract and they should not be surprised if such a result occurs. To prevent this from happening, those who negotiate contracts should be very careful to avoid ambiguous language and should be ever-alert as to the public policy considerations in their jurisdiction. This is especially important where the parties know courts in their jurisdiction have public policies favoring or disfavoring certain activities. For example, if the parties are aware that there is a public policy disfavoring restrictions as to the alienation of property, contract language can be added that expressly acknowledges this policy. The parties could then, as clearly as possible, show that they are staying within that policy when they draft their agreement. Being clearly redundant might be a good practice to make sure a court will not mistake your intentions.

Sometimes it is not. In some cases, it may be difficult to predict whether or not a clause is ambiguous, despite the parties’ best intentions to avoid such a result. If the jurisdiction’s public policy is to construe a particular clause narrowly, that policy consideration could sway a court to decide that the clause is ambiguous [or not] depending on the particular result the court wants to achieve. For example, if a clause relates to exclusive use restrictions and it would be easier for a court to construe a provision narrowly if it held the language contained in the clause to be ambiguous, then, more likely than not, the court will find the restrictions to be ambiguous. On the other hand, if it would be easier for a court to view an exclusive use provision narrowly if it determined that a clause is unambiguous; don’t be surprised to see a court finding the language to be unequivocal. Was that what happened in the Giant case? From the decision itself, we can’t tell if the Giant court took this route.

Take note that what is ambiguous to one person may not be to another. Even experts do not agree. There is no uniform consensus as to the rules of contract drafting. Even if one source is relied upon, for example the first edition of The Gregg Reference Manual, analysis under the eighth edition of the same manual might result in a slightly different interpretation.

Court’s may re-write your agreement contrary to your intentions. This particular Court’s best rationale for reaching its decision was its conclusion that, had it decided otherwise, it would have “effectively nullif[ied]” the supermarket’s exclusive use rights. On that basis, it held that its construction of the clause was the only logical interpretation of the language contained in the exclusive use restriction because landlord “could lease any portion of the Shopping Center to an entity selling groceries by simply using [the existing tenant] as a straw party.” The Court was “certain that this was not the intent of the contracting parties.” Therefore, even in a situation where there are two sophisticated parties who are each ably represented by counsel, a court could effectively rewrite the contract to state what it believes the parties intended. In the Giant case, it can easily be argued that the Court, having no idea as to what the original parties had in mind, made a guess as to what the parties should have intended. Did it do so to achieve an “equitable” result? Maybe. Did the Court interfere with the predictability of contract, i.e. did the Court change the terms of the deal? Possibly. Did the Court render its decision based, in part, on public policy concerns? As expressed above, the Court did not specifically state that this is what it was doing, but it may have been swayed by public policy considerations.

Clarify your contract or don’t make the deal. This dispute could have been avoided without litigation if the tenant had demanded that the possible ambiguous language be clarified prior to executing the lease amendment [which added carve-outs to its already existing exclusive use rights]. The tenant could have insisted that the parties state precisely what was agreed-upon. It also could have refused to accept the deal if the landlord failed to agree to tenant’s proposed revisions. If the party on the other side of a deal refuses to clarify seemingly ambiguous language, then there really isn’t an agreement in the first place. By its definition, “ambiguous” means “capable of having two meanings.” Parties can’t possibly intend that a given provision has two disparate meanings. So that is why there is no agreement in the first place. By failing to insert language which expressly reflected its intentions, the tenant in Giant exposed itself to the danger of having a judge misinterpret the meaning of the parties. Sometimes that is an acceptable business risk, and other times it is not.

A word of caution. Limited only by the duty of good faith and fair dealing – which applies only in most, but not all, jurisdictions - many contracts are circumvented by clever attorneys who see vague language, ambiguous language or public policy considerations as giving them the chance to do what might not have been originally intended by the parties who drafted the documents (or by the clients of those who drafted the documents). Careful practitioners also should be wary because even the most precisely crafted language can be seen as ambiguous if a court is inclined to view it that way.

The court’s decision in Giant should make both landlords and tenants even more cautious when negotiating leases than they may otherwise have been. In jurisdictions following the rationale of Giant, the principles relating to the certainty of contracts may have been altered. Contracting parties may now wonder whether they can rely on the plain meaning of the words in their contract for fear that a court will attempt to interpret their intent based on factors neither party considered when originally drafting their agreement.