A recent decision by the Seventh Circuit U.S. Court of Appeals emphasizes the importance of carefully drafting contract modifications to avoid ambiguity. In Curia v. Nelson, (Nov. 20, 2009), the parties disputed the terms of a stock purchase agreement involving two automobile dealerships that they entered into in 1989 and then modified several times over the next decade. At issue was Curia’s claim that his options to purchase additional shares under the original contract survived the subsequent modifications.
The district court granted Curia’s motion for summary judgment (avoiding a trial) holding as a matter of law that the contract modifications were unambiguous and compelling the sale of the additional shares to Curia. Nelson appealed the decision to the Seventh Circuit, which reversed the decision of the district court.
Both parties claimed that the contract was unambiguous, but they disagreed over what the contract modifications meant. In its ruling, the Seventh Circuit observed that under Illinois law, “[i]t is well established . . . that a contract is not unambiguous just because both parties say so, nor is a contract ambiguous simply because the parties offer different interpretations of its language.” (citing Cent. Ill. Light Co. v. Home Ins. Co., 821 N.E.2d 206, 214 (Ill. 2004)). Rather, the court noted that whether a contract is ambiguous is a question of law for the court to decide. If the contract is ambiguous then its construction is a question of fact and evidence is admissible to explain and ascertain what the parties intended.
With respect to the contract and modifications at issue, the Court in Curia held that there was more than one reasonable way to read the parties’ contract, and the court “simply cannot tell from the contract documents alone whether the parties intended the original options to survive the modifications. In other words, a trial would be necessary to determine the parties’ intent because the contract as modified by the parties were ambiguous.
Perhaps the most tangible drafting tip mentioned in the Curia opinion is that under Illinois law, “[a] modified contract containing a term inconsistent with a term of an earlier contract between the parties is interpreted as including an agreement to rescind the inconsistent term in the earlier contract.” For this reason alone, proposed contract modifications should be carefully scrutinized to avoid any altering certain provisions in the original agreement of the parties.
For Curia and Nelson, the Court’s ruling means (more than likely) more legal fees to prepare the case for trial, whereas perhaps a few more hours of attorney review and consultation could have avoided that process altogether.
The attorneys of DeBlasio Law Group, LLC welcome the opportunity to consult with individuals and businesses on transactional matters with a view towards avoiding costly litigation involving matters of contract ambiguity. Visit our website at www.DeBlasioLawGroup.com for more information or call us. We’ll listen.