For several years, KPMG performed annual audits for Merrimack College. At some point, serious financial irregularities in the College’s financial aid office were discovered relating to the 1998-2004 fiscal years that KPMG had failed to detect during its audits. The College then sued KPMG for malpractice.
KPMG moved to compel arbitration based upon an arbitration provision in the parties’ engagement letter for the 2005 fiscal year, which applied to disputes “arising out of or relating to” the engagement letter, the services provided thereunder, or to “any other services provided” by KPMG. Notwithstanding the fact that none of the parties’ engagement letters for the earlier fiscal years contained a similar provision, KPMG argued that its pre-2005 services fell within the scope of “any other services provided” within the meaning of the 2005 engagement letter, and, therefore, were subject to compulsory arbitration. The trial court denied KPMG’s motion.
KPMG fared no better in the Appeals Court. The Appeals Court conceded that KPMG’s interpretation was linguistically possible – if the phrase “any other services provided” was read in isolation – but noted that the meaning of contractual language is dependent upon context. When placed in the context of what it described as a wholly “forward-looking agreement,” the Court held that the “any other services provided” language applied only to services provided by KPMG after the 2005 engagement letter was executed. In so holding, the Court noted that, “The fact that KPMG’s preferred reading is linguistically possible does not make it a reasonable interpretation of the parties’ agreement.”
What struck me about the Court’s decision is how nicely the conclusion that a linguistically possible interpretation is not necessarily a reasonable one illuminates questions of contractual ambiguity. In Massachusetts (as well as in Maine and New Hampshire), the standard for determining whether contractual language is ambiguous is if it is reasonably susceptible of more than one interpretation. Although producing an alternative interpretation that is linguistically possible is a prerequisite to establishing ambiguity, it is not enough to meet the reasonable susceptibility threshold – that linguistically possible interpretation must also be plausible in light of the language of the rest of the contract. In other words, it is the context in which the language is used that ultimately determines whether a linguistically possible interpretation is a reasonable one.
