It’s All A Matter Of Context

Today’s installment comes courtesy of the Massachusetts Appeals Court with its decision in Merrimack College v. KPMG LLP, No. 15-P-122.

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.

An Appellate Court Reminds Us That Rules Of Contract Interpretation Do Not Trump Evidence Of The Parties’ Intent

For as long as there have been contracts, there have been judges, lawyers, and parties who have struggled to divine the meaning of documents that were – shall we say – “inartfully” drafted.  To address ambiguities in such documents, common law courts have developed a host of rules of interpretation to assist in the quest for elucidation.  With its recent decision in Lynch v. Town of Pelham, No. 2013-064, the New Hampshire Supreme Court reminds us of the proper role of such rules in the interpretive process.

The dispute at issue in Lynch finds its genesis in a 1985 deed by which a trust sold land to the Town of Pelham for the development of municipal buildings.  That deed contained several restrictive covenants, including restrictions on the architectural style of the buildings to be built, but did not specify whether those covenants were appurtenant (tied to the ownership or occupancy of a particular parcel of land) or in gross (not tied to the ownership or occupancy of a particular parcel of land).
 
Years later, the Trustee took issue with the design of a proposed fire station and sought to enforce the covenants in the Superior Court.  The Town moved to dismiss the Trustee’s complaint.  According to the Town, the restrictions were appurtenant, and, because the Trust owned no land in the Town benefiting from the covenants, the Trustee lacked standing to enforce them.  The Superior Court agreed, reasoning that any deeded covenant not expressly identified as “in gross” is, under New Hampshire’s rules of interpretation, an appurtenant covenant.

The New Hampshire Supreme Court reversed, concluding that the covenants were in gross.  In doing so, the Court noted that the touchstone in interpreting contracts, including deeds, is to ascertain the intention of the parties, and that the rules of interpretation are merely aids employed by the courts when there is little or no evidence of that intention.  It concluded that the Superior Court went astray when it gave dispositive significance to New Hampshire’s preference for appurtenant covenants over covenants in gross.  In other words, the Superior Court erroneously treated an interpretive aid as establishing a per se rule.
 
The Court observed that Lynch was not a case where evidence of the parties’ intent was entirely lacking.  To the contrary, the Court pointed out that the parties’ intent could be discerned both from the language of the deed itself and the circumstances surrounding its execution; most notably, the fact that by the time the deed was signed, the Trust owned no other land in the Town to which the covenants could possibly be appurtenant.  The Court had little trouble dispensing with the notion that the parties intended a situation where the restrictive covenants would have been unenforceable from the moment they were created.
 
With determining the parties’ intent as the ultimate goal in contract interpretation, the Court in Lynch was justifiably unwilling to give primacy to a rule of interpretation favoring appurtenant covenants over evidence that the parties actually intended to create covenants in gross.  At times it is easy to seize upon a rule of interpretation as the be-all and end-all in a case involving an ambiguous contract.  What Lynch reminds us is that the rules of interpretation are merely aids used to discern the parties’ intent – they do not trump the evidence of what the parties actually intended.