Wednesday, July 21, 2010

The Need for Unambiguity and an Underlying Agreement

A recent Ohio Court of Appeals case exemplifies the need to strive for contract terms with little ambiguity and the requirement to generate an underlying agreement in support of a promissory note.

The case, Cranberry Fin., LLC v. S&V P'ship, 186 Ohio App. 3d 275, involved a dispute regarding the terms of a promissory note. The debtor entered into a promissory note and subsequently argued that the terms of the underlying agreement were different from the note.

The court, in its opinion, stated, “A promissory note is a contract and rules of contract interpretation apply to the interpretation of promissory notes. If a contract is clear and unambiguous, then its interpretation is a matter of law and there is no issue of fact to be determined. If, however, an ambiguity is present such that parole evidence is necessary to resolve the ambiguity, a factual determination of intent or reasonableness may be necessary to supply the missing term. The fact-finder may also examine the surrounding circumstances of the transaction to determine the parties' intent. Further, it is axiomatic that contracts -- including promissory notes -- are construed against the drafter. The rule is well established that where there is doubt or ambiguity in the language of a contract it will be construed strictly against the party who prepared it. In other words, he who speaks must speak plainly or the other party may explain to his own advantage.”

But the court went further, “When a party voluntarily places his signature upon a note or other writing within the Ohio Statute of Frauds, and where that party's sole defense to an action brought upon the writing is that a different set of terms was orally agreed to at that time, such defense shall not be countenanced at law regardless of the theory under which such facts are pleaded. In such event, the writing alone shall be the sole repository of the terms of the agreement.”

In this case, the Sixth Appellate Court, merely restated what is known in the law as the “Parole Evidence” rule. Basically, the rule imparts that oral testimony may not be introduced into evidence to alter the terms of a written agreement. Only if the terms of the agreement have ambiguities, may the court entertain testimony to interpret the ambiguous portions of the agreement. Therefore, if the terms in an agreement are unambiguous, the court will not permit testimony that would alter those terms.

In this case, the court deemed the terms of the promissory to be unambiguous. Therefore, the party could not introduce evidence in derivation of those terms.

Most promissory notes are fairly simple and do not set forth underlying agreements relating to the note. Therefore, it is vitally important that the parties enter into an agreement setting forth the terms underlying the note and that agreement be referenced as part of the covenants set forth in the note.