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Contracts II
University of Alabama School of Law
Geis, George S.

Contracts II, Geis Spring2004
Defenses – Avoidance of Contract
I. Defective formulation of agreement
A. Latent Ambiguity

1) Three Situations – A latent ambiguity occurs where the expression of the parties’ agreement appears perfectly clear at the time the contract is formed, but because of subsequently discovered facts, the expression may be reasonably interpreted in either of two ways. In this situation, the following possibilities are present.

a) Neither Party Aware of Ambiguity – No Contract
· If neither party was aware of the ambiguity at the time of contracting, there is no contract unless both parties happened to intend the same meaning.

Raffles v. Wichelhaus

Peerless case –

P selling cotton to D, made a contract to send by a ship named “Peerless.” Two ships, both named Peerless – They both left at different times.

D expected to deliver from the ship leaving in Dec. and the P expected to sell from the ship leaving in Oct.

P did not want to buy from the later ship.

No contract because there was no meeting of the minds, no actual agreement formed.

Goes against the objective standard.

Is this a mistake – neither party addressed the particulars of which ship – there was inherent ambiguity – some call it a mistake – Geis likes seeing it as a bad formulation of the agreement.

The date of arrival was determined by what ship was bri

P thinks $5,620 – D thinks $56.20.

Konic accepted the purchasing order.

Court found that there was no contract because there was no meeting of the minds – same as Raffles.

b) Both Parties Aware of Ambiguity – No Contract
· If both parties were aware of the ambiguity at the time of contracting, there is no contract unless both parties in fact intended the same meaning.

c) One Party Aware of the Ambiguity – Contract
· If one party was aware of the ambiguity and the other party was not at the time of the contracting, a contract will be enforced according to the intention of the party who was unaware of the ambiguity.

2. Subjective Intent
Objective Standard Test vs. Subjective Intent
While the objective test is used in contract law generally, the latent ambiguity situation is unique in that the courts look to the subjective intention of the parties. This is because the objective test simply does not work in this situation. The objective manifestations of the parties appear to be perfectly clear but subsequent facts indicate the latent ambiguity. It is then necessary to receive evidence of what each party subjectively thought at the time of contracting.