Joyner v. Adams
361 S.E.2d 902, 1987 N.C. App. LEXIS 3279, 87 N.C. App. 570 (1987)
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Rule of Law:
When parties to a contract attach different meanings to a material term, the meaning of the innocent party who did not know of the ambiguity prevails if the other party knew or had reason to know of the innocent party's meaning. A court cannot find a lack of mutual assent without first making a factual determination as to what each party knew or should have known about the other's interpretation.
Facts:
- The Joyners (plaintiffs) and a real estate developer (defendant) entered into a lease agreement for a property.
- The lease included a rent escalation provision that would be waived if the defendant met certain development conditions by September 30, 1980.
- Negotiations over an amendment to this provision used ambiguous terms like 'completed development'.
- The Joyners understood 'completed development' to require the construction of all buildings on the property's lots.
- The defendant, an experienced commercial developer, interpreted 'developed' to mean installing water and sewer lines to make the lots ready for construction.
- By the deadline, the defendant had installed water and sewer lines but had not constructed any buildings.
- The disagreement over the meaning of 'development' led to a dispute over whether the rent should retroactively increase.
Procedural Posture:
- The Joyners (plaintiffs) sued the defendant in a North Carolina trial court for breach of a lease agreement.
- In a prior appeal, an appellate court had already determined that the language in the lease amendment was ambiguous.
- On remand, the trial court, sitting without a jury, concluded there was no 'meeting of the minds' on the disputed rent escalation provision.
- Despite finding no meeting of the minds, the trial court entered judgment for the plaintiffs by applying the rule that ambiguous contract terms are construed against the party who drafted them.
- Both the plaintiff and defendant appealed the trial court's judgment to the North Carolina Court of Appeals.
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Issue:
Does a contract provision fail for lack of mutual assent when parties attribute different material meanings to its terms, without the court first determining if one party knew or had reason to know of the meaning attached by the other?
Opinions:
Majority - Eagles, Judge
No. When parties attribute different meanings to a material contract term, a court cannot conclude there was no meeting of the minds without first determining whether one party knew or had reason to know of the meaning attached by the other. The trial court correctly found evidence that the parties had divergent meanings for the term 'development.' However, it erred by failing to make the crucial subsequent finding of fact as to whether one party knew or had reason to know of the other's interpretation. Citing the Restatement (Second) of Contracts, the court explained that if one party is aware of the misunderstanding while the other is not, the contract is enforced according to the innocent party's meaning. The trial court also erred in applying the rule of construing ambiguity against the drafter, as that rule is inappropriate where, as here, the parties were sophisticated, bargained at arm's length, and had equal bargaining power.
Analysis:
This decision solidifies the 'knew or had reason to know' standard from the Restatement (Second) of Contracts as a mandatory step in resolving disputes over ambiguous contract terms in North Carolina. It shifts the focus from merely identifying a lack of 'meeting of the minds' to a more equitable inquiry into the parties' knowledge during formation. The ruling prevents a party aware of a potential misunderstanding from later using that ambiguity to void a provision. It also curtails the use of the 'contra proferentem' (construe against the drafter) doctrine, limiting its application to cases with unequal bargaining power, such as adhesion contracts.
