6th Circuit Rules Nonsensical Contract Clause Does Not Equate to Ambiguity

December 31, 2021

In Hall v. Rag-O-Rama, LLC, the U.S. Court of Appeals for the 6th Circuit affirmed the decision of a district court that rejected Sally Hall’s breach of contract claims based on a poorly worded contract provision. The 6th Circuit held that a contract’s bad grammar does not necessarily render it ambiguous.

Factual Background

According to the Nov. 2, 2021, opinion, Hall sued her former employer, Rag-O-Rama, for breach of contract and fraud when it fired her less than a year after promoting her to an area-manager position.

When Hall began this employment with Rag-O-Rama, she signed a document titled “Communication Form,” which included her job title and employment terms. The Communication Form included a section obligating Hall to “uphold” its policies and clarifying that Rag-O-Rama hired all individuals as “at will” employees. It also included this hard-to-understand paragraph:

[Hall] is reminded of the non-competition clause guidelines, as well as, obligating associate managers and higher to one full year of employment on the management team at Rag-O-Rama. If the one full year is not met, any benefit, including but not limited to [used paid time off], will be reversed/paid back to Rag-O-Rama. If a manager separates from the company, they are prohibited from working for a direct competitor for two years.

Hall argued that the first sentence of this paragraph entitled her to work for Rag-O-Rama for one full year, but Rag-O-Rama responded that Hall was an at will employee who it could fire at any time.

District Court Background

The district court dismissed all of Hall’s claims. First, it determined that the Communication Form constituted a contract. But it found that Hall’s termination did not breach this contract because, by the terms of the contract, she remained an at-will employee. Second, it found that Hall’s fraud claims also fell short. Although she alleged unmet oral promises, the court held that she could not have reasonably relied on those promises because none of them were integrated into the employment contract. Hall appealed to the 6th Circuit.

6th Circuit Decision

The 6th Circuit applied the Kentucky rule for contract interpretation: If the contract contains unambiguous text, it must be enforced as written without reliance on outside-the-contract, “parol” evidence. See Superior Steel, Inc. v. Ascent at Roebling’s Bridge, LLC, 540 S.W.3d 770, 783-84 (Ky. 2017). If the contract contains ambiguous text that a reasonable person could interpret in different ways, a court may rely on parol evidence to determine the parties’ understanding of what the text means. See id. at 783-84.

The parties disagreed over whether the contract provision in this case was ambiguous. Hall argued that a reasonable person could read the Communication Form as guaranteeing her a one-year term of employment. She contended that the sentence “obligating associate managers and higher to one full year of employment on the management team at Rag-O-Rama” guaranteed such employment. Hall argued that a reasonable person could read the noncompete paragraph as imposing a noncompetition duty on her in exchange for a duty on Rag-O-Rama to give her one year’s worth of employment. Rag-O-Rama argued that the Communication Form unambiguously allowed it to fire her at any time. The 6th Circuit agreed with Rag-O-Rama.

The court found that the sentence, though containing awful grammar, did not limit Rag-O-Rama’s ability to fire Hall. It held that grammar errors do not automatically render a contract ambiguous if it has clear meaning despite those errors. Because no reasonable person could read this clause as prohibiting Rag-O-Rama from terminating Hall for one year after she became an area manager, the court rejected her reading. Although the court agreed that the clause is “poorly drafted,” it nevertheless held that “deficient draftsmanship does not render it susceptible to her preferred interpretation.”

This case serves as an important reminder that contracting parties cannot rely on outside-the-contract evidence and should anticipate being bound by the four corners of a contract.