Contract Ambiguity: Ensuring Precision In Legal Language

Content

• What is ambiguity in a contract?
• Are ambiguous contracts legally binding?
• What are the consequences of ambiguous contracts?
• How do you prevent ambiguity in contracts?
• Dock 365 Contract Management Software

Contracts are meant to bring clarity to commercial relationships. The parties put the terms and conditions in writing so there’s no dispute over them later. Everyone is clear on their rights, responsibilities, and obligations. What happens, though, if what it says and what it means are different? 

Contractual terms open to interpretation can only mean trouble for the legal counsel, courts, and everyone involved. Parties may misunderstand their duties, violate terms, and end up facing costly litigation. That is why businesses shouldn’t take ambiguity in contracts lightly. Here’s how you can avoid vagueness in legal agreements, making them easier to interpret and enforce. 

What is ambiguity in a contract?

A contract is ambiguous if its words, phrases, or terms are vague and open to interpretation. This lack of clarity regarding the written agreement can cause disputes regarding comprehending and performing them. For example, the terms "reasonable time," "best efforts," and "as soon as possible" are all unclear. 

Ambiguity is a regular occurrence in insurance, supplier, and lease agreements. When contractual agreements contain vague terms or phrases, stakeholders may enforce them per different interpretations. In such cases, parties generally fall back on intent to construe contracts and terms with more than one meaning. And if they can’t agree on intent, businesses resort to standard dispute resolution mechanisms and the court of law.

• Poor drafting: Inadequate attention to detail can lead to misunderstandings.
• Complex terminology: Technical jargon that is not defined can confuse parties.
• Contradictory clauses: Provisions that conflict with one another can create uncertainty.

Are ambiguous contracts legally binding?

If a contract contains all essential elements—offer, acceptance, awareness, consideration, capacity, and legality—it is legally binding, regardless of ambiguity. However, businesses will struggle to enforce it.

For whatever reason, parties enter into a contract, but after much discussion, they can’t agree on the interpretation. How do they resolve it? They can seek a resolution in a court of law if arbitration, mediation, and negotiation are unsuccessful. Courts may void ambiguous contracts if they are the product of fraud or error or are too vague to interpret. They abide by the following guidelines for everything else:

Extrinsic Evidence

When the contractual terms are unclear or incomplete, courts look at extrinsic evidence to derive meaning. It includes any information relevant to the contract not present within the written document. Courts usually consider negotiation circumstances, oral agreements, witness testimonies, emails, and messages as external evidence to interpret an ambiguous contract. General industry standards and contract-specific trade usage can help corroborate ambiguous terms or phrases. 

Parties’ Intention

When interpreting contracts, courts give weight to the parties' mutual intentions while forming them, as long as they are lawful. The contract's wording, phrasing, and terms affirm the intent and allow for interpretation. Individual provisions are given meaning by considering the contractual agreement as a whole. The court will choose the interpretation that makes the contract legal, reasonable, and attainable based on intentions and implied meaning.

Contra Proferentem Rule

According to this legal theory in contract law, courts should interpret any ambiguous or unclear terms in disfavor of the party who drafted, introduced, or demanded the inclusion. It serves as a protection against misuse of language for any one party’s benefit. There must be clear evidence of intentional ambiguity for the courts to rule against the offeror. It is quite popular in the insurance industry. 

Also Read: How To Handle Contract Disputes: Remedies & Strategies

What are the consequences of ambiguous contracts?

In the commercial sector, contracts outline the terms and conditions for commercial relationships between suppliers, customers, employees, and partners. By outlining expectations, rights, and responsibilities, they provide insight into the collaboration’s future. Any ambiguity in the words, phrases, or terminology, however, has the potential to stop everything in its tracks. Consequently, there are far-reaching consequences for the financial, operational, and reputational standing of everyone involved.

• Increased Risk of Disputes

Uncertainty in contractual terms means the parties are going to argue about its interpretations. If all other avenues fail, businesses must approach courts to resolve the disagreements. Litigation can be time-consuming and can drain parties of revenue and resources. Court decisions will dictate how they carry out the contract and may also have an impact on their future business dealings.

• Damage to Relationships & Reputation

Ambiguity in contractual agreements can cause friction and trust issues among parties. Unclear terms also increase the possibility of non-performance and non-compliance. Losing money and time over legal disputes will discourage parties from working together in the future. Regardless of the reason or cause, using ambiguous language typically comes across as dishonest or misleading. As a result, participating in such contracts may damage a business's integrity and reputation.

• Loss of Revenue

Contractual uncertainties cost money on all levels. For starters, businesses spend a lot of time and money drafting and executing contracts that, in the end, don’t hold up. Second, resolving these disputes in court can cost money in the form of fees, fines, and legal representation. Lastly, the unnecessary delays and loss of opportunities due to ambiguous contracts adversely affect the bottom line.

How do you prevent ambiguity in contracts?

Contracts are the foundation of business partnerships; if they fail, everything falls apart. That is why parties cannot simply hope for the best when drafting legal contracts. There must be precision, consistency, and structure to it. The purpose, expectations, and obligations must be clear from the contractual agreement. 

• Precise Terms and Conditions

Contractual terms must reinforce the parties’ intentions and expectations.  Vague provisions can lead to misinterpretation. Therefore, language must be clear and concise when defining the scope, deliverables, timeline, payment, confidentiality, termination, and other relevant provisions. It can be beneficial to use precise measures rather than arbitrary estimates for performance, deadlines, deliverables, and other quantifiable objectives. For instance, instead of saying "reasonable time" for performance, specify exact timelines, such as "within 30 days." This precision helps eliminate ambiguity and sets clear expectations. 

• Avoid Complexity and Jargon

The complexity and length of contracts vary according to purpose, context, and industry. Nonetheless, the goal must always be to maintain simple and straightforward legal agreements. Too many complex terms and jargon can affect the comprehensibility and enforceability of contracts. The contract must provide clear definitions for any legal or field-specific terms. For instance, force majeure clauses are common in commercial agreements. However, specifying what constitutes an unexpected event in the context of this particular contract can prevent ambiguity. Clarifying industry-specific terms within the contracts also improves the readability and comprehension of the legal agreement.

• Coherent Structure

Content placement in a contractual agreement must follow logic and order. Ambiguity and disputes may arise if pertinent details and provisions are scattered throughout the document without telling a coherent story. Headings, numberings, definitions, cross-references, and all help parties to follow complex agreements with ease. Consistent structure also helps prevent businesses from employing contradictory clauses or referencing details not part of the contract. Also, parties are less likely to lose track of relevant obligations and details.

• Standard Language

Businesses must be careful to use uniform language and terminology when drafting contracts. It enables internal and external parties to quickly comprehend and review legal agreements. For example, if the agreement refers to the goods as "product," you cannot change it halfway through to "computer." It creates needless ambiguity and confusion. Companies can build style guides, playbooks, and templates to ensure language consistency. They can keep ambiguous phrases and clauses out of the document even during the drafting stage. It also guarantees all contractual agreements uphold organizational, legal, and industrial standards. 

• Constant Reviews

Contract reviews enable businesses to catch problematic language and unclear terms early on. Collaborating with internal and external stakeholders to assess templates, drafts, and agreements can help identify areas of improvement. Thus, organizations don’t have to resort to costly negotiations or litigation to resolve ambiguous contracts. They can keep review checklists and reviewer lists for each contract type. For example, salespeople are skilled at spotting discrepancies in sales contracts. Working together to improve terms and conditions means a smooth contract lifecycle.  

Dock 365 Contract Management Software

For companies of all sizes and industries, Dock 365 CMS is a one-stop shop for competent contract drafting and management. It empowers legal professionals to maintain extensive libraries of contract templates and clauses. Thus, teams across the organization will self-serve contracts with consistent and approved language. Version control and audit trails will set a comprehensive record of the contract’s progression throughout the lifecycle. It enables parties to establish intent during disputes and ambiguities. 

Dock 365 also offers automated workflows to seamlessly route contracts through reviews and approvals. Thus, businesses can early on identify discrepancies in terms and conditions. Our AI-powered tools make it possible to extract, compare, and summarize provisions in seconds. Parties can identify inconsistencies and risks even for complex and lengthy contracts.