Ambiguity in Contract Law: Everything You Need to Know
Ambiguity in contract law can result in a void or voidable contract, depending on the type of ambiguous language identified in the agreement. 3 min read
2. Treatment of Ambiguous Contracts
3. How to Avoid Ambiguous Contracts
Ambiguity in Contract Law
Ambiguity in contract law can result in a void or voidable contract, depending on the type of ambiguous language identified in the agreement. A contract might be ambiguous if the language itself, i.e. a specific term, word, or phrase, is reasonably subject to more than one interpretation. Moreover, if one of the parties is unclear as to what is expected of him, then that party can make an argument that the contract is ambiguous.
If one of the parties has communicated to the other party that the terms are ambiguous, then the parties could try to resolve the ambiguous terms. If, however, the parties can’t agree amongst themselves, then one of the parties might bring a legal contractual dispute against the other party for breach if the defendant party isn’t performing under the contract.
For example, assume that a homeowner enters into a contract with an electrician to conduct work throughout the home. The contract indicates that the services must be rendered in June. The homeowner is interpreting the language to say that the services must be rendered and complete by June 30; however, the electrician might be interpreting the language to say that he must begin the work in June but that doesn’t necessarily mean that he needs to have the work complete by June 30.
Treatment of Ambiguous Contracts
Absent fraud or misrepresentation, a court will require the parties to simply rewrite the contract to resolve any ambiguous terms and provisions. But when a court is initially reviewing the dispute and materials provided, it will look to the following to help determine if a fraud or misrepresentation was made:
Common usage refers to a term that is known to have conflicting meanings, but has a common meaning in which the term is generally used. In this case, the court will look to the dictionary meaning of the term.
Parol evidence refers to verbal agreements made between the parties prior to signing the written contract. Generally, such verbal agreements are made during the negotiation phase.
Industry usage is how the term is used in that particular industry. This is common with language that is identified in technical contracts in which the other party might not know the term’s definition.
Prior dealings are also looked at, particularly with regard to how the parties have used the term in the past. This is helpful if the parties have entered into a similar contract in the past where the same terms were used.
Reasonableness is another important factor considered. Would a reasonable person infer that the term meant one thing? Or would someone infer that it meant what the other party intended it to mean?
Implied meanings can be used if terms are left blank; however, if the parties intended to leave such terms blank, then the court will not alter the contract with any implied provisions.
Most courts will resolve the contractual dispute against the party that drafted the contract. Therefore, the party that didn’t draft the contract will likely benefit from the court intervening in the review. The reason for this is because the court presumes that the party drafting the contract has additional knowledge and greater bargaining power compared to the other party. As such, this could result in a hardship for one of the parties, i.e. the party with the greater bargaining power.
How to Avoid Ambiguous Contracts
There are certain steps that both parties can take to avoid any ambiguous terms in a contract. These include:
- Put all contractual terms in writing
- Identify the true meaning of a term, particularly for words with more than one meaning
- Include supporting documentation, i.e. other agreements or e-mails proving prior negotiations that were entered into before the contract was formalized. This could help if the court looks to the parol evidence rule when reviewing the contract.
- Review the contract with one another before formalizing and signing it
- Obtain legal advice regarding the terms in the contract to ensure that no ambiguous language is present
If you need help learning more about ambiguity in contract law, or if you need to speak to a contract attorney regarding ambiguous terms in a contract, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.