Key Takeaways

  • Contract ambiguity occurs when terms, phrases, or provisions can reasonably be interpreted in more than one way, potentially leading to disputes or unenforceable agreements.
  • Courts may use tools such as common usage, industry standards, prior dealings, reasonableness, and parol evidence to interpret ambiguous terms.
  • Ambiguity can be patent (apparent from the face of the contract) or latent (hidden until applied to external facts).
  • In resolving contract ambiguity, courts often construe terms against the drafter under the doctrine of contra proferentem.
  • Ambiguity can cause delays, increased costs, and strained business relationships, so prevention through clear drafting is essential.
  • Strategies to avoid ambiguity include defining terms, using consistent language, cross-referencing related clauses, and reviewing contracts with legal counsel.

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.

Types and Causes of Contract Ambiguity

Contract ambiguity generally falls into two main categories:

  • Patent Ambiguity – This is obvious on the face of the contract, such as when a clause is incomplete or a term is so vague that multiple meanings are immediately apparent.
  • Latent Ambiguity – This becomes apparent only when the contract is applied to real-world facts. For example, if a contract refers to delivery at "the warehouse" but the company owns two different warehouses, the intended location may be unclear.

Common causes of contract ambiguity include:

  • Vague or general language without specific definitions
  • Use of industry jargon that may be interpreted differently by non-experts
  • Inconsistencies between different sections of the contract
  • Omitting important details like dates, quantities, or locations
  • Reliance on verbal understandings not included in the written agreement

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 Courts Resolve Contract Ambiguity

When faced with ambiguous language, courts aim to determine the parties’ original intent. In doing so, they may:

  • Apply the Doctrine of Contra Proferentem – Interpreting the ambiguity against the party who drafted the agreement, especially when there is unequal bargaining power.
  • Consider Surrounding Circumstances – Looking beyond the text to the context in which the agreement was formed.
  • Review Industry Practices – Determining whether a specialized term has a widely accepted trade meaning.
  • Admit Extrinsic Evidence – Including emails, drafts, negotiation notes, or witness testimony to clarify intent.

In some cases, if the ambiguity is too significant to reconcile, the provision may be struck or the entire contract may be declared unenforceable. This often happens when the ambiguous term relates to a key obligation or performance measure.

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

Practical Tips to Minimize Risk from Ambiguity

To reduce the risk of disputes over ambiguous language, consider these best practices:

  • Define Key Terms Clearly – Include a definitions section to ensure consistency throughout the contract.
  • Use Specific Numbers and Dates – Avoid relative terms like "soon," "reasonable time," or "adequate" without precise measurement.
  • Cross-Reference Related Clauses – Ensure that related obligations do not contradict each other.
  • Standardize Formatting and Terminology – Consistency in capitalization, numbering, and word choice reduces misinterpretation.
  • Have a Third Party Review the Contract – A fresh perspective can reveal unclear terms.
  • Document Negotiations – Keep records of discussions to serve as evidence of intent if needed later

Frequently Asked Questions

  1. What is the difference between patent and latent ambiguity?
    Patent ambiguity is clear from the face of the contract, while latent ambiguity only appears when the contract is applied to specific facts.
  2. Can a contract be enforced if it contains ambiguous terms?
    Yes, but enforcement depends on whether the court can reasonably interpret the terms using legal tools and evidence. If not, the provision or contract may be void.
  3. Why do courts construe ambiguity against the drafter?
    Under contra proferentem, the party drafting the contract is presumed to have had more control over its language and thus bears the risk of unclear terms.
  4. What role does industry custom play in resolving ambiguity?
    If a term has a well-recognized meaning within a particular trade, courts may adopt that meaning to interpret the contract.
  5. How can I ensure my contract is free from ambiguity?
    Use precise definitions, review for consistency, avoid vague language, and consult with an experienced contract attorney before signing.

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.