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What Is an Ambiguous Contract?
A contract is considered to be ambiguous if the contract is reasonably subject to more than one interpretation. Sometimes, this can mean that it’s unclear as to what the parties intended overall. But usually, an ambiguous contract means that a specific term, word, phrase, or definition is vague or unclear.
If a contract is ambiguous, it can sometimes be resolved by the parties through further discussions. If not, it may be necessary to have the document reviewed in court to have the issues resolved.
What’s an Example of an Ambiguous Contract?
A common type of ambiguous contract is where the definition of a word is not clearly defined in the contract. For example, a contract may have referenced a dollar amount for a Canadian insurance contract. The word “dollar” might be ambiguous here, since it might mean either U.S. dollars or Canadian dollars.
A court might find that the term meant Canadian dollars if the parties were both from Canada and had a history of using Canadian dollars to measure insurance limits. So, a court can use a wide range of facts from the circumstances surrounding the contract.
How Do Courts Treat Ambiguous Contracts?
Usually, if there is no evidence of fraud or misrepresentation between the parties, a court will allow the parties to rewrite the contract in order to resolve the ambiguity. When engaging in contract interpretation, a court might use the following to help them understand the parties’ intentions:
- Common Usage: Vague words can be clarified using the common usage of the term, or the dictionary meaning. This is useful for everyday, non-technical terms.
- Parol Evidence: Parol evidence refers to oral agreements that were reached prior to the formal signing of the contract (as in negotiations). In some cases parol evidence can be introduced in court, though this may vary by case
- Industry Usage: Courts may have to rely on the way a word is commonly used in a particular industry. This is common for words that have a highly technical meaning specific to a certain industry or business
- Prior dealings: Ambiguities can be resolved by examining how the parties used the term in the past. This is good for when the parties have had consistent interactions in the past
- Reasonableness: Courts will also factor in whether one interpretation is more reasonable than another. If an interpretation leads to an impossible or unlikely outcome, a different interpretation will be favored.
- Implied Meanings: A court may simply “fill in the blank” and imply that a word has a certain definition, especially where terms were left blank. However, they will avoid this if it is certain that the parties intended the contract to be silent on a certain point
Also, in most jurisdictions, ambiguous contracts are said to be resolved “against” the party that drafted the contract. The party that did not write the contract will sometimes receive the benefit of the doubt regarding ambiguities. This is because it is assumed that the party that drafted the contract may have more knowledge and bargaining power compared with the other.
Finally, courts may sometimes avoid resolving ambiguous contracts in ways that would lead to unnecessary hardship for one of the parties. This is common where one party has significantly more experience or bargaining leverage than the other.
How Can Ambiguous Contracts Be Avoided?
Parties to a contract always want to draft a contract in a way to prevent future disagreements.Here are some ways to to avoid ambiguities in a contract:
- Writing: It's best to put all the contract terms in writing.
- Different Meanings: If a particular term or phrase has two meanings, make sure that it means the same meaning for both parties and make a note of any alternative meanings.
- Other Documents: Attach any other related documents to contract that could be used later on to clear any disagreements. Other documents may sometimes not be allowed under the parol evidence rule.
- Review: Have each party review the full and complete contract before each party assents to it and signs off on it
- Legal Advice: Obtain professional advice from an experienced contract attorney and have them review the contract to resolve any ambiguous terms that may cause future problems.
What Is the Parol Evidence Rule?
The parol evidence rule states that once the parties have entered into a contract and the contract is full and complete expression of the parties agreement, no outside oral or written agreements may be introduced to add, change, or contradict the terms of the contract. However, if language in the contract is ambiguous and unclear, the parol evidence allows parties to bring is outside evidence only to resolve the ambiguous language and explain the parties intention.
Remember, that if ambiguity arise after the contract is entered into, the parol evidence rule may only be used to interpret the language and explain that parties actual intentions, but can never add, contradict, or change any terms of the original contract agreement.
Do I Need a Lawyer to Help Avoid Ambiguous Contracts?
Because there are many different factors that go into a contract, even well-written contracts can sometimes contain ambiguous terms. If you need assistance with an ambiguous contract, a business lawyer can help you resolve the issues. Many issues involving ambiguous contract can be avoided by working with a lawyer prior to the drafting and negotiating stages. An experienced attorney in your area can also represent you in court if a lawsuit arises due to a breach of contract.
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Last Modified: 01-28-2015 01:51 PM PST
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