Ambiguity in Contract Law

Under contract law, a contract is considered to be ambiguous if it is reasonably subject to more than one interpretation. An ambiguous contract term is a term that is present in the contract that could have more than one meaning.

In some cases, ambiguity in a contract may mean that it is unclear what that parties overall intent was. Typically, however, an ambiguous contract arises when a specific phrase, word, definition, or term is unclear or vague.

If a contract is determined to be ambiguous, this issue may be resolved by the parties through further discussion. If this does not work, it may be necessary to have the document reviewed in a court of law to resolve the issue.

What’s an Example of an Ambiguous Contract?

One common example of an ambiguous contract arises when the definition of a word is not clearly defined in the contract. For example, the contract may have a reference to a dollar amount in a Canadian insurance contract.

The term dollar may be ambiguous here because it can mean either U.S. dollars or Canadian dollars. A court may determine that the work meant Canadian dollars if both parties to the contract were from Canada and had a history of using Canadian dollars to measure insurance limits in their previous business transactions.

Courts may use a wide variety of facts and circumstances surrounding a contract to determine the meaning of an ambiguous term.

How Do Courts Treat Ambiguous Contracts?

Typically, if there is no evidence of fraud or misrepresentation between the parties to the contract, the court will allow the parties to rewrite the contract to resolve the ambiguity. When a court is engaging in contract interpretation, it may use the following to help understand the parties’ intentions:

• Common usage: Vague terms can be clarified by using the common usage of the term or the dictionary meaning;
  • This may be 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, for example, in negotiations;
  • In some cases parol evidence can be introduced in court, though this may vary by case;
• Industry usage: A court may have to rely on the way a term is commonly used in a specific industry;
• Prior dealings: Ambiguities can be resolved by examining how the parties used the term in the past;
  • This is useful when the parties have had consistent interactions in the past
• Reasonableness: A court will also consider whether one interpretation is more reasonable than another. If an interpretation leads to an impossible or unlikely outcome, a different interpretation will be favored; and
• Implied meanings: A court may simply fill in the blank and imply that a word has a certain definition, especially when the terms were left blank;
  • However, courts will avoid this if it is certain that the parties intended the contract to be silent on a certain issue.

How Can Ambiguous Contracts Be Avoided?

The parties to a contract should always try to draft a contract in such a way that prevents future disagreements. Ways to avoid ambiguities in a contract include, but are not limited to:

• Writing: It is always best to put all the contract terms in writing;
• Different meanings: If a particular word or phrase has two meanings, make sure that it has the same meaning for both parties;
• Other documents: Attach any other related documents to contract that could be used later on to clear any disagreements;
  • It is important to note that 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; and
• Legal advice: It is important to get professional advice from an experienced contract lawyer and have them review the contract to make sure there are no ambiguous terms that may cause future issues.

What Is the Parol Evidence Rule?

The parol evidence rule provides that one parties to a contract have entered into the contract and it is a full and completed expression of the agreement of the parties, no outside oral or written agreements may be introduced to do any of the following to the terms of the contract:

• Add;
• Change; or
• Contradict.

If, however, the language in the contract is unclear and ambiguous, the parol evidence rule allows the parties to present outside evidence only to resolve the ambiguous language and explain the parties intention. In other words, if an ambiguity arises after the contract has been entered into, the parol evidence rule can only be used to interpret the language of the contract and explain the actual intentions of the parties, but it can never add, change, or contradict any terms of the original contract agreement.

How Are Contract Disputes Involving an Ambiguous Term Handled?

How a court will handle a contract dispute involving an ambiguous term will depend on the facts of each case. If the parties to the contract attach entirely different meanings to a term in the contract at the formation stage and they do not know or have reason to know of the other party’s interpretation, it is likely that a valid contract was not formed because there was no mutual assent.

In some cases, a court will still recognize that a contract exists but will omit any disputed terms.

If a legal dispute arises over a contract term, the parties can file a civil lawsuit and request that the court determine the best interpretation of the contract term in dispute. When attempting to determine the meaning of a contract term, a court will examine several factors, including, but not limited to:

• The written documents themselves;
• External evidence, for example, emails or memos between the parties;
• Various definitions of terms, including common trade usages and ordinary definitions;
• Oral communications between the parties that was recorded; and
• Prior dealings of the parties.

In the majority of cases, a court will attempt to adhere to the original contract as closely as possible by using the four corners rule of contract interpretation. This refers to the four corners of the contract document and implies that the only legal parts of the contract are within the four corners of the contract itself.

A court will, however, consider whether or not both of the parties were aware of the mistaken term or if it was only one part.

The court will then attempt to reach an interpretation that is fair to both parties given the facts and circumstances of the case.

Do I Need a Lawyer to Help Avoid Ambiguous Contracts?

Because there are many factors that go into forming a contract, even a well-drafted contract can contain ambiguous terms. If you have any issues, questions, or concerns related to an ambiguous contract, it is important to consult with a contract lawyer who can assist you with resolving any issues.

Many issues involving ambiguous contracts can be avoided by working with an attorney before negotiations or drafting of the contract. Your lawyer can help ensure that the intentions of both you and the other party to the contract are clearly recorded in the document as well as ensure the contract meets all the legal requirements for your state.