Advanced Contracts

Lesson 16: Ambiguity in Contracts

Ambiguity in contracts arises when language in the contract is unclear or can be interpreted in multiple ways. This can lead to disputes and requires careful examination of the contract's terms to resolve. Understanding how courts interpret ambiguous terms is essential for both drafting and enforcing contracts.

Types of Ambiguity

There are two primary types of ambiguities in contracts:

Patent Ambiguity: This is an ambiguity that is apparent on the face of the contract. For example, if a contract states, "Delivery will occur on June 15," but it does not specify the year, this would be a patent ambiguity.
Latent Ambiguity: This ambiguity is not apparent just from reading the contract but becomes evident when an attempt is made to apply the contract. For instance, if a contract mentions a delivery location that has multiple branches, this could be a latent ambiguity.

Resolving Ambiguities

Courts use several methods to resolve ambiguities in contracts:

Plain Meaning Rule: Courts will first look to the ordinary meaning of the words used in the contract. If the language is clear and unambiguous, it will be enforced as written.
Extrinsic Evidence: When the language is ambiguous, courts may look at extrinsic evidence, such as the parties' conduct, their prior dealings, and the industry standards.
Contra Proferentem: This legal doctrine holds that any ambiguity in a contract should be interpreted against the party that drafted the contract. This is particularly relevant in cases involving standard form contracts or contracts of adhesion.


// Example of Plain Meaning Rule
const contractTerms = "Delivery will occur on June 15";
const yearIncluded = /(\d{4})/.test(contractTerms);
if (yearIncluded) {
    console.log("Clear and unambiguous term: ", contractTerms);
} else {
    console.log("Ambiguous term: ", contractTerms);
}

Extrinsic Evidence Diagram

graph TD A["Contract Language"] --> B["Ambiguity Detected"] B --> C["Extrinsic Evidence"] C --> D["Parties' Conduct"] C --> E["Prior Dealings"] C --> F["Industry Standards"]

Case Law Examples

Case law provides numerous examples of how courts resolve ambiguities:

Raffles v Wichelhaus: This English contract law case involved the sale of cotton and highlighted the importance of latent ambiguity when two ships with the same name were involved.
Frigaliment Importing Co. v. B.N.S. International Sales Corp.: This case dealt with the definition of "chicken" and the interpretation of ambiguous terms through extrinsic evidence.

It is crucial to draft contracts with clear and precise language to avoid potential disputes related to ambiguities.

The Role of Context

Context plays a significant role in interpreting ambiguous terms. Courts will consider the entire contract, including the intentions of the parties and the circumstances under which the contract was formed.


        // Example of considering context in ambiguity
        const contract = {
            terms: "Delivery will occur on June 15",
            context: "Year not specified, but previous deliveries always in the same year."
        };
        
        function interpretTerm(contract) {
            if (!contract.terms.includes("year")) {
                return `Ambiguous term resolved by context: Delivery will occur on June 15 of ${new Date().getFullYear()}`;
            }
            return contract.terms;
        }

        console.log(interpretTerm(contract));

The Role of Context


// Example of considering context in ambiguity
const contract = {
    terms: "Delivery will occur on June 15",
    context: "Year not specified, but previous deliveries always in the same year."
};

function interpretTerm(contract) {
    if (!contract.terms.includes("year")) {
        return `Ambiguous term resolved by context: Delivery will occur on June 15 of ${new Date().getFullYear()}`;
    }
    return contract.terms;
}
console.log(interpretTerm(contract));

Methods of Interpretation

Courts may also rely on various methods of interpretation to resolve ambiguities, including:

Reasonableness: The interpretation that leads to a reasonable and fair result will be preferred.
Purpose of the Contract: Courts may look at the purpose behind the contract to understand the ambiguous term.
Specific Over General: Specific terms will generally control over more general language.

Reasonableness Diagram

graph TD A["Ambiguous Term"] --> B["Reasonable Interpretation"] B --> C["Fair Outcome"]

Best Practices to Avoid Ambiguity

To avoid ambiguities in contracts, consider the following best practices:

Use Clear and Precise Language: Avoid vague terms and define all important terms clearly.
Consider Multiple Interpretations: Think about how each term could be interpreted and clarify any potential ambiguities.
Include a Definitions Section: Explicitly define key terms in a dedicated section of the contract.

Example of Clear Drafting


Delivery Date: The goods shall be delivered on June 15, 2023.

Conclusion

Ambiguity in contracts can lead to significant disputes and complications. By understanding how courts interpret ambiguous terms and by following best practices when drafting contracts, parties can minimize the risk of such disputes. For more details on contract interpretation, visit our lesson on Principles of Interpretation.