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Ambiguity in Business Contracts

After a contract has been entered into, it is likely both parties will file it away and it will never see the light of day again.

However, problems can occur if a dispute arises and you need to dust that contract off only to find out that the clause that you hoped would clarify the matter in dispute is open to interpretation. This may be because the contract was not drafted clearly in the first place.

How do you avoid this type of issue arising?

There are some common pitfalls that contracting parties should be aware of.

Standard terms and conditions - some industries or companies use standard form terms and conditions that will not necessarily be appropriate to an individual set of circumstances. If you are confronted with standard terms, both parties should consider whether they are fit for purpose for their particular requirements. They may be a good starting point but require some amendment to reflect both parties’ intentions.

Unsuitable precedents - whilst using a precedent is an excellent starting point, don’t be tempted to leave in terms and clauses that are simply not relevant to the commercial arrangement you are entering into. They will cause confusion at best, and at worst could affect the interpretation of the agreement. Adapt the precedent.

Urgent negotiations - last minute amendments due to pressing deadlines can sometimes mean unconsidered wording is entered which either affects the interpretation of another clause or is ambiguous itself. A legally binding agreement should never be rushed.

Proof reading - or rather NOT proof reading. Always get a second pair of eyes to check for errors and to ensure what you have drafted makes sense to a third person who has not been involved in the negotiation process.

Failure to define - always ensure that any terminology used is defined, even if it is ‘industry standard’ terminology.

What happens if a dispute does raise an issue of interpretation?

Where the dispute cannot be resolved between the parties, legal action may result, and therefore a Court will determine how to interpret the contract. This is not an ideal situation for either party as clauses in an agreement may be struck out altogether or interpreted in a manner which neither party intended.

When interpreting contracts, the Court will:

  • assess the parties’ intentions objectively;
  • consider how a reasonable businessperson would interpret the text having all of the background information reasonably available to all parties when the contract was made;
  • interpret the contract in accordance with business common sense;
  • consider the commercial purpose of the contract; and
  • look at the contract as a whole, considering all of the terms to assist in the interpretation, not just the words or clauses which are the subject of the dispute.

If you are contemplating entering into a commercial arrangement, it is always preferable to have the contract checked and advised upon or drafted by your own legal advisor.