An Introduction to Contract Ambiguity and Obscurity

An old proverb says that bad things come in threes.

Hopefully this is ‘more honoured in the breach than in the observance’, as Hamlet once noted.

But it could happen for Contract Managers, in the form of the condition of their contracts.

Look at what’s happened recently, and is about to happen soon if it hasn’t already:

• Bad thing #1: COVID-19 arrived out of the blue. It had everybody scrambling to find out how the pandemic might affect their contracts. The review process revealed the low levels of organisational knowledge about how fit their contracts were for exceptional times.
• Probable bad thing #2: Recession has arrived in some economies and is expected in most others. The contract recession-readiness check we advocated in our recent Recession Planning and Preparation for Contract Managers ebook is likely to show another knowledge shortfall with respect to contract fitness for cyclic economic difficulties that seem to occur every handful of years.

The final dimension of fitness for purpose of contracts is concerned with ambiguity and obscurity.

• Potential Bad thing #3: is the undetected presence of these evil twins in key and important contracts.

Ambiguity and obscurity in a contract can be likened to the sleeper agents of spydom. Like Burgess and Maclean, Philby or the Rosenbergs, they will lie doggo, hiding in plain sight, until activated.

Activation may take the form of a dispute about the meaning or intent of a clause. Close review of the offending clause should reveal any ambiguity or obscurity, and it may result in court action to provide the needed clarity if the parties can’t agree on it themselves. Early identification and action will also prevent a potential breach of contract.

If that activation trigger never arrives, a contract may operate with misinterpreted intentions and deliver less than expected for its whole term.

Whether or not you’ve started on your recession-readiness review of the terms in your key and important contracts, while you’re down in the trenches doing so, it makes sense to find and eliminate any instances of ambiguity in a contract. This article can help you do that.

Below, we’ll look at:

• The meaning of ambiguity and obscurity.
• Why is contract clarity important?
• The implications of ambiguity and obscurity for contracts.
• How can ambiguity and obscurity occur?
• Dealing with ambiguity and obscurity.
• Preventing ambiguity and obscurity.

What is contract ambiguity? 

Contract ambiguity is the characteristic of an agreement being open to more than one interpretation. It can be found in language, actions, situations, outcomes and anywhere that an interpretation of meaning is required.

What is Contract Obscurity? 

Contract obscurity is the characteristic of a legally-binding agreement being difficult to understand. There are several causes:

1. Incomplete information: either no details have been provided or key details have been omitted, leading to impossibility of understanding of aspects like intent, response, options and so on.
2. Incorrect information: the details provided are factually wrong, irrelevant, misleading and so on, and likely to cause misunderstanding.
3. Unintelligible information: the details provided contain undefined terms, abuse the laws of grammar and punctuation, are incoherently expressed or written in a language unfamiliar to the reader, again leading to impossibility of understanding.

Why is contract clarity important?

At its most fundamental, a contract is a statement of intentions, reinforced by specification of associated obligations and rights.

Depending on its subject matter, purpose and many other factors, a contract can be extremely simple or extraordinarily complex, crystal clear or disturbingly opaque, short or long, or any combination and degree of these dimensions.

It’s important then that a contract is a clear and accurate account of the agreed intentions of the involved parties. Why? Because it’s the official documented record of those intentions that each party must rely on and abide by during the contract’s term and sometimes for a period afterwards. It’s the go-to document for settling disputes over intent.

Mistakes do happen though, in the both the writing and reading of contracts. Some are obvious, others subtle. Some are due to inexperience, others to overconfidence. Some defy logic, others abuse grammar.

The most problematic mistakes are those that affect understanding of the contract and contract terminology.

A lack of clarity or accuracy in a contract is the linguistic equivalent of a booby-trapped door, in the sense that it can blow up in your face if you don’t check it out like your future depended on it.

Implications of ambiguity and obscurity for contracts

Many items of mechanical, electrical or electronic equipment that can be purchased today, whether simple or complicated, essentially harmless or potentially dangerous, come with an operating manual in accordance with product liability laws.

The manual describes the operating and safety features of the equipment, outlines the situations where it is and isn’t suitable for use, and provides guidance on how and how not to use it.

The safety of the operator is the overriding focus of the operating manual. Any ambiguity or obscurity in the instructions could have one or more of the following outcomes:

• place the operator, bystanders or remote people in danger of injury or death.
• result in damage to the equipment, property or infrastructure.
• create havoc and disruption way beyond the scale of the cause.

A contract really could be considered as the operating manual for achievement of its purpose.

As such, any ambiguities or obscurities it contains, regardless of cause and responsibility, could result in one party’s view that the wording does not correspond with the agreed intentions. This can impact overall contracting standards. The effects of any such mismatch might:

• Produce undesirable operational or financial outcomes for at least one of the parties.
• Cause friction, hostility and a loss of trust between the parties.
• Lead to a contract dispute between the parties.
• Result in litigation where the courts may interpret the contract in a manner not expected or desired by the parties.
• Trigger unexpected termination of the contract before end of term.

How can ambiguity and obscurity occur?

Understanding the written word can be difficult, whatever the subject. It depends not only on the skill of the writer in expressing simple and complex notions clearly, but also on the reader’s facility and familiarity with the nuances and peculiarities of the language used.

Following are some of the specific factors leading to ambiguity and obscurity in contracts.

Terminology

A specific terminology is needed in any area of expertise to succinctly and precisely describe its concepts and practices. This terminology provides a common language for practitioners to discuss and write about their area of expertise and is typically largely unknown outside the field.

There’s unlikely to be much common terminology in fields like cancer research, quantum physics and architecture, although the same words can have different meanings assigned in each field.

The more widely used the terminology in a field, the less the need for defining its foundational elements in every new discussion or document. The quite valid assumption is that the subject matter will probably only be of interest to people in the same line of work as the author, who don’t need the basics explained.

Of course, anybody can attend a discussion or read a document, but being able to understand it is another matter.

Contracts have their own distinct terminology, covering:

• Definitions: words or phrases that are specifically defined to have a particular meaning in the contract, such as:
• Commencement Date: a pre-specified date like 30 March 2020, or an unspecified date like the date that the last party signed the contract.
• Exception: any situation where an order is not received by the agreed delivery date.
• Presumed subject matter knowledge: words or phrases that may neither be defined in the contract nor encountered in typical day-to-day speech, such as:
• Indemnity: some sort of security or protection against a loss or other financial burden.
• Force Majeure: unforeseeable circumstances that prevent someone from fulfilling a contract.
• Common words that have a narrow legal meaning but may also be used with their common meaning, such as:
• Assignment: transfer of obligations and rights from one party to another, or a work task.
• Consideration: a form of compensation, or careful thought.
• Conveyance: the legal process of transferring property ownership, or the transporting of people or goods.
• Excuse: forgive performance and bar enforcement of a contract, or try to justify.
• Recital: clauses describing the parties to a contract and their purposes for entering into it, or a program of music.
• Latin words and phrases that provide a shorthand tag for certain legal concepts and obviate the need for any lengthy plain language descriptions, such as:
• Ab initio: from the beginning. The time a contract became legal.
• Bona fide: in good faith. Implies sincere good intention regardless of outcome.
• Lex loci: the law of the place. Which laws govern the contract.
• Mutatis mutandis: having changed the things that needed to be changed. When using an example to illustrate a related but slightly different situation, adapt the example to make it apply to the new situation.
• Pari passu: on equal footing. Equal ranking or priority.

A contract may also contain terminology from a particular field of expertise when necessary to describe situations, requirements, obligations, entitlements, processes and so on that are related to its purpose.

Archaism

A quick look at virtually any contract document will reveal unusual words containing elements of familiar words, usually beginning with ‘here’, ‘there’ or ‘where’. These words are archaic in origin but have very precise legal meanings. They were dropped from common usage as the spoken language evolved over hundreds of years and are no longer heard in conversation. Their use in contracts is known as archaism.

The age-old intent of archaism is to increase the formality and precision of a contract in order to increase accuracy, brevity and understanding from a legal point of view.

This intent is never going to go away. The method for satisfying it has been refined over hundreds of years and is now just part of the DNA of contracts despite some dissent among the legal fraternity about its use.

Examples of archaism include:

• Hereinafter: from this point forward.
• Thereon: on or following the thing just mentioned.
• Thereto: to that or to that place.
• Whereof: of what or of which.
• Witnesseth: take notice of or witness.

Readability

Archaism isn’t really limited to just a handful of words. It also covers writing style, and with the same intent of accuracy, brevity and understanding from the legal perspective.

The legal writing style used in contracts, even with the greatest of goodwill, could never realistically be described as conducive to readability. While this is certainly the case for most non-lawyers, occasionally even lawyers may find it so.

Readability is a measure of how easy it is to read a piece of text. It considers aspects like the length and complexity of words and sentences, and the commonality of the words used. Other factors like the use of punctuation to separate concepts, the number of concepts in a sentence, the use of active or passive voice, and the sense of a logical flow from beginning to end in a sentence, all contribute positively or negatively to readability.

The greater the readability of a piece of text, the greater the likelihood that it will be understood.

It can’t be forgotten that traditionally contracts have been written by lawyers for lawyers, and in many cases continue to be so. Time and exposure to historic contract writing style improves contract readability for lawyers. Familiarity might breed contempt, but it also facilitates understanding.

Adherence to tradition, conformity with Legal team standards, a strong sense that contracts aren’t broken so don’t need fixing, a fair bit of resistance to change, and of course, maintenance of the mystique, all conspire to essentially let the readability sleeping dog lie.

The barrier to understanding here is the generally low readability of contracts.

Ambiguities

There are too many ways for ambiguities to appear in a contract than can be reasonably discussed here. A single example will suffice to show how ambiguities can be caused and remediated.

Say a contract covering the sale of a business says ‘… the directors will receive a termination payment of $100,000.’ This can be interpreted in two ways:

1. Each director will receive the $100,000 payment. Doubtless the directors would assume this interpretation applied. For certainty, ‘each’ could be inserted between ‘will’ and ‘receive’.
2. All directors will share the $100,000 payment. This might be what the buyers intended. For certainty, ‘jointly’ could be inserted between ‘will’ and ‘receive’.

On conclusion of the sale, there’s a 50:50 chance that either the directors or the buyers will receive a rude shock if this ambiguity goes undetected.

This means it can be a short distance from actual schmoozing at the dinner celebrating the purchase to virtual fisticuffs at the courthouse.

A key point to note about ambiguities is that an unintended meaning can still make sense in a contract.

An illuminating article by Ken Adams and Alan Kaye shows the many and varied ways in which ambiguities can be associated with just the words ‘and’ and ‘or’. It highlights the effects on interpretation produced by different contract language categories and the use of ‘not’, plurals and adjectives. It shows just how easily ambiguities can be created, go unrecognised and be incorrectly ‘fixed’.

Uncertainty

Complexity and unpredictability are rife these days. No contract can afford to increase the general entropy by containing elements of uncertainty, such as:

• a lack of key clauses or options in areas like early renewal or termination, the influence of uncontrollable events, or flexibility for dealing with change.
• insufficient or no details about its intentions with respect to certain situations, in terms of obligations, rights, processes or anything else that may be relevant.
• clauses that:
• contradict each other
• reference other clauses that either don’t exist or are clearly not related or relevant to the context of the referencing clause
• are irrelevant to the purpose of the contract.

Uncertainty in a contract, a factor contributing to obscurity, means that solutions to certain circumstances might need to be derived on the fly without the benefit of forward planning or any effective contractual guidance. This can be a risky proposition.

Vagueness

Contract vagueness, another factor contributing to obscurity, can be encountered when a term is so general or meaningless that it cannot be readily understood. Where ambiguity delivers more than one interpretation, vagueness often provides none.

Examples of vagueness include:

• Pricing is expressed in non-specific dollars in a contract between an Australian company and a Singaporean entity. Since the dollar is the official currency in 19 countries, no assumptions can be made about the intended currency.
• A tenancy agreement might contain a clause stating ‘Lawns must be kept mowed.’ It doesn’t specifically state which party is obliged to do the mowing, how often, or what level of grass height is required from a mowing session. Even if the tenant could be reasonably expected to have to do the mowing, the frequency and standard desired remain debatable. This vagueness is complicated by the fact that mowing may not be possible due to weather conditions, the lack of a working mower, the absence of the obliged person, and so on.

Deadlines

Recording date and time deadlines is finicky and can contribute to obscurity.

The date format used could be dd/mm/yy or mm/dd/yy if neither the day or the month number is 13 or above.

Time zones can be overlooked and there may be no clues available as to which timezone is applicable.

A limited set of prepositions relating to a ‘when’ is used to express a date or time deadline: after, at, before, by, during, on, through, until. Some prepositions include the date or time, others don’t.

The addition of modifiers ‘not’, ‘only’ or both words together can change the meaning of a ‘when’ preposition, and reverse its position on including or excluding the specified date or time.

Say a deadline for submitting a proposal is related in some fashion to May 1, either before, on or after, using a form like ‘submit your proposal …’ or ‘don’t submit your proposal …’.

The combinations of prepositions and modifiers that can provide the desired limitation are as follows:

Some of these constructs are awkward though linguistically correct, and probably rarely used. A span of dates or times would most commonly be expressed as ‘from start date / time through end date / time inclusive’.

As with the discussion about ambiguity above, there are far too many combinations of prepositions to reasonably present here. For an in-depth discussion of ambiguity in respect of deadlines, see The Ambiguity Handbook, section 5.7 starting on page 50.

A few examples should suffice to show a deadline date for submitting a proposal is May 1 and the ‘after’ preposition is being considered, then there are four variations available:

1. Submit proposals after May 1 or submit proposals only after May 1. This means proposals are required to be submitted from May 2 onwards, but it is unclear as to whether earlier submission is allowed.
2. Submit proposals only after May 1. This means proposals are not to be submitted before May 2 but are allowed to be submitted from May 2 onwards.
3. Don’t submit proposals after May 1. This means proposal are allowed to be submitted any time up to and including May 1, but not from May 2 onwards.
4. Don’t submit proposals only after May 1. This has the same meaning as point 3.

Indefiniteness

Some elements of a contract can be indefinite or specified without clear limits. This can occur when items are agreed but unresolved when a contract is signed, with the intention of resolution as soon as practicable. There can be many reasons for this, such as:

• A technical solution to a specific problem may be imminent but not quite ready for inclusion at signing time.
• A service level agreement might only be realistically developed following a ramp-up period of usage of contracted services.
• The number and type of services required can't be determined until a comprehensive review is conducted as part of contract implementation.

Contracts in this situation should include an action plan with an agreed timetable for resolving indefiniteness. Unless and until a definitive resolution is implemented for any indefiniteness, there may be little understanding of and disagreement about who does what in the hiatus period if it causes issues.

Dealing with ambiguity and obscurity

Any ambiguity or obscurity in a contract is a problem. A simple four step process can deal effectively with each occurrence, although the work involved in each step might be far from simple:

1. Recognition. Any of the causes of ambiguity and obscurity mentioned in this article can be quite subtle or not all that obvious. Much more detail is provided in the two external articles referenced, and some time spent studying them in depth will provide good insight into patterns and forms that will assist recognition in the wild.
2. Responsibility. Determination of responsibility for the subject matter of the ambiguity or obscurity is important. This will allow both the original intent and its continued need to be established.
3. Redefinition. New wording can be agreed that indisputably delivers the original intent or any agreed modification to it, or the offending text can be slated for removal, without creating further problems elsewhere in the contract.
4. Repair. Following agreed contract change control processes, either replace the ambiguous or obscure text with the agreed updates or delete it.

Preventing ambiguity and obscurity

A focussed, ongoing preventative approach is required to detect and eliminate ambiguity and obscurity in contracts. Ideally, all key and important contracts would undergo a review under four scenarios:

1. Pre-signature review: the top-to-bottom review of the entire contract to ensure it reflects the agreed deal and the agreed infrastructure aspects of operating the deal.
2. Pre-variation review: a localised review to check that a contract amendment changes only those parts needed to effect the agreed change, without undesired side-effects.
3. Periodic relevance review: a quick check on a specific aspect of a contract, such as service level settings, to ensure ongoing satisfaction with the need for and attributes of those aspects.
4. Exceptional circumstances review: any check conducted to look at if and how well the contract is able to deal with the advent or prospect of unusual events.

An additional check in these reviews, or boosting of an existing check, to locate any ambiguities or obscurities could be expected to provide a significant return on effort. These checks should be based on those developed as a result of the information provided in this article and the associated external articles.

Summary

Ambiguity and obscurity in contracts represent latent but pretty much unmeasurable risk. That’s because they are largely invisible, lurking in the dark corners of language.

Incomprehension and its constant companion, misinterpretation, are consequences of ambiguity and obscurity, and the drivers of that latent risk.

Detection of an ambiguity or obscurity may prevent occurrence of the latent risk. Conversely, occurrence of that risk should trigger detection of an ambiguity or obscurity via the hunt for cause.

Detection should result in remediation, but also lead to a broader review of the contract in question to determine if it contains any other instances of ambiguity or obscurity.

Responsibility for any ambiguity and obscurity in a contract has to be shared between:

• The author, for introducing those problems into the contract and leaving them there. Some leeway for the author might be warranted based on assumptions of an audience qualified to read contracts.
• The other parties, for not detecting the presence of those problems. Some leeway might also be warranted here based on assumptions of the author’s expertise in creating contracts.

We all know about the problems with assumptions.

Realistically, in the short to medium term nothing is going to significantly change in the way contracts are written. Accept this and move on.

Self-interest, if not self-preservation, dictates then that Contract Managers need to take the lead on the detection and elimination of ambiguity and obscurity in the contracts they deal with. Self-reliance is an admirable and useful trait.

Learning more about our own language, and how to use it to read contracts more thoroughly, is likely to be quicker and more productive than getting lawyers to write more readable contracts for a wider audience.

Discussions with the lawyers, whether the other side’s or your own, about any ambiguities and obscurities found in their contracts might encourage them to watch out for such issues in their writing going forward.

If you would like more information about contract ambiguity and obscurity or how to a contract management solution can help you to deal with it, then contact us today.