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Contract Interpretation and the Importance of Unambiguous Terms: Part 1 of 3

     

Most folks in the contracting world would agree that contract drafting is an art form. The negotiations involve a lot of push and pull in an attempt to find balance and stable ground, but it is the language of the contract itself that must clearly explain the precise bargain that was struck. As a result, the individuals who turn the negotiated terms into the actual words that make up the contract, usually attorneys, must carefully analyze every single word, sentence, paragraph, and piece of punctuation.

An Explanation of Ambiguity

Most people likely understand the general definition and meaning of ambiguity if it is used in a sentence. Broadly speaking, something is ambiguous if it is unclear. However, ambiguity in a contract has a slightly more nuanced connotation. A specific term or clause of a contract is generally considered ambiguous if it is subject to more than one reasonable interpretation. For example, if someone states that s/he wants a Gala apple that was grown in New Zealand, it is quite clear what it is that the person desires. However, if someone merely states that s/he is craving a piece of fruit, it is unclear what exactly the person means, and in reality, the options are numerous.

 

Obviously, ambiguity is acceptable in some cases, or at least unlikely to devolve into a costly legal match. But, in contracting, ambiguity can cause relationships to end, lead to the wasting of millions and sometimes billions of dollars, and even result in the shuttering of a company's doors. Despite the fact that nebulousness does not belong in contracts, ambiguity often manages to creep in and even pervade seemingly well constructed agreements. Unfortunately, this can have dire consequences for all involved.

In far too many instances, someone else is tasked with ascertaining the meaning of the inappropriately placed ambiguity, usually a judge or arbitrator. When disagreements arise, it is the adjudicating party who must interpret the disputed terms and clauses. Of course, interpretation is not exactly a quick and easy matter, but there are some rules that judges and arbitrators use to help guide the process.

Canons of Construction

Canons of construction are essentially the principles utilized to interpret a written document. Judges and arbitrators use these canons to analyze and interpret both statutory and contractual language, although the tenets underlying the construction of these different types of instruments do vary slightly. Examples of these interpretation principles include an analysis of the plain and ordinary meaning, defining terms of art, and evaluating the drafting parties' intent, which we will address in detail in our second post.

 

And, in the world of business and contracts, interpretation is also guided by the maxim that the whole is greater than the sum of its parts, as well as an examination of the course of performance among the parties, if any, and pertinent industry customs. These principles will be covered in our third post, so please stay tuned for the additional installments in this blog series!

 

Disclaimer: SecureDocs, Inc. and its affiliates do not provide legal advice. This blog was written for informational purposes only. Therefore, it is not intended to provide legal advice, and it should not be construed as such. Please be sure to consult an appropriate professional for advice pertaining to any legal matters.

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