The Importance of Unambiguous Contract Terms: Part 2

In part one of this series, we began our discussion of contract interpretation. This installment delves a bit deeper into several of the principles of contract construction that judges and arbitrators rely on to discern the meaning of ambiguous contract terms.

Plain and Ordinary Meaning

The notion of the plain and ordinary meaning of a word sounds fairly straightforward, but it requires a bit more analysis than one might expect. When words are strung together to create complete sentences, which eventually become paragraphs, the meaning of a particular word may differ based on its use and the context of the sentence. In addition, the English language is rife with words that have multiple meanings, and each person’s interpretation of a particular word’s meaning often varies. Thus, judges and arbitrators sometimes have to reference a standard and universally accepted dictionary (literally) to find a more precise definition of a word. 

When possible, determining the plain and ordinary meaning of words is likely the preferred method of ascertaining meaning, as dictionaries are carefully crafted based on appropriate English standards and usage. Of course, the actual dictionary meaning of a specific word or words that are extracted from a contract, and are in need of defining in order to understand that contract, may be more advantageous to one party to the agreement. For this reason, it is wise to include a glossary with a contract to define any terms that are subject to interpretation. 

Terms of Art

It may be difficult to know which terms used in a contract need an actual definition spelled out in any attached glossary. After all, contracts frequently use vague words and descriptors, such as “reasonable,” “good faith efforts,” and “of value,” among many other nebulous gems. Clearly, these terms can have an array of interpretations depending on what it is the word is actually referring to and how one interprets the particular description. However, there are often a lot of terms used in contracts that would be considered terms of art, and these absolutely must be ascribed their precise meaning, as understood between the parties at the time that the contract was drafted. 

This is particularly true in technology, finance, and health sciences. Any contract that deals with intellectual property, technological innovation, special financing, biotechnology, medical devices, research and development, and other related fields, likely involves distinct and specialized information, some of which may even be unique to the parties in the arrangement. In these instances, it is downright foolish not to make it perfectly clear what the terms mean, as failing to do so allows a person with little to no familiarity with the subject to become the ultimate arbiter in deciphering its meaning. And, when such arbiters are called upon to assign meaning to such terms of art, they must generally do so by examining the most commonly accepted usage, which may not be in perfect accord with the individual case at hand.

Parties’ Intent

Sometimes the contract itself must be interpreted without completely relying on the terms contained therein. This sounds ridiculous, but there are ample legal dockets, and plenty of existing case law, attesting to the fact that countless contracts have been drafted in an incomplete or utterly vague manner. Because this has happened and continues to happen fairly frequently, courts have turned to examining the parties’ intent when they initially entered into and drafted the contractual agreement. By looking at the parties’ intent, the judge or arbitrator may understand what it is each party intended to gain from the contract, and thus may be able to interpret the final agreement on the basis of each party’s intentions and the actions that led to its creation. 

Obviously, this could lead to a satisfactory outcome for both parties, but it could also be disastrous, as plenty of contract negotiations and drafting rounds are a virtual tug of war, and thus it may not even be clear what each party originally intended. Of course, this interpretation possibility is best avoided by ensuring clear communication and careful documentation throughout the contracting process and creating a finished product, i.e., a contract, that is anything but ambiguous.

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