As a business owner, you will form different types of contracts. Examples include employment, supplier, sales, confidentiality, noncompete, licensing and lease agreements. While these contracts are expected to offer protection and clarity, they may fail to do so when ambiguity is present.
Below are two types of ambiguity seen in business agreements:
Patent ambiguity
Patent ambiguity is a flaw or contradiction that’s evident on the face of the contract. It’s obvious. One can tell there is an error just by reading the agreement. For example, a clause stating a supplier must deliver goods within 30 days, whereas another within the same contract states 45 days. Or when a purchase price in a sales agreement is written as “One Hundred Thousand Dollars,” but numerically as $10,000.
Latent ambiguity
This type of ambiguity is often more frequently reported and, in most cases, usually leads to litigation. Latent ambiguity is when contract language initially seems clear but becomes unclear when applied to real-world circumstances. For example, when language allows for two or more reasonable interpretations.
It can be confusing to state that a supplier should make deliveries to your warehouse when you have more than one warehouse or mention payment in “dollars” without being specific when the involved parties are located in both the U.S and Canada.
Other examples of ambiguous terms used in business contracts include “reasonable time,” “best efforts,” “promptly,” “timely,” “high-quality materials,” “as soon as possible” and “material breach.”
How can you avoid ambiguity in your contracts?
It’s crucial to use plain, specific language, define key terms, ensure consistency and thoroughly proofread your agreements. You should also establish clear methods for dispute resolution.
Ambiguity in business contracts can lead to costly consequences. Consider legal guidance to ensure your agreements are enforceable and protect involved parties.