Contractual ambiguity can be strategically utilised in contract drafting and provides parties with strategic tools to navigate uncertainties and achieve balanced outcomes in lieu of changing circumstances. This deliberate inclusion of ambiguity leads to flexibility and co-operative problem solving but, in many cases, also leads to fall outs and contractual deadlocks.
This blog delves into the complexities of ambiguity in contract drafting, exploring the challenges that arise owing to such uncertain terms and how they can be strategically used to reflect the parties' intent and aid in commercial transactions. The next blog shifts its focus to the interpretation of ambiguous provisions, highlighting how courts and parties navigate such uncertainties to resolve disputes and ascertain intent.
Contract drafting deals with translating the terms of the contract and intentions of the parties into clear, concise and precise language that omits any misunderstanding or misinterpretation1. The primary goals of contract drafting are that the document clearly outlines the rights, obligations and responsibilities of each of the parties involved2. Moreover, a well drafted contract ensures that its terms are enforceable and accurately reflect the parties' intentions to comply with the relevant laws and legal requirements.
The drafters of the contracts need to define various terms, prescribe behaviours and also specify the procedures to be followed and also specify conditions for applicability. Contracts often also have specifications as to how risk will be allocated between parties, such as liability, indemnification or insurance provisions. Clear contractual language can help prevent and resolve disputes whereas ambiguous language can result in demarcations between the understanding of various parties, giving rise to or exacerbating existing disputes.
Normally, phrases such as "reasonable efforts", "best endeavours", "reasonable withholding of consent." and "commercially reasonable" are utilised.3 Reasonable efforts in a supply agreement empowers the parties to adjust production schedules in light of unforeseen delays and does not hold them accountable to any stipulated level of production and they receive adequate leeway in cases of uncertainty on the other hand it also allows parties to undertake minimal effort and lead to subpar outcomes. Similarly, the term "best endeavours" when used in partnership agreements allows parties to collaborate efficiently without them being confined to a specific course of action thus allowing professional flexibility. Moreover, the phrase "commercially reasonable" in a licensing contract enables adaptable pricing mechanisms that align with prevailing market conditions, fostering a mutually beneficial arrangement but such a term may also lead to disproportionate favouritism and undermine the fairness of the agreement.
Ambiguity in contract drafting gives way to flexibility since it provides ways for future negotiations and adaptations. It allows the contract to be adaptable for circumstantial changes such as market forces, political instabilities, consumer tastes and many more4. This room for interpretation provides parties with negotiating leverage which may be exploited by parties for beneficial and biased interpretations. In certain cases, intentional ambiguity is employed since it might be challenging to foresee all possible. Intentional ambiguity can serve as a tool for negotiation, flexibility and adaptation but must be managed strategically to avoid misinterpretations and disputes.
Balancing clarity and ambiguity within a contract are crucial for fostering a shared understanding of terms. To achieve this equilibrium, it is essential to incorporate certain strategies to secure the interests of both the parties. Firstly, ambiguity can be avoided by incorporating terms and clauses that have been well defined5, this allows the establishment of a common lexicon enabling parties to have an understanding of contractual terms and concepts. Furthermore, the integration of illustrative examples or scenarios allows a better understanding of how specific provisions are to be applied. Clarity can also be enhanced through well-defined contextual references, explicitly citing sections, definitions, external documents or codes of conducts. For example, in a manufacturing contract, reference may be given to the Product Specifications Document to clarify expected quality standards. Most importantly it is essential that the drafters write in plain English or simple language to reduce the legalese and archaic words to allow greater clarity and reduce ambiguity6. It has been held in the case of Industrial Promotion and Investment Corporation of Odisha Ltd v. New India Assurance Company Limited that all contracts have a chance of ambiguity and thus nothing would be easier than explaining the terms in simple wordings since otherwise it would lead to chances of ambiguity and unfairness7. In the case of Nabha Power Ltd v. Punjab State Power Corporation Ltd. 2017,8 5 conditions laid down in the BP Refinery Proprietary Limited v. The president Counselor and Weight Pairs of Hastings9 were used. These conditions laid down the essential principles that should be utilised in contract drafting —
- For a term to be incorporated implicitly, specific conditions must be satisfied.
- The terms "reasonable" and "equitable" need to be inferred within the contract.
- There should exist a requirement to ensure the contract's practical effectiveness.
- The implied element should be glaringly evident, almost taken for granted.
- Clarity is of utmost importance when implying this term, and contradictions must be absent.
Controlled ambiguity may be essential in certain situations, but it is imperative to ensure that the overall objectives and intentions of the contract remain transparent and are communicated well. This consensus of the purpose of the contract is necessary for the deliverables to be met and the terms of the contract be satisfactorily fulfilled. Thus, it is of primary importance to explicitly state the overarching purpose and scope of the agreement. Controlled ambiguity should be reserved for areas where it serves legitimate purposes and is eventually beneficial for the performance of the contract. Overuse of ambiguity should be minimised since it can lead to unintended consequences and disputes may hinder the agreement's effectiveness.
Parallel clauses may be utilised when dealing with potential ambiguity within a single provision, by providing parallel clauses parties can better grasp the intended meaning as well as maintain the flexibility of the terms. Contracts are living documents and thus it requires periodic updates and alterations to adapt to the changing circumstances and legal amendments. This dynamic approach prevents the entrenchment of outdated terms and mitigates the risk of double interpretation and confusion. It is also prudent to establish and explicitly state dispute resolution mechanism10 such as arbitration, mediation, court proceedings which provide a roadmap for future disputes and will adequately help the involved parties to arrive at mutually beneficial solutions.
The concept of ambiguous contracts, whether accidental or strategic, may come with its own set of ethical concerns. A lawyer, in the exercise of his profession, is obliged to furnish proficient advocacy to a client wherein such competence entails the legal expertise, acumen, diligence and other essential preparation necessary for effective representation. Adhering to the same, they must exercise caution in the utilisation of ambiguity and consider any effect it might have on their ability and responsibility of delivering competent representation in instances wherein their client's interests may be better served by distinct unambiguous language.11
In conclusion, the art of contract drafting is a delicate dance between clarity and controlled ambiguity. Crafting legally binding agreements that accurately reflect the intentions of the parties while allowing for adaptability andnegotiation is a complex endeavour. A well-drafted contract not only outlines the rights, obligations, and responsibilities of each party but also navigates potential pitfalls of misinterpretation and dispute. Strategic use of clarity through well-defined terms, contextual references, and illustrative examples helps establish a common understanding. On the other hand, controlled ambiguity, when judiciously employed, can accommodate unforeseen changes and facilitate negotiation leverage. However, this balance must be carefully maintained, as excessive ambiguity can undermine the contract's purpose and lead to unintended conflicts. By incorporating parallel clauses, periodically updating terms, and establishing dispute resolution mechanisms, the parties can ensure smoother execution of the agreement and foster mutually beneficial solutions. Ultimately, mastering the interplay between clarity and controlled ambiguity is essential for achieving the true purpose of contract drafting – forging agreements that stand as pillars of collaboration, trust, and effective problem-solving for all parties involved.
Footnotes
1'Basics of Contract Drafting and Contract Review' (ILMS Academy) accessed 2 September 2023.
2 'Basics of Contract Drafting and Contract Review' (ILMS Academy) accessed 2 September 2023.
3 Kenneth Adams, 'Interpreting and Drafting Efforts Provisions: From Unreason to Reason' accessed 2 September 2023.
4 Ian Ayres and others, 'Strategic Vagueness in Contract Design: The Case of Corporate Acquisitions a U T H O R' accessed 2 September 2023.
5 Irene Ng and Huang, 'Stanford -Vienna Transatlantic Technology Law Forum TTLF Working Papers the Art of Contract Drafting in the Age of Artificial Intelligence: A Comparative Study Based on US, UK and Austrian Law' (2017) accessed 2 September 2023.
6 See Start a Business, DRAGON LAW, https://dragonlaw.io/hkg/hkg/segment/starting-a-business/ (last visited Jul 7, 2016); LEGALZOOM, http://www.legalzoom.com (last visited Jul. 8, 2016).
7 Industrial Promotion and Investment Corporation of Odisha Ltd v. New India Assurance Company Limited, (2016) 11 SCC 567.
8 Nabha Power Ltd v. Punjab State Power Corporation Ltd. 2017, (2017) 2 SCC 543.
9 BP Refinery Proprietary Limited v. The president Counselor and Weight Pairs of Hastings, (2018) 2 WLR 192
10 Irene Ng and Huang, 'Stanford -Vienna Transatlantic Technology Law Forum TTLF Working Papers the Art of Contract Drafting in the Age of Artificial Intelligence: A Comparative Study Based on US, UK and Austrian Law' (2017) law.stanford.edu/wp-content/uploads/2017/02/Irene-Ng-TTLF-Working-PAper-26-Art-of-Contract-Drafting.pdf
11 Model Rules of Professional Conduct R. 1.1 (2008).
12 Irene Ng and Huang, 'Stanford -Vienna Transatlantic Technology Law Forum TTLF Working Papers the Art of Contract Drafting in the Age of Artificial Intelligence: A Comparative Study Based on US, UK and Austrian Law' (2017) law.stanford.edu/wp-content/uploads/2017/02/Irene-Ng-TTLF-Working-PAper-26-Art-of-Contract-Drafting.pdf
13 Model Rules of Professional Conduct R. 1.1 (2008).
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