Almost all day-to-day operations in a company are governed by contracts. These include partnership, shareholder, employment, independent contractor and supplier/vendor agreements. About half of business disputes stem from vague or ambiguous terms in these contracts.
When parties entering a contract interpret a term differently, the chances of misunderstandings can be high. Ambiguity in business contracts falls under two main categories, which are:
Patent ambiguity
Obvious errors or contradictions in a contract are considered patent ambiguity. These inconsistencies are within the contract’s text. Anyone reading the document can identify them.
For example, a supplier agreement says the vendor should supply “500 units,” but somewhere else within the contract, it says “5,000 units,” or when a contract requires delivery “within 30 days,” but within the same contract, the delivery deadline for the same goods is stated as “within 45 days.”
Latent ambiguity
Latent ambiguity is hidden – it’s not on the face of the document. The language in a contract may appear clear, but its ambiguity becomes apparent when applying the terms to real-world circumstances. The involved parties may notice that the contract language allows multiple interpretations.
Examples of vague language that can result in multiple interpretations include best efforts, high quality, promptly, as soon as possible and reasonable efforts.
If a business states a vendor should supply “high-quality raw materials,” misunderstandings can occur, as the vendor may interpret it as “industry standards” or “functional,” whereas the business means “defect-free” or “premium.” A contract should define acceptable quality levels or material specifications to avoid such ambiguity.
Other examples of patent ambiguity are when a contract states “deliveries to be made to the warehouse” when a business has multiple warehouses or when a contract specifies payment in “dollars” when involved parties operate in the U.S. and Canada.
Both patent and latent ambiguity can negatively impact a business. Learn more to draft clear contracts and handle disputes efficiently.