Musings on the Nature of Ambiguity Prompted by a Recent Opinion of the Delaware Court of Chancery

Today I saw this post by Francis Pileggi on the Delaware Corporate & Commercial Litigation Blog. It’s about the recent opinion of the Delaware Court of Chancery in Cyber Holding LLC v. CyberCore Holding, Inc. (PDF here).

Cyber Holding LLC (“Seller”) sold CyberCore Corporation (the “Company”) to CyberCore Holding, Inc. (“Buyer”) (what an imaginative bunch of names) in a transaction that closed in July 2010. Here’s what happened next, as told by the court:

The Company claimed deductions for transaction-related expenses (the “Transaction Deductions”) for the tax year from January 1, 2011, to July 8, 2011 (the “Stub Year”). Because of the deductions, the Company reported a net operating loss for the Stub Year, escaped over $1 million in 2011 income tax liability, received a $214,166 refund for prepaid estimated 2011 taxes, and obtained over $3 million in income tax refunds for 2009 and 2010 by carrying back the net operating loss. Buyer has remitted to Seller refunds for the estimated prepaid taxes and the 2009 and 2010 taxes. Seller brings this action to recover $1,557,171 (the “Avoided Tax”) pursuant to Section 6.5(f)(z) of the Agreement.

Here’s the language at issue:

(f) To the extent … (z) Transaction Deductions claimed in the Tax year ending on or including the Closing Date result in a reduction of Taxes for that Tax year in excess of the amount paid to Sellers pursuant to Sections 6.5(d) and (e), then Buyer . . . shall pay to the Sellers’ Representative … an amount equal to the amount by which (i) the amount of Taxes that the Buyer, the Company and its Subsidiaries … would have been required to pay in the Tax year in question but for the deduction or the Carryforward of the Transaction Deductions … exceeds (ii) the amount of Taxes actually payable by the Buyer, the Company and its Subsidiaries … with respect to such Tax years (and in the case of payments pursuant to clause (z) above, solely to the extent such amount is in excess of the amount paid to Sellers pursuant to Sections 6.5(d) and (e)).

Again, the court:

The dispute boils down to whether the references to an amount “in excess of the amount paid to Sellers pursuant to Sections 6.5(d) and (e)” mean in excess of (1) the total amount paid pursuant to those sections (including the remittances for 2009 and 2010) or (2) the amount paid pursuant to those sections with respect to the Stub Year alone. If the first interpretation is correct, as Buyer posits, Buyer has already paid Seller over $3 million, which exceeds the amount of the Avoided Tax (approximately $1.56 million). If the second, or Seller’s, interpretation is correct, Buyer owes Seller the amount of the Avoided Tax.

The court held that the contract language at issue was ambiguous, so it denied Buyer’s motion for summary judgment. And this is where I started paying particular attention.

So the question was what the word “amount” referred to. So I asked myself what kind of ambiguity we were dealing with. The only possible candidate was lexical ambiguity, but that didn’t fit: the alternative meanings being argued over aren’t inherent in the word amount. By contrast, in a variety of contexts the word bank can mean the edge of a river or a financial institution.

That’s why I suggest that the uncertainty that caused this dispute isn’t due to ambiguity. Instead, it’s due to undue generality, which is discussed at MSCD 7.20–23. Here are the first two of those paragraphs:

If because of a lack of detail it’s unclear what a contract provision applies to, that provision can be described as overly general. As a result of undue generality, more falls within the scope of a provision than the parties had anticipated, and that can lead to confusion as to what the parties had actually intended. For example, Acme shall purchase the Ford Mustang from Widgetco is overly general if Widgetco owns more than one such car.

Overly general contract language was famously at issue in Raffles v. Wichelhaus, 2 Hurl. & C. 906, 159 Eng. Rep. 375 (Ex. 1864). The contract in question provided for purchase of cotton from a ship named “Peerless” that was to depart from Bombay. It transpired that two ships named “Peerless” were to depart from Bombay a couple of months apart—the buyer had one ship in mind, the seller the other. In failing to provide sufficient detail to distinguish the two ships, the contract was overly general.

Note that dispute over two alternative possible meanings doesn’t mean that the language at issue is ambiguous. What matters is the source of the uncertainty. If the uncertainty over the meaning of a word or phrase is entirely a function of context instead of being inherent in the word or phrase, then you haven’t got lexical ambiguity, you’ve got undue generality. (Undue generality can also engender a range of alternative possible meanings instead of just two.)

Court’s have traditionally used the label “latent ambiguity” to refer to uncertainty caused by undue generality. I suggest that it’s better to use a different label for a different mechanism.

(By the way, whoever represented Seller in this transaction should have revised the language at issue so that it refers not to “the amount paid to Sellers ” but to “the amount paid to Sellers for that Tax Year.”)


About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

4 thoughts on “Musings on the Nature of Ambiguity Prompted by a Recent Opinion of the Delaware Court of Chancery”

  1. I’m not sure that “undue generality” is the right way to describe this. There is indeed an ambiguity, in the sense that the words could refer to several different things. While MSCD recognizes two kinds of ambiguity, lexical and syntactic, this is really a third type, which is contextual. You need extrinsic information to understand to which of the possibilities the parties were referring. Since legal doctrine requires “ambiguity” to enable resort to extrinsic information, it would be better to describe the problem in terms of ambiguity, where possible, to facilitate the necessary inquiry.

    • But as noted, I think a different mechanism is involved, so I don’t think one can automatically lump it with ambiguity. In due course I’ll activate my linguist friends, and I’ll defer to them regarding what to call it.

  2. There are many kinds of uncertainty and lots of overlapping words to describe them (ambiguity, homonomy, indeterminacy, lexical ambiguity, polysemy, syntactical ambiguity, uncertainty, unclarity, vagueness, and more),

    I have the feeling that the MSCD scheme of (1) syntactic ambiguity, (2) lexical ambiguity, and (3) undue generality is somewhat idiosyncratic and will benefit from activating the linguist friends, although I doubt MSCD4 will urge ‘Use monosemes! Reject polysemes!’

    In the meantime, some random shouts:

    1/ No word, phrase, sentence, or other block of language is clear or unclear in a vacuum. All certainty and uncertainty is contextual. How do we know that ‘Congress shall make no law respecting an establishment of religion’ doesn’t mean that Congress must not make a law that shows any respect for a religious establishment? Answer: context (= 18th century use of English in America).

    2/ If a word, phrase, sentence, or other block of language has more than one reasonable interpretation, it’s ambiguous, even if the ambiguity is latent and requires additional information to uncover.

    3/ The Peerless instance is a textbook case of ambiguity. There are two reasonable interpretations of the reference to the ship Peerless, although one or both parties may not have known that when signing the contract. Additional information later made the ambiguity patent.

    4/ ‘Undue generality’ seems a suboptimal term for a type of uncertainty. First, ‘undue’ is a judgemental and not a descriptive term. That’s no help. Second, ‘generality’ seems unspecific about the kind of uncertainty it purports to describe, rather like defining ‘ill-fitting’ clothing as ‘inappropriate’ clothing, rather than clothing ‘that conforms poorly to the shape of the wearer’s body’.

    5/ When you catch yourself saying that one or another kind of uncertainty is a ‘function’ of something or ‘involves a mechanism’, tread slowly and carefully. You are nearing the forest of social science jargon, where the fog dragon lives.

    6/ In short, I’m with Vance on this one. –Wright

    • I’m not sure it elucidates anything to say that Peerless is a textbook case of ambiguity. Whatever you call it, the uncertainty in Peerless operates differently from lexical ambiguity, syntactic ambiguity, and ambiguity of the part versus the whole. I’m more interested how the uncertainty arises than the name one applies to it.


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