[Updated 14 July 2016: This post will be superseded by a forthcoming article in the Michigan Bar Journal. It should appear in October 2016.]
[I was prompted to write this post after consulting, over the past few months, dozens of cases ostensibly involving ambiguity but in fact dealing with a range of other problems. I plan on including a version of this in MSCD2, so I’d be pleased to receive comments.]
Uncertainty in contract language arises principally from six sources—ambiguity, undue generality, inconsistency, redundancy, conflict, and vagueness. The first five are pernicious, whereas the last—vagueness—is an essential drafting tool, when used with restraint.
Courts tend to attribute all such uncertainty to ambiguity, the result of using ambiguous and ambiguity to convey a broader meaning than that understood by linguists—witness how Black’s Law Dictionary defines ambiguity as “An uncertainty of meaning or intention, as in a contractual term or statutory provision.” But the broader meaning isn’t particularly helpful, as each source of uncertainty operates differently from the others. Lump them together and you risk misunderstanding them.
From a linguist’s perspective, a contract provision is ambiguous if it’s capable of conveying two or more inconsistent meanings.
Different kinds of ambiguity occur in contracts. One is syntactic ambiguity, which arises principally out of the order in which words and phrases appear and how they relate to each other grammatically. There’s also the ambiguity that MSCD groups together under the rubric “the part versus the whole” (see 8.4) and ambiguity associated with language of discretion (I’ll be discussing this in MSCD2).
Another form of contract ambiguity is lexical ambiguity, which arises when context is insufficient to allow one to determine the sense of a word that has more than one meaning. To cite a well-know example, Frigaliment Importing Co. v. B.N.S. International Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960), concerned whether an order for “chickens” was for young chickens or for chickens of any age that met the weight and quality specifications. A more recent example of a case involving lexical ambiguity is Provident Bank v. Tenn. Farmers Mut. Ins. Co., 2007 U.S. App. LEXIS 10671 (6th Cir. May 2, 2007), in which the court held that it was unclear whether the term “foreclosure” referred to foreclosure proceedings or to a foreclosure sale. And see MSCD 8.107 regarding the alternative meanings of year.
It’s commonplace for practitioners to refer to “creative ambiguity,” but it’s likely that they’re referring to vagueness (see below), as there wouldn’t seem to be anything creative about ambiguity. For one thing, ambiguity generally passes unnoticed during the drafting process and only resurfaces after closing, if at all. Furthermore, ambiguity in a contract provision may well result in a party’s being deprived of an anticipated benefit under the contract, and that in turn could lead to a dispute.
Some advocates of “creative ambiguity” might have in mind a drafter’s deliberately including in a contract an ambiguous term, with the aim of permitting the client to invoke, after signing, the hidden, alternative meaning if doing so would provide an advantage. But such gamesmanship seems antithetical to a successful contract relationship and might violate ethics rules. It likely looms larger in the imagination of lawyers than in real life.
A contract provision is unduly general if due to a lack of detail it’s unclear what it applies to. If a contract provision is unduly general, more falls within the scope of the provision than the parties had anticipated, leading to confusion as to what the parties had actually intended. For example, Acme shall purchase the Audi from Widgetco is unduly general if Widgetco owns more than one car manufactured by Audi.
Unduly 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 unduly general.
The term “latent ambiguity” has been used to describe such situations. (Black’s Law Dictionary defines latent ambiguity as “An ambiguity that does not readily appear in the language of a document, but instead arises from a collateral matter when the document’s terms are applied or executed,” and it goes on to allude to Raffles v. Wichelhaus.) But invoking ambiguity in this context only confuses matters, as ambiguity plays no part in creating the uncertainty that arises from undue generality—unduly general provisions don’t convey alternative meanings.
Inconsistency in contracts arises from employing one word or phrase to convey two different meanings—for example, using shall to express both obligations and conditions (see this post). Inconsistency also results from employing two or more different words or phrases to convey the same meaning.
Inconsistency creates confusion, and an aggrieved contract party could fasten on inconsistency in an attempt to have an unintended meaning attributed to a given provision.
Redundancy in contracts arises from including in a provision a word or phrase that conveys a meaning expressed by one or more other words or phrases in that provision. A given reader may be uncertain whether a given word or phrase is in fact redundant and may attempt to have an unintended meaning attributed to a given provision—witness litigation regarding the meaning of indemnify and hold harmless (see this post).
Conflict occurs when separate provisions in a given agreement contradict each other. Courts describe conflict, too, in terms of ambiguity. For example, in United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 813 (Del. Ch. 2007), a high-profile case involving a $6.6 billion acquisition that never closed, the court referred to how a direct conflict between two provisions on remedies rendered the agreement ambiguous. (See this article.) Again, it might be best to use different terminology to distinguish the different sources of uncertainty.
Another source of uncertainty is vagueness, which arises whenever a concept provides for the possibility of borderline cases. For example, “tall” is vague—one cannot say exactly what height someone needs to be in order to be deemed tall. As a result, any two people might agree that Tom is short and Dick is tall but disagree whether Harry—who is taller than Tom but shorter than Dick—is tall. And tallness is relative—your notion of what “tall” means would likely vary depending on whether you were considering a group of schoolgirl gymnasts, a group of professional basketball players, or a mixed population.
Vagueness is unique among the sources of uncertainty, in that it’s not inherently pernicious. Drafters routinely make use of vagueness—vague words and phrases that are commonplace in contracts include reasonable efforts, material and material adverse change, promptly and immediately, substantially, satisfactory, and undue. Drafters invoke vagueness whenever future circumstances are sufficiently uncertain as to render precise standards unworkable. For example, if a provision requiring reimbursement of attorneys’ fees and expenses would likely cover a broad range of litigation, it probably wouldn’t make sense to cap fees and expenses at a given amount. A drafter might instead make use of vagueness by having the provision refer to reimbursement of reasonable attorneys’ fees and expenses.
Under contract law, one uses the perspective of a “reasonable person” to determine whether a provision incorporating vagueness has been satisfied. (Otherwise, vagueness would be entirely relative.) If a given vague standard refers to the perspective of any one party (as in satisfactory to Acme), then in assessing satisfaction one would adopt the perspective of a reasonable person in the position of that party rather than the actual perspective of that party. It’s commonplace for drafters to attempt to circumvent the reasonable-person standard by grafting on to a vague provision at its sole discretion or some variation, as in satisfactory to Acme at its sole discretion. But a court could well hold that any such gambit falls foul of the obligation to perform in good faith; see this post.
In any given context, a drafter should weigh the benefit of vagueness—flexibility—against the cost—uncertainty.