Contract Disputes: How Courts Interpret Ambiguous Terms
Contractual agreements are the backbone of modern business relationships. From multimillion-dollar corporate deals to straightforward service agreements between two parties, these agreements are critical. But what happens when the terms are unclear? Ambiguities in contracts are one of the most common sources of conflict in business and civil law.
At Smid Law, we help clients dealing with business litigation, including contract disputes. Located in Fishers, Indiana, our law firm serves Indianapolis, Carmel, Noblesville, Zionsville, and the surrounding areas, including Hamilton County and Marion County.
Here, we’ll explore how courts interpret ambiguous terms during a contract dispute, the legal doctrines involved, and what parties can do to minimize the risk of costly litigation.
The Basics of Contract Ambiguity
Before discussing how courts resolve these issues, it’s important to understand what constitutes an ambiguous contract term. A contract is considered ambiguous when the language is reasonably susceptible to more than one interpretation. Ambiguity can arise in several forms, including:
Vagueness: Terms are too general (e.g., “reasonable efforts” or “timely manner”).
Omissions: Essential details are left out.
Contradictions: Sections of the contract conflict with each other.
Undefined terms: Specialized or industry-specific language isn’t clarified.
For example, if a construction contract states that a project must be completed in a “reasonable time,” and one party interprets that to mean 30 days while the other believes it means 90 days, this can lead to a contract dispute centered on the interpretation of that term. Such misunderstandings can have significant consequences if not clarified early.
How Courts Assist With Interpreting Ambiguities
When parties can’t agree on what a term means, the issue often lands in court. The goal of the court isn’t to rewrite the contract or favor one party over another; it’s to honor the intent of the parties at the time the agreement was made. Here, we’ll explain how courts typically approach ambiguous language in a contract dispute.
Plain Meaning Rule
Courts begin with the plain meaning rule. If the words used in the contract are unambiguous on their face, the court will interpret them according to their ordinary and usual meaning. Judges don’t consider external evidence if the language is clear. However, if a term appears ambiguous, then the court moves beyond the text.
Contextual Interpretation
When contract language is unclear, courts don’t isolate a single phrase or word; they examine the entire agreement to uncover the intended meaning. If ambiguity exists, courts analyze the contract as a whole, considering the surrounding language and structure to determine the most reasonable interpretation. They look at how the term fits within the broader context of the agreement, including:
Titles and headings
Placement of the clause in the contract
Related provisions
Logical consistency
The idea is to harmonize all clauses so that none are rendered meaningless or contradictory. This method prevents courts from distorting the agreement by focusing too narrowly on isolated words. By interpreting terms in light of the entire contract, courts are better able to preserve the deal the parties actually intended.
Extrinsic Evidence
When the wording of a contract is ambiguous and the text alone doesn’t clearly resolve the dispute, courts often turn to outside sources for guidance. This approach helps judges better understand the context in which the agreement was formed and how the parties interpreted it at the time. Courts may allow extrinsic evidence to clarify intent. This includes:
Negotiation history
Draft versions of the contract
Trade practices and industry norms
Prior dealings between the parties
Course of performance under the contract
For instance, if both parties had previously completed transactions involving similar language, that conduct might help clarify what was intended in the current contract. Extrinsic evidence can be especially persuasive when it shows a consistent understanding or pattern of behavior. However, it must align with the purpose of the contract and can’t contradict unambiguous terms.
The Doctrine of Contra Proferentem
If ambiguity remains after reviewing all contextual evidence, courts may invoke the doctrine of contra proferentem. This principle dictates that any unclear language should be interpreted against the party who drafted the contract. Rooted in fairness, it seeks to protect the less powerful party from vague or biased terms.
This principle is particularly significant in adhesion contracts—standard-form agreements where one party has little to no opportunity to negotiate the terms, such as insurance policies, consumer contracts, or employment agreements. The reasoning is that the drafting party had the chance to clarify the terms and should be held accountable for any ambiguity.
The Importance of Intent
In resolving a contract dispute, courts are ultimately focused on discerning and enforcing the intent of the parties at the time of contract formation. Intent is paramount in contract law, and judges will prioritize mutual understanding over strict textual interpretation when ambiguity clouds the meaning.
Sometimes, courts find that both interpretations are reasonable but incompatible. In such cases, they may determine that no meeting of the minds occurred, and the contract could be declared void. Alternatively, if one party’s interpretation is more consistent with the totality of the agreement or better supported by the evidence, the court will favor that interpretation.
Contract Interpretation in Different Jurisdictions
It’s worth noting that approaches to contract interpretation can vary slightly depending on whether the case is governed by common law (e.g., most states) or Uniform Commercial Code (UCC) principles, which apply to the sale of goods. Under the UCC, a more flexible and commercially practical approach is taken. For example, the UCC places a strong emphasis on:
Usage of trade: Common practices in a particular industry.
Course of dealing: Prior conduct between the same parties.
Course of performance: Conduct under the current contract.
These factors are particularly influential in resolving contract disputes involving goods, rather than services or general business agreements governed by common law. The UCC acknowledges that strict interpretations can overlook the practical realities of commercial relationships, where informal practices often define expectations.
How to Avoid Ambiguity in Contracts
The best way to avoid a contract dispute over ambiguous terms is through careful drafting and proactive communication. Ambiguities often arise not from intentional deception but from rushed drafting or assumptions that both parties understand a term in the same way. A well-drafted contract not only protects both parties but also fosters smoother working relationships.
Define Key Terms
Avoid generalities like “timely,” “reasonable,” or “sufficient.” If such terms must be used, define them explicitly. This eliminates guesswork and creates clear expectations for both sides. Consistent definitions throughout the contract also allow for coherence and help prevent internal contradictions.
Be Specific
Include dates, deadlines, pricing, quantities, performance standards, and procedures for unexpected events. Specificity limits room for interpretation and makes sure both parties know exactly what is required. Vague descriptions can lead to misaligned expectations and ultimately to a contract dispute.
Use Clear Formatting
Break long paragraphs into sub-sections, use bullet points for complicated obligations, and include headings for clarity. This improves readability and helps both parties locate key provisions quickly. Intricate contracts should be structured in a way that highlights essential responsibilities and minimizes confusion.
Avoid Jargon
Unless you’re drafting a contract among experts in a particular field, avoid technical language that could be misinterpreted. If industry-specific terms are necessary, provide clear definitions or include a glossary. Using plain language whenever possible makes your contract more accessible and legally defensible.
Review and Revise
Have contracts reviewed by legal counsel, especially if they involve significant stakes or long-term commitments. Attorneys can identify vague language, inconsistent clauses, or legal gaps that could lead to a contract dispute. Contact Smid Law to discuss your contract with one of our business law attorneys.
Contact a Business Litigation Attorney Today
Ambiguity in contracts is more than just a drafting oversight; it can lead to protracted legal battles, financial loss, and strained business relationships. If you’re dealing with a contract dispute, Smid Law is here to help. Our law firm serves Indianapolis, Fishers, Carmel, Noblesville, Zionsville, and the surrounding areas, including Hamilton County and Marion County. Contact our firm today to discuss your case and begin working together toward a clearer and more precise contract.