Contract Ambiguity 101: Risks, Legal Impact, and Steps to Clarity

Look, we’re fully aware that formal agreements are meant to capture each party’s intentions, commitments, and responsibilities in clear terms. But what happens when those terms aren’t as clear as they seem?

Ambiguity in a contract seems like a minor issue, but it can have a serious, negative impact. Think about a vendor providing “reasonable” support after a sale, or a service provider delivering results “as needed.” When terms like these are open to interpretation, they can lead to misunderstandings and disputes.

Intentional or accidental, it doesn’t matter. The reality is that ambiguous terms can turn even the most carefully planned business relationships into sources of friction and risk no one wants to deal with.

With unclear language, parties might have different interpretations of rights and obligations, which complicates the enforcement and resolution of said issues. If these vague terms are ever put under legal scrutiny, courts may step in to interpret them—and the outcome may not favor the intent of either party.

That’s why we’re going to break down all things related to contract ambiguity. We’re going to explain what it is, the risks it poses, how courts approach ambiguous contracts, and the strategies you can use to prevent unclear terms. In the end, you’ll be able to create more transparent, enforceable agreements that protect your business.

What is contract ambiguity?

You’ve signed a contract that promises to deliver a service “within a reasonable timeframe.” It sounds straightforward, but what’s “reasonable” to you might be something different to the other party. Contract ambiguity arises when vague, undefined, or contradictory terms open the door to multiple interpretations.

When the language of an agreement—the very tool designed to present misunderstandings—is unclear, it can leave everyone involved with a different understanding of their obligations.

Types of ambiguous terms

Not all ambiguous terms are created equal. Some are simply the result of phrasing that leaves too much open to interpretation, while others arise from oversight in defining specific terms. Here’s an overview:

Undefined terms. When a contract includes industry-specific terms, jargon, or technical language without defining them, it’s easy for misunderstandings to crop up. Take, for instance, the term “deliverable” in a service contract. Without clear specifications, one party might expect a formal report, while the other considers a simple presentation sufficient. Undefined terms create a gap in expectations.

Vague language. Phrases like “reasonable efforts,” “substantial progress,” or “as soon as possible” are common examples of vague language. These phrases are open to individual interpretation. What one party views as “reasonable” or “substantial” may differ significantly from what the other party envisions.

Contradictory clauses. Sometimes, contracts inadvertently include clauses that contradict each other, particularly in complex agreements with multiple amendments. For example, one section might state that a product will be delivered “within 30 days,” while another allows up to “45 days” under certain conditions. When clauses contradict each other, it’s often up to the courts to decide which one prevails.

Examples of ambiguity in contracts

There are many real-world cases rife with instances where ambiguous contract terms have led to significant consequences. For example, in a well-known case involving a food manufacturer, a contract stipulated that a company would provide “all necessary personnel” to support an expansion project.

But when it came time to execute the project, the parties disagreed on what “necessary” meant—one argued that only a minimal support staff was needed, while the other expected a team of skilled experts.

Another example involves the ambiguity of dates in employment contracts, where phrases like “two weeks’ notice” can be interpreted differently based on specific contractual or jurisdictional standards. Such disputes often lead to time-consuming negotiations, lost productivity, and, occasionally, litigation.

In short, contract ambiguity arises when wording leaves room for interpretation—an all-too-common issue that can destabilize relationships, delay project timelines, and invite legal battles. So the better you understand the causes of contract ambiguity, the more proactively you can address legal risks.

Risks associated with ambiguity in a contract

Ambiguity affects how the agreement is interpreted and introduces potential risks that impact your finances, relationships, and even regulatory standing. Let’s explore some of the most pressing risks.

1. Legal disputes and litigation

One of the most common consequences of contract ambiguity is legal disputes. When parties interpret terms differently, disagreements escalate, leading to contract disputes that require legal intervention. Litigation is an expensive, lengthy process that disrupts operations. Courts generally turn to industry standards, previous interactions between the parties, or common definitions to make a judgment.

2. Financial risks and losses

Ambiguity can also increase legal exposure, opening the door to direct financial losses. When terms are unclear, one party might interpret a payment clause in a way that reduces their financial obligations. E.g., ambiguous language in a damages clause might allow a client to claim that they owe less than expected.

3. Damaged relationships with partners or clients

Business relationships thrive on trust and clarity. Ambiguous contracts make one party feel that the other party is unfairly taking advantage of unclear terms. These misunderstandings, understandably, can damage long-term partnerships and high-stakes client relationships. 

The sense of being misled or taken advantage of can strain partnerships, reduce customer loyalty, and potentially harm a company’s reputation.

4. Compliance and regulatory issues

Vague terms that touch on regulatory or contract compliance have risks that extend beyond disputes and financial losses—they’ll result in legal penalties. Regulatory bodies may have specific requirements for compliance, and if contract language doesn’t clearly define responsibilities, it could lead to legal issues.

Are ambiguous contracts legally enforceable?

Once a contract’s language is unclear, it falls to the courts to interpret what the parties intended. Additionally, they are interpreting these terms without the benefit of knowing how each side understood the terms when they agreed to them. While contract ambiguity doesn’t automatically make a contract unenforceable, it can complicate enforcement.

How courts address ambiguity with judicial interpretation

Courts aim to interpret the language in a way that respects the original intent of both parties. Judges will often look at things like industry standards, the context in which the contract was created, and any past dealings between the parties. These help to determine how a reasonable person would interpret the terms.

If a service contract includes an undefined term like “reasonable efforts,” the court may interpret it by comparing what’s considered “reasonable” in similar contracts within the same industry. Judges may also examine the surrounding language and structure of the contract to draw out a coherent meaning. This process, called judicial interpretation, seeks to bridge the gap left by vague or undefined terms.

Consequences of a court finding contract ambiguity

If a court determines that a contract is too ambiguous to enforce fairly, it has several options:

• Void the contract. In cases where ambiguity makes it impossible to determine each party’s obligations, the court may declare the contract void, leaving both parties as if the agreement had never existed. This can be disruptive if big investments or actions have already been made.
• Interpret in favor of one party. Courts sometimes use the principle of contra proferentem, which means interpreting ambiguous terms against the party that drafted the contract. This favors the non-drafting party because the drafter had the opportunity to clarify the terms but failed to do so.
• Modify the contract. In certain cases, a court may attempt to modify or clarify specific terms to create a more enforceable agreement. For example, the court may add details to clarify responsibilities or establish timelines based on evidence of the parties’ intentions.

Enforceability and exceptions

However, keep in mind that a contract may still be enforceable despite ambiguity if:

• The ambiguity is minor. If only a small part of the contract is ambiguous (e.g. a vaguely defined timeline) and the rest of the terms are clear, a court may enforce the agreement as a whole while applying a standard interpretation or disregarding the ambiguous terms altogether.
• There’s sufficient evidence of intent. If both parties demonstrate a clear intention to uphold the contract and agree on its main objectives, courts may give effect to the contract despite ambiguity. This is relevant when additional evidence supports a common understanding of the terms.
• An ambiguity clause is present. Some contracts state that ambiguities won’t affect enforceability or that both parties agree to negotiate unclear terms in good faith. These clauses don’t always prevent disputes, but they reassure the court that both parties intend to uphold the contract.

Ways to avoid ambiguity in contracts

Preventing contract ambiguity starts with drafting agreements that leave little room for interpretation.

Clarity in contracts for lasting partnerships

There you have it. Ambiguity in contracts may start with just a few unclear words, but the consequences can ripple across your business—affecting finances, relationships, and compliance. Using clear language, defining terms, and avoiding contradictory clauses can mitigate the risks tied to contract ambiguity.

Advanced AI contract review tools add an extra layer of protection, flagging unclear terms before they lead to costly disputes. In the end, an unambiguous contract is a strategic advantage that safeguards your business interests and sets a solid foundation for lasting partnerships. Take the time to draft with precision, clarify responsibilities, and integrate tools. Your future self will thank you for it.