A contract is considered to be ambiguous “when it is reasonably susceptible to more than one reading.” Reyes v. Metromedia Software, Inc., 840 F.Supp.2d 752 (S.D.N.Y. 2012) citing U.S. Fire Ins. Co. v. Gen. Reinsurance Corp., 949 F.2d 569, 572 (2d Cir.1991).
Eliminating ambiguity is perhaps the most important element for reducing risk in an agreement. Disputes usually do not arise from a limitation of liability provision or a disclaimer of warranties but rather from ambiguity relating to a definition, the license grant, pricing, a statement of work or other fundamental terms related to what the licensor will deliver. Both parties should strive to create a contract that is clear, concise, and easily understandable, as well as one that can be easily adjudicated by an unrelated third party, such as a judge or an arbiter.
Too often, parties draft a contract based on their common understanding of the underlying transaction, which arises through many months of negotiations and meetings without providing sufficient contractual detail or clarity. In some cases, the licensee may not understand the rights it needs to utilize the software as contemplated or realize that it did not receive the use rights required to operate its business. See SAP UK Limited v. Diageo Great Britain Ltd [2017] EWHC 189 (TCC) February 16, 2017.
Ambiguity can arise in many forms:
• The failure to clearly define terms, leading each party to ascribe their own definition to terms in question. See, e.g., JA Apparel Corp. v. Abboud, 568 F.3d 390 (2d Cir. 2009) (agreement ambiguous as term “name” could be interpreted in two different manners).
• The failure to use the correct terminology in the license grant, Vernor v. Audodesk, Inc., 621 F.3d 1102 (9th Cir. 2010) (agreement granted limited license and was not a sale).
• The failure to clearly state license restrictions. See Creative Minds v. FedEx Office and Print Services, Inc., 886 F.3d 91 (2d Cir. 2018) (express prohibition in license required to restrict non0exclusive licensee exercise of license).
· The failure to clearly establish their rights upon termination including ownership, use and access to data. See e.g., DRL Software Solutions, LLC v. JourneyPure, LLC, 2018 WL 6407616 (S.D.N.Y. Dec 6, 2018).
• The failure to contemplate and address potential future problems/issues.
• The failure to address in detail the parties’ rights upon termination. See, e.g., Topps Co., Inc. v. Cadbury Stani S.A.L.C., 526 F.3d 63 (2d Cir. 2008) (license agreement ambiguous as licensee’s rights upon termination open for interpretation).
• Vagueness in the agreement’s wording.
• The failure to use precise language in any change order or a statement of work.
• Lack of detail in eliminating conflicting terms within the agreement.
• The failure to establish clear lines of communication.
• The failure to ensure adequate levels of accountability. • The failure to catch typos. See Fetch Interactive Television v. Touchstream Technologies, Inc. 2019 WL 193921 (Del. Ch. Jan. 15, 2019) (“[FetchIT] shall cure such default within fifteen (30) days or immediately if deemed to be incurable.”) (UCC-3-114: “words prevail over numbers”). • The failure to appreciate punctuation. See O’Connor v. Oakhurst Dairy, 851 F.3d 69 (1st. Cir. 2017) (absence of comma created ambiguity).
One means of reducing ambiguity is to include, if appropriate, diagrams or examples. Examples may be appropriate in illustrating the calculation of license fees and royalty payments. The inclusion of these aids may not eliminate a dispute, but they will guide a third party adjudicating any dispute in ascertaining the parties’ intent. Generic examples also provide a means to define general terms. Matrices indicating each party’s responsibilities may also serve to reduce ambiguities. Outsourcing agreements commonly use matrices to assign responsibility for various activities to the vendor, the customer or both parties jointly. For a more detailed discussion, see Jones, Envisioning Visual Contracting: Why Non-Textual Tools and Content Will Improve Your Contracting, 2 Contracting Excellence 27 (No. 6 Aug. 15, 2009), available at https://www2.iaccm.com/resources/?id=8102 (last visited February 20, 2020).
Another means of avoiding ambiguity is through the use of checklists. A checklist allows a party to apply best practices to its contracting processes and is a useful means to ensure a particular provision or concern has not been overlooked.
Finally, in conducting a final review of the document, each party should:
• check the definitions whenever a defined word is used to ensure its use is correct;
• not copy and paste clauses from other agreements without checking for ambiguity in the new context;
• not assume that because a word appears many times before, it is unambiguous in its present context;
• not agree to what is not understood;
• avoid latent ambiguities by understanding the underlying transaction;
• review the document after putting it aside for some period of time to allow the mind to clear;
• check the interrelationship of each part of the agreement against the remainder, particularly as structural integrity is weakened by changes to the original form;
• know the general rules of construction, e.g., terms should be interpreted so that all terms have effect. These rules or guidelines should be used only to test whether there is ambiguity if they were to be applied; they should not be relied on in countenancing ambiguity.
A third method of eliminating ambiguity is through the implementation of a robust education program to train all employees involved with the contract negotiation and drafting on issue-spotting and best practices. One of the most effective means of educating employees is by using examples where a party’s expectations were not met because of the use of ambiguous language.
Often in the event of a dispute over a contract’s interpretation or the parties’ intent after a contract’s execution, the parties find that the contract does not clearly address the issue in question. The likelihood of a dispute is foreseeable, as the parties often enter into extended negotiations, the result of which is that each party clearly understands the desires of the other party and the deal at the time of contract signature. While each party previously understood the issues at the time of contract execution, problems can arise when the individuals involved in the negotiation are no longer involved in the transaction, and their successors lack the detailed knowledge of their predecessors. See, e.g., Upper Deck Co., LLC v. BreaKey Int’l, 2004 WL 2980190, at *3 (S.D.N.Y. Dec. 22, 2004) (language requiring developer to deliver source code “necessary to enable consumers to use the product . . . in the same manner as the Product is presently operated” is ambiguous).
The parties’ relationship is usually strongest at the time of contract signature. After execution, the individuals involved usually transition from the negotiation team to a new group of individuals that is usually responsible for delivering the deliverables and managing the contract. Often, the new individuals lack the historical knowledge arising from the negotiation. Thus, the parties should make every effort to document all aspects of the transaction in minute detail and resist the temptation to address and document an issue after contract signature.
The question of whether a contract is ambiguous is a question of law to be resolved by a court. Leprino Foods Co. v. Gress Poultry, Inc., 379 F. Supp.2d 659 (M.D. Pa. 2005). A court interpreting a contract must first assess whether the contract is ambiguous: “To answer the ambiguity question, the court must first examine the language of the contract by itself, independent of extrinsic evidence concerning the drafting history or the intention of the parties.” Bank v. Thermo Elemental Inc., 451 Mass. 638, 648 (2008).
“Ambiguity is not created merely because the litigants disagree about the meaning of a contract.” Nicolaci v. Anapol, 387 F.3d 21, 26 (1st Cir. 2004). Rather, “a contract is only ambiguous where an agreement’s terms are inconsistent on their face or where the phraseology can support reasonable differences of opinion as to the meaning of the words employed and obligations undertaken.” Bank v. Int’l Bus. Machs. Corp., 145 F.3d 420, 424 (1st Cir. 1998) (quotations and citations omitted). The meaning of an unambiguous contract term is a question of law, while the meaning of an ambiguous contract term is a question of fact. Seaco Ins. Co. v. Barbosa, 435 Mass. 772, 779, 761 N.E.2d 946 (2002); see also Clarendon Trust v. Dwek, 970 F.2d 990, 993 (1st Cir. 1992). “Should the court find the contract language unambiguous, we interpret it according to its plain terms.” Den Norske Bank AS v. First Nat’l Bank of Boston, 75 F.3d 49, 52 (1st Cir. 1996).
Ambiguity will usually be resolved through the use of a “four-corners” approach where the court will seek to determine the intent of the parties from reading the agreement as a whole. Scungio v. Scungio, 6713 N.W.2d (Okla. 2012). In a minority of jurisdictions, the court will allow the introduction of intrinsic evidence to determine the intent of the parties. Lietz v. Hansen Law Offices, P.S.C., 271 P.3d 899 (Wash. App. 2012).
Individual clauses will be subordinated to the overall intent of the parties by reading the contract as a whole. Restatement (Second) Contracts §§ 202(2), 230, 233. Courts will look to commercial reasonableness in attempting to interpret an ambiguous contract and will examine the conflicting interpretations of the parties to ascertain which “interpretation fits both the language of the contract and the contract’s commercial setting . . . .” Sutter Insurance Company v. Applied Systems, Inc., 393 F.3d 722, 726 (7th Cir. 2004). The intent of the parties must be ascertained from the entire agreement. Waldman v. Shoemaker, 80 A.2d. 776 (Pa. 1951). Greater weight will be placed on the specific terms of the agreement over general language. County of Suffolk v. Alcorn, 266 F.3d 131 (2d Cir. 2001); Restatement (Second) Contracts § 203(c) (1981). Terms will be interpreted to give “the meaning that would be ascribed to it by a reasonably intelligent person who was acquainted with all of the usages and circumstances surrounding the making of the writing.” Unihealth v. U.S. Healthcare, Inc., 14 F. Supp.2d 623, 633 (D.N.J. 1998).
If the court is unable to resolve the ambiguity, it will be construed against the drafter or the person who supplies the words and meaning that serves the public interest. See Current Tech. Concepts v. Irie Enterprises, 530 N.W.2d 539 (Minn. 1995); Restatement (Second) of Contracts §§ 206, 261(c). As such, the party drafting the agreement should include language to the effect that each party was involved in the drafting and negotiation of the agreement and that neither party should be deemed to be the drafter of the agreement.
For an excellent discussion of drafting ambiguity-free contracts, see Feldman & Nimmer, Drafting Effective Contracts: A Practitioner’s Guide, 4th ed. (2019). See also Adams, Making a Mess of Ambiguity: Lessons from the Third Circuit’s Opinion in ‘Meyer v. CUNA Mutual Insurance Society, at https://www.adamsdrafting.com/wp/wp-content/uploads/2014/07/Making-Mess-Ambiguity.pdf (Last visited March 31, 2020).