Open to Interpretation: Legal Implications for Business Contracts

Business contracts form the key framework for your commercial relationships, helping safeguard your business from risk. They are vital to help you define the rights and responsibilities of all parties in a project and prevent disputes. However, unclear and ambiguous language in a contract can lead to different interpretations, creating risks for your business, which could ultimately escalate into disputes. This article explores how contract ambiguities can arise, some of the key principles around contractual interpretation and how your business can reduce risk by focusing on clear contract drafting to avoid disputes over contractual interpretation. 

Why is Clear Contract Language Critical for Avoiding Risk?

Misinterpreted contractual terms can cause various problems for your business. A well-drafted contract is vital to ensure all parties understand their responsibilities and are on the same page from the start. Ambiguous contracts can expose your business to legal and financial risks. 

The words in your contract will determine the interpretation of the obligations of all parties. Poorly drafted language can create uncertainty, causing misunderstandings and unintended consequences. For example, vague phrases such as ‘reasonable time’ could leave room for conflicting and mismatched expectations (e.g., where the customer expects fast action, but the supplier assumes a longer period is acceptable). 

Various commercial disputes can arise from differing interpretations of contractual provisions, often due to unclear or ambiguous language. These disagreements can occur when the parties’ intentions are not clearly reflected in the contract’s wording. In a dispute scenario, courts are then required to step in to determine the meaning of clauses. To minimise the risk of such disputes, precise, unambiguous language and terms that accurately capture the agreement reached between the parties are essential.

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What Principles of Interpretation Does English Law Follow?

When interpreting contracts, a range of broad principles apply and focus on the parties’ objective intentions. For instance, courts consider what a reasonable person would understand from the contract, basing their analysis on what the parties have written rather than what they may have subjectively intended. They would assign weight to the agreement’s wording but also examine the contract as a whole to ensure individual provisions align with its overall structure and purpose. 

They would also assess the agreement’s factual, legal, and commercial context. Business common sense also plays a crucial role, guiding interpretations that reflect practical and commercial realities. 

To avoid the meaning of a contract being litigated and left up to the decision of the courts (such as the High Court), it is vital to prioritise clear contract drafting to prevent disputes from arising in the first place. 

What are Practical Tips for Clear Contract Drafting to Avoid Risks?

You can protect your business from disputes by taking proactive steps during drafting.  

Practical strategies for businesses include the following:

• use precise language, define key terms, and ensure all provisions are consistent and easy to understand;
• focus on specific and practical provisions which reflect your commercial agreement, ensuring they are unambiguous to avoid the chance of misunderstandings;
• use short sentences and simple words to avoid confusion, given that overly complex and unnecessary legalese could confuse – especially where it is misused; 
• clearly state any important deliverables and timeframes and avoid vague phrases which could cause mismatched expectations. Use mandatory language where necessary to highlight any vital obligations clearly; and
• review the entire contract for conflicts or inconsistencies before signing it. Double-check your contracts for clarity. 

In practice, it can be challenging to get commercial contracts right. Especially without legal knowledge of the nuances of contractual terms. Working with a commercial lawyer can provide key advantages for your business.

Key Takeaways

Contractual misinterpretation can lead to stressful and costly disputes. Clear contracts help avoid such conflicts and protect your business from risk. By using clear language and focusing on specific and watertight contract drafting, your agreements can minimise risks and help encourage smooth and strong contractual relationships. Seeking legal advice can ensure that your contracts are effective, enforceable, and meet your commercial objectives. If your business needs help drafting or reviewing agreements, you can work with an experienced commercial lawyer to prepare robust contracts to help avoid risk. 

If you need legal advice on drafting contracts, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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