Ambiguity in a contract arises when terminology can be reasonably interpreted in conflicting ways, often leading to disputes over scope and financial obligations. While some long-term agreements use broad language deliberately to maintain flexibility, accidental ambiguity is a major risk. Businesses eager to close a deal often overlook the precise wording of a clause, and they do so at their peril.
Patent versus Latent Ambiguity
Contractual disputes generally stem from two distinct areas. Patent ambiguity is an obvious error or contradiction on the face of the document. Latent ambiguity remains hidden and only emerges when applying the contract to real-world circumstances. The dispute in Wood v Capita involved a latent issue regarding how to construe an indemnity clause in a share sale agreement.
Objective Intent and Contra Proferentem
When resolving these issues, courts historically relied heavily on the rule of contra proferentem, interpreting vague language strictly against the drafting party. Today, UK courts favour looking at objective intent. They consider the natural and ordinary meaning of the words, the remainder of the contract, and the facts known to the parties at the time. Crucially, while courts have regard for commercial sense, they absolutely will not consider subjective factors, such as what either party secretly intended.
The Supreme Court Decision
The disagreement over the indemnity clause went all the way to the Supreme Court. The Court established that an iterative process must be followed. Judges will balance the specific clause against the wider contract terms and the broader commercial context. Ultimately, the Court rejected the appeal, deciding the indemnity clause in question did not cover the specific circumstances of the case.
Key Preventive Measures
If contracts contain ambiguities, courts will apply a complex combination of factors to interpret them, and the final decision will not necessarily align with your own business sense. To avoid the courts entirely, businesses should take these preventive steps:
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Define all key terminology explicitly within the document.
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Remove vague language from critical operational and financial clauses.
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Include a precedence clause to clearly resolve any conflicting terms.
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Always secure an independent legal review before signing.
The Case Wood v Capita Insurance Services Limited [2017] UKSC 24
When considering each interpretation, the quality of the drafting can be taken into account, eg. where drafting is by a professional it may be appropriate to pay more attention to the rest of the contract than the factual matrix although business common sense can never be ignored entirely
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