You must avoid uncertain terms when drafting or signing contracts for your business. An uncertain term refers to an ambiguous clause. This can be problematic for your contract as parties may disagree over the correct interpretation. This article will explore how courts will interpret uncertain contractual terms.
Practical Example of an Uncertain Term
To explain an uncertain term and its effect on a contract, let us look at a practical hypothetical.
Bob signs a contract with Big Co Pty Ltd (Big Co). Big Co grow and distribute bananas. Under the agreement, Bob is to promote the sales of Big Co bananas and sign on new wholesalers and retailers. Per the contract term, Bob must use his best endeavours to sign on five new wholesalers or retailers per quarter.
Unfortunately, Bob has only managed to sign on three wholesalers or retailers in the last quarter, and Big Co is now accusing Bob of breaching the contract. Big Co claims that the contract gave rise to a strict obligation to sign on a set number of resellers.
Bob claims that under the contract, he was to use his “best efforts” to sign on new wholesalers and retailers. However, there was never any expectation that Bob successfully signs on with a set number of banana resellers. Unable to come to an amicable solution with Bob, Big Co have instituted proceedings for breach of contract and is seeking compensation.
The issue before the Court is the legal interpretation of “best efforts”. Big Co and Bob cannot agree on what this term means. As such, it is an uncertain contractual term. Accordingly, the task before the Court is one of contractual construction. Thus the question arises, what legal principles do Courts rely on in interpreting uncertain contractual terms?
To avoid doubt, when we refer to uncertain contractual terms, we refer to contractual language that is either not sufficiently precise and clear or uses terminology that is susceptible to more than one meaning.
Uncertainty Will Not Necessarily Invalidate a Contract
From a policy perspective, the Courts will not wholly invalidate a contract simply because one or more contractual terms in the document are uncertain or are capable of producing more than one result when applied. Provided that an uncertain contractual term is not entirely devoid of meaning, the Courts will ascribe the meaning they believe reflects the term properly. Towards this end, Courts go a long way to uphold transactions as far as is practicable and reasonable.
Continue reading this article below the formUncertain Terms and the Intention of the Contracting Parties
The object of construing uncertain contractual terms is to, as far as practicable, give effect to the intention of the parties. When we refer to intention, we are not referring to the subjective musing of each party at the time of the contract. What is referred to is the objective express intention of the parties as disclosed in the words of the contract. This is because you should determine the parties’ intentions from the words used rather than their actual intentions at the time.
As a general rule of construction, a party’s objective intention is judged by what a reasonable person would have thought in the circumstances.
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Legal Principles of Construction
Policy and contextual considerations aside, the Courts will refer to a specific set of legal rules and principles when attempting to interpret and contribute meaning to uncertain contractual terms. The main legal rules include, but are by no means limited to the following:
- in determining the meaning and legal effect of uncertain contractual terms, the entire contract is to be construed and considered, including its purpose, effect and operation;
- construction of uncertain contractual terms is a commercial exercise. That is, you should interpret uncertain language broadly and fairly instead of narrowly and pedantically. The aim is to give commercial effect to the document;
- in interpreting uncertain contractual terms, adopt a common sense approach; and
- when attributing meaning to uncertain contractual terms, you can achieve certainty by understanding, analysing and considering the practices of business persons, including those in the particular trade or profession inquisition.
Key Takeaways
Uncertain terms can cause serious issues between parties to a contract. Occasionally, it may lead to invalidating the contract, although the court will try to avoid this where possible. Courts will generally try to construe terms in the context of the broader contract by applying a common sense approach to it.
If you would like to know more about contractual construction, the interpretation of uncertain contractual terms or the legal principles employed in undertaking the same, 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 1300 544 755 or visit our membership page.
Frequently Asked Questions
An uncertain contract term is a term within a contract that is ambiguous (where it is difficult for the parties to determine what a particular term means) or contradictory. For example, where the parties agree that one party is to pay the other a ‘reasonable amount’ rather than a specific price or percentage of profits, this may be an uncertain contract term. This is because the parties failed to agree to a certain payment amount. For a contract term to be operative and enforceable, it has to be considered sufficiently certain.
The court will generally attempt to do all things necessary to give some meaning to a contractual term agreed between the parties if it is possible to do so. As such, for an entire contract to be considered ‘void for uncertainty’, the contract term must be so uncertain that the court cannot objectively determine the parties’ intention.
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