by Tom Stilp JD, MBA/MM, LLM, MSC, DBA, March 4th, 2025
Breach of contract costs billions of dollars, but the factors that go into a decision to breach a contract have not been studied in a systematic way. We intend to change that. Continuing with our series of the Efficient Breach Theory, in this In the Loop we focus on the “lack of transparency” in contracts as part of the breach decision.
Given the frailties of language, contract interpretation has been a problem since the early days of the common law.
Contracts can be obscure in meaning because of indefiniteness of language or as the result of having multiple meanings. A contract term is ambiguous if it is reasonably capable of being understood in more senses than one.
What we will call “pragmatic ambiguity” may be a deliberate practice (Dulek & Campbell, 2015). Ambiguity allows contracts to adapt to change in the future. Thus, it is not without purpose that contracts, which concern themselves with future performance, often contain pragmatic ambiguity.
Pragmatic ambiguity is justified in four circumstances.
- First, where information is unknown (known unknowns).
- Second, where one side has information unknown to the other side (asymmetric information).
- Third, where one or both sides know that information is potentially in error (erroneous information).
- Lastly, where circumstances dictate the need for ambiguity to address an immediate need (ambiguous bluntness), such as one side demanding information from other while providing little time to think.
This last instance mimics the “excited utterance” exception to the rule against hearsay. It is thought the stress of the moment provides insufficient time such that the “excited utterance” made during a startling event permits a court to admit the statement as valid evidence because the stress of the situation prevents the speaker from having time for reflection, essential for conscious fabrication.
Pragmatic ambiguity allows parties to “leave their options open” to adapt to change for future issues. Pragmatic ambiguity implies a moral judgment, but in this instance, moral questions are subsumed by practical ones.
We have prepared thousands of contracts, where “pragmatic ambiguity” creates negotiation positions. Learned counsel will know how to prepare contracts to the advantage of their client.
