Drafting Transactional Documents and Avoiding Ambiguity

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BY MIREILLE BUTLER

In the realm of legal practice, drafting transactional documents that are clear and unambiguous is paramount. The primary objective is to ensure that all parties involved understand the terms and obligations without misinterpretation. A well-written provision is one that provides no traction for either party to argue that something else was intended, and it is usually possible to make a provision more precise and thus resistant to aggressive interpretations. This article delves into the techniques and principles that can be employed to draft effective transactional documents.

Avoiding Mazes in Contract Language

One common pitfall in drafting transactional documents is creating complex and convoluted language that resembles a maze. Consider, for example, the following clause:

Payment. For purposes of Article 8, any Order described in Article 9 shall be deemed to include the Payment outlined in Sections 6.09 and 9.14, if not already included in Article 2.

This clause is difficult to follow and understand due to its intricate references and cross-references. Rethinking the clause structure and eliminating as many cross-references as possible will enhance readability and comprehension.¹

As for defined terms, they can be both helpful and harmful. Definitions can provide precision but also cloud meaning if not used carefully. Consider this example:

Claims will be Paid in Full within 90 days of Receipt.

Here, “Paid in Full” is defined as: “Compensated in the lawful money of Transnistria at the exchange rate prevalent on 14 July 2012.”

And “Receipt” is defined as: “When received by the Claims Processor.”

Finally, “Claims Processor” is further defined as: “Copra Holding Corp., South Tarawa, Kiribati.”

The overuse of defined terms makes a document cumbersome and difficult to interpret. It is therefore crucial to strike a balance and use definitions only when they genuinely add clarity.

Handling Ambiguities

Ambiguity occurs when a contract provision is subject to two or more mutually exclusive interpretations. There are three main types of ambiguity:

Contextual ambiguity arises when different portions of the same contract say contradictory things.²

Solution: Cross-check provisions by topic to ensure consistency.

Semantic ambiguity stems from the words themselves.³

Solution: Examine words from the perspective of a reader in bad faith to identify potential misinterpretations.

Syntactic ambiguity results from word order, punctuation, and unclear antecedents or modifiers.⁴ Temporal terms such as “hereunder,” “thereunder,” or “herein” are particularly dangerous.⁵

Solution: Ensure pronouns have clear antecedents, and structure sentences to eliminate confusion. Also think of tabulating to avoid ambiguity stemming from misplaced modifiers. For example, consider the following clause: “Developer licenses the Software for use on all WiFi-enabled computers, excluding tablets, netbooks, and laptops.” Tabulating can clarify whether the exclusion is meant to apply not only to tablets but also to netbooks and laptops, as in: “Developer licenses the Software for use on all Wifi-enabled computers, excluding: (a) tablets; (b) netbooks; and (c) laptops.”

Practical Examples

Consider the following clauses:

Example 1:

Insurance coverage terminates for all Dependent Beneficiaries who are not residing in the domicile of the Insured and who are over the age of 21.

It is unclear whether the termination of insurance coverage applies (1) to Dependent Beneficiaries who are not residing in the domicile of the Insured (regardless of age), (2) Dependent Beneficiaries who are over the age of 21 (regardless of domicile), or (3) only to Dependent Beneficiaries who meet both conditions simultaneously (not residing in the domicile of the Insured and over the age of 21).

Improved: “Insurance coverage terminates for all Dependent Beneficiaries ~~who are~~ not residing in the domicile of the Insured ~~and~~ who ~~are over the age of 21~~ have passed their 21st birthday.”

Example 2:

Acme may exercise the Option any time from February 1, 2014, to April 30, 2014.

It is unclear from this clause whether the days listed are to be excluded or included for purposes of determining exactly when Acme’s right to exercise the option starts and ends.⁶

Improved: “Acme may exercise the Option any time from February 1, 2014, inclusive, to April 30, 2014, exclusive.”

Example 3:

Disputes under this contract shall be resolved by a panel appointed by the architect consisting of three neutrals, two attorneys certified in Construction Law and one attorney certified in Environmental Law.

It is unclear from this clause whether there are six individuals on this panel or only three.

Improved: If there are six members: “Disputes under this contract shall be resolved by a six-member panel appointed by the architect, consisting of three neutrals, two attorneys certified in Construction Law, and one attorney certified in Environmental Law.”

Improved: If there are three members: “Disputes under this contract shall be resolved by a panel appointed by the architect consisting of three neutrals. Two must be attorneys certified in Construction Law and the other must be an attorney certified in Environmental Law.”

Example 4:

No term in this contract shall be construed as sanctioning the purchase of bolts from another source.

Improved: “No term in this contract shall be construed as allowing the purchase of bolts from another source.”

Improved: “No term in this contract shall be construed as prohibiting the purchase of bolts from another source.”

The few previous examples make it apparent that ambiguities in transactional documents stem from various sources, from unclear language and imprecise references to poor punctuation. Following some basic principles allows the drafter to reduce risks of ambiguity.

Avoiding Ambiguity with Precise Wording

Use of Qualifiers and Standards

In transactional drafting, qualifiers such as “material,” “reasonable,” and “best efforts” are frequently used to introduce a degree of flexibility. However, these terms can be subjective and lead to disputes if not clearly defined.

Materiality: The term “material” generally refers to a level of significance that would affect a reasonable person’s decision. For example:

“Material Adverse Change” means any material adverse change in the business, results of operations, assets, liabilities, or financial condition of the Seller.

Defining “material” in the context of the agreement can prevent misunderstandings. A clear definition might state that “material” refers to any change that would reasonably be expected to have a significant impact on the transaction.

Reasonableness: The reasonableness standard is objective, asking what a reasonable person would have done in similar circumstances. For example:

The Parties will take appropriate measures to secure the required Approvals.

Using the term “reasonable efforts” instead, defined to create an objective standard, provides greater clarity than “appropriate measures.”

Reasonable Efforts means, with respect to a given obligation, the efforts that a reasonable person in [promisor’s] position would use to comply with that obligation as promptly as possible.

Including specific actions or carve-outs can further reduce ambiguity.

Best Efforts: This term is often misunderstood to mean all possible efforts, but case law suggests it means more than “good faith” but not boundless effort. Courts have stated that “best efforts” requires more than “good faith,” which is an implied covenant in all contracts.⁷

To avoid confusion, it is advisable to use “reasonable efforts” instead of “best efforts” and to specify what actions must be taken to meet this standard.

Knowledge and Representations

Statements of knowledge in agreements should be clearly defined to prevent disputes. For example, a clause stating: “To the best of its knowledge, Seller is not in violation of any Securities Law” should specify what constitutes “knowledge.”

A clearer version might be:

Except as set forth on Schedule X, no litigation is pending or, to the knowledge of Seller’s three executive officers, threatened against the Seller. For the purposes of this provision, “knowledge” means (a) each executive officer’s actual knowledge; and (b) the knowledge that each executive officer should have had after diligent investigation.

This definition clarifies the extent of the seller’s knowledge and the investigation required.

Mandatory or Permissive?

The use of “shall” and “may” in legal documents can significantly impact their interpretation. “Shall” is generally construed as mandatory, imposing an obligation, while “may” is permissive, allowing for discretion. But both words can create ambiguities. Courts have held that “[s]hall is inherently ambiguous” as it has been used to mean “not just must and may, but also will and is.”⁸

Courts will interpret “may” and “shall” based on the context and subject matter, so clarity in drafting is essential. Some legal drafting experts advocate restricting “shall” to mandatory obligations or eliminating it altogether due to the semantic subtleties involved.⁹

Punctuation and its Impact

Punctuation plays a crucial role in transactional drafting, yet its importance is often underestimated. For instance, consider this sentence:

The Company’s managerial employees, who work in California, will not be eligible for the Benefit.

This suggests that all managerial employees are ineligible. In contrast:

The Company’s managerial employees who work in California will not be eligible for the Benefit.

This clarifies that only those managerial employees working in California are ineligible for the Benefit.

Tribunals have been known to either ignore inconvenient commas or give too much significance to them, leading to disputes over interpretations. Disgruntled parties have fought over a comma, with millions of dollars at stake!¹⁰ The careful drafter should use standard punctuation but avoid structuring language so that too much is riding on its presence or absence.

In addition, when drafting, keep in mind that Washington is an Oxford comma state!¹¹

The Oxford comma, also known as the serial comma, is placed immediately before the coordinating conjunction in a list. For example:

Seller shall deliver shirts in the following colors: red, black, blue, and green.

Without the serial comma, ambiguity may arise:

My heroes are my parents, Superman and Wonder Woman.

Lastly there may be some situations where merely adding or removing commas may not be sufficient to resolve ambiguity. For example, the “Rule of the Last Antecedent” suggests that a qualifying phrase applies only to the immediately preceding element unless separated by a comma.¹² Thus, when interpreting the phrase “letters or emails drafted by a clerk,” the Rule of the Last Antecedent would lead to interpret the qualifying modifier “drafted by a clerk” as referring to “emails” but not “letters.” However, if the meaning of a provision can be significantly changed by a comma, the drafter is better off simply rephrasing.¹³

Additional Thoughts—Principles of Clear Legal Writing

Fred Rodell, a longtime Yale Law School professor, famously stated in 1936, “There are two things wrong with almost all legal writing. One is style. The other is content. That, I think, about covers the ground.”¹⁴ What has become known as “the plain English movement” was started in 1975 in the U.S. as a way to counter these issues.¹⁵ Legal documents should be drafted in a manner that can be understood, not just by the legal technicians who draft them, but by the consumers who are bound by their terms. This requires the use of the following techniques:

Short sentences: Lengthy sentences often lead to confusion. Break down complex ideas into shorter, manageable sentences.

Definite, concrete, everyday words: Use plain language that is easily understood.

Active voice: The active voice is more direct and vigorous than the passive voice.

Tabular presentation: Present complex or multifactor information in tables or bullet lists for clarity.

Descriptive headings and subheadings: Use headings and subheadings to organize content logically and help the reader navigate the document.

Avoid legal jargon and technical terms: Use simple synonyms instead of legalese. For example, use “end” instead of “terminate,” “explain” instead of “elucidate,” and “use” instead of “utilize.”

Avoid double negatives: Double negatives can be confusing. Replace them with a single, clear term (e.g., “not able” becomes “unable”).

Reduce superfluous words: Use simpler synonyms and avoid jargon to make legal documents more accessible.

Superfluous: “In order to”
- Simplified: “To”
Superfluous: “Subsequent to”
- Simplified: “After”
Superfluous: “During such time as”
- Simplified: “While” or “During”
Superfluous: “Pursuant to”
- Simplified: “Under”

Effective drafting of transactional documents requires meticulous attention to clarity and precision. By adhering to principles of plain English, legal professionals can create documents that are both legally sound and easily comprehensible. Finally, the foundational principle behind the rules of plain English is consistency—in word choice, punctuation, numbering of clauses, use of definitions, etc. Emerson wrote “A foolish consistency is the hobgoblin of little minds … . With consistency a great soul has simply nothing to do.”¹⁶ With apologies to Ralph, in legal drafting, and particularly transactional drafting, consistency is key!

About the author

Mireille Butler is a teaching professor and the co-director of the Legal Analysis, Research, and Writing Program at the University of Washington School of Law.

NOTES

1. See Kenneth A. Adams, A Manual of Style for Contract Drafting § 4.90 (ABA 5th ed. 2023). “Generally, the fewer cross-references in a contract, the better. A reader should be able to understand each provision on its own, without having to turn to another part of the same contract or to another contract. Prioritizing cross-references can be particularly disruptive; in quantity, they’re a sign of inefficient structure.”

2. For example, a contract cannot simultaneously allow that the risk of loss does not shift until buyer accepts delivery and also that the buyer is responsible for damage arising in transit.

3. Frigaliment Imp. Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960) “The issue is, what is chicken? Plaintiff says ‘chicken’ means a young chicken, suitable for broiling and frying. Defendant says ‘chicken’ means any bird of that genus . . .” See also WebMD LLC v. RDA Int’l Inc., No. 102830/08, 2009 WL 175036 (N.Y. Sup. Ct. Jan. 6, 2009) where WebMD promised advertiser RDA its site would have 36,000 visitors. RDA asserted that, by counting the same user multiple times, WebMD failed to provide 36,000 “unique” visitors.

4. See Loso v. Loso, 31 A.3d 830 (Conn. App. Ct. 2011). The following clause was at issue: “The defendant agrees to pay for one-half the cost of Sarah’s college expenses for a four-year degree … subject to the limitation that said cost shall not exceed the tuition for a full-time residential student at UCONN- STORRS.” The defendant contended that the modifier “one-half” applied to the word tuition, so that the cap for his payment was one-half the tuition for a full-time residential student at UCONN-STORRS. Although the court disagreed and found the clause clear, the issue would have been avoided by writing: “The defendant shall pay half the cost of Sarah’s college expenses for a four-year degree, up to an amount equal to half the tuition for a full-time residential student at UCONN-Storrs.”

5. See Weichert v. Faust, 989 A.2d 1227 (Md. Ct. Spec. App. 2010). Subsection H of a non-solicitation clause contained a mutual fee-shifting provision, which provided: “If COMPANY brings any action(s) […] to enforce its rights hereunder and a judgment is entered in the COMPANY’S favor, then MANAGER shall reimburse COMPANY for the amount of the COMPANY’S attorney fees incurred in pursuing and obtaining judgment.” The issue was whether the term “hereunder” in the fee-shifting provision referred only to action taken under the non-solicitation clause, or under the entire contract. If it referred only to the non-solicitation clause, then the manager’s breach of the duty of loyalty was irrelevant to the awarding of attorney fees.

6. Adams, supra note 1 § 10.8.

7. Kroboth v. Brent, 215 A.D.2d 813, 814 (N.Y. App. Div. 1995).

8. Bland Henderson v. Commonwealth, 885 S.E.2d 477 (Va. Ct. App. 2023).

9. Bryan Garner, “Shall We Abandon Shall?,” ABA Journal (August 2012), www.abajournal.com/magazine/article/shall_we_abandon_shall/.

10. Rogers Commc’ns, Inc. v. Bell Aliant (Canadian Radio-television & Telecommunications Commission 2007); see also O’Connor v. Oakhurst Dairy, 851 F.3d 69 (1st Cir. 2017). Maine law required time-and-a-half pay for each hour worked after 40 hours, but it carved out exemptions for the following: “The canning, processing, preserving, freezing, drying, marketing, storing, packing for shipment or distribution of: Agricultural produce; Meat and fish products; and Perishable foods.” If the exemption applied to packing (for shipment or distribution), delivery drivers did not pack, so they were entitled to overtime. If the exemption was read to include packing for shipment OR distribution, the exemption applied, and the delivery drivers were not entitled to overtime. The case settled for $5 million.

11. See 2023 Washington State Bill Drafting Guide, Part IV, Section 1(f), https://leg.wa.gov/CodeReviser/pages/bill_drafting_guide.aspx#Commas. “The use or misuse of a comma can have significant implications. ‘It is urged that the comma is the lowest and least significant of all punctuation marks. . . We must confess, however, to a very high regard for the lowly comma.’ Peters v. Watson Co., 40 Wn.2d 121, 122-23 (1952). The comma is to be used only if required. The most important uses of the comma are described in the following: (i) In a series of three or more words or phrases, a comma is used after each item except the last, as in ‘officers, deputies, and employees.’ This rule applies to both conjunctive, ‘and,’ and disjunctive, ‘or,’ series.”

12. Id. Part II, Section 12 (v).

13. In Rogers, supra note 11, Rogers Communications had made an agreement with Bell Aliant to rent some of its equipment. After a couple of years, Bell Aliant asked to renegotiate the terms, but Rogers refused. It argued that the deal was binding for five full years and could not be changed earlier. So the two companies went to court over the critical clause in the agreement: “This agreement shall be effective from the date it is made and shall continue in force for a period of five (5) years from the date it is made, and thereafter for successive five (5) year terms, unless and until terminated by one year prior notice in writing by either party.” The argument all came down to that second comma—the one after the word “terms.” Bell Aliant argued that the second comma meant that the final clause—unless and until terminated by one year prior notice in writing by either party—applied to the entire agreement, not just to the renewal periods. The CRTC accepted Bell Aliant’s argument and decided in its favor.

14. Fred Rodell, Woe Unto You, Lawyers! (Reynal & Hitchcock 1939).

15. Richard C. Wydick, Plain English for Lawyers; see also 17 CFR § 230.421 guidelines under § 230.421 of the Securities Act and the SEC’s Plain English Handbook, www.sec.gov/about/reports-publications/newsextrahandbook.

16. Ralph Waldo Emerson, “Self-Reliance,” 1841.