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The Mistake of a Business Owner Regarding Ambiguity in a Contract

Ambiguities in contracts are created when a provision can be interpreted in more than one way. However, the provision has to be objectively open to more than one interpretation. Unfortunately, ambiguities often lead to litigation, which is expensive, difficult and the result is not guaranteed or it leads to unintended consequences. In addition, an ambiguity in a contract can be held against the drafter if the contract does not have a provision stating otherwise. Consider the following hypotheticals regarding ambiguities:

Hypothetical #1: More of That, Inc. is owned by Bea Trice. One of Bea’s key employee’s wants to purchase the business. The agreement is drafted by a business broker. It states that the employee is purchasing all of the assets of the business. At the closing Bea is shocked when she finds out that the funds in the business checking account do not go to her individually.

Analysis: Most likely Bea will not have any recourse because the purchase agreement did not specific any excluded assets. Therefore, the $130,000 that Bea was counting on from the sale of the business, and that she did not consider when setting a lower purchase price for her key employee was an expensive “ambiguity” that was not in her favor. That is because the purchase agreement was not ambiguous.

Hypothetical #2:  This is More, LLC has three owners. They have an operating agreement which does not limit the transfer of membership (aka ownership) interest. Their agreement is silent on what happens when Mark wants to retire and move to Florida. So, Mark transfers his ownership interest to Lizz. The two remaining owners do not like Lizz and do not want her to be an owner.

Analysis: The transfer by Mark of his ownership interests is allowed under statute because the operating agreement did not prohibit it. So, now, most likely the two remaining members will need to figure out a way to either buy Lizz out or the LLC will need to dissolve if the three owners cannot come to a resolution or an agreement as to how to work together.

Hypothetical #3: Bea sells her ownership interest in More of That, Inc. to Sally, her key employee. As part of the agreement, the parties agree that Bea will receive 30% of the net profits over a period of three years. However, the parties then disagree as to the definition of net profits, which is not defined.

Analysis: Most likely this will result in litigation. Does net profit mean per the financial statement? Does net profit mean the net amount as shown on the company’s tax return? Does net profit mean that the capital accounts of the owners are excluded from the calculation? What does it mean? Without it being defined it is subject to multiple interpretations.

Spangler and de Stefano, PLLP assists business owners with their contracts and leases.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.