Many business divorces stem from contract disputes. Cases of co-owners, partners or shareholders ending a business relationship because of contract-related issues are common.
Disagreements typically involve day-to-day operations, profit distribution, compensation, company funds, intellectual property and deadlock. Various factors can lead to contract disputes – one of which is ambiguity.
Conflicting interpretations of rights and obligations
Vague words in a business contract can result in conflicting interpretations of each party’s rights and obligations. For example:
- A partnership agreement that does not clearly define the day-to-day roles of each partner can lead to important work being undone or the same job being done twice, resulting in wasted time and resources.
- An agreement that states a partner gets a share of “net profit” without specifying what counts as expenses can lead to disagreements. One partner may believe the other is making high corporate deductions and, in turn, lowering their share.
- A shareholder agreement with unclear voting thresholds, such as one that uses terms like “substantial majority” instead of a clear numeric definition, increases the chances of severe corporate deadlocks.
- Vague buyout formulas are also risky. When remaining members want to buy a departing partner’s share but the agreement states “fair market value” without a defined appraisal method, that can leave room for different approaches that yield wildly different figures.
- Conflicting clauses can also cause disputes. For example, when the profit clause of a partnership agreement says profits will be split by ownership percentage but the compensation clause gives a working partner a high guaranteed salary first, resulting in low shareable profits for the rest.
Vague contract language opens the door for everybody to interpret clauses the way they prefer, and that often leads to litigation. Learn more about contract disputes and how to solve them to protect your business.
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