3.2 Using vague terms in contracts

Acceptable use of vague terms. Although contracts must be clear in principle, many obligations are hard to define in an all-encompassing manner. For example, precise criteria may depend on extraneous uncertainties, or the parties may be willing to assume clear (and even stricter) criteria only after a minimum level of mutual trust has been established. In such cases, it would be inevitable to use a vague term. It makes sense to elaborate on vague terms by agreeing on conditions or milestones to achieve specificity (and certainty) at a later stage.

Vague terms and gentlemen’s agreements. Although vagueness should be avoided, many vague terms serve a useful purpose. As a general principle, a contract should be clear about the obligations of each party. However, clear obligations are not always agreeable. In such cases, the principals may well work on the basis of a gentlemen’s agreement reflected by some vague wording of intention, materiality or reasonableness. Remember, however, that if an obligation is not clear, the strongest contracting party will have the benefit of the doubt as to whether it did perform duly.

Examples of vague terms. Some examples of vague or unspecified contract terms are reasonable, undue delay, material, substantially and properly. Referring to good faith is often also vague.

Good faith. Good faith is a subjective state of mind requiring due and sincere consideration. Referring in a contract to good faith, essentially introduces a standard of conduct which has yet to be defined, and reflects a call for ‘good-housekeeping-behaviour-but-not-too-much’. By contrasting it in a particular context to what ‘bad faith’ entails, it is often possible to define what is not good faith (and in international commercial transactions, if behaviour is not continuously in a grey area of bad faith, this may well define an appropriate and acceptable course of ‘acting in good faith’).

There is no need to expressly provide that a party “shall act in good faith”, although many contract drafters believe that such a reference can be a useful reminder. For example, it is not uncommon to provide that “in the event that XYZ occurs, the parties shall discuss in good faith any adjustments to the price”.

Good faith in contracts, and the law. The principle of good faith (or “good faith and fair dealing”) may be considered one of the fundamental concepts of the Germanic legal family and, although less articulated, the Roman legal systems as well. Lawyers from these legal traditions (and the legal systems based on or inspired by them) will have a good sense of what it means to say that each contracting party must act in accordance with the principles of good faith.

For lawyers from a common law jurisdiction, it is much more difficult to appreciate what the scope of good faith actually is. They feel uncomfortable with the idea that some undefined, vague cerebral phrase may result in unexpected obligations: they would prefer clear contract wording that outlined a party`s obligations and, in cases where these obligations were not clearly stated that, the principle of freedom of contract should prevail.

Reference. For more about the principle of good faith, see section 5.1(b). It is common to use vague terms that are in effect a reflection of the principle of good faith. To understand what an obligation entails when designated by a vague term such as reasonable, material or substantial, it is inevitable to invoke what lawyers of the Roman and Germanic traditions would call the principle of good faith. These will be discussed next.