Latency results from a faulty connection. Latency is a time delay between the moment something is initiated, and the moment one of its effects begins or becomes detectable. In the case of GunZ: The Duel, which uses connections between computers instead of a central server to connect clients, this means a delay between the moment one player initiates an action, and the moment that action is detected by the clients of other players. "Ping" is usually used as a measure of latency by players.
When a player is experiencing latency, it complicates the hit detection of the game. Thus, a player may "hit" a player, but that "hit" will not register on the other player's client. Thus, that player will not receive the "hit". However, as lag is based on the connection between players, the same phenomena will occur to the other player; thus, it is best to fix one's connection to improve the client interaction between oneself and other players; contrary to popular belief, a faulty connection does not give a player an unfair advantage.
In extreme cases of latency, the client will simply reject a connection, resulting in an Agent Error.