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ascertaining the parties’ intention as to purpose by disregarding the contract’s unambiguous language.124
§ 4.4. Ambiguous Contracts
As we have seen, a contract is ambiguous when it is susceptible to two or more reasonable meanings that are advanced by the parties.125 Ambiguities may be intrinsic or extrinsic.126 Intrinsic ambiguities take the forms of term ambiguities, sentence ambiguities, structural ambiguities, and vagueness.127 Extrinsic ambiguities also take these forms because the relevant extrinsic evidence must show that the contract’s language is ambiguous. In this section, we will look at several examples of ambiguous contracts in these forms. We will consider how a judge or fact-finder should resolve such ambiguities in Chapter 5.
§ 4.4.1. Term Ambiguity
Term ambiguities are the easiest to detect. They involve a single word or short phrase that reasonably bear the two contested meanings. In Chapter 1, we gave the following simple examples: The word bank refers to distinct things when it is used in descriptions of rivers and of financial institutions. When a commercial contract calls for the purchase and sale of chicken, can the seller fulfill its obligation by delivering stewing chickens rather than the younger and more expensive broilers and fryers?128
§ 4.4.2. Sentence Ambiguity
In Chapter 1, we gave the following simple example of a sentence ambiguity: In a land sale contract, the seller commits to “put in gas and electricity lines at no cost to the buyer; property also to be surveyed at once.” Must the seller put in the gas and electricity at once?
124See also Radiation Sys., Inc. v. Amplicon, Inc., 882 F.Supp. 1101, 1123 (D.D.C. 1995); W.O. Barnes, Inc. v. Folsinski, 60 N.W.2d 302, 306 (Mich. 1953); RESTATEMENT (SECOND) OF CONTRACTS § 202(1) and cmt. c (1981).
125See § 4.1.
126Id.
127Farnsworth, supra note 4, at 952–57.
128Frigaliment Importing Co., Ltd. v. B.N.S. Intern. Sales Corp., 190 F.Supp. 116 (1960).
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In Shelby County State Bank v. Van Diest Supply Co.,129 a common kind of sentence ambiguity was at the center of the dispute. The parties entered into a security agreement that described the collateral as “[a]ll inventory, including but not limited to agricultural chemicals, fertilizers, and fertilizer materials sold to Debtor by [the seller].”130 The court found that this sentence was ambiguous.131 It could include as collateral all inventory whether or not supplied by the seller, including the listed agricultural goods supplied by the seller. Or it could include “[a]ll inventory . . . sold to Debtor by the seller,” excluding inventory supplied by third parties.
Sentence ambiguities often involve a question whether a modifying word or clause pertains to a part of the sentence. Consider the following part of a force majeure provision in a contract for the manufacture and sale of goods:
Neither party will be liable for delays or suspension of performance
. . . caused by acts of God or governmental authority, strikes, accidents, explosions, floods, fires or the total loss of manufacturing facilities or any other cause that is beyond the reasonable control of that party (“Force Majeure”) so long as that party has used its best efforts to perform despite such Force Majeure.132
The “reasonable control” clause might modify all of the listed force majeure events, or it might modify only “any other cause.” Put otherwise, “or” preceding the “reasonable control” clause might be conjunctive or disjunctive.133 It would matter, for example, when the manufacturer’s plant was destroyed by an explosion within its control. (We will consider how a court can resolve this ambiguity in Chapter 5.134)
A court found a more subtle sentence ambiguity in Intermountain Eye and Laser Centers, P.L.L.C. v. Miller.135 The dispute concerned the duration of a non-competition agreement between a physician and his employer. The governing clause said that the agreement would continue
129303 F.3d 832 (7th Cir. 2002).
130Id. at 834–35.
131Id. at 836.
132The Pillsbury Co., Inc. v. Wells Dairy, Inc., Ruling on Wells Dairy Motion for Summary Judgment against Pillsbury, Iowa District Court for Plymouth County, Law Nos. LACV029916 & LACV029523, April 17, 2006. The author served as an expert consultant for Wells Dairy’s attorneys in this case.
133See FARNSWORTH, supra note 2, at § 7.2.
134See § 5.2.
135127 P.3d 121 (Idaho 2005).
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for the period of 2 years immediately following the termination of the Physician’s employment with the company for any or no reason (. . . including the expiration of the term of this Agreement).136
The question was whether the parenthetical clause modified reason or termination. If it modified reason, the employer could argue that the two-year period commenced at the time that the physician’s employment terminated even if the employment terminated after the expiration of the agreement. If, however, the parenthetical clause modified termination, the physician could argue that the period commenced earlier, when the agreement expired.
§ 4.4.3. Structural Ambiguity
Structural ambiguities involve incoherence or conflicts among the provisions of a contract. In Chapter 1, we gave the following simple example: Assume that the termination clause of a contract for the sale of goods provides that either party may terminate at any time but only with one year’s notice. The force majeure clause, however, says that the buyer may terminate upon the occurrence of a force majeure event. If a force majeure event occurs, may the buyer terminate immediately?
In Canam Steel Corp. v. Bowdoin Construction Corp.,137 a structural ambiguity appeared from two documents, one incorporating the other by reference. The first was a form contract between a general contractor and its structural steel subcontractor. It contained a pay-when-paid provision: “Receipt of payment by the Contractor shall be a condition precedent to any payment to the Subcontractor hereunder.”138 The subcontractor’s steel supplier, wary of the subcontractor’s credit, sought an assurance from the general contractor that payment would be made within sixty days of the steel supplier’s invoice. The general contractor sent a letter to the steel supplier that said:
It is our intent to issue a check made jointly to [the steel supplier and the subcontractor] for [the contract price for the steel supplied]. It will be paid 60 days from the date of your invoice. . . . Payment to
136Id. at 126.
137613 N.E.2d 121 (1993).
138Id. at 122.
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be made under the terms and conditions of the contract between [the subcontractor and the general].139
When the general contractor refused to pay for supplied steel on the ground that the owner had not paid him, the steel supplier brought an action against it. The steel supplier reasonably rested its case on the provision requiring the general to pay within sixty days of the steel supplier’s invoice. The general reasonably defended on the basis of the letter’s incorporation by reference of the structural steel subcontract, which contained the pay-when-paid provision.
§ 4.4.4. Vagueness
In Chapter 1, we said that a word or phrase is vague when it has no distinct boundaries between its range of application and the range of neighboring words. Rather, there is a band in which reasonable people may differ over the proper use of the term; indeed, there is no single proper use within the band. For example, the range of application of “orange” shades into those for “yellow” and “red” with no lines of demarcation. A contract that calls for a delivery of goods of “fair and average quality” may lead to a dispute due to vagueness.
A common kind of vagueness problem is illustrated by Elliot & Frantz, Inc. v. Ingersoll-Rand Co.140 A manufacturer and a distributor entered into a distribution contract in which the manufacturer agreed to “provide sales assistance, engineering and application advice, reasonable quantities of advertising materials, campaigns and instruction in sales and service.”141 After the manufacturer terminated, the distributor claimed that the manufacturer breached by failing to supply it with adequate services and support as required by this provision. The district court granted summary judgment for the manufacturer on the ground that the contract required a reasonable amount of support. The appellate court held that the district court erred because the clause was vague. It did not, by its terms, require a quantitative level of services and support and could be interpreted to require either a minimal amount or a reasonable amount. It did require reasonable quantities of advertising materials, but it did not
139Id.
140457 F.3d 312 (3d Cir. 2006).
141Id. at 327.