138 |
ELEMENTS OF CONTRACT INTERPRETATION |
by its terms require reasonable quantities of sales assistance, engineering, and application advice. It may be added that it was unclear due to a sentence ambiguity—whether reasonable modified only “quantities of advertising materials” or also “campaigns and instruction in sales and service.” And, if reasonable services and support were required, reasonable obviously is a vague term. The question of meaning was given to the jury.
§ 4.5. No Need to Find Ambiguity?
Though the great majority of jurisdictions require a finding of ambiguity before or after considering extrinsic evidence, some secondary authorities would not. Chief among them are Corbin and Farnsworth, the Restatement (Second) of Contracts, and the UCC. The courts do not follow the former three authorities widely in this respect. The latter, however, is statutory law that courts have followed in some interesting cases.
§ 4.5.1. Corbin
Corbin, followed by Farnsworth, strongly opposed any need for a court to find an ambiguity before admitting all relevant evidence of subjective intention in order to interpret the relevant contract language. His arguments, however, depend on a questionable premise. The argument is as follows:
There are, indeed, a good many cases holding that the words of a writing are too “plain and clear” to justify the admission of parol evidence as to their interpretation. In other cases, it is said that such testimony is admissible only when the words of the writing are themselves “ambiguous.” Such statements assume a uniformity and certainty in the meaning of language that do not in fact exist; they should be subjected to constant attack and disapproval.142
Findings of plain meaning and ambiguity however, need not make these assumptions about the nature of language and meaning. Accordingly, one can accept that all language is ambiguous and retain the plain meaning and ambiguity rules. It is irrelevant whether the contract language is ambiguous in the abstract. What matters is whether it is ambiguous as
142 CORBIN, supra note 8, at 108–10; Farnsworth, supra note 4.
The Ambiguity Question |
139 |
between the (usually two) meanings advanced by the parties.143 One of those meanings may well be outside the array of meanings that the language reasonably bears under the circumstances. When this is the case, a court properly holds that the contract is unambiguous (in the contested respect).
Corbin’s argument is telling as against literal, acontextual interpretation. Very few courts, if any, however, employ this approach. The argument, moreover, is not effective against objective interpretation. Some courts interpret objectively and make the ambiguity decision only after considering the document as a whole, its evident purpose(s), the circumstances under which it was made, and other features of the objective context. This context makes the court’s practice neither literalist, because meaning will vary with the context, nor acontextual, because the objective context matters.
§ 4.5.2. The Restatement (Second) of Contracts
The Restatement (Second) largely follows Corbin on interpretation. It does not say that a finding of ambiguity is required, before or after considering extrinsic evidence of subjective intention.144 The best reading is that the Restatement (Second) does not require a finding of ambiguity, before or after. The comments make it clear that no such finding is needed when the extrinsic evidence concerns an agreed private code,145 general usage,146 trade usage,147 or “the rules in aid of interpretation,” several of which involve extrinsic evidence.148 These specifics may be supported by more general provisions. For example, a term must be given a specific meaning when the parties both have attached that meaning to it; here, there is no linguistic limitation on the meaning that a party can attach.149 In this light, reconsider the case of an agreed private code:
A and B are engaged in buying and selling shares of stock from each other, and agree orally to conceal the nature of their dealings by using the word “sell” to mean “buy” and using the word “buy” to
143See § 4.1.
144By contrast, see RESTATEMENT (FIRST) OF CONTRACTS §§ 230, 233 (1932).
145RESTATEMENT (SECOND) OF CONTRACTS § 212, cmt. b., illus. 4 (1981).
146Id. at § 220, cmt. d.
147Id. at § 222, cmt. b.
148Id. at § 202, cmt. a.
149Id. at § 201(1).
140 |
ELEMENTS OF CONTRACT INTERPRETATION |
mean “sell.” A sends a written offer to B to “sell” certain shares, and B accepts. The parties are bound in accordance with the oral agreement.150
Certainly the word buy is not ambiguous in that its array of reasonable meanings includes sell. Under the Restatement (Second), this does not matter. Extrinsic evidence of the private agreement is admissible to give meaning to the express agreement.
Three additional provisions bolster the above reading. The Restatement (Second) provides that reasonable usages, trade usages, and courses of dealing may qualify the parties’ express agreement.151 As will be illustrated in the next section, qualifying an agreement may involve a partial contradiction of its terms. This means that, under these provisions, a term need not be ambiguous in order for evidence of these elements to be admissible. Even a partial contradiction entails that a meaning is being given to the express term that is not within its array of reasonable meanings.
There is, however, little support in the case law for dispensing with findings of ambiguity before admitting evidence of the parties’ subjective intentions, as in the case of the private code. As indicated above, the great majority of jurisdictions follow the plain meaning rule.152 It requires a finding of ambiguity before admitting extrinsic evidence for the purpose of giving meaning to the contract’s terms. Even the landmark Pacific Gas & Electric case does not dispense with a requirement that the language be ambiguous before finally admitting extrinsic evidence for this purpose.153 And ironically, as indicated above, dispensing with the need to find ambiguity ignores the procedural context in which the question arises.154 Consequently, on this point, the Restatement (Second) does not restate the common law very well.
§ 4.5.3. The Uniform Commercial Code
The UCC also does not require a finding of ambiguity before allowing extrinsic evidence of a contract’s commercial context—primarily, course
150Id. at § 212, cmt. b., illus. 4.
151Id. at §§ 221–23.
152See § 4.
153See § 4.2.2.
154See § 4.2.3.
The Ambiguity Question |
141 |
of performance, course of dealing, and usage of trade.155 A principal purpose and policy of the statute is “to permit the continued expansion of commercial practices through custom, usage and the agreement of the parties.”156 Consequently, the very concept of an agreement is liberated from the common’s law’s formalistic rules of offer and acceptance.157 Agreement is defined as
the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in this Act.158
Because an agreement may be inferred from the commercial context, that context always is relevant to ascertaining the commercial meaning of the agreement, supplementing it, or even qualifying it.159 No need to find ambiguity stands in the way.
The idea of qualifying an agreement requires some elaboration. On this basis, a few courts have held that the commercial context can trump a contract’s unambiguous express terms.160 One court has written that established practices and usages within a particular trade or industry are a more reliable indicator of the parties’ “true intentions” than the “sometimes imperfect and often incomplete language of the written contract.”161 On these views, the contract language does not always control inferences from the commercial context.
In Nanakuli Paving and Rock Co. v. Shell Oil Co.,162 a paving contractor, Nanakuli, contracted with a supplier of asphalt, Shell. An express provision of the contract said that the price for the asphalt was to be “Shell’s Posted Price at the time of delivery.”163 Following the 1973 oil embargo, Shell’s posted price rose significantly. Paying this price would hurt Nanakuli, which had bid for jobs it was bound to do in non-escalating contracts on the basis of Shell’s posted price at the earlier time of the bid. Nanakuli claimed that Shell was contractually bound to “price protect” it; that is, Shell was bound to sell the previously committed asphalt to
155UCC § 2-202(a) and cmt. 1(c) (2001); Columbia Nitrogen, 451 F.2d at 9.
156UCC § 1-102(2)(b) (2001).
157E.g., id. §§ 2-204; 2-206; 2-207.
158Id. at § 1-201(b)(3).
159Id. at § 1-303(d) (2001).
160Nanakuli Paving and Rock Co., 664 F.2d at 797; Columbia Nitrogen, 451 F.2d at 9–10.
161Urbana Farmers Union Elevator Co. v. Schock, 351 N.W. 2d 88, 92 (N.D. 1984).
162664 F.2d 772 (9th Cir. 1981).
163Id. at 778.
142 |
ELEMENTS OF CONTRACT INTERPRETATION |
Nanakuli at the (lower) posted price at the time when the bids were made. The jury found that Shell was so bound, and the US Court of Appeals for the Ninth Circuit upheld the verdict.
Nanakuli made one argument that is relevant here: There was a trade usage requiring price protection based on the practices of all materials suppliers to the asphalt paving trade in Hawaii. Shell argued in response that, even if there were a relevant usage of trade, price protection could not reasonably be construed as consistent with the express price term, in which case the UCC required that the express price term control. Shell’s argument raised the question whether a usage of trade can prevail over an express term when they contradict each other. The court held that the usage of trade can prevail when the contradiction is only partial. The court wrote, quoting a law review article before applying its point to the case:
Therefore usage may be used to ‘qualify’ the agreement, which presumably means to ‘cut down’ express terms although not to negate them entirely.” Here, the express price term was “Shell’s Posted Price at time of delivery.” A total negation of that term would be that the buyer was to set the price. It is a less than complete negation of the term that an unstated exception exists at times of price increases, at which times the old price is to be charged, for a certain period or for a specified tonnage, on work already committed at the lower price on non-escalating contracts.164
The result in Nanakuli is not obviously correct. Perhaps the unambiguous express pricing term should have prevailed over any contrary usage of trade. This view draws support from Sections 1-205(4) and 2-208(2), as they were in force when the case was decided. They provide a hierarchy of contextual elements of interpretation:
[T]he express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable:
(1)express terms prevail over course of performance, course of dealing and usage of trade. . . .165
164Id. at 805.
165UCC § 1-303(e)(1) (2001).
The Ambiguity Question |
143 |
The hierarchy comes into play only when these contextual elements of interpretation cannot be harmonized reasonably with the express terms.166 In Nanakuli, it may be argued, no reasonable harmonization was possible; therefore, the express pricing term should have prevailed.
Moreover, there might be a significant difference between the relevant provisions in Articles 1 and 2 of the UCC. In Article 1, upon which the Nanakuli court relied, the contextual elements can “explain, supplement or qualify the terms of the agreement.”167 In Article 2, however, when the agreement is integrated, the contextual elements can only explain or supplement the express terms.168 There is no reference to qualifying express terms in Article 2. Because Article 2 applies specifically to transactions in goods,169 and asphalt paving materials are goods, the text arguably draws a distinction here that undermines the holding in Nanakuli. That case is based on the “qualify” language that was missing from the more directly applicable part of the statute.
§ 4.6. Criticisms of the Plain Meaning and
Four Corners Rules
Scholars—and an occasional judge—have subjected the plain meaning and four corners rules to sometimes blistering criticisms.170 Some subjectivists claim that these rules are on the way out in an increasing number of jurisdictions,171 though the research conducted for this study does not bear this claim out. With an eye to the future, when more courts might consider abandoning these rules, it may help to review the main criticisms and their rejoinders here.
166Id. at § 1-303(a).
167Id. at § 1-303(d).
168UCC § 2-202(a) (2001).
169Id. at § 2-102.
170CORBIN, supra note 8, at §§ 535, 542; JOSEPH M PERILLO, CALAMARI & PERILLO ON
CONTRACTS § 3.10 (5th ed. 2003); JAMES BRADLEY THAYER, A PRELIMINARY TREATISE ON THE LAW OF EVIDENCE 428–29 (1898), 9 JOHN HENRY WIGMORE, A TREATISE ON THE ANGLO-AMERICAN SYSTEM OF EVIDENCE IN TRIALS AT COMMON LAW § 2470 (3d ed. 1940); Margaret N. Kniffin, A New Trend in Contract Interpretation: The Search for Reality as Opposed to Virtual Reality, 74 OREGON L. REV. 643, passim (1995).
171 Id. at 649.