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From an advocacy standpoint, advancing an unlikely interpretation is not a bad strategy when the stakes are high; one wants to and might get to a jury; one is litigating the case anyhow on formation or remedies issues; as an obfuscating tactic; or when non-legal considerations might be weighty. But, from a more neutral standpoint, these are not reasonable interpretive disputes. They do not show that the contract language was not clear enough to settle the dispute before the court as a matter of law.
We should not, moreover, gauge the extent of clear cases by confining our attention to the many reported cases in which the applicable terms were rightly held to be unambiguous. In many reported cases involving ambiguous terms, the evidence of party intent cuts only or predominantly in one way.24 As a practical matter, one supposes, the parties’ intention is being implemented when the interpreter follows the predominant evidence. Many cases in litigation, moreover, involve uncontroversial contract terms and only a factual controversy or a real dispute over formation, breach, remedies, or other issues. Further, few contract disputes ever see the light of day: Many disputes do not come to court, but are settled quickly—with and without the aid of lawyers—because the contract is clear. And, in light of the millions of contracts concluded each day, interpretive disputes must be rare; by far, most contracts are performed without a hitch. In clear cases, the goals converge to support the single relevant meaning.
§ 1.2.2. Kinds of Ambiguous Terms
Contract interpretation often focuses on the finding of relevant ambiguity— the failure of contract terms to refer singularly to states of affairs or actions that are relevant to deciding what the contract prohibits, permits, or requires of a party. Terms may allow an array of plausible referents for three main reasons. First, all language is general and in itself indeterminate. That is, each meaningful term refers to at least one class of things in the world, not to one and only one particular thing, and it does not provide dispositive criteria for the classification of a particular case. Language would be useless for communication if it were so fine-grained as to have a separate word for each bit of sand on each beach in the world. Even two neighbors would be unlikely to share much of a vocabulary. Second, the
24 See In re Soper’s Estate, 264 N.W. 427 (Minn. 1935).
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parties’ knowledge, foresight, and attention spans are limited.25 They (and their lawyers) tend to communicate in detail only about the most salient parts of their contract. As possibilities seem more remote, as when drafting a force majeure clause, the parties tend to express themselves, if at all, with less clarity and completeness. Third, the stakes in many transactions do not justify lengthy and therefore costly negotiation and drafting exercises. Here, it is bluster to say, “if you write at all, write it all.” The parties may leave the details to interpretation, if it should become necessary. The law of contract interpretation (and implication) facilitates less expensive, truncated contracts.
Contract language may fail in at least four ways. Following Professor E. Allan Farnsworth, we will call these ways term ambiguity, sentence ambiguity, structural ambiguity, and vagueness.26 Distinguishing them should help when looking for terms that permit an array of reasonable and relevant meanings.
Term ambiguity is the most familiar kind of ambiguity. Technically, unlike vagueness, a word or phrase is ambiguous when it has two or more distinct meanings. It then can refer to two or more distinct classes of ideas, actions, events, states of affairs, or persons. When it does, the contract parties may each favor a different referent from within the array of meanings, producing an interpretive dispute. For example, the word bank refers to distinct things when it is used in descriptions of rivers and financial institutions. In an example above,27 the parties agreed on the sale and purchase of A’s Iliad. When a commercial contract calls for the purchase and sale of chicken, can the seller fulfill its obligation by delivering stewing chicken rather than the younger, more marketable, and more expensive broilers and fryers?28
Usage also allows ambiguity to be used in a broader sense to refer to any failure of language. (Ambiguity is ambiguous.) In this book, we will usually use the word in its broader sense, following judicial practice.
Problems of sentence ambiguity plague the contract drafter. Consider: “The house had a gazebo in the yard which was white.” Is it the house or the gazebo or the yard that was white? In a land sale contract, the seller may commit to “put in gas and electricity lines at no cost to the buyer; property
25See generally James W. Bowers, Murphy’s Law and the Elementary Theory of Contract Interpretation: A Response to Schwartz and Scott, 57 RUTGERS L. REV. 587, passim (2005).
26E. Allan Farnsworth, “Meaning” in the Law of Contracts, 76 YALE L.J. 939, 952–57 (1967).
27See § 1.1.1.
28Frigaliment Importing Co., 190 F.Supp. at 116.
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also to be surveyed at once.” Must the seller put in the gas and electricity “at once?”
There is a structural ambiguity when a contract document as a whole is ambiguous because two provisions have incompatible implications, both of which are relevant to the dispute.29 Assume that the termination clause of a contract 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. When a force majeure event occurs, may the buyer terminate without notice?
A word or phrase is vague when it has no distinct boundaries between its range of referents and the range of neighboring words. For example, the referents of orange shade into those for yellow and red with no lines of demarcation. Rather, there is a band in which reasonable people may differ over the proper use of the term; indeed, there is no proper use within the band. A contract that calls for a delivery of goods of “fair and average quality” or “reasonable quality” may lead to a dispute due to vagueness.
§ 1.2.3. Resolving Ambiguities
The elements of contract interpretation are relevant evidentiary considerations to be taken into account and if necessary weighed to reach a decision when an interpreter identifies contract terms, determines whether a term or a contract is ambiguous, or resolves an ambiguity. Insofar as the question of ambiguity is concerned, under literalism, only the dictionary and the governing contract words in the document may be taken into account. Under objectivism, the whole document, objective circumstances at the time of formation, the contract’s purpose(s), usages and customs, and other objective factors, may be taken into account. Under subjectivism, all evidence that is relevant to ascertaining the parties’ mental intentions when the contract was formed may be considered, including the parties’ prior dealings and a party’s statement of its own intention during negotiations or in court.
Under the prevailing law, all of the elements are available after a court has determined that a contract is ambiguous. When extrinsic evidence is
29 E.g., Commander Oil Corp. v. Advance Food Serv. Equip., 991 F.2d 49, 53–55 (2d Cir. 1993).
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admitted, resolution of the ambiguity generally is the province of the finder of fact, whether jury or judge.30 Consequently, in addition to the elements objectivism allows, extrinsic evidence of subjective intentions may be introduced and considered as relevant to resolving the ambiguity.31 How finders of fact consider and weigh the factual elements is something of a mystery. The jury, in particular, is a black box. Nonetheless, in Chapter 5, we will examine cases in which judges resolved an ambiguity.
§ 1.2.4. The Limits of Parties’ Intention
A cautionary note: Interpretation will not suffice in every case to determine the parties’ contractual rights, duties, and powers. In some contract disputes, interpretive resources are exhausted before a resolution can be found. This may happen when no express term addresses the point at all, even ambiguously. For example, many contracts do not address a party’s right to cancel should the other materially breach. The law adds constructive conditions of exchange to most contracts. These conditions allow one party to cancel if the other materially breaches.32 Constructive conditions of exchange are not based on an interpretation of the parties’ intention. When concluding a contract, the parties typically are optimistic and do not think about material breaches and cancellation for breach. Hence, they may have no ascertainable intention on the point. These constructive conditions are implied as a matter of fairness and policy to enhance a non-breaching party’s security with respect to further performances due from the party in breach.33
When interpretation is indeterminate or no applicable express terms are available, a court must settle the dispute with noninterpretive tools, such as a default rule like contra proferentem (interpretation against the drafter). Such a tool is available when, after interpretation is exhausted, there is a gap on the disputed point.
302 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 8.9 (3rd ed. 2004).
31Pepcol Mfg. Co. v. Denver Union Corp., 687 P.2d 1310, 1314 (Colo. 1984); Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1233 (Del,Super. (1997); see Regency Commercial Assocs. v. Lopax, Inc. 869 N.E.2d 310, 317 (Ill.App. 2007).
32Bruner v. Hines, 324 So. 2d 265 (Ala. 1975); JOSEPH M. PERILLO, CALAMARI AND PERILLO ON CONTRACTS §§ 11.16, 11.18(a) (5th ed. 2003).
33RESTATEMENT (SECOND) OF CONTRACTS § 231, cmt. a (1981); STEVEN J. BURTON & ERIC G. ANDERSEN, CONTRACTUAL GOOD FAITH § 6.2 (1995).
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Some authorities support a court’s power to “supply” an omitted term to settle a dispute in the absence of any applicable term or default rule. This alternative does not purport to give meaning to contract terms or otherwise to implement the parties’intention. Rather, as the Restatement (Second) of Contracts [Restatement (Second)] puts it,“where there is in fact no agreement, the court should supply a term which comports with community standards of fairness and policy.”34 Some courts have openly done this, but not many.35 Some skeptical observers suspect that the courts sometimes are supplying terms in disguise, rather than giving meaning to contract language or implying terms to implement the parties’ intention.36
In addition, a very few judges follow Judge Richard A. Posner in pursuing the goal of economic efficiency when there is no dispositive literal meaning. Judge Posner would decide what the parties, as rational economic actors, would have agreed to had they bargained on the point.37 This alternative, however, lacks sufficient support in judicial practice to earn further treatment in the descriptive and analytical portion of this book (Chapters 2 to 5). Several academic legal analysts offer a number of other formulae geared to pursuing economic efficiency in contract interpretation.38 As of yet, however, the courts have not endorsed any of them. Some comments on economic analysis are included in Chapter 6.39
Still, there will be cases in which the parties’ intention runs out and there is no available default rule. In Raffles v. Wichelhaus,40 a buyer agreed to buy goods to be shipped on a ship called the Peerless. There turned out to be two ships named the Peerless, sailing at different times. On which
34RESTATEMENT (SECOND) OF CONTRACTS § 204, cmt. d (1981).
35Haines v. City of New York, 364 N.E.2d 820, 822 (N.Y. 1977) (supplying a “reasonable time” term); S. Bell Tel. & Tel. Co. v. Fla. E. Coast Ry. Co., 399 F.2d 854, 858–59 (5th Cir. 1968) (supplying a “terminable upon reasonable notice” term); Toch v. Eric Schuster Corp., 490 S.W.2d 618, 621–22 (Tex.App. 1972) (holding that trial court may designate a reasonable time and area for a noncompetition clause in an employment contract).
36For a case where this may be suspected, see Spaulding v. Morse, 76 N.E.2d 137 (Mass. 1947).
37Beanstalk Group, Inc. v. AM Gen. Corp., 283 F.3d 856, 860 (7th Cir. 2002) (Posner, J.); Posner, supra note 5, at 1590–91, 1605–06; see Baldwin Piano, Inc. v. Deutsche Wurlitzer GmbH, 392 F.3d 881, 883–85 (7th Cir. 2004).
38See, e.g., Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87, 91–92 (1989); Charles J. Goetz & Robert E. Scott,
The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 CAL. L. REV. 261, 308–09 (1985); Avery Wiener Katz, The Economics of Form and Substance in Contract Interpretation, 104 COLUM. L. REV. 496 (2004); Eric A. Posner, The Parol Evidence Rule, the Plain Meaning Rule, and the Principles of Contractual Interpretation, 146 U. PA. L. REV. 533, 573 (1998).
39See § 6.2.2.
40159 Eng. Rep. 375 (Ex. 1864).