§ 5.3. Non-Existent or Ambiguous Contexts

In some few cases, interpretive resources will run out of guidance without providing an adequate basis for resolving an ambiguity in accordance with the parties’ agreement. There may be an absence of evidence supporting reliance on any of the contextual elements, as when neither party introduces extrinsic evidence so there is no extrinsic context to an ambiguous document. The evidence may support the use of elements that conflict so seriously that the context is as ambiguous as the contract language. In the latter case, the interpreter can “weigh” the elements supporting each branch of the ambiguity and come to a judgment. Such a case is well suited for fact-finder decision because there are conflicting reasonable inferences that can be drawn from the evidence. But maybe the weights of the elements on each side are equal, or there is, in any event, no substantial evidence to support a verdict either way. Non-interpretive stan- dards—standards that do not aim at ascertaining the parties’ intention as manifested—then are needed in order to resolve the dispute. Two kinds of non-interpretive standards then can come into play—default rules and findings that the contract or a term thereof has failed.

§ 5.3.1. Default Rules

A default rule is a rule that the law imports into a contract when the parties have not “otherwise agreed.”180 It fills a gap in the contract. The UCC contains a great many default rules. Section 1-302 provides with respect to the entire statute:

(a)Except as otherwise provided in subsection (b) or elsewhere in [the Uniform Commercial Code], the effect of provisions of [the Uniform Commercial Code] may be varied by agreement.

(b)The obligations of good faith, diligence, reasonableness, and care prescribed by [the Uniform Commercial Code] may not be disclaimed by agreement. The parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable.181

180Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87 (1989).

181UCC § 1-302 (2001).

In addition, many substantive provisions specifically apply “unless otherwise agreed.”182 A default rule should be distinguished from a mandatory rule, i.e., a rule that cannot be varied by agreement, such as the duty of good faith in the performance and enforcement of a contract.183

Before invoking a default rule, the decision maker must determine whether there is a gap in the contract. There is no gap if the disputed part of the contract is unambiguous or if the relevant ambiguity can be resolved using the elements of contract interpretation. There is a gap if the interpretive resources run out of guidance without settling the dispute nonarbitrarily. The decision maker then should invoke an applicable default rule, if there is one.

§ 5.3.2. Interpretation Against the Drafter

In some cases, interpretive resources run out of guidance, and there is no applicable substantive default rule. A decision maker then may invoke a commonly used procedural default rule, contra proferentem (interpretation against the drafter), if there is a single or predominant drafter.184 Like a substantive default rule, contra proferentem applies only when the parties have not otherwise agreed. It therefore should be applied only when the interpreter cannot ascertain the parties’ intention after using all available interpretive elements and guides.185 Unlike a substantive default rule, however, this rule does not have any content. It is not like a rule providing, “[u]nless otherwise agreed . . . the place for delivery of goods is the seller’s place of business or if he has none his residence.”186 Contra proferentem should not be used to block application of a substantive default rule. It does not implement the parties’ agreement or give meaning to contract language,187 so it does not constitute an “agreement otherwise.”

Contra proferentem is based mainly on two rationales.188 First, it poses an incentive for drafters to draft more clearly and completely than they

182E.g., id. at §§ 2-206; 2-307; 2-308.

183Id. at § 1-304.

184See Coliseum Towers, 769 N.Y.S.2d at 296–97; Boston Ins. Co. v. Fawcett, 258 N.E.2d 771, 776 (Mass. 1970).

185Klapp, 663 N.W.2d at 469–74.

186Id.

187Id. at 473–74; In re Marriage of Best, 859 N.E.2d 173, 186 (Ill.App. 2006) ((reversed on other grounds, In re Marriage of Best, 2008 WL 733225 (Ill. 2008)).

188See RESTATEMENT (SECOND) OF CONTRACTS § 206, cmt. a (1981); see AIU Ins. Co. v. FMC Corp., 799 P.2d 1253, 1265 (Cal. 1990).

otherwise would, hopefully obviating the need to find or resolve an ambiguity if a dispute ensues. Second, when there is only one drafter, that person can be expected to draft a contract that favors itself or its client. The contract may be a standard form and a contract of adhesion that is downright unfair to the non-drafting party, especially if that party is an insured, a consumer, or an employee with little bargaining power. The contract also may be one that is tailored to one transaction and that is drafted by a more sophisticated and stronger party, but that is not open to negotiation. In such cases, contra proferentem may be assumed to correct for an imbalance in the fairness of the exchange, though this is not necessarily so.189 These rationales indicate that contra proferentem does not aim at ascertaining the parties’ intention and therefore interpreting a contract’s provisions.

A clear majority of courts regards contra proferentem as a rule to be applied by the fact-finder as a tiebreaker or last resort.190 For example, a jury may be instructed to interpret the contract using all relevant elements of contract interpretation, and to apply contra proferentem only if those elements do not resolve the ambiguity. Such a use of the rule is unobjectionable. But the interpretive elements first should be exhausted.

§ 5.3.3. No Agreement

There are cases in which the context is non-existent or ambiguous, and neither a default rule nor contra proferentem applies. Because the courts are committed to the proposition that they do not make contracts for the parties, they then have little alternative but to declare the contract or a term thereof a failure. If the ambiguous term can be severed because it is not essential to the contract, the contract will be enforceable otherwise.191 If severing an ambiguous term is not justified, however, the entire contract may fail. Thus, in the famous case of Raffles v. Wichelhaus,192 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 one must the seller ship the goods? There was no way to resolve

189Ruttenberg v. U.S. Life Ins. Co. in City of New York, 413 F.3d 652, 666 (7th Cir. 2005).

190Id. at 665–66; Klapp, 663 N.W.2d at 472–74; Gardiner, Kamya & Assoc., P.C. v. Jackson, 467 F.3d 1348, 1352–53 (Fed.Cir. 2006).

191Eckles v. Sharman, 548 F.2d 905 (10th Cir. 1977).

192159 Eng. Rep. 375 (Exch. 1864).