Contracts Chapter 7

What is ambiguity?

Language reasonably susceptible to two or more meanings.

What’s the key point about ambiguity for lawyers?

Courts interpret ambiguity. Lawyers prevent it.

Who decides whether ambiguity exists?

The judge. This is a question of law, not a jury question.

What is the judge doing at the ambiguity stage?

Only asking whether two or more reasonable meanings exist.

Can the parties choose which approach the court uses?

No. Whether a court uses a textual or contextual approach is determined by the forum's

common law, not by party preference.

What is the textual approach?

• read text alone

• if clear, stop

• outside evidence only if text is ambiguous

What is the contextual approach?

• consider context from the start

• outside facts can reveal latent ambiguity

• text alone may not show full picture

What’s the difference between the two approaches?

Both ask whether language supports more than one reasonable meaning. The difference is

when context is considered.

What is facial ambiguity?

Ambiguity visible from the text alone. Both approaches recognize it.

What is latent ambiguity?

Ambiguity that only appears when applied to facts. Contextual courts are more willing to find

it.

Why does the distinction between latent and facial ambiguity matter?

A textual court might say "text is clear, no ambiguity." A contextual court might say "text ooks clear, but when applied to facts, we see two reasonable readings." Same contract, different results.

What are the three methods courts use to resolve ambiguity?

Information Asymmetry → who knew more?

Weight of Evidence → which meaning is better supported?

Default Rules → who drafted it? (construe against the drafter)

Why do courts apply these methods in sequence?

These are a decision tree, not a menu. Courts check knowledge first because if one party knew the other's meaning and stayed silent, that unfairness should be resolved directly. Evidence is next. Default rules come last.

Interpretation Algorithm: Knowledge First

§ 20(2), § 201(2)

• if A knew (or had reason to know) B’s meaning but B did not know A’s, B’s meaning controls

  • innocent party’s meaning controls

• if both party’s are innocent go to weight of the evidence

So in sum, 20(2) tells you when a misunderstanding does NOT kill the contract (because one party is at fault; knew or had reason to know), but 201(2) tells you whose meaning controls in that situation

Interpretation Algorithm: Weigh the Evidence

§ 200, § 202, § 203

• text + context + usage + performance + dealing

• which meaning is better supported?

• use preferences: specific over general, reasonable over unreasonable, negotiated over boilerplate

Interpretation Algorithm: Default Rules

§ 206

• construe against the drafter

• last resort

• weaker in negotiated, arms-length deals

Interpretation Algorithm: Good Faith Check

§ 205

• always applies in the background

• no exploiting ambiguity

Under § 201(2), who wins if one party is “innocent” and the other knew?

The innocent party’s meaning controls.

What if both are “equally innocent?”

Neither meaning controls. Under § 201(3), neither party is bound by the other’s meaning.

When is construe against the drafter applied?

Only as a last resort, after knowledge and evidence inquiries fail. It allocates drafting risk but doesn't tell us what the parties actually intended.

Why is construe against the drafter weaker in negotiated contracts?

The policy rationale (protecting a weaker party who had no say in drafting) doesn't apply when both parties are sophisticated and negotiated at arms-length. Joyner v. Adams shows courts are skeptical in this context.

How does information asymmetry (§ 201(2)) resolve a dispute?

The court asks: Did one party know (or have reason to know) the other's meaning, while that other party did not know?

• if yes → unknowing party’s meaning controls

• if knowledge is symmetric (both knew or neither knew) → method fails, move to weight of evidence

What evidence shows “knowledge” or “reason to know”?

• direct statements during negotiations

• industry positions (insider v. outsider)

• prior dealings between the parties

• documents exchanged (specs, emails, proposals)

• conduct after signing

How does weight of the evidence (§§ 200, 202, 203) resolve a dispute?

The court examines evidence buckets and asks which meaning is better supported:

Contract text → plain meaning, defined terms

Pre-contract communications → what parties said in negotiations

Trade usage → how the industry uses the term

Course of dealing → how these parties used the term before

Course of performance → how parties performed under this contract

Practical indicators → price, labels, market conditions

What preferences apply when weighing evidence?

• specific over general

• negotiated over boilerplate

• reasonable over unreasonable

Who bears the burden of proof?

The party claiming the narrower or specialized meaning must prove it was mutually intended. (Frigaliment: buyer claimed "chicken" meant young broilers; buyer lost because it couldn't carry the burden.)

How does construe against the drafter (§ 206) resolve a dispute?

The party who supplied the ambiguous language loses. The other party's meaning controls.

When do courts refuse to apply "construe against the drafter"?

When both parties are sophisticated, the contract was negotiated at arm's length, and both had counsel. The policy rationale (protecting a weaker party) doesn't fit. (Joyner v. Adams).

What is the role of good faith (§ 205)?

It constrains enforcement, not interpretation. Even the winning party cannot exploit ambiguity or weaponize literal text to defeat reasonable expectations.

Decision Sequence Overview

1. Knowledge first → one party knew more? that party loses

2. Evidence second → which meaning is better supported? burden on party claiming narrower meaning

3. Drafter last → only if still stuck. weaker in negotiated deals

4. Good faith always → winning does not mean unlimited enforcement

Frigaliment v. B.N.S.

Weight of Evidence

• The party claiming a term has a specialized or narrower

  meaning bears the burden of proving that meaning was

  mutually intended. When both meanings are defensible, burden

  of persuasion determines the outcome.

Joyner v. Adams (1987)

Construe Against Drafter

• Courts must follow the sequence: knowledge inquiry first,

  evidence inquiry second, default rules last. Jumping to

  "construe against the drafter" without doing the prior analysis is

  error.

Joyner v. Adams (1990)

Information Asymmetry

• Equal innocence means neither meaning controls. Plaintiff lost

  because plaintiff bore the burden of proving defendant should

  have known.

When does ambiguity prevent contract formation?

When the parties attach materially different meanings to a term and neither party knows or has reason to know of the other's meaning.

What’s the key point about formation failure for lawyers?

Ambiguity usually leads to interpretation. Rarely, it prevents formation. Raffles is that rare case.

What rule governs ambiguity and formation failure?

Restatement (2d) § 20(1).

What is the test under Restatement (2d) § 20(1)?

1. the term is material

2. both meanings are reasonable (the term is genuinely ambiguous)

3. there is an equal misunderstanding; miss any one of these and the contract survives

What is “equal misunderstanding”?

Neither party knew or had reason to know of the other’s meaning.

What is the legal consequence when § 20(1) is satisfied?

No contract is formed at all. The result is formation failure because there was no mutual assent.

Why can’t the court just pick the “better” meaning and enforce the contract?

Interpretation doctrines such as construing ambiguity against the drafter or choosing the more reasonable meaning only apply after assent is established.

No assent → no contract → nothing to interpret.

How does Raffles differ from a standard interpretation dispute?

A: In an interpretation dispute, both parties agree a contract exists but disagree about what it means. In Raffles, the threshold question is whether the parties ever actually reached agreement at all.

Why do courts strongly prefer to preserve contracts rather than find formation failures?

Parties expended resources negotiating and may have relied on the deal

• commercial expectations favor enforcement

• formation failure is a drastic remedy - no contract, no breach, no damages

• § 20(1) intentionally sets a high bar to keep formation failure rare

Could better drafting have prevented the outcome in Raffles?

Yes. The drafter could have:

• added a sailing date: “ex Peerless sailing October 1862”

• added a vessel identifier or registration number

• referenced a shipping schedule

• added an arrival window

Ambiguity: main takeaway

Courts interpret ambiguity - lawyers prevent it through proper drafting

What is an indefinite term?

The parties addressed an issue, but what they wrote is too vague to interpret. Unlike a gap (where the parties said nothing), indefiniteness means the parties said something, but the court cannot make sense of it.

What is the governing rule for indefiniteness?

Restatement § 33. A contract cannot be formed unless its terms are "reasonably certain." Terms are reasonably certain if they "provide a basis for determining the existence of a breach and for giving an appropriate remedy."

What is the key test under § 33?

Can the court determine (1) whether there has been a breach, and (2) what remedy to give? If yes, the term is enforceable despite being vague. If no, the term is fatally indefinite.

Is indefiniteness fatal?

"Indefiniteness is not fatal unless it prevents any reasonable enforcement."

What makes an indefinite term curable/enforceable?

• the term has an established legal meaning (i.e. “best efforts”)

• there is an objective standard the court can apply (i.e. industry practice)

• context from the parties’ dealings helps the court interpret it

• the court can look to surrounding circumstances to give the term content

What are examples of indefinite but enforceable terms?

• "Best efforts" → legal meaning developed through case law; requires reasonable, goodfaith efforts consistent with industry practice

• "Reasonable satisfaction" → objective standard; would a reasonable person be satisfied?

• "Good working order" → objective standard tied to industry norms

• "Suitable for professional use" → court can examine nature of the event, parties' communications, industry practice

Why can the court enforce these terms?

Each has an external anchor. The court is not inventing what the parties meant; it is applying an objective standard or established legal definition. The court can determine breach (did the party meet the standard?) and fashion a remedy (what would compliance have looked like?).

What makes an indefinite term fatal (unenforceable)?

• no objective reference point

• parties disagree on the reference point itself

• court would have to choose between equally plausible meanings with no basis for choosing

• term goes to the essence of the bargain (esp. price)

What is the key case for fatal indefiniteness?

Walker v. Keith. The lease gave the tenant an option to renew at a rent "fixed on the comparative basis of rental values as of the date of the renewal with rental values at this time reflected by the comparative business conditions of the two periods."

Why did the rent term in Walker fail?

• no objective reference point (local conditions? national conditions?)

• no formula the court could apply

• court would have to invent the rent, not interpret it

As the court said: "Courts are called upon not to enforce an agreement or to determine what the agreement was, but to write their own concept of what would constitute a proper one."

What is an “agreement to agree” and why is it fatal?

When parties leave an essential term (like specific equipment or price) to be "mutually agreed" later, and they never reach agreement, the court has no basis for determining what was required. Courts generally refuse to enforce agreements to agree because doing so would require inventing the bargain

What is the difference between ambiguity and indefiniteness?

• ambiguity: the term has two or more reasonable, identifiable meanings; the court’s job is to choose which meaning the parties intended, using extrinsic evidence and rules of construction

• indefiniteness: the term is so vague it does not yield even two clear meanings to choose between; there is nothing for the court to interpret

Enforceable Indefinite Terms (legal meaning or objective standard exists)

• “best efforts”

• “reasonable time”

• “good working order”

• “suitable for professional use”

Middle Ground Indefinite Terms (may be enforceable if context helps)

• “fair price”

• “market rate”

• “suitable”

Fatal Indefinite Terms (no anchor; court would have to invent the bargain)

• “rent based on comparative business conditions”

• “competitive pricing”

• “as we agree later”

What is the common thread across all fatal indefinite terms?

Restatement § 33(2). When the vagueness makes it impossible to determine whether there has been a breach or to fashion a remedy, the term fails. The court's role is to interpret agreements, not to write them.

What should you always ask when you see a vague term?

Is there an objective standard, legal meaning, or external anchor that allows the court to determine breach and remedy? If yes, the term is curable. If no, the term is fatal. The contract lives or dies on the answer.

What is a gap?

The parties didn't address an issue at all. There is no term to interpret because the term is missing.

What is the governing rule for filling gaps?

Restatement § 204. When the parties to a bargain "sufficiently defined to be a contract" have not agreed on an essential term, the court supplies a term that is "reasonable in the circumstances."

What is the key limitation on § 204?

The phrase "sufficiently defined to be a contract." The court will only fill gaps if there is already enough of a contract to work with. If the gap is so large that filling it would require the court to invent the bargain, the court refuses.

When do courts imply terms?

Only when they can do so without inventing the bargain

What makes a gap “small” (fillable)?

• there is a reasonable default that reflects what most parties would want

• the court is applying a standard, not choosing between options

• theg ap does not go to the essence of the bargain

What are examples of small gaps and their defaults?

• duration → terminable at will on reasonable notice

• time for performance → reasonable time

• place of performance → reasonable place

• payment timing → reasonable time after performance

Why can a court fill small gaps?

Each has a well-established default. For duration, "terminable at will" reflects what most parties would expect. For timing, "reasonable time" is a standard courts can apply by looking at the nature of the performance, industry practice, and the parties' circumstances. The court isn't inventing anything; it's supplying what the parties almost certainly would have agreed to.

What makes a gap “big” (fatal)?

The court would have to invent the bargain, not merely supply a default. There is no objective

standard or reasonable default to apply.

What are the fatal gaps under common law?

• price

• quantity

• essential performance obligations

Why is a missing price fatal?

• price goes to the heart of the bargain

• there is no “reasonable default” for price in a services contract

• what’s a reasonable price for audio equipment rental? $500? $1,500? the court has no basis for choosing

• the parties should have negotiated this themselves

• sun printing v. remington: cardozo wrote that the court cannot “make a contract” for the parties

Why is a missing quantity fatal?

• without quantity, the court cannot determine whether the agreement has been kept or broken (§ 33 comment a)

• there is no “reasonable quantity” default the way there is a “reasonable time” default

• duration and timing have natural benchmarks; quantity does not

• filling quantity would require the court to invent the scope of the deal from scratch

Why are missing essential performance obligations fatal?

• if a court cannot determine what performance was owed, it cannot determine breach or remedy (33(2))

• a promise to pay a “fair share of profits” could mean anything from a nominal sum to a material portion; the court would be guessing, not interpreting (Varney v. Ditmars)

• when multiple essential obligations are missing (i.e. who pays taxes, insurance, repairs), filling them all would mean writing the contract, not enforcing it

• the more essential terms left open, the stronger the ingerence the parties did not intend to be bound (33(3))

What is the common thread across all fatal gaps?

Restatement § 33(2) requires that terms "provide a basis for determining the existence of a breach and for giving an appropriate remedy." When a missing term makes it impossible to know whether performance was rendered or to measure damages, the contract fails.

What should you always ask when you see a gap?

Can the court fill this gap without inventing the bargain? If yes, small gap. If no, big gap. The contract lives or dies on the answer.

What is the key difference between common law and the UCC regarding gaps?

Common law fills small gaps but big gaps (price, quantity) kill the contract. UCC Article 2 provides statutory gap-fillers that save contracts common law would kill.

Why does the UCC provide gap-fillers that common law doesn’t?

Three reasons:

• predictable transactions: sales of goods involve a limited universe of promise (late delivery, damaged goods, wrong quantity, wrong place)

• market prices exist: goods have observable market prices the court can reference

• sensible defaults: for most issues in goods transactions, there’s a default rule that reflects what most parties would want

Why can’t common law provide the same gap-fillers?

Common law transactions are too varied. Services contracts can involve almost anything (employment, licensing, advertising, vendor agreements). There's no one-size-fits-all default for “price of services" or "place of performance for services."

UCC § 2-305

Price: reasonable price at time of delivery

UCC § 2-308

Place of delivery: seller’s place of business

UCC § 2-309

Time for performance: reasonable time

UCC § 2-310

Time for payment: on delivery

UCC § 2-509

Risk of loss: allocated based on delivery terms

What is § 2-305 (Open Price Term) and why is it significant?

Under common law, a missing price is fatal. Under the UCC, if the parties intended to make a contract but left price open, the price is "a reasonable price at the time for delivery."

Why can the UCC fill a missing price when common law cannot?

Goods have market prices. If you're selling wheat, steel, or audio equipment, there's usually a market price the court can reference. The court isn't inventing the price; it's looking at what similar goods sell for.

What is § 2-308 (Place of Delivery)?

If the contract doesn't specify where the seller should deliver, delivery occurs at the seller's place of business. The buyer comes to the seller to pick up the goods unless the contract says otherwise.

What is § 2-309 (Time for Performance)?

If the contract doesn't say when performance is due, performance is due within a reasonable time. This is the same as common law; it's not unique to the UCC.

What is § 2-310 (Time for Payment)?

If the contract doesn't say when the buyer must pay, payment is due on delivery. This protects the seller: no credit unless the contract says so.

C/L v. UCC Comparison: Missing Price

C/L: Fatal

UCC: Filled (reasonable price)

C/L v. UCC Comparison: Missing Place of Delivery

C/L: fillable

UCC: filled (seller’s place)

C/L v. UCC Comparison: Missing Time for Performance

C/L: fillable

UCC: filled (reasonable time)

C/L v. UCC Comparison: Payment

C/L: Fillable

UCC: Filled (on delivery)

C/L v. UCC Comparison: Missing Duration

C/L: fillable

UCC: filled (reasonable time + notice)

C/L v. UCC Comparison: Indefinite Terms

C/L: often fatal

UCC: often cured

Does the UCC fill all gaps?

No. The UCC has gap-fillers for price, place, time, and payment, but not for quantity. Quantity is too essential. The court cannot determine what the parties intended to buy and sell.

Is a missing quantity term always fatal under the UCC?

Not always. There's an exception for requirements contracts ("all the equipment Buyer needs") and output contracts ("all the equipment Seller produces"). Those are enforceableb ecause there's a reference point. But "quantity to be determined later" is usually fatal.

What does it mean that UCC gap-fillers are "default rules"?

They apply unless the parties agree otherwise. If the parties are happy with the default, they don't need to address the issue. But if they want something different, they can contract around the default.

What are examples of contracting around defaults?

• Default: delivery at seller’s place of business → parties can agree: delivery at buyer’s location

• Default: payment on delivry →parties can agree: net 30 payment terms

Why do default rules save transaction costs?

Sophisticated parties who know the defaults can leave terms out, confident the law will fill them sensibly. They only need to negotiate when they want something different from the default.

How do you determine which regime applies?

Ask: Is this a sale of goods? If yes, UCC Article 2 applies and its gap-fillers are available. If no (services, real estate, licensing), common law applies and its stricter rules govern.