Rules for Interpreting Incomplete Contracts: A Cautionary Note

• Author: Steven L. Harris
• Position: Norman and Edna Freehling Scholar and Professor of Law

Norman and Edna Freehling Scholar and Professor of Law, Chicago-Kent College of Law. The author thanks Douglas Baird and Claire Hill for helpful suggestions.

I am very honored to have been invited to participate in this symposium in honor of Bill Hawkland. Many thanks to Jim Bowers for coming up with the idea and to Jim, as well as the Louisiana Law Review, for bringing it to successful fruition.

I am especially pleased to participate because of my longtime connection with Bill Hawkland. The University of Illinois College of Law, on whose faculty I served for a dozen years, is among a very small number of major law schools that do not merely value, but prize, contributions to law reform-and particularly to the reform of commercial law-as well as "practical" and "doctrinal" scholarship. I have no doubt that this welcoming attitude was a direct consequence of Bill Hawkland's having served two tours of duty at Illinois.

Some years ago, I had the great pleasure of working closely with Bill on the revision of U.C.C. Article 6 on bulk sales, first as the advisor from the American Bar Association and then as Bill's co- reporter. I suspect the Article 6 project was unique in the history of private legislatures. Given this group's interests, perhaps the history of Article 6 deserves a few words here.¹ The Drafting Committee was charged with the task of revising Article 6. But rather than accept its jurisdiction, or even expand it, as so many committees are wont to do, the committee (very soon after its appointment) actually tried to put itself out of business by recommending repeal. In response, the Executive Director of the National Conference of Commissioners on Uniform State Laws ("NCCUSL") informed us that our charge from the Scope and Program Committee was to revise Article 6, and that we lacked jurisdiction to recommend repeal. So we got to work and revised the Article. Three years later, when the Article was up for approval at the NCCUSL Annual Meeting, it became clear from the floor discussion that some Committee members had reservations about the entire concept of a bulk sales law. Ultimately, the members were asked to indicate their preferences, as between the revision they had worked several years to fashion and repeal. With one exception, the members favored repeal, and NCCUSL adopted this position as its primary recommendation.²Bill's and the Committee's work did not go completely for naught. For those states that chose not to revise, NCCUSL recommended adoption of the revised version. To date, only five states have adopted the revision, while over 40 have repealed. My strong hunch is that Bill has not been disappointed with the outcome.

Having cut my teeth on Article 6, I was asked to serve on the Study Committee for U.C.C. Article 2 and then to join Chuck Mooney as a reporter for the Drafting Committee to Revised U.C.C. Article 9. After more than a decade of active involvement in reform of commercial law, I cannot help but view the Bowers and Scott debate³ on the appropriate role that context should play in the interpretation of contracts through the eyes of a statutory draftsman. It is from this perspective that I offer these comments.

Although abstract debates are both interesting and helpful, any substantial change in judicial conduct is likely to require a legislative solution. The inherent limits to such a solution are substantial. First, these issues are complex. Under what circumstances may a court look to evidence of context? Which facts are relevant? What is the relationship between the context and the written agreement of the parties? In addition, the statutory rules need to be comprehensible to, and readily susceptible to proper application by judges with incomplete and imperfect information. Given the vast array of different facts and circumstances upon which the U.C.C. operates and the broad range of judicial talent, one must expect that the legal regime will not generate the "right" answer in every case. The question is whether the U.C.C.'s provisions for interpreting contracts in context can be materially improved upon.

No one can deny the appeal of interpreting the language of a contract in context. Like other documents, contracts are drafted against a host of background assumptions and understandings, some of which are quite basic. Strategic considerations aside, the cost of bringing all these assumptions from the background to the conscious mind and reducing them to writing often is prohibitive. The errors that can arise from failing to interpret contracts in light of these unexpressed assumptions and understandings are so readily apparent and potentially egregious that, if the goal of contract law is to give effect to the parties' actual agreement (or, in the words of the U.C.C., "the bargain of the parties in fact"), resort to matters outside the express language of the parties would appear to be essential.

Jim Bowers' discussion of how courts would construe a contract to build a building with perfectly straight walls provides a perfect example,⁴ as does the familiar example in the U.C.C. context of a contract for the sale of two-by-four's. Anyone with any familiarity with the subject matter of these contracts knows that the parties actually contemplate...